PRESIDENT'S MESSAGE
Dear Shareholder:
I am pleased to present the Annual Report to Shareholders for Federated
American Leaders Fund II, a portfolio of Federated Insurance Series.
This report covers the 12-month period from January 1, 1997 through December
31, 1997. It begins with a commentary by the fund's portfolio manager, which
is followed by a complete listing of the fund's stock holdings and the
fund's financial statements.
As a shareholder, your money has been at work in a diversified portfolio of
leading American corporations. At the end of the reporting period, the
fund's 91 holdings were diversified across 12 key business and industrial
sectors. Many of the holdings--including Allstate, Bristol-Myers Squibb,
Exxon, General Motors, Pepsico, and Wal-Mart--are household names.
In a strong and volatile stock market, the fund's portfolio performed
extremely well. Contributing to the fund's excellent total return of 32.34%
were an income of $0.10 per share, capital gains distributions of $0.36 per
share, and a significant 28% increase in net asset value.* Over the
reporting period, fund net assets rose from $142 million to $305 million.
Thank you for choosing Federated American Leaders Fund II as a diversified,
professionally managed way to participate in the long-term growth potential
of American companies. We trust you were pleased with the positive
performance of your investment. As always, we welcome your comments and
suggestions.
Sincerely,
[Graphic]
J. Christopher Donahue
President
February 15, 1998
* Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Performance information does not reflect the charges
and expenses of a variable life insurance contract.
MANAGEMENT DISCUSSION AND ANALYSIS
The year of 1997, was a strong year for the fund. The fund had a total
return of 32.34%* versus 27.14% and 33.36% for the Lipper Growth and Income
Funds Average** and the Standard & Poor's 500 Index,*** respectively. For
the fourth quarter of 1997, the fund returned 2.40% verses 0.83% and 2.87%
for the Lipper Growth and Income Fund Average and the Standard & Poor's 500
Index, respectively.
Continued market strength has led us to become more defensive as valuations
have become excessive in some areas and speculation seems more abundant. We
are close to seven years of an economic expansion, which is long by historic
standards. The current economic turmoil facing some of our foreign trading
partners also concerns us. The combination of these and other factors has
increased the uncertainty levels in investors' minds. As previously stated,
when uncertainty increases in financial markets, the typical reaction is a
"flight to quality." This is where investors begin taking profits in more
speculative and often smaller companies and invest in large well run
companies which have weathered difficult economic and market periods. This
occurrence should bode well for the fund given our investment process.
The best performing sectors were Finance, Technology and Energy. We continue
to overweight Energy due to its defensive nature as well as attractive
valuation. In Finance, we remain slightly below market weighted as valuation
is now in the upper end of historic ranges. The run up in Technology has
given us the opportunity to reduce our exposure, as excessive valuation and
slowing growth rates persist. We continue to increase our exposure to
Utilities and Retailing as both groups have been ignored by investors,
valuations are attractive, and fundamentals are improving. We continue to
seek undervalued quality companies and avoid good stories with high risk.
As part of our portfolio management process in determining relative sector
weightings, we also attempt to identify underlying investment themes. At
this time, the major themes in the fund's portfolio are as follows:
1. Benefits as a result of corporate restructuring, such as Pharmacia &
Upjohn, Rubbermaid, Unilever N.V., and CIGNA.
2. Companies which generate significant excess cash flow such as Philip Morris
and Dow Chemical.
3. Dominant companies with superior management; PepsiCo, Wal-Mart Stores, and
Philip Morris fit this description.
While concerned by the market's strength over the past years, we believe
good long-term values can be identified by our disciplined investment
process and careful fundamental research. We believe 1998 will be more
challenging, and we will continue to help control risk through
diversification and attention to valuation of individual stocks.
* Performance quoted represents past performance and is not indicative of
future performance. Investment return and principal value will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Performance information does not reflect the charges
and expenses of a variable annuity or variable life insurance contract.
** The Standard & Poor's 500 Stock Index, a composite index of common stocks
in industry, transportation, and financial and public utility companies, can
be used to compare to the total returns of funds whose portfolios are
invested primarily in common stocks. This index is unmanaged and actual
investments cannot be made in an index.
*** Lipper figures represent the average of the total returns reported by
all of the mutual funds designated by Lipper Analytical Services as falling
into the respective categories indicated. Lipper returns do not take sales
charges into account.
FEDERATED AMERICAN LEADERS FUND II
GROWTH OF $10,000 INVESTED IN THE FEDERATED AMERICAN LEADERS FUND II
The graph below illustrates the hypothetical investment of $10,000* in the
Federated American Leaders Fund II (the "Fund") from February 10, 1994
(start of performance) to December 31, 1997, compared to the Standard and
Poor's 500 Index (S&P 500)+ and the Lipper Growth and Income Funds Average
(LGIFA).++
[Graphic representation omitted. See Appendix falfii.]
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT
OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The S&P 500 and the LGIFA have been adjusted to reflect
reinvestment of dividends on securities in the index and average.
+ The S&P 500 is not adjusted to reflect sales charges, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. The
index is unmanaged.
++ The LGIFA represents the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the category, and is not adjusted to reflect any sales charges.
However, these total returns are reported net of expenses or other fees that
the SEC requires to be reflected in a fund's performance.
PORTFOLIO OF INVESTMENTS
FEDERATED AMERICAN LEADERS FUND II
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--98.6%
BASIC INDUSTRY--5.3%
212,500 Archer-Daniels-Midland Co. $ 4,608,594
33,500 Arco Chemical Co. 1,564,032
28,000 Consolidated Papers, Inc. 1,494,500
32,000 Dow Chemical Co. 3,248,000
143,500 Louisiana-Pacific Corp. 2,726,500
82,500 USX-U.S. Steel Group, Inc. 2,578,125
TOTAL 16,219,751
CONSUMER DURABLES--4.4%
51,000 Borg-Warner Automotive, Inc. 2,652,156
35,000 Centex Corp. 2,202,813
55,000 Eastman Kodak Co. 3,344,688
33,500 General Motors Corp. 2,030,938
123,000 Rubbermaid, Inc. 3,075,000
TOTAL 13,305,595
CONSUMER NON-DURABLES--8.0%
36,500 CPC International, Inc. 3,932,875
121,000 PepsiCo, Inc. 4,408,938
43,000 Philip Morris Cos., Inc. 1,948,438
62,000 RJR Nabisco Holdings Corp. 2,325,000
54,500 Russell Corp. 1,447,657
42,000 Sara Lee Corp. 2,365,125
82,500 UST, Inc. 3,047,344
82,000 Unilever N.V., ADR 5,119,875
TOTAL 24,595,252
ENERGY MINERALS--10.9%
42,000 Amerada-Hess Corp. 2,304,750
35,500 Chevron Corp. 2,733,500
49,000 Exxon Corp. 2,998,188
44,500 Mobil Corp. 3,212,344
</TABLE>
FEDERATED AMERICAN LEADERS FUND II
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
ENERGY MINERALS--CONTINUED
109,400 Occidental Petroleum Corp. $ 3,206,788
48,500 Royal Dutch Petroleum Co., ADR 2,628,094
143,500 Sun Co., Inc. 6,035,969
43,000 Texaco, Inc. 2,338,125
154,500 USX Marathon Group 5,214,375
79,000 YPF Sociedad Anonima, ADR 2,700,813
TOTAL 33,372,946
FINANCE--12.0%
29,000 Allstate Corp. 2,635,375
72,000 Bear Stearns Cos., Inc. 3,420,000
69,000 Block (H&R), Inc. 3,092,063
81,000 Boston Properties, Inc. 2,678,063
37,500 CIGNA Corp. 6,489,844
14,000 General RE Corp. 2,968,000
45,000 MBIA Insurance Corporation 3,005,675
66,000 Marsh & McLennan Cos., Inc. 4,921,125
59,000 Morgan Stanley, Dean Witter, Discover & Co. 3,488,375
27,000 Republic New York Corp. 3,083,063
31,500 (a)Security Capital Group, Inc. 1,023,750
TOTAL 36,805,333
HEALTH CARE--9.7%
46,000 Abbott Laboratories 3,015,875
91,500 Biomet, Inc. 2,344,688
68,000 Bristol-Myers Squibb Co. 6,434,500
30,900 Merck & Co., Inc. 3,283,125
106,500 (a)Perrigo Co. 1,424,438
154,000 Pharmacia & Upjohn, Inc. 5,640,250
174,000 U.S. Surgical Corp. 5,100,375
45,500 United Healthcare Corp. 2,260,781
TOTAL 29,504,032
PRODUCER MANUFACTURING--7.3%
62,500 Cincinnati Milacron, Inc. 1,621,094
170,500 ITT Industries, Inc. 5,349,438
</TABLE>
FEDERATED AMERICAN LEADERS FUND II
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
PRODUCER MANUFACTURING--CONTINUED
121,000 Ingersoll-Rand Co. $ 4,900,500
88,500 Johnson Controls, Inc. 4,218,920
95,000 (a)Lexmark Intl. Group, Class A 3,610,000
23,000 Loews Corp. 2,440,875
TOTAL 22,140,827
RETAIL TRADE--4.6%
46,500 Dayton-Hudson Corp. 3,138,750
443,500 (a)K Mart Corp. 5,127,969
145,000 Wal-Mart Stores, Inc. 5,718,438
TOTAL 13,985,157
SERVICES--9.9%
23,000 ABB AB, ADR 2,708,250
82,098 Browning-Ferris Industries, Inc. 3,037,626
291,000 News Corp., Ltd., ADR 5,783,625
20,500 News Corp., Ltd., ADR 457,406
145,500 Readers Digest Association, Inc., Class A 3,436,558
59,621 (a)TCI Ventures Group, Class A 1,688,020
99,000 (a)Tricon Global Restaurants, Inc. 2,877,188
68,000 (a)Viacom, Inc., Class A 2,779,500
44,000 (a)Viacom, Inc., Class B 1,823,250
207,000 Waste Management, Inc. 5,692,500
TOTAL 30,283,923
TECHNOLOGY--10.2%
71,000 AMP, Inc. 2,982,000
57,500 (a)Cabletron Systems, Inc. 862,500
244,000 First Data Corp., Class 7,137,000
45,000 General Motors Corp., Class H 1,662,188
28,000 International Business Machines Corp. 2,927,750
23,600 Matsushita Electric Industrial Co., ADR 3,587,200
380,500 (a)Novell, Inc. 2,853,750
57,000 (a)Raytheon Co., Class A 2,810,813
101,000 (a)Seagate Technology, Inc. 1,944,250
73,500 (a)Storage Technology Corp. 4,552,406
TOTAL 31,319,857
</TABLE>
FEDERATED AMERICAN LEADERS FUND II
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
TRANSPORTATION--2.5%
16,000 (a)AMR Corp. $ 2,056,000
72,000 CNF Transportation, Inc. 2,763,000
86,000 Ryder Systems, Inc. 2,816,500
TOTAL 7,635,500
UTILITIES--13.8%
44,000 Coastal Corp. 2,725,250
31,000 Columbia Gas System, Inc. 2,435,438
162,500 Entergy Corp. 4,864,844
59,000 GTE Corp. 3,082,750
109,000 Houston Industries, Inc. 2,908,938
147,500 MCI Communications Corp. 6,314,844
151,000 P G & E Corp. 4,596,063
103,500 Public Service Enterprises Group, Inc. 3,279,656
51,800 SBC Communications, Inc. 3,794,350
178,079 (a)Tele-Communications, Inc., Class A 4,975,082
73,000 U.S. West, Inc. 3,294,125
TOTAL 42,271,340
TOTAL COMMON STOCKS (IDENTIFIED COST $248,065,693) 301,439,513
(B)REPURCHASE AGREEMENT--1.8%
$ 5,440,000 BT Securities Corp., 6.60%, dated 12/31/1997, due 1/2/1998 (at 5,440,000
amortized cost)
TOTAL INVESTMENTS (IDENTIFIED COST $253,505,693)(C) $ 306,879,513
</TABLE>
(a) Non-income producing security.
