Registration No. 33-67012
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. _______ [ ]
Post-Effective Amendment No. ___11__ [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. ___12__ [X]
LB VARIABLE ANNUITY ACCOUNT I
(Exact Name of Registrant)
LUTHERAN BROTHERHOOD
(Name of Depositor)
625 Fourth Avenue South, Minneapolis, Minnesota 55415
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code: (612) 340-7215
David J. Larson
Senior Vice President, Secretary and General Counsel
Lutheran Brotherhood
625 Fourth Avenue South
Minneapolis, Minnesota 55415
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate
box)
[X] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on (date) pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(3) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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LB VARIABLE ANNUITY ACCOUNT I
CROSS REFERENCE SHEET
Pursuant to Rule 495 under the Securities Act of 1933 indicating the
location in the Prospectus of the information called for by the Items of
Parts A and B of Form N-4.
Part A
Item Number and Caption Location
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1. Cover Page Cover Page
2. Definitions Definitions
3. Synopsis or Highlights Summary
4. Condensed Financial
Information Condensed Financial Information
5. General Description of Registrant,
Depositor, and Portfolio Companies Lutheran Brotherhood, the Variable
Account and the Fund; Voting
Rights; Sales and Other Agreements
6. Deductions Charges and Deductions; Sales and
Other Agreements
7. General Description of
Variable Annuity Contracts Lutheran Brotherhood, the Variable
Account and the Fund -- Addition,
Deletion or Substitution of
Investments; The Contracts --
Allocation of Premiums; --
Surrenders (Redemptions); --
Transfers; -- Contract Owner,
Beneficiaries and
Annuitants; Annuity Provisions --
Frequency and Amount of Annuity
Payments; General Provisions --
Postponement of Payments
8. Annuity Period Annuity Provisions
9. Death Benefit The Contracts -- Death Benefit
Before the Maturity Date; -- Death
Benefit After the Maturity Date
10. Purchases and Contract Value The Contracts -- Issuance of a
Contract; -- Allocation of
Premiums; -- Accumulated Value;
Accumulation Units and Accumulation
Unit Value; Sales and Other
Agreements
11. Redemptions The Contracts -- Free Look Period;
-- Surrender (Redemptions); General
Provisions -- Postponement of
Payments
12. Taxes Charges and Deductions -- Other
Taxes; Federal Tax Status
13. Legal Proceedings Legal Proceedings
14. Table of Contents of the Statement
of Additional Information Statement of Additional Information
Table of Contents
Part B
15. Cover Page Cover Page
16. Table of Contents Table of Contents
17. General Information and History Introduction
18. Services Administration of the Contracts;
Custody of Assets; Independent
Public Accountants and Financial
Statements
19. Purchase of Securities Being
Offered Distribution of the Contracts
20. Underwriters Distribution of the Contracts
21. Calculation of Yield Quotations of
Money Market Sub-Accounts Calculation of Yield
22. Annuity Payments See "Annuity Provisions" in Part A
23. Financial Statements Independent Public Accountants and
Financial Statements
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered in Part C to this Registration Statement.
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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
(800) 990-6290
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This Prospectus describes an individual flexible premium variable annuity
contract (the "Contract") offered by Lutheran Brotherhood ("LB" "we" or
"us"), a fraternal benefit society organized under Minnesota law. We offer
the Contract only in situations in which the Contract's Annuitant is
eligible for membership in Lutheran Brotherhood. We may sell the Contract to
or in connection with retirement plans which may or may not qualify for
special Federal tax treatment under the Internal Revenue Code.
We allocate net premiums based on the Annuitant's designation to one or more
Subaccounts of LB Variable Annuity Account I (the "Variable Account"),
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 seven
Portfolios of the Fund -- the Opportunity Growth Portfolio, the Mid Cap
Growth Portfolio, the World Growth Portfolio, the Growth Portfolio, the High
Yield Portfolio, the Income Portfolio, and the Money Market Portfolio.
Additional information about LB, the Contract and the Variable Account is
contained in a Statement of Additional Information (SAI) dated May 1, 1999.
That SAI was filed with the Securities and Exchange Commission and is
incorporated by reference in this Prospectus. You may obtain a copy of the
SAI without charge by writing to us at our address above. In addition, the
Securities and Exchange Commission maintains a Web site (http://www.sec.gov)
that contains the SAI. The Table of Contents for the Statement of
Additional Information may be found on Page 31 of this Prospectus.
An investment in the Contract is not a deposit of the bank or financial
institution and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. An investment in the
Contract involves investment risk including the possible loss of principal.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined if this prospectus is truthful or complete. 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, 1999.
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TABLE OF CONTENTS
Page
SUMMARY FEE TABLE 4
SUMMARY
The Contract 6
Charges and Deductions 7
Annuity Provisions 7
Federal Tax Status 8
Condensed Financial Information 8
Performance Related Information 8
LUTHERAN BROTHERHOOD, THE VARIABLE ACCOUNT AND THE FUND
Lutheran Brotherhood 10
The Variable Account 10
LB Series Fund, Inc. 10
Addition, Deletion or Substitution of Investments 12
THE CONTRACTS
Purchasing a Contract 13
Processing Your Application 13
Allocation of Premium 13
Free Look Period 13
Accumulated Value, Accumulation Units and Accumulation Unit Value 14
Minimum Accumulated Value 15
Death Benefit Before the Maturity Date 15
Death Benefit After the Maturity Date 16
Surrender (Redemption) 16
Transfers 17
Telephone Transfers 17
Special Transfer Service -- Dollar Cost Averaging 17
Assignments 18
Contract Owner, Beneficiaries and Annuitants 18
CHARGES AND DEDUCTIONS
Surrender Charge (Contingent Deferred Sales Charge) 19
Administrative Charge 19
Mortality and Expense Risk Charge 20
Investment Advisory Fee of the Fund 20
Taxes 20
Sufficiency of Charges 20
ANNUITY PROVISIONS
Maturity Date 21
Maturity Proceeds 21
Settlement Options 21
Frequency of Annuity Payments 21
Amount of Variable Annuity Payments 21
Subaccount Annuity Unit Value 22
GENERAL PROVISIONS
Postponement of Payments 23
Payment by Check 23
Reports to Contract Owners 23
Contract Inquiries 23
FEDERAL TAX STATUS
Introduction 23
Variable Account Tax Status 23
Taxation of Annuities in General 24
Qualified Plans 25
1035 Exchanges 26
Diversification Requirements 26
Withholding 27
Other Considerations 27
EMPLOYMENT-RELATED BENEFIT PLANS 27
VOTING RIGHTS 28
SALES AND OTHER AGREEMENTS 29
YEAR 2000 29
LEGAL PROCEEDINGS 30
LEGAL MATTERS 30
FINANCIAL STATEMENTS AND EXPERTS 30
FURTHER INFORMATION 30
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS 31
ORDER FORM 31
APPENDIX A - DEFINITIONS
APPENDIX B - CONDENSED FINANCIAL INFORMATION
APPENDIX C - MORE INFORMATION ABOUT THE FIXED ACCOUNT
APPENDIX D - ILLUSTRATION OF MONTHLY VARIABLE ANNUITY
SETTLEMENT OPTION
SUMMARY FEE TABLE
The purpose of these tables is to help you understand the various costs and
expenses associated with your Contract. You may allocate premiums and
transfer Accumulated Value to any one of the Subaccounts - Opportunity
Growth, Mid Cap Growth, World Growth, Growth, High Yield, Income, and Money
Market - or to the Fixed Account or to any combination of the Subaccounts
and the Fixed Account. You pay no initial sales charge when you purchase the
Contract. All costs that you bear directly or indirectly for the Subaccounts
and Portfolios are shown below. We will deduct any premium taxes that
apply.
Contract Owner 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,
Mid Cap Growth and Opportunity Growth Subaccounts
(as a percentage of average daily Accumulated Value or Annuity
Unit Value) Mortality and Expense Risk Fees 1.10%
Total Subaccount Annual Expenses 1.10%
Annual Expenses For Growth, High Yield, Income, Money Market,
Mid Cap Growth and Opportunity Growth Portfolios
(as a percentage of Portfolio average daily net assets)
Management Fees (Investment Advisory Fees) 0.40%
Other Expenses After Expense Reimbursement 0%(3)
Total Portfolio Annual Expenses 0.40%
EXAMPLE (4)
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 $104 $180
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 $15 $48 $ 82 $180
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%
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%
Other Expenses After Expense Reimbursement 0%(3)
Total Portfolio Annual Expenses 0.85%
EXAMPLE (4)
1 year 3 years 5 years 10 years
------ ------- ------- --------
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 $127 $229
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 $106 $229
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(1) 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) 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 and
the Accumulated Value 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) 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 affiliate, LBVIP, have agreed to reimburse the Fund for
these operating expenses. For the fiscal year of the Fund ending December
31, 1998, the Fund was reimbursed approximately $3,975,850 for such
operating expenses. See Pages 10-12. The Expense Reimbursement Agreement
could be terminated at any time by the mutual agreement of the Fund, LB and
LBVIP, but the Fund, 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 these operating expenses, which would reduce the
net investment return on the shares of the Fund held by the Subaccounts of
the Variable Account.
(4) In these examples, the $30 annual administrative charge is approximated
as a 0.01% charge based on LB's average contract size.
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
Please refer to Appendix A at the end of this Prospectus for definitions of
several technical terms, which can help you understand details about your
Contract. The Summary is an introduction to various topics related to the
Contract. For more detailed information on each subject, refer to the
appropriate page numbers.
The Contract
Detailed explanations are provided in "The Contracts" - pages 13-18.
Issuance of a Contract. Lutheran Brotherhood issues individual flexible
premium variable annuity contracts. In order to purchase a Contract, you
must submit an application to us through one of our licensed
representatives, 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 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 minimum acceptable initial premium is $600 on an annualized basis. We
may, at our discretion, waive this initial premium requirement. You may make
subsequent premiums under the Contracts, but we may choose not to accept any
subsequent premium less than $50.
Free Look Period. You have the right to return the Contract within 10 days
after you receive it.
Allocation of Premiums. You may allocate premiums under the Contract to one
or more Subaccounts of the Variable Account and to the Fixed Account. The
assets of each Subaccount will be invested solely in a corresponding
Portfolio of the Fund-
* Opportunity Growth Portfolio
* Mid Cap Growth Portfolio
* World Growth Portfolio
* Growth Portfolio
* High Yield Portfolio
* Income Portfolio
* Money Market Portfolio
The Accumulated Value of the Contract in the Subaccounts and, except to the
extent fixed amount annuity payments have been elected, 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 us. (See Appendix B.)
On the date we approve the Contract Owner's application, we will transfer
from the general account the initial premium (after deduction of any
required premium taxes) and any interest 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 among the Subaccounts and the Fixed
Account in the same proportion as the initial premium, at the end of the
Valuation Period in which we receive the subsequent premium
Surrenders. If a Written Notice from you requesting a surrender is received
on or before the Maturity Date, we will pay to you all or part of the
Accumulated Value of a Contract 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.
Transfers. On or before the Maturity Date, you may request the transfer of
all or a part of your 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). We
reserve the right to limit the number of transfers in any Contract Year;
although, we will always allow at least two transfers a year. 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, you may, by Written Notice
and only once each Contract Year, change the percentage allocation of
variable annuity payments among the available Subaccounts
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
you surrender your Contract in whole or in part before it has been in force
for six full Contract Years, we will deduct a surrender charge from the
amount surrendered; provided that in each Contract Year, you may surrender
without a surrender charge up to 10% of your 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, decreasing thereafter by 1% each subsequent Contract Year. In
no event will the total surrender charge on any one Contract exceed 6.5% 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 on pages
19-20.
Administrative Charge. On each Contract Anniversary prior to and including
the Maturity Date, we deduct an annual administrative charge of $30 from the
Accumulated Value of your Contract. (This charge will be lower to the extent
legally required in some states.) 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, or the
Accumulated Value is greater than $5,000.
Mortality and Expense Risk Charge. A daily mortality and expense risk charge
is deducted 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. We guarantee not to increase the charge 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 Opportunity Growth, Mid Cap
Growth, Growth, High Yield, Income, and Money Market Portfolios. LB also
receives a daily investment advisory fee from the Fund equal to 0.85% of the
aggregate average daily net assets of the World Growth Portfolio.
Annuity Provisions
See pages 21-22 for more details.
You 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. You may also elect to receive a single sum by
surrendering your Contract on the Maturity Date and paying any applicable
surrender charge.
Federal Tax Status
For a description of the Federal income tax status of annuities, see Pages
23-24. 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
Condensed financial information derived from the financial statements of the
Variable Account is contained in Appendix B.
The financial statements of LB are also contained in the Statement of
Additional Information.
Performance Related Information
The Variable Account may advertise certain performance related information
concerning the Subaccounts.
Yields
The Variable Account may also 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 "effective yield" will be slightly higher than the
"yield" because of the compounding effect of this assumed reinvestment. The
annualized current yield and effective yield for the seven-day base period
ended December 31, 1998, was 3.74% and 3.81%, respectively. For more
information, see the Statement of Additional Information.
The Variable Account may also advertise for the other Subaccounts yield
quotations based on a 30-day (or one month) period, which is 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 base period ended December 31, 1998
for the High Yield Subaccount was 9.66%. The current yield for the same 30-
day base period for the Income Subaccount was 4.48%. For more information,
see the Statement of Additional Information.
Total Returns
From time to time, we 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. If the assumed investment has less than 10
years of performance history, the total return will be shown from
Commencement of Operations.
The average annual total returns for the 1-year, 5-year, and 10-year periods
through December 31, 1998, and for the period from commencement of
operations through December 31, 1998 for the Subaccounts are as follows:
1 Year 5 Year 10 Year Inception
----- ------ ------ -------------
Opportunity Growth
Subaccount (1/18/96) -9.24% -- -- 2.92%*
Mid Cap Growth
Subaccount (1/30/98) -- -- -- 4.54%
World Growth Subaccount (1/18/96) 9.24%* -- -- 7.46%*
Growth Subaccount (3/8/88) 20.14%* 20.02%* 17.44%* 15.66%*
High Yield Subaccount (3/8/88) -7.82%* 5.94%* 9.81%* 9.53%*
Income Subaccount (3/8/88) 2.37%* 5.38%* 8.19%* 7.81%*
Money Market Subaccount (2/18/88) -1.46%* 3.60%* 4.34%* 4.48%*
*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 and the Accumulated Value is less than
$5,000. Inclusion of the administrative charge would reduce the total
return figures shown above. Assumes applicable sales charge upon surrender.
Premium taxes may apply depending on various states' laws.
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 with 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 or publications
such as:
The Bank Rate Monitor National Index Lipper Analytical Services
Barron's Money
Business Week Mutual Fund Forecaster
Donoghue's Money Market Fund Report Newsweek
Financial Services Week The New York Times
Financial Times Personal Investor
Financial World Stanger Report
Forbes Sylvia Porter's Personal Finance
Fortune USA Today
Global Investor U.S. News & World Report
Institutional Investor The Wall Street Journal
Investor's Daily Wiesenberger Investment
Kiplinger's Personal Finance Companies Service
LUTHERAN BROTHERHOOD, THE VARIABLE ACCOUNT
AND THE FUND
Lutheran Brotherhood
Lutheran Brotherhood issues the Contracts. We are a fraternal benefit
society owned and operated for our members. We were founded in 1917 under
Minnesota law. We are currently licensed to transact life insurance
business in all 50 states and the District of Columbia. At the end of 1998,
we had total assets of approximately $20.551 billion.
To help us meet capitalization requirements of various states, LB has
invested approximately $115.8 million in LBVIP. LB may invest additional
amounts in LBVIP in the future but is not currently legally obligated to do
so. The assets of LB do not support the benefits payable under the Contracts
described in this Prospectus.
We are 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 we do business. We submit annual reports on our
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. We are also subject to certain
Federal securities laws and regulations.