(b) The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
(c) The cost of investments for federal tax purposes amounts to
$253,544,018. The net unrealized appreciation/depreciation of investments
on a federal tax basis amounts to $53,335,495 which is comprised of
$60,594,271 appreciation and $7,258,776 depreciation at December 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($305,796,063) at December 31, 1997.
The following acronyms are used throughout this portfolio:
ADR --American Depository Receipt
MBIA --Municipal Bond Investors Assurance
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED AMERICAN LEADERS FUND II
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost $ 306,879,513
$253,505,693, and tax cost $253,544,018)
Cash 1,485
Income receivable 491,576
Receivable for investments sold 1,069,079
Receivable for shares sold 299,076
Deferred organizational costs 15,952
Total assets 308,756,681
LIABILITIES:
Payable for investments purchased $ 2,846,984
Payable for shares redeemed 38,269
Accrued expenses 75,365
Total liabilities 2,960,618
NET ASSETS for 15,578,504 shares outstanding $ 305,796,063
NET ASSETS CONSIST OF:
Paid in capital $ 230,404,530
Net unrealized appreciation of investments 53,373,820
Accumulated net realized gain on investments 20,425,622
Undistributed net investment income 1,592,091
Total Net Assets $ 305,796,063
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
$305,796,063 / 15,578,504 shares outstanding $19.63
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED AMERICAN LEADERS FUND II
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld of $26,399) $ 3,999,327
Interest 532,712
Total income 4,532,039
EXPENSES:
Investment advisory fee $ 1,671,330
Administrative personnel and services fee 169,740
Custodian fees 41,379
Transfer and dividend disbursing agent fees and expenses 24,526
Trustees' fees 2,990
Auditing fees 12,983
Legal fees 7,991
Portfolio accounting fees 77,327
Share registration costs 29,488
Printing and postage 46,007
Insurance premiums 4,076
Miscellaneous 14,982
Total expenses 2,102,819
Waivers--
Waiver of investment advisory fee (198,839)
Net expenses 1,903,980
Net investment income 2,628,059
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 20,429,655
Net change in unrealized appreciation of investments 36,461,644
Net realized and unrealized gain on investments 56,891,299
Change in net assets resulting from operations $ 59,519,358
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED AMERICAN LEADERS FUND II
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 2,628,059 $ 1,422,431
Net realized gain (loss) on investments ($20,467,415 and 20,429,655 3,780,324
$3,738,194, respectively, as computed for federal tax purposes)
Net change in unrealized appreciation of investments 36,461,644 12,783,766
Change in net assets resulting from operations 59,519,358 17,986,521
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (1,147,286) (1,311,113)
Distributions from net realized gains on investments (3,728,320) (450,672)
Change in net assets resulting from distributions to (4,875,606) (1,761,785)
shareholders
SHARE TRANSACTIONS--
Proceeds from sale of shares 148,786,787 89,014,893
Net asset value of shares issued to shareholders in payment of 4,876,320 1,761,418
distributions declared
Cost of shares redeemed (44,727,260) (13,298,117)
Change in net assets resulting from share transactions 108,935,847 77,478,194
Change in net assets 163,579,599 93,702,930
NET ASSETS:
Beginning of period 142,216,464 48,513,534
End of period (including undistributed net investment income of $ 305,796,063 $ 142,216,464
$1,592,091 and $111,318, respectively)
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.26 $12.80 $ 9.74 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.19 0.19 0.20 0.19
Net realized and unrealized gain (loss) on investments 4.64 2.54 3.06 (0.26)
Total from investment operations 4.83 2.73 3.26 (0.07)
LESS DISTRIBUTIONS
Distributions from net investment income (0.10) (0.18) (0.19) (0.19)
Distributions in excess of net investment income(b) -- -- (0.01) --
Distributions from net realized gain on investments (0.36) (0.09) -- --
Total distributions (0.46) (0.27) (0.20) (0.19)
NET ASSET VALUE, END OF PERIOD $19.63 $15.26 $12.80 $ 9.74
TOTAL RETURN(C) 32.34% 21.58% 33.71% (0.70%)
RATIOS TO AVERAGE NET ASSETS
Expenses 0.85% 0.85% 0.85% 0.54%*
Net investment income 1.18% 1.54% 2.03% 2.58%*
Expense waiver(d) 0.09% 0.22% 1.36% 25.42%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $305,796 $142,216 $48,514 $2,400
Average commission rate paid(e) $0.0499 $0.0012 -- --
Portfolio turnover 56% 90% 43% 32%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from February 10, 1994 (date of
initial public investment) to December 31, 1994. For the period from
December 9, 1993 (start of business) to January 31, 1994, the Fund had no
investment activity.
(b) Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principals. These
distributions do not represent a return of capital for federal income tax
purposes.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(e) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were charged.
This disclosure is required for fiscal years beginning on or after
September 1, 1995.
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED AMERICAN LEADERS FUND II
DECEMBER 31, 1997
ORGANIZATION
Federated Insurance Series (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act") as an open-end, management
investment company. The Trust consists of eight portfolios. The financial
statements included herein are only those of Federated American Leaders Fund
II (the "Fund"), a diversified portfolio. The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The primary objective of the Fund is to achieve long-term
growth of capital. The Fund's secondary objective is to provide income.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
Listed equity securities are valued at the last sale price reported on a
national securities exchange. Short-term securities are valued at the prices
provided by an independent pricing service. However, short-term securities
with remaining maturities of sixty days or less at the time of purchase may
be valued at amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less
than the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code"). Dividend income and distributions to shareholders are
recorded on the ex-dividend date.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable
to regulated investment companies and to distribute to shareholders each
year substantially all of its income. Accordingly, no provisions for federal
tax are necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The
Fund records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, expenses, and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
<S> <C> <C>
Shares sold 8,511,603 6,346,064
Shares issued to shareholders in payment of distributions declared 304,810 124,400
Shares redeemed (2,560,144) (938,427)
Net change resulting from share transactions 6,256,269 5,532,037
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Advisers, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.75% of the
Fund's average daily net assets. The Adviser may voluntarily choose to waive
any portion of its fee. The Adviser can modify or terminate this voluntary
waiver at any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net
assets of all funds advised by subsidiaries of Federated Investors for the
period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent for the Fund. The
fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee.
The fee is based on the level of the Fund's average daily net assets for the
period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES
Organizational expenses of $47,855 were borne initially by the Adviser. The
Fund has reimbursed the Adviser for these expenses. These expenses have been
deferred and are being amortized over the five-year period following the
Fund's effective date. For the year ended December 31, 1997, the Fund
expensed $12,761 of organizational expenses.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors
or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended December 31, 1997, were as follows:
PURCHASES $227,150,749
SALES $119,118,995
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of the Federated Insurance Series and Shareholders
of FEDERATED AMERICAN LEADERS FUND II:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated American Leaders Fund
II (a portfolio of the Federated Insurance Series) as of December 31, 1997,
and the related statement of operations for the year then ended, the
statement of changes in net assets for the years ended December 31, 1997 and
1996, and the financial highlights for the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned as of December 31, 1997, by correspondence with the
custodian and brokers; where replies were not received, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated
American Leaders Fund II as of December 31, 1997, the results of its
operations, the changes in its net assets and its financial highlights for
the respective stated periods in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 6, 1998
TRUSTEES
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
J. Christopher Donahue
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
DIRECTORS
John F. Donahue
Chairman
J. Christopher Donahue
President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Richard B. Fisher
Vice President
Matthew S. Hardin
Assistant Secretary
Variable funds are not bank deposits or obligations, are not guaranteed by
any bank, and are not insured or guaranteed by the U.S. government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other government agency. Investment in variable funds involves investment
risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectus which contains facts
concerning its objective and policies, management fees, expenses, and other
information.
NOTES
NOTES
[Graphic]Federated Investors
Federated American Leaders Fund II
Federated Insurance Series
ANNUAL REPORT
TO SHAREHOLDERS
DECEMBER 31, 1997
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
CUSIP 313916405
G00843-01 (2/98)
[Graphic]
FEDERATED UTILITY FUND II
Federated Insurance Series
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
[Graphic]
Annual Report to Shareholders
December 31, 1997
Cusip 313916108
G00845-01 (2/98)
PRESIDENT'S MESSAGE
Dear Shareholder:
I am pleased to present the Annual Report to Shareholders for Federated
Utility Fund II, a portfolio of Federated Insurance Series.
This report covers the 12-month fiscal year period from January 1, 1997
through December 31, 1997. It begins with a commentary by the fund's
portfolio manager, which is followed by a complete listing of the fund's
utility holdings and the financial statements.
The fund is an attractive way to help your money earn dividend income, with
some opportunities for growth, from an investment sector that supplies
critical services to society. At the end of the reporting period, the fund's
67 common and preferred stock holdings were spread across the electric,
telecommunication, natural gas and international utilities.
In a positive 1997 environment for utilities, Federated Utility Fund II
performed extremely well. Contributing to the fund's strong total return of
26.63% were $0.28 per share in income, $0.26 per share in capital gains, and
a significant 20% increase in net asset value.* As of December 31, 1997, net
assets reached $104 million--a significant increase over the $64 million in
net assets at the beginning of the reporting period.
Thank you for choosing Federated Utility Fund II as a diversified,
professionally managed way to participate in the income and growth
opportunities of utility stocks. We hope you are pleased with the fund's
strong performance. As always, we welcome your comments and suggestions.
Sincerely,
[Graphic]
J. Christopher Donahue
President
February 15, 1998
* Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Performance information does not reflect the charges
and expenses of a variable annuity or variable life insurance contract.
MANAGEMENT DISCUSSION AND ANALYSIS
The fourth quarter of 1997 was the utility sector's strongest quarter in
this decade. During this period, the Standard & Poor's ("S&P") Utility
Index* returned 16.3%, while the S&P 500 Index** returned 2.9%. The S & P
Communications Index*** returned 19.6%. The electric utility sector
returned 18.3%, as the turmoil in Asian markets drove investors to sectors
with little foreign exposure and lower stock-price volatility. Natural
gas stocks returned "only" 8.8% because of widespread expectations that
the El Nino climatic phenomenon would cause a mild winter and lower gas
prices. Federated Utility Fund II returned 13.0% in the fourth quarter
of 1997.+
For the fiscal year ended December 31, 1997, Federated Utility Fund II
returned 26.6%,+ which was a bit ahead of our peers. The S&P Utility Index
returned 24.8%, and the S&P Communications Index returned 41.3%.
In industry developments, the electric industry's transition to competition
continued in a way that was generally constructive for investors. Illinois
passed restructuring legislation and joined nine other states that have
established plans to provide choice to retail buyers of energy. Utilities in
Texas, another key state, reached interim agreements with the utility
commission. These developments reduced investor uncertainty about industry
cash flows and have provided support to the stocks.
Merger and acquisition activity continued. Pacificorp received the British
Government's approval to acquire the Energy Group; Ohio Edison and Centerior
Energy merged to form FirstEnergy; and the quarter ended with American
Electric Power's proposal to acquire Central & Southwest. The merger and
acquisition aspect of the electric and gas industries may be an overlooked
side to the utility story. As with the banking and defense sectors over the
last decade, if regulators allow utility mergers and industry consolidation,
the stocks could do quite well without overall industry growth.
Among telecom stocks, MCI agreed to merge with Worldcom. After the
subsequent spike in MCI's stock, we reduced our holding of MCI from 3.2% to
1.7% of the fund. Elsewhere in the sector, slower-than-expected competition
for local phone service has helped the stocks of the Regional Bell Operating
Companies (RBOCs).
Gas stocks have weakened because of El Nino. We are particularly attracted
to gas, which is becoming the fuel of choice for environmental, economic,
and national security reasons. In addition, gas and electric stocks offer
merger and acquisition appeal as the industries converge to offer various
energy services to customers.
We significantly increased our exposure to domestic (electric and gas)
utilities and reduced our foreign exposure and non-utility holdings,
particularly convertibles. This is consistent with our defensive strategy
going into 1998. Our primary non-utilities are Real Estate Investment Trusts
(REITs).
Despite the recent spurt in utility stocks, electric and gas stocks still
seem attractive. The dividend yield on electrics is three times that of the
S&P 500 Index, and their price per cash flow multiple is at a 50% discount.
Gas stocks seem undervalued and offer positive fundamentals and takeover
appeal. Telephone stocks seem fairly valued, but demand for communications
services is surging. I like the prospects for utilities in 1998.
THEMES
1. Skilled, shareholder-oriented management who can capitalize on the
industry's unprecedented changes.
2. Domestic utilities with superior growth prospects and low dividend payouts.
3. Undervalued domestic utilities with high and secure dividend yields.
4. Defensive non-utilities (e.g., REITs) to provide relative safety in a
market decline.
* Standard & Poor's Utility Index is an unmanaged index of common stocks
from forty different electric and natural gas utilities indicating daily
changes in the price of the stocks. Investments cannot be made in an index.
** Standard & Poor's 500 Index is an unmanaged composite index of common
stocks in industrial, transportation, and financial and public utility
companies, and can be used to compare the total returns of funds whose
portfolios are invested primarily in common stocks. Investments cannot be
made in an index.
*** Standard & Poor's Communications Index is an unmanaged index of common
stocks from telephone utilities indicating daily changes in the price of the
stocks. Investments cannot be made in an index.
+ Performance quoted represents past performance and is not indicative
of future results. Investment return and principal value will fluctuate,
so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Performance information does not reflect the
charges and expenses of a variable annuity or variable life insurance contract.
COMMENTS REGARDING RECENT PURCHASES
We virtually eliminated our foreign exposure and added to
domestic electric and gas utilities. We also replaced most non-utility
convertibles with REITs and undervalued, out-of-favor common stocks.
FLORIDA PROGRESS, MONTANA POWER, NEW CENTURY ENERGIES, HOUSTON INDUSTRIES,
SCANA, POTOMAC ELECTRIC, PUBLIC SERVICE ENTERPRISE GROUP, and AMAREN are
domestic electric companies that are undergoing positive changes or seem
overlooked and undervalued.
EL PASO ENERGY is a leading gas pipeline company with strong earnings
prospects.
BARRICK GOLD (GOLD MINING), BURLINGTON RESOURCES (gas production), FEDERAL
SIGNAL (diversified manufacturing), and ULTRAMAR-DIAMOND SHAMROCK (oil
refining) common stocks seem undervalued, out-of-favor, and relatively low
risk.
BELL ATLANTIC has substantial potential for cost reductions from its merger
with NYNEX.
FEDERATED UTILITY FUND II
GROWTH OF $10,000 INVESTED IN THE FEDERATED UTILITY FUND II
The graph below illustrates the hypothetical investment of $10,000* in the
Federated Utility Fund II (the "Fund") from February 10, 1994 (start of
performance) to December 31, 1997, compared to the Standard and Poor's
500 Index (S&P 500)+ and the Standard and Poor's Utility Index (SPUX)+.
[GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX FUFII]
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED DECEMBER 31, 1997
1 Year 26.63%
Start of Performance (2/10/94) 14.54%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT
OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The S&P 500 and the SPUX have been adjusted to reflect
reinvestment of dividends on securities in the indices.
+ The S&P 500 and the SPUX are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the
Fund's performance. The indices are unmanaged.
PORTFOLIO OF INVESTMENTS
FEDERATED UTILITY FUND II
DECEMBER 31, 1997
FEDERATED UTILITY FUND II
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--85.6%
BASIC INDUSTRY--1.5%
26,700 Barrick Gold Corp. $ 497,288
1,900 Viag AG 1,023,430
TOTAL 1,520,718
ELECTRIC UTILITIES: CENTRAL--10.5%
76,000 CMS Energy Corp. 3,348,750
37,300 Cinergy Corp. 1,429,056
64,900 DPL, Inc. 1,865,875
51,500 NIPSCO Industries, Inc. 2,546,031
27,300 Union Electric Co. 1,180,725
14,500 Utilicorp United, Inc. 562,781
TOTAL 10,933,218
ELECTRIC UTILITIES: EAST--4.0%
59,000 DQE, Inc. 2,072,375
14,300 Peco Energy Co. 346,775
33,500 Potomac Electric Power Co. 864,719
28,100 Public Service Enterprises Group, Inc. 890,419
TOTAL 4,174,288
ELECTRIC UTILITIES: SOUTH--17.8%
21,400 Central & SouthWest Corp. 579,138
44,288 Duke Energy Corp. 2,452,448
86,300 Entergy Corp. 2,583,606
48,500 FPL Group, Inc. 2,870,594
27,900 Florida Progress Corp. 1,095,075
38,700 Houston Industries, Inc. 1,032,806
18,200 LG&E Energy Corp. 450,450
35,800 SCANA Corp. 1,071,763
68,900 Southern Co. 1,782,788
67,000 TECO Energy, Inc. 1,884,375
66,900 Texas Utilities Co. 2,780,531
TOTAL 18,583,574
</TABLE>
FEDERATED UTILITY FUND II
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
ELECTRIC UTILITIES: WEST--9.2%
34,300 Montana Power Co. $ 1,091,169
26,100 New Century Energies, Inc. 1,251,169
45,000 P G & E Corp. 1,369,688
96,000 Pacificorp 2,622,000
46,300 Pinnacle West Capital Corp. 1,961,963
42,600 Puget Sound Energy, Inc. 1,285,988
ENERGY MINERALS--3.1%
TOTAL 9,581,977
6,300 Atlantic Richfield Co. 504,788
17,400 Burlington Resources, Inc. 779,738
12,100 Mapco, Inc. 559,625
42,500 Ultramar Diamond Shamrock Corp. 1,354,688
TOTAL 3,198,839
FINANCE--8.6%
39,900 Associated Estates Realty Corp. 945,131
30,000 Avalon Properties, Inc. 928,125
29,100 Boston Properties, Inc. 962,119
52,100 Duke Realty Investments, Inc. 1,263,425
18,200 Equity Residential Properties Trust 920,238
30,000 Liberty Property 856,875
49,800 Meditrust Corp. 1,823,925
10,300 Price REIT, Inc. 421,656
37,500 Security Capital Pacific Trust 909,375
MAJOR U.S. TELECOMMUNICATIONS--15.5%
TOTAL 9,030,869
13,700 Ameritech Corp. 1,102,850
20,300 Bell Atlantic Corp. 1,847,300
26,300 BellSouth Corp. 1,481,019
39,400 GTE Corp. 2,058,650
40,500 MCI Communications Corp. 1,733,906
33,986 SBC Communications, Inc. 2,489,475
50,500 Sprint Corp. 2,960,563
55,200 U.S. West, Inc. 2,490,900
TOTAL 16,164,663
</TABLE>
FEDERATED UTILITY FUND II
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
NATURAL GAS DISTRIBUTION--7.2%
1,100 AGL Resources, Inc. $ 22,481
41,700 Consolidated Natural Gas Co. 2,522,850
5,300 Keyspan Energy Corp. 195,106
70,500 MCN Corp. 2,846,438
51,000 Pacific Enterprises 1,918,875
TOTAL 7,505,750
OIL/GAS TRANSMISSION--7.0%
7,000 Columbia Gas System, Inc. 549,938
40,000 El Paso Natural Gas 2,660,000
55,616 Enron Corp. 2,311,540
40,900 Sonat, Inc. 1,871,175
TOTAL 7,392,653
OTHER TELEPHONE/COMMUNICATIONS--0.5%
17,500 Cincinnati Bell, Inc. 542,500
PRODUCER MANUFACTURING--0.7%
34,300 Federal Signal Corp. 741,738
TOTAL COMMON STOCKS (IDENTIFIED COST $73,808,187) 89,370,787
CONVERTIBLE PREFERRED STOCKS--6.0%
BASIC INDUSTRY--0.4%
36,000 Coeur d'Alene Mines Corp., Conv. Pfd., $1.49 436,500
ENERGY MINERALS--0.8%
13,700 Unocal Corp., Cumulative Conv. Pfd., $3.13 777,818
FINANCE--2.2%
22,700 Merrill Lynch & Co., Inc., STRYPES 783,150
25,700 Salomon Smith Barney Holdings, Inc., DECS, Series CSN, $3.48 1,522,725
TOTAL 2,305,875
NATURAL GAS DISTRIBUTION--0.5%
8,200 MCN Corp., PRIDES, $8.00 512,500
OIL/GAS TRANSMISSION--2.1%
16,700 Williams Cos., Inc. (The), Conv. Pfd., $3.50 2,233,979
TOTAL CONVERTIBLE PREFERRED STOCKS (IDENTIFIED COST $5,755,837) 6,266,672
</TABLE>
FEDERATED UTILITY FUND II
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
(A)REPURCHASE AGREEMENT--8.5%
$ 8,915,000 BT Securities Corp., 6.60%, dated 12/31/1997, due 1/2/1998 $ 8,915,000
TOTAL INVESTMENTS (IDENTIFIED COST $88,479,024)(B) $ 104,552,459
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
(b) The cost of investments for federal tax purposes amounts to
$88,532,645. The net unrealized appreciation of investments on a federal
tax basis amounts to $16,019,814 which is comprised of $16,509,833
appreciation and $490,019 depreciation at December 31, 1997.
Note: The categories of investments are shown as a percentage of net
assets ($104,462,159) at December 31, 1997.