The Variable Account
The Variable Account is a separate account of LBVIP, established by our
Board of Directors in 1987 pursuant to the laws of the State of Minnesota.
The Variable Account meets the definition of a "separate account" under the
federal securities laws. We have 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").
This registration does not involve supervision by the SEC of the management
or investment policies or practices.
The assets of the Variable Account are owned by us, and we are 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 we may
conduct. We may transfer to our 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 our other income, gains or losses. We 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.
You may allocate the premiums paid under the Contract to one or more of the
Subaccounts of the Variable Account. We invest the assets of each Subaccount
in a corresponding Portfolio of the Fund. The Subaccounts and corresponding
Portfolios of the Fund are:
Subaccount Corresponding Portfolio
---------- -----------------------
Opportunity Growth Subaccount Opportunity Growth Portfolio
Mid Cap Growth Subaccount Mid Cap Growth Portfolio
World Growth Subaccount World Growth Portfolio
Growth Subaccount Growth Portfolio
High Yield Subaccount High Yield Portfolio
Income Subaccount Income Portfolio
Money Market Subaccount Money Market Portfolio
The Portfolios of the Fund each have an investment objective:
Opportunity Growth Portfolio. To achieve long-term growth of capital by
investing primarily in a professionally managed diversified portfolio of
smaller capitalization common stocks.
Mid Cap Growth Portfolio. To achieve long-term growth of capital by
investing primarily in a professionally managed diversified portfolio of
common stocks of companies with medium market capitalizations.
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.
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.
We cannot assure that the Portfolios of the Fund will achieve their
respective investment objectives.
As custodian for the Variable Account, we will hold shares of the Fund
purchased by each Subaccount of the Variable Account.
The Fund is designed to provide an investment vehicle for variable annuity
and variable life insurance contracts. Shares of the Fund are sold to other
insurance company separate accounts of LB and separate accounts of our
indirect subsidiary, Lutheran Brotherhood Variable Insurance Products
Company ("LBVIP"). 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 and for LBVIP and LB to invest simultaneously in the Fund, although
we do 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:
* Changes in state insurance laws
* Changes in Federal income tax law
* Changes in the investment management of the Fund
* Differences in voting instructions between those given by the
contract owners from the different separate accounts
In addition, if we believe the Fund's response to any of those events or
conflicts insufficiently protects Contract Owners, we will take appropriate
action on our 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 us 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 also acts as investment adviser to the Fund. LB is a
registered investment adviser under the Investment Advisers Act of 1940. LB
charges the Fund a daily investment advisory fee equal to an annual rate of
0.40% of the aggregate average daily net assets of the Money Market, Income,
High Yield, Growth, Mid Cap Growth, and Opportunity Growth Portfolios. LB
also charges the Fund an annual investment advisory fee equal to 0.85% of
the aggregate average daily net assets of the World Growth Portfolio.
LB has engaged T. Rowe Price Associates, Inc. ("T. Rowe Price") as
investment Sub-adviser for the Opportunity Growth Portfolio. T. Rowe Price
was founded in 1937 and has its principal offices in Baltimore, Maryland.
As of December 31, 1998, T. Rowe Price and its affiliates managed over $148
billion. Richard T. Whitney, Managing Director of T. Rowe Price, is
primarily responsible for day-to-day management of the Opportunity Growth
Portfolio and developing and executing the Portfolio's investment program.
LB pays this Sub-adviser an annual fee for its sub-advisory services to the
Opportunity Growth Portfolio. The fee payable is equal to 0.30% of that
Portfolio's average daily net assets.
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 the U.S.
equivalent of $32 billion under management as of December 31, 1998 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 this Sub-adviser an annual fee for its sub-advisory services to the
World Growth Portfolio. The fee payable is equal to a percentage of each
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. (See the LB Series Fund, Inc.
Prospectus which is included in the latter half of this booklet.)
You should periodically evaluate your allocation among the Subaccounts in
light of current market conditions and the investment risks associated with
investing in the Fund's various Portfolios. A full description of the Fund,
its investment objectives, policies and restrictions, its expenses, the
risks associated with investing in the Fund's Portfolios and other aspects
of the Fund's operation is contained in the accompanying LB Series Fund,
Inc. Prospectus, which should be carefully read in conjunction with this
Prospectus.
Addition, Deletion or Substitution of Investments
We reserve 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 Portfolio
shares of the Fund are no longer available for investment or if in our
judgment further investment in any Portfolio should become inappropriate in
view of the purposes of the Variable Account, we may redeem the shares, if
any, of that Portfolio and substitute shares of another registered open-end
management company. We 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.
We also reserve 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, we may, in our 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 us.
If any of these substitutions or changes are made, we may by appropriate
endorsement change the Contract to reflect the substitution or change. If we
deem 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 LBVIP separate accounts.
THE CONTRACTS
Purchasing a Contract
You purchase a Contract by submitting an application to us through one of
our licensed representatives who is also a registered representative of
LBSC. In your application you select the features of your Contract,
including:
* The amount of your initial premium. This premium must be at least $600
on an annualized basis, though we may choose to waive this requirement.
* How you plan to pay premiums after the initial premium. We may require
any such premium to be at least $50.
* How you want your premiums allocated among the Subaccount(s) and/or Fixed
Account.
* Your age at the time you want annuity payments to begin. This will
establish the Maturity Date, which must be a Contract Anniversary at
least three years after the Date of Issue.
* The beneficiary to receive the benefit payable upon the death of the
Annuitant.
Processing your Application
We will process your application after we have received both it and your
initial premium. Your contract's Date of Issue will be the date on which we
receive the initial premium. If we determine that your application is in
good order, we will approve it within two days after the Date of Issue. If
we determine that the application is not in good order, we will attempt to
complete it within five business days. If the application is not complete
at the end of this period, we will tell you the reason for the delay and
inform you that we will return the initial premium to you unless you
specifically consent to our keeping it until the application is complete.
Allocation of Premium
If we approve your application on the Date of Issue, we will allocate the
initial premium among the Subaccount(s) and/or the Fixed Account according
to your application on that date. Otherwise, we will deposit your initial
premium in our general account where it will earn interest at a rate which
we determine. The interest and any cost of crediting interest will be paid
by us, not other Contract Owners. On the date we approve your application,
we will allocate your initial premium (including any interest earned while
in the general account) among the Subaccount(s) and/or the Fixed Account
according to your application. If any premium taxes are required, we will
deduct them from the initial premium prior to making any allocation among
the Subaccount(s) and/or the Fixed Account.
The allocation percentages which you select must be in whole numbers and
their sum must be 100% We reserve the right to adjust allocation
percentages to eliminate fractional percentages. Premiums which you pay
after the initial premium are allocated at the end of the Valuation Period
in which we receive them using the allocation percentages specified in your
application. You may change the allocation percentages for future premiums
without charge and at any time by giving us Written Notice or, if you have
completed the Telephone Transaction Authorization Form, by telephone. Any
change will apply to all future premiums unless you request another change.
The values in the Subaccounts of the Variable Account will vary with the
investment experience of the corresponding Portfolios. You bear the entire
investment risk of your contract. You should periodically review your
allocations of premiums in light of market conditions and your overall
financial objectives.
Free Look Period
After you receive your contract, you have a "free look" period of 10 days
(20 days in Nevada and North Carolina; 30 days if you are age 60 or over and
reside in California) to decide if you want to keep it. If you decide to
cancel the contract within the free look period, you may do so by returning
it to us or to the representative through home you bought it. When we
receive the contract at our Home Office, we will cancel it and refund to you
an amount which depends on the state in which your contract was issued.
In Michigan, North Carolina, Nevada, South Carolina and Washington, we will
refund all premiums which you have paid. In Pennsylvania, we will refund
the sum of:
(a) The difference between the premiums paid and the amounts allocated to
the Variable and Fixed Accounts; and
(b) The Accumulated Value on the day the contract is first received by us
or our representative.
In all other states, we will refund the sum of:
(a) The Accumulated Value on the date the returned contract is received by
us or our representative;
(b) Any charges we made for premium taxes; and
(c) The amount attributable to your contract for risk charges and taxes, if
any, deducted from the Variable Account, and for advisory fees charged
against the net asset value in the Fund portfolios.
In addition to the "free look" period described, the Employee Retirement
Income Security Act of 1974 ("ERISA") grants certain revocation rights to
contracts issued as individual retirement annuities ("IRA"s). If your
contract is an IRA and you revoke it under the rights granted by ERISA, we
will refund all premiums which you have paid regardless of the state in
which the contract was issued.
Accumulated Value, Accumulation Units, and Accumulation Unit Value
Accumulated Value. Your Contract's value is expressed as its Accumulated
Value. On or before the Maturity Date, Your Contract's Accumulated Value is
the sum of:
* The amount which your contract has in the Fixed Account; and
* The amounts which your contract has in each of the Subaccounts. Amounts
in the Subaccounts are calculated at the end of each Valuation Period as
follows:
* First, we calculate the Accumulation Unit Value for each Subaccount.
This calculation recognizes those actions and events occurring during
the current Valuation Period which affect the total dollar value of
the Subaccount without affecting the number of Accumulation Units held
by the Subaccount. (See Accumulation Unit Value below.)
* Next, Contract transactions for the current Valuation Period are made.
These transactions in and out of each Subaccount are done in terms of
buying and selling Accumulation Units of the Subaccount at the current
(i.e. newly-calculated) Accumulation Unit Value for the Subaccount.
* Finally, we calculate the amount which your contract has in each
Subaccount by multiplying your number of Accumulation Units in the
Subaccount by the current Accumulation Unit Value for the Subaccount.
The Accumulated Value calculated at the end of a Valuation Period applies to
all days in that period, including days which are not Valuation Days. Your
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 that you pay, any surrenders you make, and any charges
we assess 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.
Determination of Number of Accumulation Units.
Transactions in and out of a Subaccount are made by buying or selling
Accumulation Units of the Subaccount at the Subaccount Accumulation Unit
Value.
Your contract buys Accumulation Units in a Subaccount when:
* You allocate premiums to that Subaccount; or
* You transfer Accumulated Value into that Subaccount from another
Subaccount or from the Fixed Account.
Accumulation Units in a Subaccount are sold when:
* You transfer Accumulated Value out of that Subaccount into another
Subaccount or the Fixed Account;
* You make a surrender from that Subaccount; or
* We deduct all or part of the Administrative Charge from that Subaccount.
Accumulation Unit Value. A Subaccount's Accumulation Unit Value is the unit
price that is used whenever Accumulation Units of the Subaccount are bought
or sold. Accumulation Unit Values may increase or decrease during each
Valuation Period. We re-determine the Accumulation Unit Value for each
Subaccount at the end of each Valuation Period before making any
transactions for that period that would affect the number of units held in
the Subaccount. Each Subaccount's Accumulation Unit Value is calculated as
the total dollar value of that Subaccount divided by the total number of
Accumulation Units held by that Subaccount for all contracts (including
Accumulation Units held as reserves for variable annuities). The total
dollar value of a Subaccount is:
(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 current Valuation
Period, plus or minus
(c) a charge or credit for any taxes reserved which we determine to be a
result of the investment operation of the Portfolio, minus
(d) the mortality and expense risk charge. This charge is currently
0.003014% (but guaranteed never to exceed 0.003425%) of the net assets
of the Subaccount for each day during the current Valuation Period
(see pages 20-21).
Minimum Accumulated Value
We require your contract to maintain a minimum Accumulated Value. The
amount which must be maintained depends on your premium paying history as
follows:
(a) At the end of any 24-month period which you pay no premiums, your
Accumulated Value must be at least $1000 after all contract charges
have been applied.
(b) If you pay at least one premium every 24-months, we require only that
the Accumulated Value always be sufficient to cover the contract's
administrative charge (see pages 19-20).
If we know that your contract will not meet these requirements on an
upcoming Contract Anniversary, we will notify you 60 days before that
anniversary and inform you of the minimum dollar amount which you must pay
to keep the contract in force. If you fail to pay at least that amount, we
will terminate your contract on the Contract Anniversary. If we do so
because your contract failed to meet Requirement (a), we will pay you the
remaining Accumulated Value. If your contract fails to meet Requirement (b)
your contract terminates without value.
Death Benefit Before the Maturity Date
If the Annuitant dies before the Maturity Date, the Beneficiary will be
entitled to receive the contract's death benefit.
The amount of the death benefit will be the greatest of:
* The Accumulated Value on the date we calculate the death benefit
* The sum of all premiums we received for the contract, less the amount of
all partial surrenders (including any applicable charges) which you made;
and
* The Accumulated Value on the preceding Minimum Death Benefit Date plus
the sum of the premiums we received for the contract after that date,
less the amount of any partial surrenders (including any applicable
charges) which you made after that date. The first Minimum Death Benefit
Date is the Date of Issue of this contract. Thereafter, Minimum Death
Benefit Dates occur every six years on the Contract Anniversary.
We calculate the death benefit on the later of:
(a) The date we receive both proof of the Annuitant's death; and
(b) The date we receive a written request from the Beneficiary for either a
single sum payment or a settlement option.
If the Beneficiary requests a single sum payment, we will pay the death
benefit within seven days after the date we calculate it. If the
beneficiary requests a settlement option, it must be an option that you
could have selected before the Maturity Date, and the option must provide
that either:
a) The principal and interest are completely distributed within five years
after the date of death; or
b) If the beneficiary is a natural person, distribution of the principal
and interest is made by means of a periodic payment which begins within
one year after the date of death and is not guaranteed for a period
which extends beyond the life expectancy of the beneficiary.
If we do not receive a written request from the beneficiary within one year
from the date of the Annuitant's death, we will deem the Beneficiary to have
requested a single sum payment. Any proceeds not subsequently withdrawn will
be paid in a lump sum on the date five years after the date of death. (If
the Beneficiary is your spouse, he or she may, to the extent permitted by
law, elect to continue the contract in force, in which case your spouse will
become and be treated as the Annuitant.)
If your contract was issued in connection with a Qualified Plan, additional
restrictions on the manner of payment of the death benefit may apply. Any
such restrictions 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 the annuitant dies while we are paying you an annuity income under a
settlement option, any death benefit payable will depend on the terms of the
settlement option. If a death benefit is payable, the beneficiary may elect
to receive the proceeds in the form of a settlement option, but only if the
payments are paid at least as rapidly as payments were being paid under the
settlement option in effect on the date of death. If your contract was
issued in connection with a Qualified Plan, additional restrictions on the
manner of payment of the death benefit may apply.
Surrender (Redemption)
On or before the Maturity Date, you may surrender all or part of your
contract's Accumulated Value by giving us Written Notice. Any surrender
which you request will be made at the end of the Valuation Period during
which the requirements for surrender are completed. We will pay you the
proceeds from a surrender within seven days after the surrender is made.
The proceeds will be the amount surrendered less any surrender charge and
premium tax due (see pages 19-20).
A surrender reduces your Accumulated Value by the amount surrendered. For
amounts surrendered from a Subaccount, this is done by selling Accumulation
Units of the Subaccount. For partial surrenders, we allocate the surrender
among the Subaccounts and the Fixed Account so that all accounts are reduced
in value by the same percentage. With our approval, you may specify a
different allocation for a partial surrender.
A partial surrender must be at least $200. and must not reduce the remaining
Accumulated Value to less than $1,000. When you request a partial
surrender, you specify the amount which you want to receive as a result of
the surrender. If there are no surrender charges, withholding taxes or
premium taxes associated with the surrender, the amount surrendered will be
the amount which you request. Otherwise, the amount surrendered will be the
amount necessary to provide the amount requested after we apply the
surrender charge and any withholding and premium taxes.
After the Maturity Date, your contract does not have an Accumulated Value
which can be surrendered. However, if you are receiving annuity payments
under certain settlement options, surrender may be allowed. Surrender is
not allowed if your settlement option involves a life income or if you
agreed not to revoke or change the option once annuity payments begin. For
other settlement options, the amount available for surrender will be the
commuted value of any unpaid annuity payments computed on the basis of the
assumed interest rate incorporated in the annuity payments.