The following acronyms are used throughout this portfolio:
DECS --Dividend Enhanced Convertible Stock
PRIDES --Preferred Redeemable Increased Dividend Equity Securities
REIT --Real Estate Investment Trust
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED UTILITY FUND II
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost
$88,479,024 and tax cost $88,532,645) $ 104,552,459
Cash 4,895
Cash denominated in foreign currencies 5,169
Income receivable 190,506
Receivable for investments sold 254,988
Receivable for shares sold 130,098
Deferred organizational costs 16,422
Total assets 105,154,537
LIABILITIES:
Payable for investments purchased $ 412,038
Payable for shares redeemed 267,252
Payable for taxes withheld 1,377
Accrued expenses 11,711
Total liabilities 692,378
NET ASSETS for 7,311,923 shares outstanding $ 104,462,159
NET ASSETS CONSIST OF:
Paid in capital $ 81,167,447
Net unrealized appreciation of investments 16,073,435
Accumulated net realized gain on investments 6,198,230
Undistributed net investment income 1,023,047
Total Net Assets $ 104,462,159
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
$104,462,159 / 7,311,923 shares outstanding $14.29
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED UTILITY FUND II
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld of $29,045) $ 2,974,428
Interest 317,905
Total income 3,292,333
EXPENSES:
Investment advisory fee $ 579,563
Administrative personnel and services fee 125,002
Custodian fees 13,641
Transfer and dividend disbursing agent fees and expenses 21,799
Directors'/Trustees' fees 2,556
Auditing fees 12,889
Legal fees 3,053
Portfolio accounting fees 50,495
Share registration costs 5,192
Printing and postage 40,343
Insurance premiums 2,776
Taxes 1,477
Miscellaneous 10,382
Total expenses 869,168
Waiver of investment advisory fee (208,884)
Net expenses 660,284
Net investment income 2,632,049
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY:
Net realized gain on investments and foreign currency transactions 6,203,822
Net change in unrealized appreciation of investments and 11,041,239
translation of assets and liabilities in foreign currency
Net realized and unrealized gain on investments and foreign currency 17,245,061
Change in net assets resulting from operations $ 19,877,110
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED UTILITY FUND II
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 2,632,049 $ 1,890,779
Net realized gain on investments and foreign currency transactions 6,203,822 1,471,710
($6,250,253 and $1,464,419, respectively, as computed for federal
tax purposes)
Net change in unrealized appreciation of investments and 11,041,239 2,758,768
translation of assets and liabilities in foreign currency
Change in net assets resulting from operations 19,877,110 6,121,257
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (1,688,915) (1,821,526)
Distributions from net realized gains on investments and foreign (1,464,468) (192,047)
currency
Change in net assets resulting from distributions to
shareholders (3,153,383) (2,013,573)
SHARE TRANSACTIONS--
Proceeds from sale of shares 37,584,111 36,577,954
Net asset value of shares issued to shareholders in payment of 3,153,380 2,013,573
distributions declared
Cost of shares redeemed (16,556,595) (8,821,081)
Change in net assets resulting from share transactions 24,180,896 29,770,446
Change in net assets 40,904,623 33,878,130
NET ASSETS:
Beginning of period 63,557,536 29,679,406
End of period (including undistributed net investment income of $ 104,462,159 $ 63,557,536
$1,023,047 and $91,190, respectively)
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.81 $11.03 $ 9.29 $ 9.48
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.40 0.42 0.45 0.34
Net realized and unrealized gain (loss) on investments and
foreign currency 2.62 0.82 1.74 (0.19)
Total from investment operations 3.02 1.24 2.19 0.15
LESS DISTRIBUTIONS
Distributions from net investment income (0.28) (0.41) (0.45) (0.34)
Distributions from net realized gain on investments and foreign
currency transactions (0.26) (0.05) -- --
Total distributions (0.54) (0.46) (0.45) (0.34)
NET ASSET VALUE, END OF PERIOD $14.29 $11.81 $11.03 $ 9.29
TOTAL RETURN(B) 26.63% 11.56% 24.18% 1.12%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.85% 0.85% 0.85% 0.60%*
Net investment income 3.41% 3.92% 4.62% 4.77%*
Expense waiver/reimbursement(c) 0.27% 0.51% 2.24% 54.83%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $104,462 $63,558$29,679 $974
Average commission rate paid(d) $0.0207 $0.0402 -- --
Portfolio turnover 95% 63% 62% 73%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from April 14, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 9, 1993
(start of business) to April 13, 1994, net investment income was distributed
to the Fund's adviser.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and
net investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were charged.
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED UTILITY FUND II
DECEMBER 31, 1997
ORGANIZATION
Federated Insurance Series (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act") as an open-end, management
investment company. The Trust consists of eight portfolios. The financial
statements included herein are only those of Federated Utility Fund II
(the "Fund"), a diversified portfolio. The financial statements of
the other portfolios are presented separately. The assets of each portfolio
are segregated and a shareholder's interest is limited to the portfolio in
which shares are held. The investment objective of the Fund is to achieve
high current income and moderate capital appreciation.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
Listed foreign and domestic corporate bonds, other fixed income and
asset-backed securities, and unlisted securities and private placement
securities are generally valued at the mean of the latest bid and asked
price as furnished by an independent pricing service. Listed
foreign and domestic equity securities are valued at the last sale price
reported on a national securities exchange. Short-term securities are valued
at the prices provided by an independent pricing service. However,
short-term securities with remaining maturities of sixty days or less at the
time of purchase may be valued at amortized cost, which approximates fair
market value. Investments in other open-end regulated investment companies
are valued at net asset value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to
have segregated within the custodian bank's vault, all securities held as
collateral under repurchase agreement transactions. Additionally, procedures
have been established by the Fund to monitor, on a daily basis, the market
value of each repurchase agreement's collateral to ensure that the value of
collateral at least equals the repurchase price to be paid under the
repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less
than the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code"). Distributions to shareholders are recorded on the
ex-dividend date. Income and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
RECLASSIFICATION OF NET ASSET ACCOUNTS
During the year ended December 31, 1997, the Fund reclassified the effects
of certain differences between the financial statement amounts and
distributions determined in accordance with income tax regulations. These
differences were reclassified (increase/(decrease)) between accumulated
net realized gain /(loss) on investments and undistributed net investment
income.
INCREASE (DECREASE)
ACCUMULATED UNDISTRIBUTED
NET REALIZED NET INVESTMENT
GAIN/LOSS INCOME
$11,279 $(11,279)
Net investment income, net realized gains/losses, and net
assets were not affected by this reclassification.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
Withholding taxes on foreign interest and dividends have been provided for
in accordance with the Fund's understanding of the applicable country's tax
rules and rates.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions.
The Fund records when-issued securities on the trade date and maintains
security positions such that sufficient liquid assets will be available
to make payment for the securities purchased. Securities purchased on
a when-issued or delayed delivery basis are marked to market daily
and begin earning interest on the settlement date.
FOREIGN EXCHANGE CONTRACTS
The Fund may enter into foreign currency commitments for the delayed
delivery of securities or foreign currency exchange transactions. The
Fund may enter into foreign currency contract transactions to protect
assets against adverse changes in foreign currency exchange rates or
exchange control regulations. Purchased contracts are used to acquire
exposure to foreign currencies; whereas, contracts to sell are used to
hedge the Fund's securities against currency fluctuations. Risks may
arise upon entering these transactions from the potential inability of
counterparties to meet the terms of their commitments and from unanticipated
movements in security prices or foreign exchange rates. The foreign currency
transactions are adjusted by the daily exchange rate of the underlying
currency and any gains or losses are recorded for financial statement
purposes as unrealized until the settlement date. At December 31, 1997, the
Fund had an outstanding foreign currency commitment as set forth below:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS SETTLEMENT FOREIGN CURRENCY IN EXCHANGE CONTRACTS APPRECIATION
PURCHASED DATE UNITS TO RECEIVE FOR AT VALUE (DEPRECIATION)
<S> <C> <C> <C> <C> <C>
Japanese Yen January 3, 1998 148,750 $1,144 $1,144 $0
</TABLE>
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S.
dollars. All assets and liabilities denominated in foreign currencies ("FC")
are translated into U.S. dollars based on the rate of exchange of such
currencies against U.S. dollars on the date of valuation. Purchases and
sales of securities, income, and expenses are translated at the rate of
exchange quoted on the respective date that such transactions are recorded.
Differences between income and expense amounts recorded and collected or
paid are adjusted when reported by the custodian bank. The Fund does not
isolate that portion of the results of operations resulting from changes in
foreign exchange rates on investments from the fluctuations arising from
changes in market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales and maturities of short-term securities, sales
of FCs, currency gains or losses realized between the trade and settlement
dates on securities transactions, the difference between the amounts of
dividends, interest, and foreign withholding taxes recorded on the Fund's
books, and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized foreign exchange gains and losses arise from changes in
the value of assets and liabilities other than investments in securities at
fiscal year end, resulting from changes in the exchange rate.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, expenses, and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Fund permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997 1996
<S> <C> <C>
Shares sold 2,992,224 3,296,405
Shares issued to shareholders in payment of distributions declared 267,672 180,323
Shares redeemed (1,330,203) (785,968)
Net change resulting from share transactions 1,929,693 2,690,760
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Advisers, the Fund's investment adviser (the "Adviser"),
receives for its services an annual investment advisory fee
equal to 0.75% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive any portion of its fee. The Adviser can modify
or terminate this voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services.
The fee paid to FServ is based on the level of average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors
for the period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent for the Fund.
The fee paid to FSSC is based on the size, type, and number of accounts
and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee.
The fee is based on the level of the Fund's average daily net assets for
the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES
Organizational expenses of $49,266 were borne initially by the Adviser.
The Fund has reimbursed the Adviser for these expenses. These expenses
have been deferred and are being amortized over the five-year period
following the Fund's effective date. For the period ended December 31, 1997,
the Fund expensed $13,138 of organizational expenses.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities,
for the period ended December 31, 1997, were as follows:
PURCHASES $85,830,745
SALES $69,808,712
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of the Federated Insurance Series
and Shareholders of FEDERATED UTILITY FUND II:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated Utility Fund II, (a
portfolio of the Federated Insurance Series) as of December 31, 1997, and
the related statement of operations for the year then ended, the statement
of changes in net assets for the years ended December 31, 1997 and 1996, and
the financial highlights for the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned as of December 31, 1997, by correspondence with the
custodian and brokers; where replies were not received, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated
Utility Fund II as of December 31, 1997, the results of its operations, the
changes in its net assets and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 6, 1998
TRUSTEES
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
J. Christopher Donahue
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
J. Christopher Donahue
President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Richard B. Fisher
Vice President
Matthew S. Hardin
Assistant Secretary
Variable funds are not bank deposits or obligations, are not guaranteed
by any bank, and are not insured or guaranteed by the U.S. government,
the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other government agency. Investment in variable funds involves
investment risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectus which contains facts
concerning its objective and policies, management fees, expenses, and other
information.
[Graphic]
Federated Fund for U.S. Government Securities II
Federated Insurance Series
ANNUAL REPORT TO SHAREHOLDERS
DECEMBER 31, 1997
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-245-7400
www.federatedinvestors.com
Cusip 313916207
G00846-01 (2/98)
[Graphic]
PRESIDENT'S MESSAGE
Dear Shareholder:
I am pleased to present the Annual Report to Shareholders for Federated Fund
for U.S. Government Securities II, a portfolio of Federated Insurance
Series.
This report covers the 12-month fiscal year period from January 1, 1997
through December 31, 1997. It begins with a com-mentary by the fund's
portfolio manager, which is followed by a complete listing of the fund's
government bond holdings and the financial statements.
To help your money pursue an attractive level of income, Federated Fund for
U.S. Government Securities II invests primarily in short- to
intermediate-term U.S. government mortgage-backed securities and U.S.
Treasury notes and bonds.
In an improved environment for bonds, the fund produced a net total return
of 8.58%. Contributing to the net total return was a dividend stream that
totaled $0.39 per share, in addition to a 4% increase in net asset value.*
On December 31, 1997, net assets reached $63 million.
Thank you for choosing Federated Fund for U.S. Government Securities II as a
diversified, professionally managed way to pursue income opportunities
through government bonds. We will continue to keep you up-to-date on your
progress. As always, we welcome your comments and suggestions.
Sincerely,
[Graphic]
J. Christopher Donahue
President
February 15, 1998
* Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Performance information does not reflect the charges
and expenses of a variable annuity or variable life insurance contract.
MANAGEMENT DISCUSSION AND ANALYSIS
Federated Fund for U.S. Government Securities II, a portfolio of Federated
Insurance Series, provides shareholders a professionally managed portfolio
of U.S. government securities. The fund is managed for specific maturity
levels according to management's assumptions on market risk and volatility.
Current investment strategy emphasizes a diversified range of mortgage
securities with coupons averaging 7.28% and a weighted average effective
duration of 3.43 years.