For all surrenders, you should consider the tax implications of a surrender
before you make a surrender request. See pages 24-25.
Transfers
On or before the Maturity Date, you may request the transfer of all or a
part of your contract's Accumulated Value among the Subaccounts of the
Variable Account and the Fixed Account.
You can request a transfer in two ways:
1) By giving us written notice
2) By telephone after completing a Telephone Transaction Authorization
Form.
We will make the transfer without charge at the end of the Valuation period
during which we receive your request. For transfers from the Fixed account
to a Subaccount of the Variable Account, the amount taken from the Fixed
Account is used to buy Accumulation Units of the chosen Subaccount. For
transfers from a Subaccount, Accumulation Units of the Subaccount are sold
and the resulting dollar amount is, depending on your request, either
transferred to the Fixed Account or used to buy Accumulation Units of
another Subaccount.
Transfers are subject to the following conditions:
* The total amount transferred must be at least $200. However, if the
total value in a Subaccount or the Fixed Account is less than $200, the
entire amount may be transferred.
* We reserve the right to limit the number of transfers in each Contract
Year. However, we will always allow at least two transfers per Contract
Year. (For contracts issued in Texas, we allow twelve transfers per
Contract Year.)
* In any Contract Year, only one of your allowed transfers may be from the
Fixed Account. Any transfer from the Fixed Account must be made on or
within 45 days after a Contract Anniversary.
Transfers will also be subject to any conditions which the Portfolio whose
shares are involved may impose,
After the Maturity Date, you 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 you complete the Telephone
Transaction Authorization Form. If you elect to complete the Telephone
Transaction Authorization Form, you thereby agree that we, our agents and
employees will not be liable for any loss, liability cost or expense when
we, our 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 you have completed the Telephone Transaction Authorization Form, is
later determined not to have been made by you or was made without your
authorization, and a loss results from such unauthorized instruction, you
bear the risk of this loss. We will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. In the event we do
not employ such procedures, we 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
We administer a dollar cost averaging program which enables you to pre-
authorize the periodic transfer of predetermined dollar amounts from the
Money Market Subaccount to as many of the other Subaccounts or to the Fixed
Account as you specify. This program is generally suitable if you are
making a substantial deposit to your Contract and 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. This 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 you can continue to invest regularly
throughout changing market conditions, it can be an effective strategy to
help meet your long-term goals.
If you are interested in the dollar cost averaging program you may obtain an
application and full information concerning the program and its restrictions
from us. If you enter into a dollar cost averaging agreement with us, it
will continue until the amount in the Money Market Subaccount is exhausted
or you terminate the agreement.
Assignments
Assignment is the transfer of contract ownership from one party to another.
If a 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.
We are not bound by an assignment unless it is in writing and filed at our
Home Office. We are not responsible for the validity or effect of any
assignment.
You should consider the tax implications of an assignment. See pages 24-25.
Contract Owner, Beneficiaries and Annuitants
Unless another owner is named in the application, the Annuitant is the owner
of the Contract and may exercise all of the 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 owner may change the Beneficiary by giving us Written Notice of the
change. The change will not be effective until we receive your Written
Notice at our Home Office. Once we receive it, the change will be effective
as of the date on which you signed the notice. However, the change will not
affect any payments made or actions taken by us before we received your
notice, and we will not be responsible for the validity of any change.
CHARGES AND DEDUCTIONS
Surrender Charge (Contingent Deferred Sales Charge)
We do not deduct a charge for sales expenses from premiums at the time
premiums are paid. Instead, we deduct a charge at the time you surrender
all or part of the your Accumulated Value. This surrender charge applies
only during the first six Contract Years. During those years, we calculate
the surrender charge as a percentage of the amount which you surrender,
subject to certain exceptions noted below.
Surrender Charges
Contract Year Percent Applied
------------- ---------------
1 6%
2 5%
3 4%
4 3%
5 2%
6 1%
After Contract Year 6 there is no charge for making surrenders. In addition,
during the first six Contract Years we will limit or waive surrender charges
as follows:
* Cumulative Percent-of-Premium Limit. For all surrenders, we will limit
the Surrender Charge so that on any date, the sum of all surrender
charges applied to that date will not exceed 6.5% of the total of
premiums you have paid to that date.
* Surrenders Paid Under Certain Settlement Options. For surrenders which
you make after Contract Year 3, there is no surrender charge applied
to amounts which you elect to have paid under:
1) A settlement option for a fixed amount or a fixed period (including
Option 3V described on page 21)
if the payments will be made for at least five years and you agree at
the time of settlement that after the first payment is made, you may
not revoke or change the settlement option.
2) Options which involve a life income, including Option 4V or 5V
described on Page 21.
* Ten Percent Free Each Contract Year. In each Contract Year, you may
surrender without a Surrender Charge up to 10% of the Accumulated Value
existing at the time of your first surrender made in that Contract Year.
This "Ten Percent Free" is not cumulative. For example, if you make no
surrenders during the first three Contract Years, the percentage of
Accumulated Value which you may surrender without charge in the fourth
Contract Year is 10%, not 40%.
* Total Disability of the Annuitant. There is no surrender charge if the
Annuitant is totally disabled (as defined in your contract) on the date
of a surrender.
Certain surrenders are subject to a 10% Federal tax penalty on the amount of
income withdrawn. See pages 23-27.
If surrender charges are not sufficient to cover our sales expenses, we will
bear the loss; conversely, if the amount of such charges proves more than
enough, we will retain the excess (see "Sufficiency of Charges" below). We
do not currently believe that the surrender charges we impose will cover our
expected costs of distributing the Contracts.
Administrative Charge
Your Contract includes an annual administrative charge of $30 (or less, if
required by the state where your contract is issued) to help us cover the
expenses we incur in administrating your contract, the Variable Account and
the Subaccounts. On each Contract Anniversary prior to and including the
Maturity Date, we will determine if this charge will be applied to your
contract. We apply the charge only on Contract Anniversaries on which the
sum of premiums you have paid less the amount of any Partial Surrenders you
have made is less than $5,000 and the Accumulated Value is less than $5,000.
We deduct the charge from your Accumulated Value, allocating the deduction
among the Subaccounts and the Fixed Account so that all accounts are reduced
in value by the same percentage. Any such deduction from a Subaccount is
made by selling Accumulation Units of the Subaccount. With our approval,
you may specify a different allocation for the administrative charge.
Mortality and Expense Risk Charge
We assume certain financial risks associated with the contracts. Those
risks are of two basic types:
* Mortality Risk. This includes our risk that (1) Death Benefits paid
before the Maturity Date will be greater than the Accumulated Value
available to pay those benefits, and (2) annuitant payments involving
life incomes will continue longer than we expected due to lower than
expected death rates of the persons receiving them.
* Expense Risk. This is the risk that the expenses we incur to issue and
maintain contracts will exceed the charges that we make to cover those
expenses.
As compensation for assuming these risks, we deduct a daily mortality and
expense risk charge from the average daily net assets in the Variable
Account. The current charge (0.003014% per day) is equal to an annual rate
of 1.10% (approximately 0.80% for mortality risk and 0.30% for expense risk)
of the average daily net assets of each Subaccount in the Variable Account.
We may change this charge in the future, but we guarantee that it will never
exceed an annual rate of 1.25% (0.003425% per day).
If the mortality and expense risk charge is insufficient to cover the actual
cost of the mortality and expense risk assumed by us, we will bear the loss.
We will not reduce annuity payments or increase the administration charge to
compensate for the insufficiency. If the mortality and expense risk charge
proves more than sufficient, the excess will be profit available to us for
any appropriate 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, Mid Cap Growth
Portfolio, Income Portfolio, High Yield Portfolio and Opportunity Growth
Portfolio, and 0.85% of the aggregate average daily net assets of the World
Growth Portfolio. See pages 10-12, and the accompanying current LB Series
Fund, Inc. Prospectus.
Taxes
Currently, no charge will be made against the Variable Account for Federal
income taxes. We 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 us. Charges for other taxes, if any, attributable to the
Variable Account may also be made. See page 23.
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, we will bear the loss. Any such expenses borne by us will be
paid out of our 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, we will retain the excess.
ANNUITY PROVISIONS
Maturity Date
The Maturity Date is the date on which we begin paying you your contract's
annuity income. This date is based on the maturity age which you specify in
your application. You may change the Maturity Date by giving us Written
Notice at least 30 days before both the Maturity Date currently in effect
and the new Maturity Date. The new date selected must satisfy our
requirements for a Maturity Date and any requirements that may be imposed by
the state in which your contract was issued.
Maturity Proceeds
The proceeds available on the Maturity Date will be the amount provided by
surrendering your contract's entire Accumulated Value on that date. If the
Maturity Date occurs within the first six Contract Years, surrender charges
will be deducted from the Accumulated Value if they apply. Premium taxes
will also be deducted if they apply (see pages 19-20).
We will pay you the proceeds at maturity according to the annuity settlement
option which you select. However, we will pay the proceeds in a single sum
if the Accumulated Value on the Maturity Date is less than $2,000 or if you
elect to receive the proceeds in a single sum. If we pay you proceeds in a
single sum, your contract will terminate on the Maturity Date.
If you have not selected either a settlement option or a single sum payment
by the Maturity Date, we will pay proceeds of $2,000 or more using a fixed
annuity, life income with 10-year guarantee period.
Settlement Options
You may elect to have proceeds paid to you under an annuity settlement
option or a combination of options. Under each option, you may choose
whether annuity payments are to be made on a fixed or variable basis. You
may change your choice of settlement option by giving us Written Notice at
least 30 days before the Maturity Date.
The fixed annuity settlement options available to you are described in your
contract but are not summarized here. The variable annuity settlement
options which your contract offers are as follows:
Option 3V--Income for a Fixed Period. Under this option, we pay an annuity
income for a fixed number of years, not to exceed 30.
Option 4V--Life Income with Guaranteed Period. Under this option, we pay an
annuity income for the lifetime of the payee. If the payee dies during the
guaranteed period, payments will be continued to the end of that period and
will be paid to the Beneficiary. You may select a guaranteed period of 10
or 20 years. You may not revoke or change the option once annuity payments
begin.
Option 5V--Joint and Survivor Life Income with Guaranteed Period. Under
this option, we pay an annuity income 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 end of that period and will be paid to the
Beneficiary. You may select a guaranteed period of 10 or 20 years. You may
not revoke or change the option once annuity payments begin.
In addition to these options, proceeds may be paid under any other
settlement option which you suggest and to which we agree.
Frequency of Annuity Payments
Annuity payments under a settlement option will be paid at monthly intervals
unless you and we agree to a different payment schedule. If annuity
payments would be or become less than $25 ($20 for contracts issued in the
state of Texas) if a single settlement option is chosen, or $25 ($20 for
contracts issued in the state of Texas) on each basis if a combination of
variable and fixed options is chosen, we may change the frequency of
payments to intervals that will result in payments of at least $25 ($20 for
contracts issued in the state of Texas) each from each option chosen.
Amount of Variable Annuity Payments
The amount of the first variable annuity payment is determined by applying
the proceeds to be paid under a particular settlement option to the annuity
table in the contract for that option. The table shows the amount of the
initial annuity payment for each $1,000 applied.
Subsequent variable annuity payments vary in amount according to 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 (as determined 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 procedure described here 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 these 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. We
guarantee 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
A Subaccount's Annuity Unit Value is used to determine the dollar value of
annuity payments based on Annuity Units of the Subaccount. Annuity Unit
Values may increase or decrease during each Valuation Period. We re-
determine the Annuity Unit Value for each Subaccount at the end of each
Valuation Period before making any transactions for that period that would
affect the number of units held in the Subaccount. Each Subaccount's
Annuity Unit Value is equal to (a) times (b) times (c) where:
(a) Is that Subaccount's Annuity Unit Value at the end of the immediately
preceding Valuation Period.
(b) Is that Subaccount's investment factor for the current Valuation
Period.
(c) Is a discount factor equivalent to an assumed investment earnings rate
of 3 1/2% per year.
The investment factor used in (b) measures the investment performance of the
Subaccount during the Valuation Period. It is equal to the Subaccount's
Accumulation Unit Value at the end of the Valuation Period divided by the
Subaccount's Accumulation Unit Value at the end of the immediately preceding
Valuation Period.
The discount factor used in (c) offsets the effect of the assumed investment
earnings rate of 3.5% per year that is built into the annuity tables in the
contracts. This means that, if the investment factor calculated in (b) were
equivalent to an annual rate of 3.5%, (b) times (c) would be equal to one,
the Annuity Unit Value would remain constant and the corresponding annuity
payments would be level.
GENERAL PROVISIONS
Postponement of Payments
We may defer payment of any surrender, death benefit or annuity payment
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 from
the Subaccounts of the Variable Account may also be postponed under
these circumstances.
Payment by Check.
If a payment which we make to you depends on the premiums you pay by check,
our payment may be delayed until your check has cleared your bank.
Reports to Contract Owners
At least once each year we will send you a report showing the value of your
contract. The report will include the Accumulated Value and any additional
information required by law. Values shown will be for a date no more than
two months prior to the date we mail the report.
Contract Inquiries
Inquiries regarding a contract may be made by writing to us at our 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, LB, and, if the Contract is purchased under a retirement plan, upon
the type of retirement plan and 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 intend to 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 investment in 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 generally determined by a
formula which establishes the ratio that the investment in the Contract
bears to the expected return under the Contract as of the Maturity Date.
Where annuity payments are made under certain Qualified Plans, the portion
of each payment that is excluded from gross income will generally be equal
to the total amount of any investment in the Contract as of the Maturity
Date, divided by the number of anticipated payments, which are determined by
reference to the age of the Annuitant. The taxable portion is taxed at
ordinary income tax rates. For certain types of Qualified Plans there may be
no investment 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. 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, and the income on
such a Contract will be taxable in the year received or accrued by the
Contract Owner. This rule does not apply, however, 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. This section 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 described above.
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.
Distributions from Section 403(b) tax-sheltered annuities that are
attributable to 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. Self-employed individuals may establish Qualified Plans
commonly referred to as "H.R. 10" 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.
Roth IRAs. Section 408A of the Code permits eligible individuals to make
nondeductible contributions to an individual retirement program known as a
"Roth IRA." Section 408A includes limits on how much an individual may
contribute to a Roth IRA and when distributions may commence. Qualified
distributions from Roth IRAs are excluded from gross income if (a) made more
than five years after the taxable year of the first contribution to the Roth
IRA, and (b) meet any of the following conditions: (1) the annuity owner
has reached age 59 1/2; (2) the distribution is paid to a beneficiary after
the owner's death; (3) the annuity owner is disabled; or (4) the
distribution (not exceeding $10,000) will be used for a first time home
purchase. Nonqualified distributions are includable in gross income only to
the extent they exceed contributions made to the Roth IRA. The taxable
portion of a nonqualified distribution may be subject to a 10% penalty tax.
Subject to certain limitations, a traditional individual retirement account
or annuity may be converted into a Roth IRA and upon such a conversion, an
individual is required to include the taxable portion of the conversion in
gross income, but is not generally subject to a 10% penalty tax.
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". The assets of the Fund are expected to meet the
diversification requirements. LB 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. 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. 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.
YEAR 2000
Our business units utilize data processing systems in the administration of
the insurance and financial services products which they market. Most of
our data processing systems have required modifications to enable them to
process dates including the year 2000 and beyond.
Since early 1996, we have been preparing for the computer requirements
associated with the approaching turn of the century. We completed
assessment of its internal systems in 1996. As of the date of this
prospectus, the necessary system changes are substantially complete. System
testing is in process and we expect testing of all critical systems to be
completed during the first six months of 1999.