Balanced budgets, reduced Treasury supply, and the turmoil in the Asian
sector were the key events that shaped the course of interest rates during
1997. The pivotal event of 1997 was the Asian currency and financial crisis,
which intensified in the fourth quarter. This event brought bond yields
below 6% to close out 1997. The impact to the shape of the yield curve was a
pronounced flattening to less than 30 basis points with the long end
rallying on positive inflation fundamentals while the two-year yield was
targeted near the funds rate by the Federal Reserve Board's on-hold policy.
In 1997, the performance of the mortgage market was stellar, as the
pass-through market outperformed comparable duration matched Treasuries by
130 basis points. The majority of the mortgage market's strong performance
over Treasuries occurred in the first half of 1997. During this period, the
mortgage market was the beneficiary of a trading range environment in the
U.S. Treasury market, low volatility, and tightening spreads. The second
half of 1997 proved to be less favorable as interest rates declined on the
10 year U.S. Treasury by 75 basis points, the yield curve flattened, and
volatility increased. The interest rate rally in the Treasury market has
brought mortgage rates down to the lows last seen in early 1996 and has
greatly increased prepayment risk within the mortgage backed sector. Given
this environment the basic theme throughout 1997 was to favor securities
that offered prepayment protection.
The fund maintained a duration neutral risk profile to a blend of Lehman's
Government and Mortgage Indices during 1997. The portfolio continues to
favor securities that offer diminished exposure to negative convexity and
prepayment risk. Purchase activity focused on 15- and 30-year discount
mortgage collateral which offered attractive option-adjusted spreads over
higher coupon collateral. In addition, the fund continues to add to
positions in agency debentures and Treasuries to enhance call protection.
As of December 31, 1997, total net assets were $63.1 million and the average
30-day net yield as calculated under Securities and Exchange Commission
guidelines was 5.67%* based upon the net asset value of $10.54.
* Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Performance information does not reflect the charges
and expenses of a variable annuity or variable life insurance contract.
** These indices are unmanaged.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
GROWTH OF $10,000 INVESTED IN THE FEDERATED FUND FOR U.S. GOVERNMENT
SECURITIES II
The graph below illustrates the hypothetical investment of $10,000* in the
Federated Fund For U.S. Government Securities II (the "Fund") from March 28,
1994 (start of performance) to December 31, 1997, compared to the Lehman
Brothers 5-Year Treasury Bellwether Index (LB5TB)+ and the Lipper U.S.
Mortgage Funds Average (LUSMFA)++.
[GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX FUSGII]
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED DECEMBER 31, 1997
1 Year 8.58%
Start of Performance (3/28/94) 6.40%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT
OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The LB5TB and the LUSMFA have been adjusted to reflect
reinvestment of dividends on securities in the index and average.
+ The LB5TB is not adjusted to reflect sales charges, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. The
index is unmanaged.
++ The LUSMFA represents the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the category, and is not adjusted to reflect any sales charges.
However, these total returns are reported net of expenses or other fees
that the SEC requires to be reflected in a fund's performance.
PORTFOLIO OF INVESTMENTS
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
INTERMEDIATE-TERM U.S. GOVERNMENT OBLIGATIONS--14.5%
$ 1,000,000 Federal Farm Credit Bank, 7.350%, 3/24/2005 $ 1,078,980
500,000 Federal Farm Credit Bank, 8.650%, 10/1/1999 523,545
900,000 Federal Farm Credit Bank, 9.000%, 3/7/2000 958,545
3,000,000 Federal Home Loan Bank System, 6.050%, 9/16/1999 3,014,040
1,500,000 Federal Home Loan Bank System, 6.285%, 6/26/2000 1,515,881
1,000,000 Federal Home Loan Bank System, 6.830%, 7/17/2001 1,031,170
1,000,000 Federal Home Loan Bank System, 8.600%, 8/25/1999 1,043,790
TOTAL INTERMEDIATE-TERM U.S. GOVERNMENT OBLIGATIONS 9,165,951
(IDENTIFIED COST $9,076,591)
LONG-TERM U.S. GOVERNMENT OBLIGATIONS--63.3%
2,000,000 (b)Federal Home Loan Mortgage Corp. TBA, 6.50%, 15 Year, 1,978,120
January
10,539,610 Federal Home Loan Mortgage Corp., 6.00% - 9.00%, 9/1/2010 - 10,710,275
12/1/2027
1,800,000 (b)Federal National Mortgage Association TBA, 7.50%, 30 Year, 1,844,442
January
2,000,000 (b)Federal National Mortgage Association TBA, 8.00%, 30 Year, 2,075,500
January
10,493,422 Federal National Mortgage Association, 6.00% - 10.00%, 10,613,387
5/1/2003 - 11/1/2027
12,284,010 Government National Mortgage Association, 6.50% - 9.50%, 12,701,233
11/15/2016 - 11/15/2027
TOTAL LONG-TERM U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED 39,922,957
COST $39,301,915)
U.S. TREASURY OBLIGATIONS--19.9%
1,100,000 United States Treasury Bonds, 6.000%, 2/15/2026 1,099,252
900,000 United States Treasury Bonds, 8.000%, 11/15/2021 1,122,813
900,000 United States Treasury Bonds, 9.250%, 2/15/2016 1,221,381
690,000 United States Treasury Bonds, 11.250%, 2/15/2015 1,081,403
500,000 United States Treasury Notes, 5.625%, 10/31/1999 499,710
700,000 United States Treasury Notes, 5.875%, 2/15/2000 703,101
2,500,000 United States Treasury Notes, 6.250%, 2/28/2002 - 6/30/2002 2,550,980
1,000,000 United States Treasury Notes, 6.625%, 3/31/2002 1,033,050
1,000,000 United States Treasury Notes, 6.875%, 5/15/2006 1,070,440
1,000,000 United States Treasury Notes, 7.000%, 7/15/2006 1,079,880
1,000,000 United States Treasury Notes, 7.250%, 8/15/2004 1,081,360
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST 12,543,370
$11,986,849)
(A)REPURCHASE AGREEMENTS--10.5%
835,000 BT Securities Corp., 6.600%, dated 12/31/1997, due 1/2/1998 835,000
2,000,000 (c)Goldman Sachs Group, LP, 5.680%, dated 11/26/1997, due 2,000,000
1/20/1998
</TABLE>
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(A)REPURCHASE AGREEMENTS--CONTINUED
$ 1,800,000 (c)Goldman Sachs Group, LP, 5.750%, dated 12/9/1997, due $ 1,800,000
1/14/1998
2,000,000 (c)UBS Securities, Inc., 5.700%, dated 11/24/1997, due 2,000,000
1/14/1998
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 6,635,000
TOTAL INVESTMENTS (IDENTIFIED COST $67,000,355)(D) $ 68,267,278
</TABLE>
a) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investments in the repurchase agreements are through
participation in joint accounts with other Federated funds.
(b) These securities are subject to dollar roll transactions.
(c) Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase
agreement within seven days if creditworthiness of the issuer is
downgraded.
(d) The cost of investments for federal tax purposes amounts to $67,000,355.
The net unrealized appreciation of investments on a federal tax basis
amounts to $1,266,923, which is comprised of $1,283,610 appreciation and
$16,687 depreciation at December 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($63,098,950) at December 31, 1997.
The following acronyms are used throughout this portfolio:
LP --Limited Partnership
TBA --To Be Announced
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $ 68,267,278
$67,000,355)
Income receivable 682,915
Receivable for shares sold 253,317
Deferred organizational costs 17,191
Total assets 69,220,701
LIABILITIES:
Payable for shares redeemed $ 103,801
Payable to Bank 94,238
Payable for dollar roll transactions 5,900,259
Accrued expenses 23,453
Total liabilities 6,121,751
NET ASSETS for 5,983,889 shares outstanding $ 63,098,950
NET ASSETS CONSIST OF:
Paid in capital $ 60,543,576
Net unrealized appreciation of investments 1,266,923
Accumulated net realized gain on investments 51,915
Undistributed net investment income 1,236,536
Total Net Assets $ 63,098,950
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
$63,098,950 / 5,983,889 shares outstanding $10.54
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest (net of dollar roll expense of $61,354) $ 3,153,498
EXPENSES:
Investment advisory fee $ 278,790
Administrative personnel and services fee 125,000
Custodian fees 12,748
Transfer and dividend disbursing agent fees and expenses 27,784
Directors'/Trustees' fees 1,914
Auditing fees 13,668
Legal fees 2,720
Portfolio accounting fees 51,506
Printing and postage 47,459
Insurance premiums 2,526
Miscellaneous 20,953
Total expenses 585,068
Waiver--
Waiver of investment advisory fee (211,328)
Net expenses 373,740
Net investment income 2,779,758
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 181,810
Net change in unrealized appreciation of investments 1,068,779
Net realized and unrealized gain on investments 1,250,589
Change in net assets resulting from operations $ 4,030,347
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 2,779,758 $ 1,410,381
Net realized gain (loss) on investments ($181,810 net gain and 181,810 (129,895)
$129,895 net loss, respectively, as computed for federal tax
purposes)
Net change in unrealized appreciation 1,068,779 21,469
Change in net assets resulting from operations 4,030,347 1,301,955
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (1,612,272) (1,344,598)
Distributions from net realized gains -- (68,239)
Change in net assets resulting from distributions to (1,612,272) (1,412,837)
shareholders
SHARE TRANSACTIONS--
Proceeds from sale of shares 44,186,152 36,293,161
Net asset value of shares issued to shareholders in payment of 1,612,207 1,406,120
distributions declared
Cost of shares redeemed (20,082,031) (14,888,081)
Change in net assets resulting from share transactions 25,716,328 22,811,200
Change in net assets 28,134,403 22,700,318
NET ASSETS:
Beginning of period 34,964,547 12,264,229
End of period (including undistributed net investment income of $ 63,098,950 $ 34,964,547
$1,236,536 and $69,050, respectively)
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.09 $10.29 $ 9.99 $ 9.99
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.58 0.59 0.54 0.27
Net realized and unrealized gain (loss) on investments 0.26 (0.18) 0.30 --
Total from investment operations 0.84 0.41 0.84 0.27
LESS DISTRIBUTIONS
Distributions from net investment income (0.39) (0.57) (0.54) (0.27)
Distributions from net realized gain on investments -- (0.04) -- --
Total distributions (0.39) (0.61) (0.54) (0.27)
NET ASSET VALUE, END OF PERIOD $10.54 $10.09 $10.29 $ 9.99
TOTAL RETURN(B) 8.58% 4.20% 8.77% 2.62%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.80% 0.80% 0.80% 0.48%*
Net investment income 5.98% 6.00% 6.00% 3.99%*
Expense waiver/reimbursement(c) 0.45% 1.01% 4.81% 32.83%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $63,099 $34,965 $12,264 $1,244
Portfolio turnover 73% 97% 65% 0%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from March 29, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 8,
1993 (start of business), to March 28, 1994, net investment income was
distributed to the Fund's adviser.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
DECEMBER 31, 1997
ORGANIZATION
Federated Insurance Series (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as an open-end, management
investment company. The Trust consists of eight portfolios. The financial
statements included herein are only those of Federated Fund For U.S.
Government Securities II (the "Fund"), a diversified portfolio. The
financial statements of the other portfolios are presented separately. The
assets of each portfolio are segregated and a shareholder's interest is
limited to the portfolio in which shares are held. The investment objective
of the Fund is to provide current income.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
U.S. government securities are generally valued at the mean of the latest
bid and asked price as furnished by an independent pricing service.