The work on these computer systems extends to the software that we purchase
from vendors. In addition, we have been communicating formally with its
business partners to identify and assess potential exposure that could
result from their failure to address these computer issues on a timely
basis. Each of our departments is involved in the process of preparing a
contingency plan.
We and our business partners bear all the costs of identifying and resolving
the computer systems issues associated with the year 2000. These costs will
have no effect on the performance of the Variable Account. The Contract
permits us to increase the charges for our expense risks up to the
guaranteed maximum rates. We, however, do not expect the costs for the year
2000 compliance to have any significant effect on the benefits or values
provided by the Contracts.
We believe that its computer systems will be ready for the year 2000 well in
advance of the deadline. By their nature, however, the issues in this area
carry the risk of unforeseen problems, both at LB and at all the other sites
where supporting functions and interaction take place. There can be no
assurance that these problems will not have a material adverse impact on the
operations of LB and the Variable Account.
A description of the Fund's preparations for the "Year 2000" is contained in
the accompanying LB Series Fund, Inc. prospectus.
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 LLP,
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
PricewaterhouseCoopers 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
Below is a copy of the Table of Contents included in the Statement of
Additional Information. To obtain a copy of this document, complete and
mail the form below.
Page
Introduction 2
Custody of Assets 2
Independent Accountants and Financial Statements 2
Distribution of the Contracts 3
Calculation of Performance
Money Market Subaccount 3
Other Subaccounts 4
Financial Statements of Variable Account 9
Comment on Financial Statements of LB 20
Financial Statements of LB 20
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)
<PAGE>
APPENDIX A
DEFINITIONS
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.
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 who controls all the rights under the Contract
while the Annuitant is alive. The Annuitant is the Contract Owner, unless
another owner is named in the Contract application.
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 LBVIP 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 4.0%) declared by LB at
least annually. Amounts accumulated in the Fixed Account are guaranteed by
LB. (See Appendix B.)
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 LBVIP shall specify in a notice to the
Contract Owner.
LBSC. Lutheran Brotherhood Securities Corp., which is an indirect subsidiary
of Lutheran Brotherhood and which acts as the principal underwriter of the
Contracts.
LB Representative. A person who is licensed by state insurance officials to
sell the Contracts and who is also a registered representative of LBSC.
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 which acts as the investment adviser to the Fund.
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
408A 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.
Valuation Day. 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.
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.
<PAGE>
APPENDIX B
CONDENSED FINANCIAL INFORMATION
Condensed Financial Information
Condensed financial information is derived from the financial statements of
the Variable Account is contained in Appendix B.
Selected data for Accumulation Units outstanding throughout the period
ending December 31:
Opportunity Growth Subaccount
-----------------------------
1998 1997 1996
---- ---- ----
Accumulation Unit Value:
Beginning of period $11.77 $11.79** $10.00
End of period 11.29 11.77 11.79
Number of Accumulation Units
outstanding at end of period 26,883,494 15,755,047 8,925,231
Mid Cap Growth Subaccount
-----------------------------
1998
----
Accumulation Unit Value:
Beginning of period $10.00**
End of period 11.05
Number of Accumulation Units
outstanding at end of period 4,916,782
World Growth Subaccount
---------------------------
1998 1997 1996
---- ---- ----
Accumulation Unit Value:
Beginning of period $11.11 $10.93** $10.00
End of period 12.83 11.11 10.93
Number of Accumulation Units
outstanding at end of period 14,890,293 12,470,902 6,809,063
<TABLE>
<CAPTION>
Growth Subaccount
-----------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value:
Beginning of period $38.02 $29.52 $24.38 $17.95 $19.68*
End of period 48.27 38.02 29.52 24.38 17.95
Number of Accumulation Units
outstanding at end of period 24,210,985 19,279,447 13,809,177 7,742,874 3,142,640
High Yield Subaccount
----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value:
Beginning of period $27.50 $24.35 $22.06 $18.64 $20.41
End of period 26.78 27.50 24.35 22.06 18.64
Number of Accumulation Units
outstanding at end of period 20,236,846 15,720,991 10,632,678 5,557,895 2,514,043
Income Subaccount
-----------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value:
Beginning of period $20.86 $19.39 $18.98 $16.07 $17.21
End of period 22.57 20.86 19.39 18.98 16.07
Number of Accumulation Units
outstanding at end of period 16,424,298 11,878,420 9,066,360 5,274,785 2,264,894
Money Market Subaccount
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value:
Beginning of period $1.55 $1.48 $1.43 $1.36 $1.33
End of period 1.61 1.55 1.48 1.43 1.36
Number of Accumulation Units
outstanding at end of period 57,199,273 34,676,637 31,024,219 15,771,786 5,984,694
- ----------
</TABLE>
*Commencing February 1, 1994, the date the Registration Statement for the
Variable Account was declared effective.
**Commencing January 18, 1996.
***Commencing January 30, 1998.
The financial statements of LBVIP are also contained in the Statement of
Additional Information.
<PAGE>
APPENDIX C
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>
APPENDIX D
ILLUSTRATION OF MONTHLY VARIABLE ANNUITY SETTLEMENT OPTION
The illustration included in this appendix shows how the monthly variable
annuity settlement option income may change with the investment experience
of the Variable Account. The illustration shows how the monthly income
would vary over time if the investment return on the assets held in each
Portfolio of the Fund were a uniform, gross, after-tax annual rate of 0
percent, 5.06 percent and 12 percent. The incomes would be different from
those shown if the gross annual investment returns average 0 percent, 5.06
percent and 12 percent over a period of years, but fluctuated above and
below these averages for individual Contract years.
The monthly incomes reflect the fact that the net investment return of the
Subaccounts of the Variable Account is lower than the gross, after-tax
return on the assets held in the Fund as a result of the advisory fee paid
by the Fund and charges made against the Subaccounts. The incomes shown
take into account the following fees: Growth (0.40%); High Yield (0.40%);
Income (0.40%); Money Market (0.40%); Opportunity Growth (0.40%); Mid Cap
Growth (0.40%); and World Growth (0.85%); and the daily charge to each
Subaccount for assuming mortality and expense risks which is equivalent to a
charge at an annual current rate of 1.10% of the average assets of the
Subaccounts and which is guaranteed never to exceed an annual rate of 1.25%.
After deduction of these amounts, the illustrated gross investment rates of
return 0%, 5.06% and 12% correspond to net annual rates of -1.56%, 3.50% and
10.44%, respectively, assuming an average investment advisory fee of 0.46%.
The illustration assumes 100% of the assets are invested in Subaccounts of
the Variable Account. For comparison purposes, a current fixed annuity
income, available through the Fixed Account, is also provided. The first
variable payment is always based on an investment rate of 3.50%. After the
first variable annuity payment, future variable payments will increase if
the annualized net rate of return exceeds the 3.50%, and will decrease if
the annualized net rate of return is less than the 3.50%.
The hypothetical values shown are based upon a male, age 65 selecting a life
income with a 10-year guaranteed period and having $100,000 of non-qualified
funds at settlement. Upon request, LB(VIP) will provide a comparable
illustration based upon the proposed Annuitant's age, gender (except for
Contracts issued in the state of Montana), settlement option, type of funds
and cash available at settlement. Contracts purchased in Montana cannot
vary on the basis of the Annuitant's gender.
<PAGE>
Variable Annuity Payout Illustration
Prepared for: Prospect Commencement Date: 4/30/1999
Prepared by: Lutheran Brotherhood Cash Available at Settlement: $100,000
Sex: Male Date of Birth: 4/30/1934 Funds: Nonqualified
State: MN Initial Monthly Income: $608
Income Option: Life Income with 10 Year Guaranteed Period
The monthly variable annuity income amount shown below assumes a
constant annual investment return. The assumed investment rate of 3.50% is
used to calculate the first monthly payment. Thereafter, monthly payments
will increase or decrease based upon the relationship between 3.50% and the
performance of the Subaccounts selected. The investment returns shown are
hypothetical and not a representation of future results.
Annual Rate of Return
--------------------------------------
0% Gross 5.06% Gross 12.00% Gross
Date Age (-1.56% Net) (3.50% Net) (10.44% Net)
- ----------------------- --- ------------ ------------ ------------
April 30, 1999 65 $608 $608 $ 608
April 30, 2000 66 578 608 649
April 30, 2001 67 550 608 692
April 30, 2002 68 523 608 739
April 30, 2003 69 498 608 788
April 30, 2008 74 387 608 1,090
April 30, 2013 79 301 608 1,508
April 30, 2018 84 235 608 2,087
April 30, 2023 89 183 608 2,886
April 30, 2028 94 142 608 3,993
April 30, 2033 99 111 608 5,524
April 30, 2034 100 105 608 5,894
If 100% of your cash available at settlement was applied to provide a fixed
annuity on the commencement date of this illustration, the fixed annuity
income amount would be $660.
Net rates of return reflect expenses totaling 1.56%, which consist of the
current 1.10% Variable Account mortality and expense risk charge and 0.46%
for the Fund advisory fee (this is an average with the actual varying from
0.40% to 0.85%).
This is an illustration only and not a contract.
<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, 1999 (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 3
CALCULATION OF PERFORMANCE
Money Market Subaccount 3
Other Subaccounts 4
FINANCIAL STATEMENTS OF VARIABLE ACCOUNT 9
COMMENT ON FINANCIAL STATEMENTS OF LB 20
FINANCIAL STATEMENTS OF LB 20
--------------------------------------------------
The date of this Statement of Additional Information
is May 1, 1999.
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 1998, LB had total assets of approximately $20.551 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 seven Portfolios of the Fund-the Growth Portfolio, the High
Yield Portfolio, the Income Portfolio, the Opportunity Growth Portfolio, the
Mid Cap 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
reports of PricewaterhouseCoopers 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)".
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, 1998:
Value of hypothetical pre-existing account with exactly
one Accumulation Unit at the beginning of the period $1.609834
Value of same account (excluding capital changes) at end
of the seven-day period $1.610989
Net change in account value $0.001155
Base Period Return:
Net change in account value divided by beginning account value $0.000717
Annualized Current Yield [0.000717 X (365/7)] 3.74%
Effective Yield (0.000717 + 1)365/7-1 3.81%
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,
1998:
Dividends and interest earned by the High Yield Subaccount
during the base period $4,904,062
Expenses accrued for the base period $ 659,640
------------
$4,244,422(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 ($26.781385 x 20,078,017 Units) = $537,717,103(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) = 0.007893(C)
Adding one and raising total to the
6th power (C + 1)6= 1.048305(D)
Annualized current yield [2(D - 1) X 100] = 9.66%
The following example illustrates the annualized current yield calculation
for the Income Subaccount for the 30-day base period ended December 31,
1998:
Dividends and interest earned by the Income Subaccount
during the base period $1,792,130
Expenses accrued for the base period $ 447,605
------------
$1,344,525(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 ($20.567869 x 16,133,451 Units) = $364,097,609(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) = 0.003693(C)
Adding one and raising total to the 6th power (C + 1)6 = 1.022362(D)
Annualized current yield [2(D-1) X 100] = 4.47%
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,
1998:
Hypothetical $1,000 initial investment on March 8, 1988 $1,000
Ending redeemable value of the investment on
December 31, 1998 (after deferred sales charge) $4,828
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%) 382.81%*
Average annual total return from inception through
December 31, 1998 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 ten years
and 10 months; the result is reduced by one and is
expressed in terms of a percentage
(For example, 0.2 equals 20%) 15.66%*
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,
1998:
Hypothetical $1,000 initial investment on March 8, 1988 $1,000
Ending redeemable value of the investment on
December 31, 1998 (after deferred sales charge) $2,678
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%) 167.81%*
Average annual total return from inception through
December 31, 1997 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 ten years
and 10 months; the result is reduced by one and is
expressed in terms of a percentage
(For example, 0.2 equals 20%) 9.53%*
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,
1998:
Hypothetical $1,000 initial investment on March 8, 1988 $1,000
Ending redeemable value of the investment on December 31, 1998
(after deferred sales charge) $2,257
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%) 125.68%*
Average annual total return from inception through
December 31, 1998 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 ten years
and 10 months; the result is reduced by one and is
expressed in terms of a percentage
(For example, 0.2 equals 20%) 7.81%*
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, 1998
Hypothetical $1,000 initial investment on February 18, 1988 $1,000
Ending redeemable value of the investment on December 31, 1998
(after deferred sales charge) $1,611
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%) 61.10%*
Average annual total return from inception through
December 31, 1998 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 ten years and
11 months; the result is reduced by one and is
expressed in terms of a percentage
(For example, 0.2 equals 20%) 4.48%*
The following example illustrates the average annual total return for the
Opportunity Growth Subaccount from the date of inception through the period
ended December 31, 1998:
Hypothetical $1,000 initial investment on January 18, 1996 $1,000
Ending redeemable value of the investment on
December 31, 1998 (after deferred sales charge) $1,089
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%) 8.87%*
Average annual total return from inception through December
31, 1998 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 two years and 347 days; the result is reduced
by one and is expressed in terms of a percentage
(For example, 0.2 equals 20%)..................................... 2.92%*
The following example illustrates the average annual total return for the
World Growth Subaccount from the date of inception through December 31,
1998:
Hypothetical $1,000 initial investment on January 18, 1996 $1,000
Ending redeemable value of the investment on December 31, 1997
(after deferred sales charge) $1,237
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%) 23.68%*
Average annual total return from inception through December
31, 1998 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 two years and 347 days; the result is
reduced by one and is expressed in terms of a percentage
(For example, 0.2 equals 20%)..................................... 7.46%
The following example illustrates the average annual total return for the
Mid Cap Growth Subaccount from the date of inception through December 31,
1998:
Hypothetical $1,000 initial investment on January 30, 1988 $1,000
Ending redeemable value of the investment on December 31, 1998
(after deferred sales charge) $1,045
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%) 4.54%*
- -----------------------------
*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 and the Accumulated Value 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.
[GRAPHIC OMITTED: PRICEWATERHOUSECOOPERS LOGO]
PricewaterhouseCoopers LLP
650 Third Avenue South
Park Building
Suite 1300
Minneapolis MN 55402-4333
Telephone (612) 370 9300
Facsimile (612) 373 7178
Report of Independent Accountants
To Lutheran Brotherhood and Contract
Owners of LB Variable Annuity Account I
In our opinion, the accompanying statements 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 the Opportunity
Growth, Mid Cap Growth, World Growth, Growth, High Yield, Income and Money
Market subaccounts of LB Variable Annuity Account I at December 31, 1998 the
results of each of their operations for the year or period 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.
[GRAPHIC OMITTED: PRICEWATERHOUSECOOPERS SIGNATURE]
March 24, 1999
<TABLE>
<CAPTION>
LB Variable Annuity Account I
Opportunity Growth Subaccount
Financial Statements
Statement of Assets and Liabilities
December 31, 1998
<S> <C>
ASSETS:
Investment in LB Series Fund, Inc. -
Opportunity Growth Portfolio 17,246,255
shares at net asset value of $11.06 per share
(cost $198,894,322) $ 190,704,519
Receivable from LB for units issued 134,645
Receivable from LB for annuity
reserve adjustment 25
--------------
Total assets 190,839,189
--------------
LIABILITIES:
Payable to LB for mortality and expense
risk charge 164,607
--------------
NET ASSETS $ 190,674,582
==============
NET ASSETS APPLICABLE TO ANNUITY
CONTRACT OWNERS:
Contracts in accumulation period, accumulation
units outstanding of 16,883,494 $ 190,674,003
Reserves for contracts in annuity payment
period (note 2) 579
--------------
NET ASSETS $ 190,674,582
==============
Unit Value (net assets divided by units outstanding) $11.29
======
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME:
Dividend Income $ 523,049
Mortality and expense risk charge (1,976,721)
------------
Net investment loss (1,453,672)
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain on investments 924,277
Net change in unrealized depreciation of
investments (7,569,189)
------------
Net loss on investments (6,644,912)
------------
Net change in net assets resulting from
operations $ (8,098,584)
============
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
Years Ended December 31, 1998 and 1997
1998 1997
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss $ (1,453,672) $ (631,693)
Net realized gain on investments 924,277 20,285
Net change in unrealized appreciation or depreciation of
investments (7,569,189) 3,255,747
-------------- --------------
Net change in net assets resulting from operations (8,098,584) 2,644,339
-------------- --------------
UNIT TRANSACTIONS:
Proceeds from units issued 42,707,044 69,812,923
Net asset value of units redeemed (12,241,975) (4,283,131)
Annuity benefit payments (3) --
Adjustments to annuity reserves 25 --
Transfers from other subaccounts 19,380,132 25,429,696
Transfers to other subaccounts (36,426,833) (13,400,910)
Transfers from fixed account 172,526 318,086
Transfers to fixed account (287,767) (309,720)
-------------- --------------
Net increase in net assets from unit transactions 13,303,149 77,566,944
-------------- --------------
Net increase in net assets 5,204,565 80,211,283
NET ASSETS:
Beginning of period 185,470,017 105,258,734
-------------- --------------
End of period $ 190,674,582 $ 185,470,017
============== ==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
<CAPTION>
LB Variable Annuity Account I
Mid Cap Growth Subaccount
Financial Statements
Statement of Assets and Liabilities
December 31, 1998
<S> <C>
ASSETS:
Investment in LB Series Fund, Inc. -
Mid Cap Growth Portfolio 4,849,964 shares
at net asset value of $11.13 per share
(cost $50,809,234) $ 53,971,914
Receivable from LB for units issued 419,210
Receivable from LB for annuity reserve
adjustment 26
--------------
Total assets 54,391,150
--------------
LIABILITIES:
Payable to LB for mortality and
expense risk charge 45,426
--------------
NET ASSETS $ 54,345,724
==============
NET ASSETS APPLICABLE TO ANNUITY
CONTRACT OWNERS:
Contracts in accumulation period, accumulation
units outstanding of 4,916,782 $ 54,345,148
Reserves for contracts in annuity payment
period (note 2) 576
--------------
NET ASSETS $ 54,345,724
==============
Unit Value (net assets divided by units outstanding) $11.05
======
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the period from January 30, 1998 (effective date) to December 31, 1998
<S> <C>
INVESTMENT INCOME:
Dividend Income $ 178,517
Mortality and expense risk charge (279,559)
------------
Net investment loss (101,042)
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized loss on investments (130,261)
Net change in unrealized appreciation
of investments 3,162,679
------------
Net gain on investments 3,032,418
------------
Net increase in net assets resulting
from operations $ 2,931,376
============
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
For the period from
January 30, 1998
(effective date) to
December 31, 1998
--------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss $ (101,042)
Net realized loss on investments (130,261)
Net change in unrealized appreciation of investments 3,162,679
--------------
Net increase in net assets resulting from operations 2,931,376
--------------
UNIT TRANSACTIONS:
Proceeds from units issued 34,699,211
Net asset value of units redeemed (1,688,639)
Annuity benefit payments (3)
Adjustments to annuity reserves 26
Transfers from other subaccounts 22,714,195
Transfers to other subaccounts (4,518,168)
Transfers from fixed account 318,569
Transfers to fixed account (110,843)
--------------
Net increase in net assets from unit transactions 51,414,348
--------------
Net increase in net assets 54,345,724
NET ASSETS:
Beginning of period --
--------------
End of period $ 54,345,724
==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
<CAPTION>
LB Variable Annuity Account I
World Growth Subaccount
Financial Statements
Statement of Assets and Liabilities
December 31, 1998
<S> <C>
ASSETS:
Investment in LB Series Fund, Inc. -
World Growth Portfolio 15,059,289 shares
at net asset value of $12.67 per share
(cost $167,319,676) $190,772,802
Receivable from LB for units issued 436,109
Receivable from LB for annuity reserve
adjustment 75
--------------
Total assets 191,208,986
--------------
LIABILITIES:
Payable to LB for mortality and expense
risk charge 171,437
--------------
NET ASSETS $191,037,549
==============
NET ASSETS APPLICABLE TO ANNUITY
CONTRACT OWNERS:
Contracts in accumulation period, accumulation
units outstanding of 14,890,293 $191,035,873
Reserves for contracts in annuity payment
period (note 2) 1,676
--------------
NET ASSETS $191,037,549
==============
Unit Value (net assets divided by units outstanding) $12.83
======
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME:
Dividend Income $ 3,147,902
Mortality and expense risk charge (1,830,250)
------------
Net investment income 1,317,652
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain on investments 1,294,473
Net change in unrealized appreciation of
investments 19,814,236
------------
Net gain on investments 21,108,709
------------
Net increase in net assets resulting from
operations $22,426,361
============
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
Years Ended December 31, 1998 and 1997
1998 1997
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 1,317,652 $ 328,657
Net realized gain on investments 1,294,473 72,345
Net change in unrealized appreciation or depreciation of
investments 19,814,236 (494,823)
-------------- --------------
Net change in net assets resulting from operations 22,426,361 (93,821)
-------------- --------------
UNIT TRANSACTIONS:
Proceeds from units issued 45,318,136 56,715,967
Net asset value of units redeemed (10,909,433) (3,028,143)
Annuity benefit payments (10) --
Adjustments to annuity reserves 75 --
Transfers from other subaccounts 20,874,973 17,992,353
Transfers to other subaccounts (25,168,067) (7,431,894)
Transfers from fixed account 242,848 197,461
Transfers to fixed account (296,684) (197,878)
-------------- --------------
Net increase in net assets from unit transactions 30,061,838 64,247,866
-------------- --------------
Net increase in net assets 52,488,199 64,154,045
NET ASSETS:
Beginning of period 138,549,350 74,395,305
-------------- --------------
End of period $191,037,549 $138,549,350
============== ==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
<CAPTION>
LB Variable Annuity Account I
Growth Subaccount
Financial Statements
Statement of Assets and Liabilities
December 31, 1998
<S> <C>
ASSETS:
Investment in LB Series Fund, Inc. -
Growth Portfolio 49,672,759 shares at
net asset value of $23.51 per share
(cost $924,809,403) $1,167,634,174
Receivable from LB for units issued 2,394,981
----------------
Total assets 1,170,029,155
----------------
LIABILITIES:
Payable to LB for mortality and expense
risk charge 1,032,295
Payable to LB for annuity reserve adjustment 8,761
----------------
Total liabilities 1,041,056
----------------
NET ASSETS $1,168,988,099
================
NET ASSETS APPLICABLE TO ANNUITY
CONTRACT OWNERS:
Contracts in accumulation period, accumulation
units outstanding of 24,210,985 $1,168,742,734
Reserves for contracts in annuity payment
period (note 2) 245,365
----------------
NET ASSETS $1,168,988,099
================
Unit Value (net assets divided by units outstanding) $48.27
======
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME:
Dividend Income $ 8,816,496
Mortality and expense risk charge (10,234,120)
--------------
Net investment loss (1,417,624)
--------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain on investments 119,033,614
Net change in unrealized appreciation
of investments 109,138,360
--------------
Net gain on investments 228,171,974
--------------
Net increase in net assets resulting
from operations $226,754,350
==============
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
Years Ended December 31, 1998 and 1997
1998 1997
------------------ --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ (1,417,624) $ 168,117
Net realized gain on investments 119,033,614 61,772,252
Net change in unrealized appreciation or depreciation of
investments 109,138,360 76,572,734
------------------ --------------
Net increase in net assets resulting from operations 226,754,350 138,513,103
------------------ --------------
UNIT TRANSACTIONS:
Proceeds from units issued 259,833,824 190,243,960
Net asset value of units redeemed (60,317,012) (20,194,521)
Annuity benefit payments (4,169) --
Adjustments to annuity reserves (8,761) --
Transfers from other subaccounts 95,383,761 49,173,572
Transfers to other subaccounts (84,788,287) (31,446,677)
Transfers from fixed account 1,400,349 844,149
Transfers to fixed account (2,244,082) (1,825,504)
------------------ --------------
Net increase in net assets from unit transactions 209,255,623 186,794,979
------------------ --------------
Net increase in net assets 436,009,973 325,308,082
NET ASSETS:
Beginning of period 732,978,126 407,670,044
------------------ --------------
End of period $1,168,988,099 $732,978,126
================== ==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
<CAPTION>
LB Variable Annuity Account I
High Yield Subaccount
Financial Statements
Statement of Assets and Liabilities
December 31, 1998
<S> <C>
ASSETS:
Investment in LB Series Fund, Inc. --
High Yield Portfolio 59,124,136 shares at
net asset value of $9.16 per share
(cost $593,711,964) $541,396,585
Receivable from LB for units issued 1,195,320
Receivable from LB for annuity reserve
adjustment 2,297
--------------
Total assets 542,594,202
--------------
LIABILITIES:
Payable to LB for mortality and
expense risk charge 499,795
--------------
NET ASSETS $542,094,407
==============
NET ASSETS APPLICABLE TO ANNUITY
CONTRACT OWNERS:
Contracts in accumulation period, accumulation
units outstanding of 20,236,846 $541,971,260
Reserves for contracts in annuity payment
period (note 2) 123,147
--------------
NET ASSETS $542,094,407
==============
Unit Value (net assets divided by units outstanding) $26.78
======
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME:
Dividend Income $ 51,493,354
Mortality and expense risk charge (5,595,732)
------------
Net investment income 45,897,622
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain on investments 5,964,777
Net change in unrealized depreciation
of investments (69,226,416)
------------
Net loss on investments (63,261,639)
------------
Net change in net assets resulting from
operations $(17,364,017)
============
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
Years Ended December 31, 1998 and 1997
1998 1997
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 45,897,622 $ 28,750,981
Net realized gain on investments 5,964,777 6,266
Net change in unrealized appreciation or depreciation
of investments (69,226,416) 13,269,345
-------------- --------------
Net change in net assets resulting from operations (17,364,017) 42,026,592
-------------- --------------
UNIT TRANSACTIONS:
Proceeds from units issued 160,460,416 132,360,574
Net asset value of units redeemed (33,212,118) (13,827,786)
Annuity benefit payments (2,956) --
Adjustments to annuity reserves 2,297 --
Transfers from other subaccounts 49,203,441 31,697,501
Transfers to other subaccounts (48,566,730) (18,330,438)
Transfers from fixed account 905,617 547,725
Transfers to fixed account (1,708,924) (1,028,730)
-------------- --------------
Net increase in net assets from unit transactions 127,081,043 131,418,846
-------------- --------------
Net increase in net assets 109,717,026 173,445,438
NET ASSETS:
Beginning of period 432,377,381 258,931,943
-------------- --------------
End of period $542,094,407 $432,377,381
============== ==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
<CAPTION>
LB Variable Annuity Account I
Income Subaccount
Financial Statements
Statement of Assets and Liabilities
December 31, 1998
<S> <C>
ASSETS:
Investment in LB Series Fund, Inc. -
Income Portfolio 36,237,640 shares at
net asset value of $10.21 per share
(cost $355,186,250) $370,001,383
Receivable from LB for units issued 1,090,230
--------------
Total assets 371,091,613
--------------
LIABILITIES:
Payable to LB for mortality and
expense risk charge 339,202
Payable to LB for annuity reserve adjustment 3,849
--------------
Total liabilities 343,051
--------------
NET ASSETS $370,748,562
==============
NET ASSETS APPLICABLE TO ANNUITY
CONTRACT OWNERS:
Contracts in accumulation period, accumulation
units outstanding of 16,424,298 $370,651,895
Reserves for contracts in annuity payment
period (note 2) 96,667
--------------
NET ASSETS $370,748,562
==============
Unit Value (net assets divided by units outstanding) $22.57
======
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME:
Dividend Income $ 18,411,309
Mortality and expense risk charge (3,350,469)
------------
Net investment income 15,060,840
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain on investments 21,298
Net change in unrealized appreciation
of investments 8,963,639
------------
Net gain on investments 8,984,937
------------
Net increase in net assets resulting
from operations $ 24,045,777
============
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
Years Ended December 31, 1998 and 1997
1998 1997
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 15,060,840 $ 11,557,831
Net realized gain on investments 21,298 8,983
Net change in unrealized appreciation or depreciation
of investments 8,963,639 4,025,454
-------------- --------------
Net increase in net assets resulting from operations 24,045,777 15,592,268
-------------- --------------
UNIT TRANSACTIONS:
Proceeds from units issued 96,118,868 65,314,529
Net asset value of units redeemed (20,398,088) (9,593,742)
Annuity benefit payments (2,248) --
Adjustments to annuity reserves (3,849) --
Transfers from other subaccounts 50,048,980 16,778,453
Transfers to other subaccounts (26,659,110) (15,507,951)
Transfers from fixed account 674,015 247,864
Transfers to fixed account (801,799) (884,697)
-------------- --------------
Net increase in net assets from unit transactions 98,976,769 56,354,456
-------------- --------------
Net increase in net assets 123,022,546 71,946,724
NET ASSETS:
Beginning of period 247,726,016 175,779,292
-------------- --------------
End of period $370,748,562 $247,726,016
============== ==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
<CAPTION>
LB Variable Annuity Account I
Money Market Subaccount
Financial Statements
Statement of Assets and Liabilities
December 31, 1998
<S> <C>
ASSETS:
Investment in LB Series Fund, Inc. -
Money Market Portfolio 91,215,610 shares
at net asset value of $1.00 per share
(cost $91,215,610) $ 91,215,610
Receivable from LB for units issued 1,014,556
Receivable from LB for annuity
reserve adjustment 101
--------------
Total assets 92,230,267
--------------
LIABILITIES:
Payable to LB for mortality and
expense risk charge 80,477
--------------
NET ASSETS $ 92,149,790
==============
NET ASSETS APPLICABLE TO ANNUITY
CONTRACT OWNERS:
Contracts in accumulation period, accumulation
units outstanding of 57,199,273 $ 92,147,418
Reserves for contracts in annuity payment
period (note 2) 2,372
--------------
NET ASSETS $ 92,149,790
==============
Unit Value (net assets divided by units outstanding) $ 1.61
======
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME:
Dividend Income $ 3,328,321
Mortality and expense risk charge (710,778)
------------
Net investment income $ 2,617,543
============
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
Years Ended December 31, 1998 and 1997
1998 1997
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 2,617,543 $ 2,091,454
UNIT TRANSACTIONS:
Proceeds from units issued 75,641,407 64,588,565
Net asset value of units redeemed (8,586,012) (3,375,750)
Annuity benefit payments (36) --
Adjustments to annuity reserves 101 --
Transfers from other subaccounts 53,851,313 28,246,878
Transfers to other subaccounts (85,329,600) (83,200,583)
Transfers from fixed account 850,589 787,334
Transfers to fixed account (527,048) (1,532,524)
-------------- --------------
Net increase in net assets from unit transactions 35,900,714 5,513,920
-------------- --------------
Net increase in net assets 38,518,257 7,605,374
NET ASSETS:
Beginning of period 53,631,533 46,026,159
-------------- --------------
End of period $ 92,149,790 $ 53,631,533
============== ==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
LB Variable Annuity Account I
Notes to Financial Statements
December 31, 1998
(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 seven subaccounts -- Opportunity Growth, Mid
Cap Growth, World Growth, 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.
Accordingly, no provision for income taxes has been charged against the
Variable Account.
Annuity Reserves
Annuity reserves are computed for currently payable contracts according to
the 1983 Table A mortality table and the 2000 IAM mortality table. The
assumed interest is 3.5 percent. Changes to annuity reserves are based on
actual mortality and risk experience. If the reserves required are less than
the original estimated reserve amount held in the Variable Account, the
excess is reimbursed to LB. If additional reserves are required, LB
reimburses the Variable Account.
Other
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
(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 $1,545,599 and $816,199
were deducted in 1998 and 1997, respectively.