Short-term securities are valued at the prices provided by an independent
pricing service. However, short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less
than the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code"). Distributions to shareholders are recorded on the
ex-dividend date.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable
to regulated investment companies and to distribute to shareholders each
year substantially all of its income. Accordingly, no provisions for federal
tax are necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The
Fund records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
DOLLAR ROLL TRANSACTIONS
The Fund enters into dollar roll transactions, with respect to mortgage
securities issued by GNMA, FNMA, and FHLMC, in which the Fund sells mortgage
securities to financial institutions and simultaneously agrees to accept
substantially similar (same type, coupon, and maturity) securities at a
later date at an agreed-upon price. Dollar roll transactions involve "to be
announced" securities and are treated as short-term financing arrangements
which will not exceed 12 months. The Fund will use the proceeds generated
from the transactions to invest in short-term investments, which may enhance
the Fund's current yield and total return.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, expenses, and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 1996
<S> <C> <C>
Shares sold 4,326,667 3,618,961
Shares issued to shareholders in payment of distributions declared 160,196 140,342
Shares redeemed (1,969,286) (1,484,884)
Net change resulting from share transactions 2,517,577 2,274,419
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Advisers, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.60% of the
Fund's average daily net assets.
The Adviser may voluntarily choose to waive any portion of its fee and/or
reimburse certain operating expenses of the Fund. The Adviser can modify or
terminate this voluntary waiver and/or reimbursement at any time at its sole
discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net
assets of all funds advised by subsidiaries of Federated Investors for the
period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent for the Fund. The
fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records, for which it receives a fee.
The fee is based on the level of the Fund's average daily net assets for the
period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES
Organizational and/or start-up administrative service expenses of $51,572
were borne initially by the Adviser. The Fund has reimbursed the Adviser for
these expenses. These expenses have been deferred and are being amortized
over the five-year period following the Fund's effective date. For the
period ended December 31, 1997, the Fund expensed $13,753 of organizational
expenses.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors
or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended December 31, 1997, were as follows:
PURCHASES $62,048,002
SALES $33,441,535
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of the Federated Insurance Series and Shareholders
of FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II:
We have audited the accompanying statement of assets and liabilities,
including the portfolio investments, of Federated Fund for U.S. Government
Securities II (a portfolio of the Federated Insurance Series), as of
December 31, 1997, and the related statement of operations for the year then
ended, the statement of changes in net assets for the years ended December
31, 1997 and 1996, and the financial highlights for the periods presented.
These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned as of December 31, 1997, by correspondence with the
custodian and brokers; where replies were not received, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated Fund
for U.S. Government Securities II as of December 31, 1997, the results of
its operations, the changes in its net assets and its financial highlights
for the respective stated periods in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 6, 1998
TRUSTEES
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
J. Christopher Donahue
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
J. Christopher Donahue
President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer and Secretary
Richard B. Fisher
Vice President
Matthew S. Hardin
Assistant Secretary
Variable funds are not bank deposits or obligations, are not guaranteed by
any bank, and are not insured or guaranteed by the U.S. government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other government agency. Investment in variable funds involves investment
risk, including possible loss of principal.
This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectus which contains facts
concerning its objective and policies, management fees, expenses, and other
information.
PRESIDENT'S MESSAGE
Dear Shareholder:
I am pleased to present the Annual Report to Shareholders for Federated High
Income Bond Fund II, a portfolio of Federated Insurance Series.
This report covers the 12-month period from January 1, 1997 through December
31, 1997. It begins with a commentary by the fund's portfolio manager, which
is followed by a complete listing of the fund's high-yield bond holdings and
the fund's financial statements.
For the reporting period, the fund continued to perform well in a relatively
favorable economic environment, benefiting from expert security selection
and broad diversification. At the end of the reporting period, the fund's
holdings were diversified across more than 200 high-yield bonds representing
the entire business and industrial spectrum.
Contributing to the fund's total return of 13.83% were an income of $0.61
per share, capital gains distributions of $0.04 per share, and a 0.7%
increase in net asset value.* Over the reporting period, fund net assets
more than doubled to reach $156 million.
Thank you for choosing Federated High Income Bond Fund II as a diversified,
professionally managed way to participate in the income opportunities of
high-yield corporate bonds.** We trust you were pleased with the income and
total performance generated by your investment. As always, we welcome your
comments and suggestions.
Sincerely,
[Graphic]
J. Christopher Donahue
President
February 15, 1998
* Performance quoted reflects past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost. Performance information does not reflect the charges and
expenses of a variable life insurance contact.
** Lower rated bonds involve a higher degree of risk than investment grade
bonds in return for higher yield potential.
MANAGEMENT DISCUSSION AND ANALYSIS
The high-yield market generated excellent returns for the 12-month period
ended December 31, 1997. For example, the Lehman Brothers High Yield Bond
Index* returned 12.76% for the year, versus 9.65% for the Lehman Brothers
Aggregate Bond Index,* a measure of high-quality bond performance. The major
factor for the superior relative performance of high-yield bonds was the
almost ideal economic environment which existed for all of 1997. Strong
steady economic growth coupled with low inflation resulted in good operating
performance for most high-yield issuers. Declining interest rates (the
interest rate on 10-year U.S. Treasury securities declined approximately
0.70%) and strong equity markets provided an attractive financial market
environment for high-yield issuers. Finally, the high-yield market benefited
from strong demand for high-yield securities as investors were attracted to
the historically strong total return performance of the marketplace and the
attractive yields offered by high-yield securities in a falling interest
rate environment.
The fund's portfolio outperformed both the Lipper High Current Yield Fund
Average** and the Lehman Brothers High Yield Bond Index for the reporting
period. Several factors benefited the fund versus the benchmarks. The fund's
largest industry exposures have been (and continue to be)
telecommunications, cable, and broadcasting. These three sectors generated
very strong performance versus the market during the year. The fund was
generally underweighted in basic industries such as steel, forest products,
and commodity chemicals. These sectors underperformed especially in the
fourth quarter as economic concerns about 1998 began to increase. The fund's
portfolio also had no exposure to emerging Asian markets which were
negatively impacted in the fourth quarter by economic and currency turmoil.
Several portfolio holdings were involved in corporate finance activities
such as mergers, initial public offerings, and tenders, which proved
beneficial to bondholders. For example, Astor was acquired by AlliedSignal
while Ralph's Grocery and Brooks Fiber have announced plans to be acquired.
AMF and International Home Foods did an initial stock offering and Owens
Illinois tendered for their outstanding debt. Finally, the fund's portfolio
benefited from outstanding individual security selection, avoiding major
deteriorating situations while holding numerous strong performers. Nextel,
Teleport, Cablevision Systems, and GS Technologies were particularly strong
performers.
As we look out into 1998, the main area of uncertainty is what impact the
developing problems in Asia will have on U.S. economic growth, inflation,
and equity markets. It would appear that the problems in Asia will serve to
slow the U.S. economy and reduce inflation, much like a Federal Reserve
Board ("Fed") tightening. This could serve to head off inflationary fears,
reduce the likelihood of a Fed tightening, and extend the economic
expansion. An extended economic expansion would be a long-term positive for
high-yield bonds. The risk is that the Asia's problems have a greater impact
on the U.S. economy and push the domestic economy into recession. Superior
credit selection will be essential in 1998 as the odds-on-bet is for slower
economic activity which could lead to negative credit surprises. From a
portfolio perspective, we continue to like companies that are benefiting
from secular growth like telecommunications, and companies in consolidating
business like cable and broadcasting.
* Lehman Brothers High Yield Bond Index is an unmanaged index which includes
fixed rate, public nonconvertible, non-investment grade issues that are
rated Ba1 or lower by Moody's Investors Service. Lehman Brothers Aggregate
Bond Index is an unmanaged total return index measuring both the capital
price changes and income provided by the underlying universe of securities,
weighted by market value outstanding. Investments cannot be made in an
index.
** Lipper figures represent the average of the total returns reported by all
of the mutual funds designated by Lipper Analytical Services, Inc. as
falling into the respective categories indicated. These figures do not
reflect sales charges.
FEDERATED HIGH INCOME BOND FUND II
GROWTH OF $10,000 INVESTED IN THE FEDERATED HIGH INCOME BOND FUND II
The graph below illustrates the hypothetical investment of $10,000* in the
Federated High Income Bond Fund II (the "Fund") from March 1, 1994 (start of
performance) to December 31, 1997, compared to the Lehman Brothers Single B
Rated Index (LBSBRI)+, and the Lipper High Current Yield Funds Average
(LHCYFA)++.
[Graphic representation omitted. See Appendix fhibfii.]
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT
OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBSBRI and the LHCYFA have been adjusted to reflect
reinvestment of dividends on securities in the index and average.
+ The LBSBRI is a proprietary unmanaged index of Single B rated securities
and is not adjusted to reflect sales charges, expenses, or other fees that
the SEC requires to be reflected in the Fund's performance. The index is
unmanaged.
++ The LHCYFA represents the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the category, and is not adjusted to reflect any sales charges.
However, these total returns are reported net of expenses or other fees that
the SEC requires to be reflected in a fund's performance.