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
$346,041 and $295,514 were deducted in 1998 and 1997, respectively.
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 of $23,977,629 and $15,818,642 were deducted in 1998 and 1997,
respectively.
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 $1,412,634 and $2,236,434 in 1998 and 1997
respectively.
<TABLE>
<CAPTION>
(4) UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) were as follows:
Subaccounts
- ---------------------------------------------------------------------------------------------------------------------
Opportunity Mid Cap World High Money
Growth Growth Growth Growth Yield Income Market
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1996 8,925,231 -- 6,809,063 13,809,177 10,632,678 9,066,360 31,024,219
Units issued 8,717,193 -- 6,845,002 7,373,534 6,664,785 4,338,746 63,079,116
Units redeemed (1,887,377) -- (1,183,163) (1,903,264) (1,576,472) (1,526,686) (59,426,698)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Units outstanding at
December 31, 1997 15,755,047 -- 12,470,902 19,279,447 15,720,991 11,878,420 34,676,637
Units issued 5,822,590 5,692,095 5,635,872 8,752,862 7,869,549 6,942,973 84,107,925
Units redeemed (4,694,143) (775,313) (3,216,481) (3,821,324) (3,353,694) (2,397,095) (61,585,289)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Units outstanding at
December 31, 1998 16,883,494 4,916,782 14,890,293 24,210,985 20,236,846 16,424,298 57,199,273
============ ============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
(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:
Subaccounts
- ---------------------------------------------------------------------------------------------------------------------
Opportunity Mid Cap World High Money
Growth Growth Growth Growth Yield Income Market
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997
Purchases $77,878,517 -- $65,101,401 $250,228,610 $160,898,635 $69,354,377 $35,455,852
Sales 357,743 -- 36,473 1,026,398 146,129 1,128,583 27,215,621
For the year ended
December 31, 1998
Purchases 21,043,114 51,363,271 34,964,200 332,867,085 185,071,813 113,870,258 59,044,367
Sales 7,006,015 423,776 2,581,601 7,216,865 5,847,851 568,543 21,176,016
</TABLE>
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.
[GRAPHIC OMITTED: PRICEWATERHOUSECOOPERS LOGO]
PricewaterhouseCoopers LLP
650 Third Avenue South
Park Building
Suite 1300
Minneapolis MN 55402-4333
Telephone (612) 370 9300
Facsimile (612) 373 7178
Report of Independent Accountants
March 15, 1999
To The Board of Directors and Members
of Lutheran Brotherhood
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of members' equity and of
cash flows present fairly, in all material respects, the financial
position of Lutheran Brotherhood (the Society) and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting
principles. 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.
[GRAPHIC OMITTED: PRICEWATERHOUSECOOPERS SIGNATURE]
<TABLE>
<CAPTION>
LUTHERAN BROTHERHOOD
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 AND 1997
(Dollars in millions)
ASSETS 1998 1997
---------- ----------
<S> <C> <C>
Investments:
Fixed income securities available for sale,
at fair value $ 7,521 $ 6,977
Equity securities available for sale,
at fair value 791 651
Mortgage loans 1,969 2,258
Real estate 52 42
Loans to contractholders 692 675
Short-term investments 412 211
Amounts due from brokers 451 63
Other invested assets 68 79
---------- ----------
Total investments 11,956 10,956
Cash and cash equivalents 555 553
Deferred policy acquisition costs 921 903
Investment income due and accrued 128 127
Other assets 138 112
Separate account assets 6,853 5,451
---------- ----------
Total assets $ 20,551 $ 18,102
========== ==========
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Contract reserves $ 9,719 $ 9,551
Benefits in the process of payment 53 41
Dividends payable 105 92
Amounts due to brokers 1,066 482
Other liabilities 245 240
Separate account liabilities 6,853 5,451
---------- ----------
Total liabilities 18,041 15,857
Members' equity:
Accumulated other comprehensive income 369 277
Retained earnings 2,141 1,968
---------- ----------
Total members' equity 2,510 2,245
---------- ----------
Total liabilities and members' equity $ 20,551 $ 18,102
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
LUTHERAN BROTHERHOOD
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions)
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Revenues:
Premiums $ 504 $ 482 $ 457
Net investment income 735 769 719
Net realized investment gains 126 127 66
Contract charges 169 148 126
Annuity considerations and other income 159 150 150
------ ------ ------
Total revenues 1,693 1,676 1,518
Benefits and other deductions:
Net additions to contract reserves 377 367 357
Contractholder benefits 597 574 563
Dividends 198 177 164
Commissions and operating expenses 176 149 126
Amortization of deferred policy
acquisition costs 101 89 61
Fraternal activities 66 63 59
------ ------ ------
Total benefits and other deductions 1,515 1,419 1,330
Income before income taxes 178 257 188
Provision for income taxes 5 9 11
------ ------ ------
Net income $ 173 $ 248 $ 177
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
LUTHERAN BROTHERHOOD
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions)
Accumulated Other
Comprehensive Income (Loss)
---------------------------
Unrealized
Unrealized Gains/Losses Total
Comprehensive Gains/Losses Acquisition Retained Members'
Income Investments Costs Earnings Equity
------------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 $ 346 $ (122) $1,543 $1,767
Comprehensive income:
Net income $ 177 -- -- 177 177
Other comprehensive
Income (loss) (104) (179) 75 -- (104)
------ ------ ------ ------ ------
Total comprehensive income $ 73
======
Balance at
December 31, 1996 167 (47) 1,720 1,840
Comprehensive income:
Net income $ 248 -- -- 248 248
Other comprehensive
Income (loss) 157 206 (49) -- 157
------ ------ ------ ------ ------
Total comprehensive income $ 405
======
Balance at
December 31, 1997 373 (96) 1,968 2,245
Comprehensive income:
Net income $ 173 -- -- 173 173
Other comprehensive
Income (loss) 92 106 (14) -- 92
------ ------ ------ ------ ------
Total comprehensive income $ 265
======
Balance at
December 31, 1998 $ 479 $ (110) $2,141 $2,510
------ ------ ------ ------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
LUTHERAN BROTHERHOOD
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions)
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 173 $ 248 $ 177
Adjustments to reconcile net
income to net cash
provided by operating activities:
Depreciation and amortization 3 (10) (4)
Deferred policy acquisition costs (32) (37) (63)
Equity in earnings of other invested assets 8 (26) (13)
Realized net investment (gains) and losses (123) (127) (66)
Change in operating assets and liabilities:
Loans to contractholders (18) (23) (24)
Other assets (13) (7) (10)
Contract reserves 168 283 235
Other liabilities 29 43 49
-------- ------- -------
Total adjustments 22 96 104
-------- ------- -------
Net cash provided by operating activities 195 344 281
-------- ------- -------
Cash flows from investing activities:
Proceeds from investments sold,
matured or repaid:
Fixed income securities available for sale 11,122 8,061 8,588
Equity securities available for sale 12,498 688 430
Mortgage loans 520 431 265
Short-term investments 466 553 678
Other invested assets 28 18 56
Costs of investments acquired
Fixed income securities available for sale (10,981) (8,527) (8,917)
Equity securities available for sale (12,517) (703) (509)
Mortgage loans (221) (245) (295)
Short-term investments (660) (539) (729)
Other invested assets (448) (28) (12)
-------- ------- -------
Net cash used in investing activities (193) (291) (445)
-------- ------- -------
Net increase (decrease) in cash and
cash equivalents 2 53 (164)
-------- ------- -------
Cash and cash equivalents,
beginning of year 553 500 664
-------- ------- -------
Cash and cash equivalents,
end of year $ 555 $ 553 $ 500
======== ======= =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
LUTHERAN BROTHERHOOD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions unless otherwise stated)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Nature of Operations and Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Lutheran Brotherhood (the Society), a fraternal benefit organization
offering life insurance and related financial service products as well
as fraternal benefits for Lutherans throughout the United States. Also
included in the accounts of the Society are its wholly owned subsidiary,
Lutheran Brotherhood Financial Corporation (LBFC), which is the parent
company of Lutheran Brotherhood Variable Insurance Products Company
(LBVIP), a stock life insurance company; an investment adviser; a
broker-dealer; a real estate development company and a property and
casualty insurance agency. All significant intercompany balances and
transactions have been eliminated in consolidation.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
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 and disclosure of contingent 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.
Financial Statement Presentation
Certain prior year amounts, in the financial statements and notes to the
financial statements, have been reclassified to conform to the 1998
financial statement presentation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues with an original maturity of 90 days or less.
Investments
See disclosures regarding the determination of fair value of financial
instruments at Note 9.
Carrying value of investments is determined as follows:
Fixed income securities Fair value
Equity securities Fair value
Mortgage loans on real estate Amortized cost less impairment
allowance
Investment real estate Cost less accumulated
depreciation and impairment
allowance
Real estate joint ventures Equity accounting method
Real estate acquired through foreclosure Lower of cost or fair value
less estimated cost to sell
Loans to contractholders Unpaid principal balance
Short-term investments Amortized cost
Other invested assets Equity accounting method
Fixed income securities which may be sold prior to maturity and equity
securities (common stock and nonredeemable preferred stock) are classified
as available for sale.
Realized investment gains and losses on sales of securities are
determined on a specific identification method for fixed income
securities and the average cost method for equity securities and are
reported in the Consolidated Statement of Income. Unrealized
investment gains and losses on fixed income and equity securities
classified as available for sale, net of the impact of unrealized
investment gains and losses on deferred acquisitions costs, are
reported as other comprehensive income.
Mortgage loans are considered impaired when it is probable that the
Society will be unable to collect all amounts according to the
contractual terms of the loan agreement. Real estate is considered
impaired when the carrying value exceeds the fair value. In cases
where impairment is present, valuation allowances are established and
netted against the asset categories to which they apply and changes in
the valuation allowances are included in realized investment gains or
losses.
Deferred Acquisition Costs
Those costs of acquiring new business, which vary with and are
primarily related to the production of new business, are deferred.
Such costs include commissions, certain costs of contract issuance and
underwriting, and certain variable agency expenses. Deferred contract
acquisition costs are subject to recoverability testing at the time of
contract issue and loss recognition testing at the end of each
accounting period. Deferred policy acquisition costs are adjusted for
the impact of unrealized gains or losses on investments as if those
gains or losses had been realized, with corresponding credits or
charges included in equity.
For participating-type long duration contracts, deferred acquisition
costs are amortized over the expected average life of the contracts in
proportion to estimated gross margins. The effects of revisions to
experience on previous amortization of deferred acquisition costs are
reflected in earnings and change in unrealized investment gains
(losses) in the period estimated gross profits are revised.
For universal life-type and investment-type contracts, deferred
acquisition costs are amortized over the average expected life of the
contracts in proportion to estimated gross profits from mortality,
investment, and expense margins and surrender charges. The effects of
revisions to experience on previous amortization of deferred
acquisition costs are reflected in earnings and change in unrealized
investment gains (losses) in the period estimated gross profits are
revised.
For health insurance and certain term life insurance contracts,
deferred acquisition costs are amortized over the average expected
premium paying period, in proportion to expected premium revenues at
the time of issue.
Separate Accounts
Separate account assets include segregated funds invested by the
Society for the benefit of variable life insurance and variable
annuity contract owners. The assets (principally investments) and
liabilities (principally to contractholders) of each account are
clearly identifiable and distinguishable from other assets and
liabilities of the Society. Assets are valued at fair value. The
investment income, gains and losses of these accounts generally accrue
to the contractholders, and, therefore, are not included in the
Society's consolidated net income.
Derivative Financial Instruments
The Society's current utilization of derivative financial instruments
is not significant. 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 future contracts, 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.
Other Assets
Other assets include property and equipment reported at depreciated
cost. The Society provides for depreciation of property and equipment
using the straight-line method over the useful lives of the assets
which are three to ten years for equipment and forty years for
property.
Future Contract Benefits
Liabilities for future contract benefits on participating-type long
duration contracts are the net level premium reserve for death
benefits. Liabilities are calculated using dividend fund interest
rates and mortality rates guaranteed in calculating cash surrender
values.
Liabilities for future contract and contract benefits on universal
life-type and investment-type contracts are based on the contract
account balance.
Liabilities for future contract benefits on health insurance and
certain term life insurance contracts are calculated using the net
level premium method and assumptions as to investment yields,
mortality, morbidity and withdrawals. The assumptions, made at the
time of issue, are based on best estimates of expected experience and
include provision for possible adverse deviation.
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 Revenue and Benefits to Contractholders
Recognition of Certain Participating-type Contracts Revenue and
Benefits to Contractholders
Participating contracts are long-duration contracts with expected
dividends to contractholders based on actual experience, paid in
accordance with the contribution principle. Premiums are recognized as
revenues when due. Death and surrender benefits are reported as
expenses when incurred. Dividends to contractholders based on
estimates of amounts to be paid for the period are reported separately
as expenses.
Recognition of Universal Life-Type Contracts Revenue and Benefits to
Contractholders
Universal life-type contracts are insurance contracts with terms that
are not fixed and guaranteed. The terms that may be changed could
include one or more of the amounts assessed the contractholder,
premiums paid by the contractholder or interest accrued to
contractholder balances. Amounts received as payments for such
contracts are not reported as premium revenues.
Revenues for universal life-type contracts consist of investment
income, charges assessed against contract account values for deferred
contract loading, the cost of insurance and contract administration.
Contract benefits and claims that are charged to expense include
interest credited to contracts and benefit claims incurred in the
period in excess of related contract account balances.
Recognition of Investment Contract Revenue and Benefits to
Contractholders
Contracts that do not subject the Society to risks arising from
contractholder mortality or morbidity are referred to as investment
contracts. Certain deferred annuities are considered investment
contracts. Amounts received as payments for such contracts are not
reported as premium revenues.
Revenues for investment contracts consist of investment income and
contract administration charges. Contract benefits that are charged to
expense include benefit claims incurred in the period in excess of
related contract balances, and interest credited to contract balances.
Recognition of Term Life, Health and Annuity Revenue and Benefits to
Contractholders
Products with fixed and guaranteed premiums and benefits consist
principally of health insurance contracts, certain term life contracts
and annuities with life contingencies. Premiums are recognized as
revenue when due. Benefits and expenses are associated with earned
premiums so as to result in recognition of profits over the life of
the contracts. This association is accomplished by means of the
provision for liabilities for future contract benefits and the
amortization of deferred contract acquisition costs.
Dividends
The dividend scale, approved annually by the Board of Directors, seeks
to achieve equity among contractholders. Dividends charged to
operations represent an estimation of those incurred during the
current year.
Income Taxes
Lutheran Brotherhood qualifies as a tax-exempt organization under the
Internal Revenue Code. Accordingly, no provision for income taxes has
been made. Lutheran Brotherhood's subsidiary, Lutheran Brotherhood
Financial Corporation (LBFC) is a taxable entity. LBFC and its
subsidiaries file a consolidated federal income tax return. Federal
income taxes are charged or credited to operations based upon amounts
estimated to be payable or recoverable as a result of taxable
operations for the current year. Deferred income tax assets and
liabilities are recognized based on the temporary differences between
financial statement carrying amounts and income tax bases of assets
and liabilities using enacted income tax rates and laws.
The provision for income taxes reflected on the Consolidated Statement
of Income consisted of federal and state income tax expense of $5, $9
and $11 for the years ended December 31, 1998, 1997 and 1996,
respectively. At December 31, 1998 and 1997, LBFC had recorded a net
deferred federal income tax liability of $31 and $24, respectively.
The deferred tax liability is mainly due to the net effect of the
temporary differences of reserves held for future benefits and
deferred acquisitions costs as computed for financial statement and
tax return purposes.
NOTE 3 -- INVESTMENTS
Fixed Income Securities
Investments in fixed income securities are primarily intended to back
long-term liabilities; therefore, care should be exercised in drawing
any conclusions from market value information.
Investments in fixed income securities at December 31, 1998 and 1997
follow:
<TABLE>
<CAPTION>
Available for Sale
(Carried at Fair Value)
December 31, 1998
------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Fixed income securities:
U.S. government $ 599 $ 51 $ -- $ 650
Mortgage-backed securities 2,521 47 1 2,567
Non-investment grade bonds 524 15 11 528
All other corporate bonds 3,569 246 39 3,776
--------- ---------- ---------- ------
Total available for sale $ 7,213 $ 359 $ 51 $7,521
========= ========== ========== ======
Available for Sale
(Carried at Fair Value)
December 31, 1997
------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
Fixed income securities:
U.S. government $ 1,076 $ 30 $ -- $1,106
Mortgage-backed securities 1,976 58 1 2,033
Non-investment grade bonds 467 22 1 488
All other corporate bonds 3,180 189 19 3,350
--------- ---------- ---------- ------
Total available for sale $ 6,699 $ 299 $ 21 $6,977
========= ========== ========== ======
</TABLE>
Equity Securities
Investments in equity securities and preferred stock at December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cost $ 624 $ 560
Gross unrealized gains 192 110
Gross unrealized losses 25 19
---------- ----------
Carrying value $ 791 $ 651
========== ==========
Contractual Maturity of Fixed Income Securities
The amortized cost and fair value of fixed income securities available
for sale as of December 31, 1998 are shown below by contractual
maturity. Actual maturities may differ from contractual maturities
because securities may be restructured, called or prepaid.
Amortized Fair
Years to Maturity Cost Value
---------- ----------
One year or less $ 101 $ 126
After one year through five years 1,041 1,077
After five years through ten years 1,843 1,910
After ten years 1,707 1,841
Mortgage-backed securities 2,521 2,567
---------- ----------
Total available for sale $ 7,213 $ 7,521
========== ==========
Mortgage Loans and Real Estate: The Society's mortgage loans and real
estate investments are diversified by property type and location and,
for mortgage loans, borrower and loan size.
At December 31, the carrying values of mortgage loans and real estate
investments were as follows:
1998 1997
---------- ----------
Mortgage loans:
Residential and commercial $ 1,641 $ 1,945
Loans to Lutheran Churches 328 313
---------- ----------
Total mortgage loans $ 1,969 $ 2,258
========== ==========
Real estate:
To be disposed of $ 2 $ 2
To be held and used 50 40
---------- ----------
Total real estate $ 52 $ 42
========== ==========
</TABLE>
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 and held 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, 1998, the market value of securities loaned and the cash
collateral received were $130 and $132 respectively.
NOTE 4 -- INVESTMENT INCOME AND REALIZED GAINS AND LOSSES
Investment income summarized by type of investment was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Fixed income securities $ 459 $ 426 $ 393
Equity securities 18 15 10
Mortgage loans 177 202 214
Real estate 14 11 15
Contract loans 45 44 42
Other invested assets 4 42 15
Short-term investments 52 55 59
---------- ---------- ----------
Gross investment income 769 795 748
Investment expenses 34 26 29
---------- ---------- ----------
Net investment income $ 735 $ 769 $ 719
========== ========== ==========
Gross realized investment gains and losses on sales of all types of
investments are as follows:
Year Ended December 31,
-----------------------------------
1998 1997 1996
---------- ---------- ----------
Fixed income securities:
Realized gains $ 99 $ 68 $ 84
Realized losses 31 40 65
Equity securities:
Realized gains 86 109 62
Realized losses 39 33 27
Other investments:
Realized gains 13 25 22
Realized losses 2 2 10
---------- ---------- ----------
Total net realized
investment gains $ 126 $ 127 $ 66
========== ========== ==========
</TABLE>
NOTE 5 -- SEPARATE ACCOUNT BUSINESS
Separate account assets include segregated funds invested by the
Society for the benefit of variable life insurance and variable
annuity contract owners. A portion of the contract owner's premium
payments are invested by the Society into the LB Variable Insurance
Account I, the LB Variable Annuity Account I, the LBVIP Variable
Insurance Account, the LBVIP Variable Insurance Account II, or the
LBVIP Variable Annuity Account I (the Variable Accounts). The Society
records these payments as assets in the separate accounts. Separate
account liabilities represent reserves held related to the separate
account business.
The Variable Accounts are unit investment trusts registered under the
Investment Company Act of 1940. Each Variable Account has seven
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 shares of the Fund are
carried in the Variable Accounts' financial statements at the net
asset value of the Fund. The Society serves as the investment adviser
of the Fund and is compensated through a daily investment advisory fee
based on the average daily net assets of each portfolio. For the year
ended December 31, 1998 and 1997, advisory fee income of $24 and $19,
respectively, is included in the Consolidated Statement of Income.
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 the Society.
The assets and liabilities of the Variable Accounts are clearly
identified and distinguished from the other assets and liabilities of
the Society. The assets of the Variable Accounts will not be applied
to the liabilities arising out of any other business conducted by the
Society. Considerations received and death claims paid on variable
life insurance and variable annuity contracts are included in income
and expenses of the Society and correspondingly offset by transfers to
or from the Variable Accounts, respectively.
The Society assumes the mortality and expense risk associated with
these contracts for which it is compensated by the separate accounts.
The daily charges to the separate accounts are based on the average
daily net assets at the following annual rates (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
Rate Charges Charges Charges
------ --------- --------- ---------
<S> <C> <C> <C> <C>
LB Variable Insurance
Account I 0.6% $ 593 $ 377 $ 171
LB Variable Annuity
Account I 1.1% 23,978 15,819 8,170
LBVIP Variable Insurance
Account 0.6% 1,118 911 696
LBVIP Variable Insurance
Account II 2.3% 60 55 52
LBVIP Variable Annuity
Account I 1.1% 40,092 34,251 27,568
--------- --------- ---------
$ 65,841 $ 51,413 $ 36,657
========= ========= =========
</TABLE>
Income from these charges is included in the Consolidated
Statement of Income.
In addition, the Society deducts certain amounts from the cash value
of the accounts invested in the separate accounts for surrender
charges, annual administrative charges and cost of insurance charges
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
LB Variable Insurance
Account I $ 8,455 $ 5,930 $ 3,163
LB Variable Annuity
Account I 1,892 1,112 502
LBVIP Variable Insurance
Account 10,145 9,030 8,206
LBVIP Variable Insurance
Account II -- -- --
LBVIP Variable Annuity
Account I 1,591 1,807 1,569
--------- --------- ---------
$ 22,083 $ 17,879 $ 13,440
========= ========= =========
</TABLE>
NOTE 6 -- EMPLOYEE BENEFIT PLANS
Pension Plans
Defined Benefit
Lutheran Brotherhood has noncontributory defined benefit plans which
cover substantially all employees. The Society's policy is to fund all
defined benefit pension costs using the aggregate level value 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.
Components of net pension cost for the year ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits
earned during the year $ 4,117 $ 3,682 $ 3,322
Interest cost on projected
benefit obligations 8,327 7,771 7,084
Expected return on assets (8,099) (7,405) (6,769)
Amortization of transition
amount 127 127 127
--------- --------- ---------
Net pension cost $ 4,472 $ 4,175 $ 3,764
========= ========= =========
</TABLE>
The following rates were used in computing the pension cost for each
of the three years in the period ended December 31:
Discount rates used to determine expense 8.00%
Assumed rates of compensation increases 6.00%
Expected long-term rates of return 8.00%
The following tables summarize the reconciliation of funded status as
of December 31 of the pension plan, including the change in benefit
obligation and the change in plan assets included in the Society's
other liabilities at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Change in benefit obligation
Projected benefit obligation at
beginning of year $ 106,821 $ 97,206
Service cost 4,117 3,682
Interest cost 8,327 7,771
Actuarial (gain) loss (970) 1,947
Benefits paid (3,937) (3,785)
--------- ---------
Projected benefit obligation at end of year $ 114,358 $ 106,821
========= =========
Change in plan assets
Fair value of plan assets at
beginning of year $ 101,020 $ 92,427
Actual return on plan assets 8,647 7,939
Employer contribution 4,427 4,439
Benefits paid (3,937) (3,785)
--------- ---------
Fair value of plan assets at end of year $ 110,157 $ 101,020
========= =========
Funded status
Funded status $ (4,201) $ (5,801)
Unrecognized actuarial (gain) loss (709) 809
Unrecognized transition amount 1,285 1,412
--------- ---------
Accrued benefit cost $ (3,625) $ (3,580)
========= =========
Plan assets on deposit with the Society are invested primarily in
corporate bonds and mortgage loans. Plan contributions are
accumulated in a deposit administration fund, which is a part of the
general investment fund of the Society.
The following rates were used in computation of the funded status for
the plan:
1998 1997
--------- ---------
Discount rates used for obligations 7.00% 8.00%
Assumed rates of compensation increases 5.00% 6.00%
</TABLE>
Defined Contribution
The Society has noncontributory defined contribution retirement plans
which cover substantially all employees and field representatives and
a noncontributory non-qualified deferred compensation plan which
covers substantially all of its general agents. As of January 1, 1998,
approximately $122 of the defined contribution retirement plans'
assets were held by the Society and the remaining $110 were held in a
separate trust. The accrued retirement liability at December 31, 1998
of $138 is included in contract reserves. Expenses related to the
retirement plan for the years ended December 31, 1998, 1997 and 1996
were $11, $10 and $10, respectively. Accumulated vested deferred
compensation benefits at December 31, 1998 total $57 and are included
in other liabilities.
Effective April 1, 1997, the Society established contributory 401(k)
defined contribution plans which cover substantially all employees and
field representatives. Participants are immediately vested in their
contributions plus investment earnings thereon.
Postretirement Benefits Other Than Pensions
The Society has a postretirement medical benefit plan which provides
for a minor subsidy of certain medical benefits for eligible early
retirees until age 65. The Society's obligation for post-retirement
medical benefits under the plan is not significant.
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 reinsurance contracts. As of December 31, 1998, total
life insurance inforce approximated $47 billion, of which
approximately $973 had been ceded to various reinsurers. The Society
retains a maximum of $2 of coverage per individual life. Premiums
ceded to other companies of $6 are reported as a reduction in premium
income and benefits were reduced by $5 for reinsurance recoverable for
the year ended December 31, 1998.
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 amount of the
allowance for uncollectible reinsurance receivables was immaterial at
December 31, 1998.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
Financial Commitments
The Society has commitments to extend credit for mortgage loans of
$111 and $61 at December 31, 1998 and 1997, respectively. Commitments
to other invested assets were $34 and $5 at December 31, 1998 and
1997, respectively.
NOTE 9 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating fair
value disclosures for financial instruments. In cases where quoted
market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in
immediate settlement of the instrument.
Fixed Income Securities: Fair values for fixed income securities are
based on quoted market prices, where available. For fixed maturities
not actively traded in the market, fair values are estimated using
market quotes from brokers or internally developed pricing methods.
Equity Securities: Fair value equals carrying value as these
securities are carried at quoted market value.
Mortgage Loans: The fair values for mortgage loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered in the marketplace for similar loans to borrowers with similar
credit ratings.
Loans on Insurance Contracts: The carrying amount reported in the
balance sheet approximates fair value since loans on insurance
contracts reduce the amount payable at death or at surrender of the
contract.
Cash and Cash Equivalents, Short-Term Investments: The carrying
amounts for these assets approximate the assets' fair values.
Other Financial Instruments Reported as Assets: The carrying amounts
for these financial instruments (primarily premiums and other accounts
receivable and accrued investment income), approximate those assets'
fair values.
Investment Contract Liabilities: The fair value for deferred annuities
was estimated to be the amount payable on demand at the reporting date
as those investment contracts have no defined maturity and are similar
to a deposit liability. The amount payable at the reporting date was
calculated as the account balance less applicable surrender charges.
The fair values for supplementary contracts and immediate annuities
without life contingencies were estimated using discounted cash flow
analyses using similar maturities or by using cash surrender value.
The carrying amounts reported for other investment contracts which
include participating pension contracts and retirement plan deposits
approximate those liabilities' fair value.
Other Deposit Liabilities: The carrying amounts for dividend
accumulations and premium deposit funds approximate the liabilities'
fair value.
The carrying amounts and estimated fair values of the Society's
financial instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial instruments
recorded as assets:
Fixed income securities $ 7,521 $ 7,521 $ 6,977 $ 6,977
Equity securities 791 791 651 651
Mortgage loans:
Commercial 1,641 1,752 1,945 2,039
Church 328 340 313 317
Contract loans 692 692 675 675
Cash and cash equivalents 555 555 553 553
Short-term investments 412 412 211 211
Other financial instruments
recorded as assets 722 722 331 331
Financial instruments
recorded as liabilities:
Investment contracts:
Deferred annuities 9,267 9,050 8,244 8,003
Supplementary contracts
and immediate annuities 350 350 312 312
Other deposit liabilities:
Dividend accumulations 34 34 33 33
Premium deposit funds 2 2 3 3
</TABLE>
NOTE 10 -- STATUTORY FINANCIAL INFORMATION
Accounting practices used to prepare statutory financial statements
for regulatory filing of fraternal life insurance companies differ
from generally accepted accounting principles. The following
reconciles the Society's statutory net change in surplus and statutory
surplus determined in accordance with accounting practices prescribed
or permitted by the Department of Commerce of the State of Minnesota
with net income and members' equity on a generally accepted accounting
principles basis.
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Net change in statutory surplus $ 121 $ 210
Change in asset valuation reserves 17 25
Net change in statutory surplus
and asset valuation reserves 138 235
Adjustments:
Future contract benefits and
contractholders' account balances (9) (45)
Deferred acquisition costs 32 37
Investment (losses) gains (13) 13
Other, net 25 8
-------- --------
Net income $ 173 $ 248
======== ========
Year Ended
December 31,
--------------------
1998 1997
-------- --------
Statutory surplus $ 1,141 $ 1,021
Asset valuation reserves 260 242
-------- --------
Statutory surplus and asset
valuation reserves 1,401 1,263
Adjustments:
Future contract benefits and
contractholders' account balances (417) (410)
Deferred acquisition costs 920 903
Interest maintenance reserves 192 136
Valuation of investments 336 300
Unearned revenue liability (44) (45)
Dividend liability 105 92
Other, net 17 6
-------- --------
Members' equity $ 2,510 $ 2,245
======== ========
NOTE 11 -- SUPPLEMENTARY FINANCIAL DATA
Following is a condensed synopsis of statutory financial information
of the Society (excluding affiliated subsidiaries) at December 31,
1998 and 1997. This information is included to satisfy certain state
reporting requirements for fraternals.
December 31,
--------------------
1998 1997
-------- --------
Invested and other admitted assets $ 12,215 $ 11,283
Assets held in separate accounts 2,724 1,871
-------- --------
Total assets 14,939 13,154
-------- --------
Contract reserves 9,194 9,050
Liabilities related to separate accounts 2,616 1,788
Other liabilities and assets reserves 1,988 1,295
-------- --------
Total liabilities and asset reserves 13,798 12,133
-------- --------
Unassigned surplus 1,141 1,021
-------- --------
Total liabilities, asset reserves and surplus 14,939 13,154
-------- --------
Savings from operations before net
realized capital gains 54 142
Net realized capital gains 37 74
-------- --------
Net savings from operations 91 216
Total other changes 30 (6)
-------- --------
Net increase in unassigned surplus $ 121 $ 210
======== ========
</TABLE>
NOTE 12 -- LEGAL MATTERS
The Society is involved in various pending or threatened legal
proceedings arising out of the normal course of business. Also, the
Society recently has been named in civil litigation proceedings
alleging inappropriate life insurance sales practices by the Society,
which appear to be substantially similar to claims asserted in class
actions brought against many other life insurers. These matters are
sometimes referred to as market conduct lawsuits. The Society believes
it has substantial defenses to these actions and intends to assert
them in the courts where the actions were filed. While the ultimate
resolution of such litigation cannot be predicted with certainty at
this time, in the opinion of management such matters will not have a
material adverse effect on the financial position or results of
operations of the Society.