PORTFOLIO OF INVESTMENTS
FEDERATED HIGH INCOME BOND FUND II
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--89.5%
AEROSPACE & DEFENSE--0.2%
$ 250,000 Tracor, Inc., Sr. Sub. Note, 8.50%, 3/1/2007 $ 255,000
AUTOMOBILE--2.6%
225,000 Aftermarket Technology Co., Sr. Sub. Note, 12.00%, 8/1/2004 250,875
350,000 Aftermarket Technology Co., Sr. Sub. Note, Series D, 12.00%, 390,250
8/1/2004
1,350,000 Collins & Aikman Products Co., Sr. Sub. Note, 11.50%, 1,523,813
4/15/2006
150,000 Delco-Remy International, Inc., Sr. Note, 8.625%, 12/15/2007 152,625
350,000 Exide Corp., Sr. Note, 10.00%, 4/15/2005 372,750
850,000 Lear Corp., Sub. Note, 9.50%, 7/15/2006 939,250
100,000 Lear Seating Corp., Sub. Note, 8.25%, 2/1/2002 101,875
250,000 Oxford Automotive, Inc., Sr. Sub. Note, 10.125%, 6/15/2007 265,000
TOTAL 3,996,438
BANKING--1.2%
1,250,000 First Nationwide Escrow Corp., Sr. Sub. Note, 10.625%, 1,403,125
10/1/2003
500,000 First Nationwide Holdings, Inc., Sr. Sub. Note, 9.125%, 525,000
1/15/2003
TOTAL 1,928,125
BEVERAGE & TOBACCO--0.4%
600,000 Dimon, Inc., Sr. Note, 8.875%, 6/1/2006 641,250
BROADCAST RADIO & TV--6.9%
900,000 (b)ACME Television, LLC, Sr. Disc. Note, 0/10.875%, 9/30/2004 667,125
450,000 Capstar Broadcasting Partners, Inc., Sr. Sub. Note, 9.25%, 464,625
7/1/2007
350,000 Chancellor Media Corp., Sr. Sub. Note, 8.75%, 6/15/2007 356,125
250,000 Chancellor Media Corp., Sr. Sub. Note, 9.375%, 10/1/2004 260,625
575,000 Chancellor Radio Broadcasting Co., Sr. Sub. Note, 8.125%, 563,500
12/15/2007
1,800,000 (b)Fox/Liberty Networks, LLC, Sr. Disc. Note, 0/9.75%, 1,161,000
8/15/2007
375,000 (b)Fox/Liberty Networks, LLC, Sr. Note, 8.875%, 8/15/2007 375,938
200,000 Jacor Communications, Inc., Sr. Sub. Note, 9.75%, 12/15/2006 216,000
600,000 Katz Media Corp., Sr. Sub. Note, 10.50%, 1/15/2007 663,000
550,000 Lamar Advertising Co., Sr. Sub. Note, 9.625%, 12/1/2006 595,375
1,200,000 Outdoor Systems, Inc., Sr. Sub. Note, 8.875%, 6/15/2007 1,260,000
400,000 SCI Television, Inc., Sr. Secd. Note, 11.00%, 6/30/2005 415,036
</TABLE>
FEDERATED HIGH INCOME BOND FUND II
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--CONTINUED
BROADCAST RADIO & TV--CONTINUED
$ 525,000 SFX Broadcasting, Inc., Sr. Sub. Note, 10.75%, 5/15/2006 $ 578,813
575,000 Sinclair Broadcast Group, Inc., Sr. Sub. Note, 10.00%, 612,375
9/30/2005
350,000 Sinclair Broadcast Group, Inc., Sr. Sub. Note, 8.75%, 350,875
12/15/2007
900,000 Sinclair Broadcast Group, Inc., Sr. Sub. Note, 9.00%, 913,500
7/15/2007
50,000 Sullivan Broadcast Holdings Inc., Deb., 13.25%, 12/15/2006 52,750
600,000 Sullivan Broadcast Holdings Inc., Sr. Sub. Note, 10.25%, 645,000
12/15/2005
475,000 Young Broadcasting, Inc., Sr. Sub. Note, 10.125%, 2/15/2005 503,500
150,000 Young Broadcasting, Inc., Sr. Sub. Note, 9.00%, 1/15/2006 150,750
TOTAL 10,805,912
BUILDING & DEVELOPMENT--1.2%
400,000 (b)American Architectural Products Corp., Sr. Note, 11.75%, 405,000
12/1/2007
450,000 American Builders & Contractors Supply Co., Inc., Sr. Sub. 469,125
Note, 10.625%, 5/15/2007
500,000 (b)Building Materials Corp. of America, Sr. Note, 8.00%, 501,250
10/15/2007
450,000 Building Materials Corp. of America, Sr. Note, 8.625%, 465,750
12/15/2006
TOTAL 1,841,125
BUSINESS EQUIPMENT & SERVICES--1.7%
900,000 (b)Dialog Corp. PLC, Sr. Sub. Note, 11.00%, 11/15/2007 938,250
300,000 Electronic Retailing Systems International, Inc., Sr. Disc. 201,000
Note, 0/13.25%, 2/1/2004
325,000 Knoll Inc., Sr. Sub. Note, 10.875%, 3/15/2006 368,875
625,000 Outsourcing Solutions, Inc., Sr. Sub. Note, 11.00%, 11/1/2006 695,313
400,000 United Stationers Supply Co., Sr. Sub. Note, 12.75%, 5/1/2005 457,000
TOTAL 2,660,438
CABLE TELEVISION--11.7%
2,436 Australis Media Ltd., Sr. Disc. Note, 0/15.75%, 5/15/2003 975
275,000 Australis Media Ltd., Unit, 0/14.00%, 5/15/2003 110,000
200,000 CF Cable TV, Inc., Sr. Secd. 2nd Priority Note, 11.625%, 227,584
2/15/2005
500,000 Cablevision Systems Corp., Sr. Note, 7.875%, 12/15/2007 513,125
150,000 Cablevision Systems Corp., Sr. Sub. Deb., 9.875%, 2/15/2013 166,500
875,000 Cablevision Systems Corp., Sr. Sub. Note, 9.25%, 11/1/2005 931,875
650,000 Cablevision Systems Corp., Sr. Sub. Note, 9.875%, 5/15/2006 715,000
200,000 Charter Communications Holdings, Inc., Sr. Disc. Note, 157,000
0/14.00%, 3/15/2007
425,000 Charter Communications Southeast, L.P., Sr. Note, 11.25%, 473,875
3/15/2006
900,000 Comcast Corp., Sr. Sub. Deb., 9.375%, 5/15/2005 960,750
</TABLE>
FEDERATED HIGH INCOME BOND FUND II
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--CONTINUED
CABLE TELEVISION--CONTINUED
$ 600,000 Comcast UK Cable, Deb., 0/11.20%, 11/15/2007 $ 490,500
2,150,000 Diamond Cable Communications PLC, Sr. Disc. Note, 0/10.75%, 1,472,750
2/15/2007
1,625,000 EchoStar Satellite Broadcasting Corp., Sr. Disc. Note, 1,373,125
0/13.125%, 3/15/2004
725,000 FrontierVision Holdings, L.P., Sr. Disc. Note, 0/11.875%, 536,500
9/15/2007
2,225,000 International Cabletel, Inc., Sr. Defd. Cpn. Note, 0/11.50%, 1,757,750
2/1/2006
475,000 International Cabletel, Inc., Sr. Disc. Note, 0/12.75%, 397,813
4/15/2005
400,000 Le Groupe Videotron Ltee, Sr. Note, 10.625%, 2/15/2005 446,000
850,000 Lenfest Communications Inc., Sr. Note, 8.375%, 11/1/2005 879,750
400,000 (b)Pegasus Communications Corp., Sr. Note, 9.625%, 10/15/2005 410,000
300,000 Pegasus Media, Note, 12.50%, 7/1/2005 343,500
400,000 Rogers Cablesystems Ltd., Sr. Secd. 2nd Priority Note, 10.00%, 442,000
12/1/2007
900,000 Rogers Cablesystems Ltd., Sr. Secd. 2nd Priority Note, 10.00%, 999,000
3/15/2005
400,000 Rogers Cablesystems Ltd., Sr. Sub. Gtd. Note, 11.00%, 464,000
12/1/2015
350,000 Rogers Communications, Inc., Sr. Note, 8.875%, 7/15/2007 351,750
450,000 TCI Communications, Inc., Sr. Note, 6.875%, 2/15/2006 452,421
3,100,000 TeleWest PLC, Sr. Disc. Deb., 0/11.00%, 10/1/2007 2,425,750
1,175,000 UIH Australia/Pacific, Sr. Disc. Note, 0/14.00%, 5/15/2006 781,375
TOTAL 18,280,668
CHEMICALS & PLASTICS--3.8%
500,000 Buckeye Cellulose Corp., Sr. Sub. Note, 8.50%, 12/15/2005 510,000
900,000 Buckeye Cellulose Corp., Sr. Sub. Note, 9.25%, 9/15/2008 940,500
200,000 Foamex L.P., Sr. Sub. Note, 13.50%, 8/15/2005 229,000
600,000 Harris Chemical North America, Inc., Sr. Note, 10.25%, 636,000
7/15/2001
500,000 ISP Holding, Inc., Sr. Note, 9.00%, 10/15/2003 520,625
475,000 ISP Holding, Inc., Sr. Note, 9.75%, 2/15/2002 504,094
1,575,000 Polymer Group, Inc., Sr. Sub. Note, 9.00%, 7/1/2007 1,582,875
375,000 RBX Corp., Sr. Sub. Note, Series B, 11.25%, 10/15/2005 333,750
875,000 Sterling Chemicals Holdings, Inc., Sr. Disc. Note, 0/13.50%, 529,375
8/15/2008
150,000 Uniroyal Technology Corp., Sr. Secd. Note, 11.75%, 6/1/2003 156,750
TOTAL 5,942,969
CLOTHING & TEXTILES--3.2%
350,000 Collins & Aikman Floorcoverings, Inc., Sr. Sub. Note, 10.00%, 369,250
1/15/2007
625,000 Dyersburg Corp., Sr. Sub. Note, 9.75%, 9/1/2007 651,563
</TABLE>
FEDERATED HIGH INCOME BOND FUND II
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--CONTINUED
CLOTHING & TEXTILES--CONTINUED
$ 450,000 GFSI, Inc., Sr. Sub. Note, 9.625%, 3/1/2007 $ 463,500
575,000 (b)Glenoit Corp., Sr. Sub. Note, 11.00%, 4/15/2007 621,000
950,000 Pillowtex Corp., Sr. Sub. Note, 10.00%, 11/15/2006 1,021,250
150,000 (b)Pillowtex Corp., Sr. Sub. Note, 9.00%, 12/15/2007 154,500
1,650,000 WestPoint Stevens, Inc., Sr. Sub. Deb., 9.375%, 12/15/2005 1,740,750
TOTAL 5,021,813
CONGLOMERATES--0.2%
350,000 (b)ClimaChem, Inc., Sr. Note, 10.75%, 12/1/2007 362,250
CONSUMER PRODUCTS--3.6%
500,000 American Safety Razor Co., Sr. Note, 9.875%, 8/1/2005 537,500
200,000 (b)Amscan Holdings, Inc., Sr. Sub. Note, 9.875%, 12/15/2007 205,500
150,000 Herff Jones, Inc., Sr. Sub. Note, 11.00%, 8/15/2005 163,875
150,000 Hosiery Corp. of America, Inc., Sr. Sub. Note, 13.75%, 162,750
8/1/2002
450,000 ICON Fitness Corp., Sr. Disc. Note, 0/14.00%, 11/15/2006 263,250
150,000 ICON Health & Fitness, Inc., Sr. Sub. Note, 13.00%, 7/15/2002 168,375
750,000 (b)NBTY, Inc., Sr. Sub. Note, 8.625%, 9/15/2007 753,750
525,000 Playtex Family Products Corp., Sr. Sub. Note, 9.00%, 535,500
12/15/2003
500,000 Playtex Products, Inc., Sr. Note, 8.875%, 7/15/2004 512,500
450,000 Renaissance Cosmetics, Inc., Sr. Note, 11.75%, 2/15/2004 416,250
50,000 Revlon Consumer Products Corp., Note, 9.375%, 4/1/2001 51,750
625,000 Revlon Consumer Products Corp., Sr. Sub. Note, 10.50%, 662,500
2/15/2003
200,000 (b)Sealy Corporation, Sr. Sub. Note, 9.875%, 12/15/2007 206,000
325,000 (b)Sealy Mattress Co., Sr. Sub. Disc. Note, 0/10.875%, 198,250
12/15/2007
450,000 Simmons Co., Sr. Sub. Note, 10.75%, 4/15/2006 478,125
400,000 Syratech Corp., Sr. Note, 11.00%, 4/15/2007 374,000
TOTAL 5,689,875
CONTAINER & GLASS PRODUCTS--0.5%
400,000 Owens-Illinois, Inc., Sr. Note, 8.10%, 5/15/2007 429,604
250,000 Plastic Containers, Inc., Sr. Secd. Note, 10.00%, 12/15/2006 267,500