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Part A: None.
Part B: Financial Statements of Lutheran Brotherhood. (3)
Financial Statements of LB Variable Annuity Account I. (3)
(b) Exhibits:
1. Resolution of the Board of Directors of Lutheran Brotherhood
("Depositor") authorizing the establishment of LB Variable
Annuity Account I ("Registrant"). (1)
2. Not Applicable.
3.(a) Form of Distribution Agreement between Depositor and
Lutheran Brotherhood Securities Corp ("LBSC"). (1)
(b) Forms of General Agent's Agreement and Selected Registered
Representative Agreement between LBSC and agents with
respect to the sale of Contracts. (1)
4. Form of Contract. (1)
5. Contract Application Form. (1)
6. Articles of Incorporation and Bylaws of Depositor. (1)
7. Not Applicable.
8. Not Applicable.
9. Opinion of counsel as to the legality of the securities being
registered (including written consent). (1)
10. Not Applicable.
11. Not Applicable.
12. Not Applicable.
13. Computations of Performance Data. (1)
14. Consent of Independent Accountant. (3)
15. Powers of Attorney. (1)(2)
16. Consent of Counsel. (3)
________________________________
(1) Included in Post-Effective Amendment No. 8 filed April 30, 1998.
(2) Included in post-effective amendment No. 5 to the registration
statement on Form N-4, Registration No. 33-67012, filed by the Registrant on
April 30, 1996.
(3) Filed herewith.
Item 25. Directors and Officers of the Depositor
DIRECTORS POSITIONS AND OFFICES WITH DEPOSITOR
Robert O. Blomquist Chairman of the Board
Lutheran Brotherhood of Directors
625 Fourth Avenue South
Minneapolis, Minnesota
Robert P. Gandrud President, Chief Executive
Lutheran Brotherhood Officer and Director
625 Fourth Avenue South
Minneapolis, Minnesota
Richard W. Duesenberg Director
Retired, formerly Senior Vice President
General Counsel and Secretary
Monsanto Company
One Indian Creek Lane
St. Louis, Missouri
Bobby I. Griffin Director
Executive Vice President
Medtronic, Inc.
7000 Central Avenue Northeast
Minneapolis, Minnesota
William R. Halling Director
The Economic Club of Detroit
333 W. Fort Street, Suite 100
Detroit, Michigan
James M. Hushagen Director
Partner, Eisenhower & Carlson
1200 First Interstate Plaza
Tacoma, Washington
Herbert D. Ihle Director
Retired, formerly President
Diversified Financial Services
10453 Shelter Grove
Eden Prairie, Minnesota
Richard C. Kessler Director
President
The Kessler Enterprise, Inc.
6649 Westwood Boulevard, Suite 130
Orlando, Florida
Judith K. Larsen Director
Vice President
Dataquest
3790 La Selva
Palo Alto, California
Dr. Luther S. Luedtke Director
California Lutheran University
60 West Olsen Road
Thousand Oaks, California
John P. McDaniel Director
President
Medlantic Healthcare Group
100 Irving Street, N.W.
Washington, D.C.
Mary Ellen H. Schmider Director
Retired, formerly Dean of Graduate Studies
Coordinator of Grants
Moorhead State University
7701 180th Street
Chippewa Falls, Wisconsin
Dr. Albert K. Siu Director
Vice President
AT&T
19 SchoolHouse Road, Room A107
Somerset, New Jersey
OFFICERS POSITIONS AND OFFICES WITH DEPOSITOR
Robert P. Gandrud President and Chief Executive
Officer
Rolf F. Bjelland Executive Vice President -
Investments
David J. Larson Senior Vice President, Secretary
and General Counsel
Dr. Edward A. Lindell Senior Vice President - External
Affairs
Michael E. Loken Senior Vice President - Management
Information Services
Bruce J. Nicholson President-Elect and Chief
Operating Officer
William H. Reichwald Executive Vice President - Marketing
David W. Angstadt Executive Vice President - Marketing
Jennifer H. Martin Senior Vice President - Human
Resources
Jerald E. Sourdiff Senior Vice President and Chief
Financial Officer
Daniel G. Walseth Senior Vice President - Law
Mary M. Abbey Vice President - Client Systems
Galen R. Becklin Vice President - Tech Support & Data
Processing
Larry A. Borlaug Vice President - Prototype
Development
Colleen Both Vice President - Chief Compliance
Officer
J. Keith Both Senior Vice President - Marketing
Randall L. Boushek Vice President - Portfolio Manager
Michael R. Braun Vice President - Management
Information Services
David J. Christianson Vice President - Insurance Services
Craig R. Darrington Vice President - Marketing
Pamela H. Desnick Vice President - Communications
Mitchell F. Felchle Vice President - Institutional
Relations Group
Charles E. Heeren Vice President - Bond Investments
Wayne A. Hellbusch Vice President - Agency Services
Otis F. Hilbert Vice President - Law
Gary J. Kallsen Vice President - Mortgages and Real
Estate
Fred O. Konrath Vice President - Marketing
Douglas B. Miller Regional Vice President - Marketing
C. Theodore Molen Regional Vice President - Marketing
Susan Oberman Smith Vice President - Product Management
James R. Olson Vice President - Investor
Services/Administration
Kay J. Owen Vice President - Corporate
Administration
Dennis K. Peterson Vice President
Bruce M. Piltingsrud Vice President - Research/Marketing
Strategies
Richard B. Ruckdashel Vice President - Product Marketing
Rolf H. Running Vice President - New Ventures Group
Lynette J.C. Stertz Vice President - Controller's
David K. Stewart Vice President and Treasurer
John O. Swanson, M.D. Vice President and Medical Director
Louise K. Thoreson Vice President - Fraternal
James M. Walline Vice President - Equities/Mutual
Funds Investment
Anita J.T. Young Vice President
The principal business address of each of the foregoing officers is 625
Fourth Avenue South, Minneapolis, Minnesota 55415.
Item 26. Persons Controlled by or Under Common Control with Depositor or
Registrant
Registrant is a separate account of Depositor, established by the Board of
Directors of Depositor in 1993 pursuant to the laws of the State of
Minnesota. Depositor is a fraternal insurance society organized under the
laws of the state of Minnesota and is owned by and operated for its members.
It has no stockholders nor is it subject to the control of any affiliated
persons. Depositor controls the following wholly owned direct and indirect
subsidiaries: (a) Lutheran Brotherhood Financial Corporation ("LBFC"), a
Minnesota corporation which is a holding company that has no independent
operations; (b) Lutheran Brotherhood Variable Insurance Products Company
("LBVIP"), a Minnesota corporation organized as a stock life insurance
company; (c) LBSC, a Pennsylvania corporation which is a registered broker-
dealer; (d) Lutheran Brotherhood Research Corp., a Minnesota corporation
which is a licensed investment adviser; and (e) Lutheran Brotherhood Real
Estate Products Company, a Minnesota corporation.
Item 27. Number of Contract Owners
There were 88,664 Contract Owners as of April 26, 1999.
Item 28. Indemnification
Reference is hereby made to Section 5 of Depositor's Bylaws, filed as an
Exhibit to this Registration Statement, and to Section 5 of LBSC's By-Laws,
which mandate indemnification by Depositor and LBSC of directors, officers
and certain others under certain conditions. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of Depositor or LBSC, pursuant
to the foregoing provisions or otherwise, Depositor and LBSC have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Depositor or LBSC of
expenses incurred or paid by a director or officer or controlling person of
Depositor or LBSC in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person of
Depositor or LBSC in connection with the securities being registered,
Depositor or LBSC will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether or not such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
An insurance company blanket bond is maintained providing $10,000,000
coverage for officers and employees of Lutheran Brotherhood, Depositor and
LBSC, and $750,000 coverage for their general agents and Depositor's
Representatives, both subject to a $100,000 deductible.
Item 29. Principal Underwriter
(a) LBSC, the principal underwriter of the Contracts, is also named as
distributor of the stock of The Lutheran Brotherhood Family of Funds, a
diversified open-end investment company organized as a Delaware business
trust, consisting of the following series: Lutheran Brotherhood Money Market
Fund, Lutheran Brotherhood Opportunity Growth Fund, Lutheran Brotherhood Mid
Cap Growth Fund, Lutheran Brotherhood Fund, Lutheran Brotherhood World
Growth Fund, Lutheran Brotherhood Income Fund, Lutheran Brotherhood High
Yield Fund, and Lutheran Brotherhood Municipal Bond Fund. LBSC also acts or
will act as the principal underwriter of the following variable contracts:
flexible premium variable life insurance contracts issued by Depositor
through LB Variable Insurance Account I, a separate account of Depositor to
be registered as a unit investment trust under the Investment Company Act of
1940; flexible premium deferred variable annuity contracts issued by LBVIP
through LBVIP Variable Annuity Account I, a separate account of LBVIP
registered as a unit investment trust under the Investment Company Act of
1940; flexible premium variable life insurance contracts issued by LBVIP
through LBVIP Variable Insurance Account, a separate account of LBVIP
registered as a unit investment trust under the Investment Company Act of
1940; and of single premium variable life insurance contracts issued by
LBVIP through LBVIP Variable Insurance Account II, a separate account of
LBVIP registered as a unit investment trust under the Investment Company Act
of 1940.
(b) The directors and officers of LBSC are as follows:
Robert P. Gandrud Chairman and Director
J. Keith Both President
Rolf F. Bjelland Director
Bruce J. Nicholson Director
David W. Angstadt Director
David J. Larson Director
Jennifer H. Martin Director
Jerald E. Sourdiff Chief Financial Officer and Director
David K. Stewart Treasurer
Otis F. Hilbert Vice President and Secretary
Larry A. Borlaug Vice President
Colleen Both Vice President
Mitchell F. Felchle Vice President
Wayne A. Hellbusch Vice President
Douglas B. Miller Vice President
C. Theodore Molen Vice President
James R. Olson Vice President
William H. Reichwald Vice President
Richard B. Ruckdashel Vice President
Vicki R. Brandt Assistant Vice President
Stephen R. Grinna Assistant Vice President
Douglas J. Halvorson Assistant Vice President
Katie S. Kloster Assistant Vice President
Frederick P. Johnson Assistant Vice President
Brenda J. Pederson Assistant Vice President
Marie A. Sorensen Assistant Vice President
John C. Bjork Assistant Secretary
James M. Odland Assistant Secretary
The principal business address of each of the foregoing officers is 625
Fourth Avenue South, Minneapolis, Minnesota 55415.
(c) Not Applicable.
Item 30. Location of Accounts and Records
The accounts and records of Registrant are located at the office of
Depositor at 625 Fourth Avenue South, Minneapolis, Minnesota 55415.
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
Registrant will file a post-effective amendment to this Registration
Statement as frequently as is necessary to ensure that the audited financial
statements in this Registration Statement are never more than 16 months old
for so long as payments under the Contracts may be accepted.
Registrant will include either (1) as part of any application to purchase a
Contract offered by the Prospectus, a space that an applicant can check to
request a Statement of Additional Information, or (2) a postcard or similar
written communication affixed to or included in the Prospectus that the
applicant can remove to send for a Statement of Additional Information.
Registrant will deliver any Statement of Additional Information and any
financial statements required to be made available under this form promptly
upon written or oral request.
Lutheran Brotherhood hereby represents that, as to the individual flexible
premium variable annuity contracts that are the subject of this registration
statement, File Number 33-67012, that the fees and charges deducted under
the contracts, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred and the risks assumed by
Lutheran Brotherhood.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it meets all of the requirements for effectiveness
of this amendment to the Registration Statement pursuant to Rule 485(b)
under the Securities Act of 1933 and has duly caused this amendment to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Minneapolis and State of Minnesota
on the 6th day of May, 1999.
LB VARIABLE ANNUITY ACCOUNT I
(Registrant)
By LUTHERAN BROTHERHOOD
(Depositor)
By /s/ Robert P. Gandrud
----------------------------
Robert P. Gandrud, President
Pursuant to the requirements of the Securities Act of 1933, the
Depositor has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minneapolis and State of Minnesota on the 6th day of May, 1999.
LUTHERAN BROTHERHOOD
(Depositor)
By /s/ Robert P. Gandrud
---------------------------
Robert P. Gandrud, President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed on the 6th day of
May, 1999 by the following directors and officers of Depositor in the
capacities indicated:
/s/ Robert P. Gandrud President and Chief Executive Officer
----------------------- (Chief Executive Officer)
Robert P. Gandrud
/s/ Jerald E. Sourdiff Chief Financial Officer (Principal
----------------------- Financial Officer)
Jerald E. Sourdiff
/s/ David K. Stewart Treasurer (Principal Accounting Officer)
-----------------------
David K. Stewart
A Majority of the Board of Directors:
Robert O. Blomquist Richard Kessler
Richard W. Duesenberg Judith K. Larsen
Robert P. Gandrud Luther S. Luedtke
Bobby I. Griffin John P. McDaniel
William R. Halling Mary Ellen H. Schmider
James M. Hushagen
Herbert D. Ihle
Otis F. Hilbert, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named directors of Lutheran
Brotherhood pursuant to powers of attorney duly executed by such persons.
/s/ Otis F. Hilbert
--------------------------------
Otis F. Hilbert, Attorney-in-Fact
<PAGE>
INDEX TO EXHIBITS
LB VARIABLE ANNUITY ACCOUNT I
EXHIBIT NO.
- ----------
14 Consent of Independent Accountant.
16 Consent of Counsel.
27 Financial Data Schedule.
<PAGE>
EXHIBIT 14
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 11 to the
registration statement on Form N-4 (the "Registration Statement") of our
report dated March 24, 1999, relating to the financial statements of LB
Variable Annuity Account I, which appears in such Statement of Additional
Information, and to the incorporation by reference of our report into the
Prospectus which constitutes part of this Registration Statement. We also
consent to the references to us under the heading "Financial Statements and
Experts" in such Prospectus and under the heading "Independent Accountants
and Financial Statements" in such Statement of Additional Information.
We also consent to the use in such Statement of Additional Information of
our report dated March 15, 1999, relating to the financial statements of
Lutheran Brotherhood which appears in such Statement of Additional
Information.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
May 6, 1999
<PAGE>
EXHIBIT 16
625 Fourth Avenue South
Minneapolis, Minnesota 55415
(612) 340-5727
Fax: (612) 340-7062
[logo] LUTHERAN
BROTHERHOOD
James M. Odland
Assistant Vice President
Law Division
May 6, 1999
Lutheran Brotherhood
625 Fourth Avenue South
Minneapolis, MN 55415
Ladies and Gentlemen:
I consent to the use of my name under the heading "Legal Matters" in the
Prospectuses constituting part of the Registration Statement, on Form N-4
(File No. 33-67012), of LB Variable Annuity Account I.
Very truly yours,
/s/ James M. Odland
James M. Odland
<PAGE>
EXHIBIT 16
JONES & BLOUCH L.L.P.
SUITE 405 WEST
1025 THOMAS JEFFERSON STREET, N.W.
WASHINGTON, D.C. 20007-0805
JORDEN BURT BERENSON & JOHNSON LLP TELEPHONE (202) 223-3500
AFFILIATED COUNSEL TELECOPIER (202) 223-4593
May 6, 1999
Lutheran Brotherhood
625 Fourth Avenue South
Minneapolis, Minnesota 55415
Re: LB Variable Annuity Account I
Gentlemen:
We hereby consent to the reference to this firm under the caption "Legal
Matters" in the prospectus contained in Post-Effective Amendment No. 11 to
the registration statement, on Form N-4, File No. 33-67012, to be filed with
the Securities and Exchange Commission.
Very truly yours,
/s/ Jones & Blouch L.L.P.
Jones & Blouch L.L.P.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the LB
Variable Annuity Accout I Annual Report to Shareholders dated December 31,
1998 and is qualified in its entirety by reference to such Annual Report.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
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