TOTAL 697,104
ECOLOGICAL SERVICES & EQUIPMENT--1.6%
1,900,000 (b)Allied Waste Industries, Inc., Sr. Disc. Note, 0/11.30%, 1,344,250
6/1/2007
850,000 Allied Waste North America, Inc., Company Guarantee, 10.25%, 937,125
12/1/2006
</TABLE>
FEDERATED HIGH INCOME BOND FUND II
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--CONTINUED
ECOLOGICAL SERVICES & EQUIPMENT--CONTINUED
$ 200,000 ICF Kaiser International, Inc., Sr. Sub. Note, 13.00%, $ 207,500
12/31/2003
TOTAL 2,488,875
ELECTRONICS--0.7%
225,000 Advanced Micro Devices, Inc., Sr. Secd. Note, 11.00%, 8/1/2003 241,594
575,000 Fairchild Semiconductor Corp., Sr. Sub., 10.125%, 3/15/2007 610,938
250,000 Viasystems, Inc., Sr. Sub. Note, 9.75%, 6/1/2007 259,375
TOTAL 1,111,907
FINANCIAL INTERMEDIARIES--0.3%
375,000 ContiFinancial Corp., Sr. Note, 8.375%, 8/15/2003 391,500
FOOD & DRUG RETAILERS--2.8%
375,000 Carr-Gottstein Foods Co., Sr. Sub. Note, 12.00%, 11/15/2005 416,250
350,000 (b)Community Distributors, Inc., Sr. Note, 10.25%, 10/15/2004 358,750
700,000 DiGiorgio Corp., Sr. Note, 10.00%, 6/15/2007 691,250
650,000 Jitney-Jungle Stores of America, Inc., Sr. Sub. Note, 10.375%, 682,500
9/15/2007
1,475,000 Ralph's Grocery Co., Sr. Note, 10.45%, 6/15/2004 1,664,906
550,000 Stater Brothers Holdings, Inc., Sr. Sub. Note, 9.00%, 7/1/2004 576,813
TOTAL 4,390,469
FOOD PRODUCTS--1.9%
625,000 Aurora Foods, Inc., Sr. Sub. Note, 9.875%, 2/15/2007 662,500
550,000 Curtice-Burns Foods, Inc., Sr. Sub. Note, 12.25%, 2/1/2005 609,125
950,000 International Home Foods, Inc., Sr. Sub. Note, 10.375%, 1,049,750
11/1/2006
550,000 Van de Kamp's, Inc., Sr. Sub. Note, 12.00%, 9/15/2005 616,000
TOTAL 2,937,375
FOOD SERVICES--1.1%
225,000 AmeriServe Food Distribution, Inc., Sr. Note, 8.875%, 228,375
10/15/2006
1,400,000 AmeriServe Food Distribution, Inc., Sr. Sub. Note, 10.125%, 1,477,000
7/15/2007
TOTAL 1,705,375
FOREST PRODUCTS--1.5%
50,000 Container Corp. of America, Sr. Note, 11.25%, 5/1/2004 55,000
100,000 Container Corp. of America, Sr. Note, 9.75%, 4/1/2003 108,500
450,000 Four M Corp., Sr. Note, 12.00%, 6/1/2006 479,250
200,000 Repap New Brunswick, 2nd Priority Sr. Secd. Note, 10.625%, 191,000
4/15/2005
500,000 S. D. Warren Co., Sr. Sub. Note, 12.00%, 12/15/2004 560,000
</TABLE>
FEDERATED HIGH INCOME BOND FUND II
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--CONTINUED
FOREST PRODUCTS--CONTINUED
$ 100,000 Stone Container Corp., Sr. Note, 11.50%, 10/1/2004 $ 106,750
800,000 Stone Container Corp., Sr. Note, 12.58%, 8/1/2016 884,000
TOTAL 2,384,500
HEALTHCARE--3.4%
275,000 Alliance Imaging, Inc., Sr. Sub. Note, 9.625%, 12/15/2005 280,500
975,000 Dade International, Inc., Sr. Sub. Note, 11.125%, 5/1/2006 1,082,250
650,000 Genesis Health Ventures, Inc., Sr. Sub. Note, 9.25%, 10/1/2006 665,438
200,000 Genesis Health Ventures, Inc., Sr. Sub. Note, 9.75%, 6/15/2005 208,500
850,000 Tenet Healthcare Corp., Sr. Note, 8.00%, 1/15/2005 867,000
900,000 Tenet Healthcare Corp., Sr. Sub. Note, 10.125%, 3/1/2005 985,500
1,200,000 Tenet Healthcare Corp., Sr. Sub. Note, 8.625%, 1/15/2007 1,242,000
TOTAL 5,331,188
HOME PRODUCTS & FURNISHINGS--0.8%
975,000 Falcon Building Products, Inc., Sr. Sub. Disc. Note, 0/10.50%, 650,813
6/15/2007
150,000 Falcon Building Products, Inc., Sr. Sub. Note, 9.50%, 153,750
6/15/2007
400,000 (b)Werner Enterprises, Inc., Sr. Sub. Note, 10.00%, 11/15/2007 413,000
TOTAL 1,217,563
HOTELS, MOTELS, INNS & CASINOS--0.5%
350,000 CapStar Hotel Co., Sr. Sub. Note, 8.75%, 8/15/2007 363,125
350,000 Courtyard by Marriott II LP, Sr. Note, 10.75%, 2/1/2008 383,250
TOTAL 746,375
INDUSTRIAL PRODUCTS & EQUIPMENT--3.9%
700,000 Amphenol Corp., Sr. Sub. Note, 9.875%, 5/15/2007 749,000
400,000 Cabot Safety Acquisition Corp., Sr. Sub. Note, 12.50%, 450,000
7/15/2005
650,000 Continental Global Group, Inc., Sr. Note, 11.00%, 4/1/2007 695,500
300,000 (b)Elgin National Industries, Inc., Sr. Note, 11.00%, 312,750
11/1/2007
400,000 Euramax International PLC, Sr. Sub. Note, 11.25%, 10/1/2006 435,000
250,000 Fairfield Manufacturing Co., Inc., Sr. Sub. Note, 11.375%, 265,000
7/1/2001
300,000 Hawk Corp., Sr. Note, 10.25%, 12/1/2003 321,000
300,000 International Knife & Saw, Inc., Sr. Sub. Note, 11.375%, 325,500
11/15/2006
375,000 Johnstown America Industries, Inc., Sr. Sub. Note, 11.75%, 412,500
8/15/2005
225,000 Johnstown America Industries, Inc., Sr. Sub. Note, 11.75%, 247,500
8/15/2005
525,000 MMI Products, Inc., Sr. Sub. Note, 11.25%, 4/15/2007 574,875
</TABLE>
FEDERATED HIGH INCOME BOND FUND II
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--CONTINUED
INDUSTRIAL PRODUCTS & EQUIPMENT--CONTINUED
$ 550,000 Neenah Corp., Sr. Sub. Note, 11.125%, 5/1/2007 $ 606,375
125,000 (b)Roller Bearing Co. of America, Inc., Sr. Sub. Note, 9.625%, 126,563
6/15/2007
500,000 Unifrax Investment Corp., Sr. Note, 10.50%, 11/1/2003 517,500
TOTAL 6,039,063
LEISURE & ENTERTAINMENT--4.9%
1,164,000 AMF Group, Inc., Sr. Sub. Disc. Note, 0/12.25%, 3/15/2006 921,015
300,000 Cobblestone Golf Group, Inc., Sr. Note, 11.50%, 6/1/2003 327,000
150,000 KSL Recreation Group, Inc., Sr. Sub. Note, 10.25%, 5/1/2007 161,250
550,000 (b)Livent, Inc., Sr. Note, 9.375%, 10/15/2004 552,750
850,000 Premier Parks, Inc., Sr. Note, 12.00%, 8/15/2003 947,750
175,000 Premier Parks, Inc., Sr. Note, 9.75%, 1/15/2007 187,250
1,325,000 Six Flags Theme Parks, Sr. Sub. Disc. Note, 0/12.25%, 1,417,750
6/15/2005
3,050,000 Viacom, Inc., Sub. Deb., 8.00%, 7/7/2006 3,095,750
TOTAL 7,610,515
MACHINERY & EQUIPMENT--1.4%
500,000 Alvey Systems, Inc., Sr. Sub. Note, 11.375%, 1/31/2003 533,750
700,000 Clark Material Handling Corp., Sr. Note, 10.75%, 11/15/2006 752,500
500,000 (b)National Equipment Services, Inc., Sr. Sub. Note, 10.00%, 497,500
11/30/2004
400,000 Tokheim Corp., Sr. Sub. Note, 11.50%, 8/1/2006 456,000
TOTAL 2,239,750
METALS & MINING--0.5%
500,000 (b)AEI Holding Co., Inc., Sr. Note, 10.00%, 11/15/2007 517,500
400,000 Royal Oak Mines, Inc., Sr. Sub. Note, 11.00%, 8/15/2006 290,000
TOTAL 807,500
OIL & GAS--4.3%
1,000,000 Abraxas Petroleum Corp., Sr. Note, 11.50%, 11/1/2004 1,100,000
575,000 DI Industries, Inc., Sr. Note, 8.875%, 7/1/2007 600,875
350,000 (b)Dailey Petroleum Services Corp., Sr. Note, 9.75%, 8/15/2007 369,250
100,000 Falcon Drilling Co., Inc., Sr. Note, 8.875%, 3/15/2003 106,750
150,000 Falcon Drilling Co., Inc., Sr. Note, 9.75%, 1/15/2001 157,875
50,000 Falcon Drilling Co., Inc., Sr. Sub. Note, 12.50%, 3/15/2005 57,250
950,000 Forcenergy Gas Exploration, Inc., Sr. Sub. Note, 8.50%, 959,500
2/15/2007
600,000 Forcenergy Gas Exploration, Inc., Sr. Sub. Note, 9.50%, 640,500
11/1/2006
</TABLE>
FEDERATED HIGH INCOME BOND FUND II
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--CONTINUED
OIL & GAS--CONTINUED
$ 100,000 Giant Industries, Inc., Sr. Sub. Note, 9.75%, 11/15/2003 $ 103,500
100,000 (b)Newpark Resources, Inc., Sr. Sub. Note, 8.625%, 12/15/2007 102,000
350,000 Pacalta Resources Ltd., Sr. Note, 10.75%, 6/15/2004 346,938
250,000 Petsec Energy, Inc., Sr. Sub. Note, 9.50%, 6/15/2007 257,813
825,000 Pride Petroleum Services, Inc., Sr. Note, 9.375%, 5/1/2007 891,000
675,000 United Meridian Corp., Sr. Sub. Note, 10.375%, 10/15/2005 749,250
250,000 (b)XCL, Ltd., Unit, 13.50%, 5/1/2004 301,250
TOTAL 6,743,751
PRINTING & PUBLISHING--2.3%
750,000 Affiliated Newspaper Investments, Inc., Sr. Disc. Note, 716,250
0/13.25%, 7/1/2006
150,000 Garden State Newspapers, Inc., Sr. Sub. Note, 12.00%, 7/1/2004 168,750
1,125,000 (b)Garden State Newspapers, Inc., Sr. Sub. Note, 8.75%, 1,133,438
10/1/2009
450,000 Hollinger International Publishing, Inc., Sr. Sub. Note, 477,000
9.25%, 2/1/2006
350,000 Hollinger International Publishing, Inc., Sr. Sub. Note, 371,000
9.25%, 3/15/2007
375,000 K-III Communications Corp., Company Guarantee, Series B, 391,054
8.50%, 2/1/2006
338,000 Petersen Publishing Co., L.L.C., Sr. Sub. Note, 11.125%, 383,630
11/15/2006
TOTAL 3,641,122
REAL ESTATE--0.3%
335,000 Trizec Finance Ltd., Sr. Note, 10.875%, 10/15/2005 376,875
RETAILERS--0.6%
425,000 Brylane Capital Corp., Sr. Sub. Note, 10.00%, 9/1/2003 453,156
525,000 Leslie's Poolmart, Inc., Sr. Note, 10.375%, 7/15/2004 546,000
TOTAL 999,156
SERVICES--0.9%
300,000 Coinmach Corp., Sr. Note, 11.75%, 11/15/2005 334,500
325,000 (b)Coinmach Corp., Sr. Note, Series C, 11.75%, 11/15/2005 362,375
625,000 DecisionOne Corp., Sr. Sub. Note, 9.75%, 8/1/2007 646,875
TOTAL 1,343,750
STEEL--1.4%
300,000 Bayou Steel Corp., 1st Mtg. Note, 10.25%, 3/1/2001 310,500
500,000 GS Technologies Operating Co., Inc., Sr. Note, 12.00%, 549,375
9/1/2004
475,000 GS Technologies Operating Co., Inc., Sr. Note, 12.25%, 533,188
10/1/2005
450,000 Ryerson Tull, Inc., Note, 8.50%, 7/15/2001 468,000
</TABLE>
FEDERATED HIGH INCOME BOND FUND II
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--CONTINUED
STEEL--CONTINUED
$ 325,000 Ryderson Tull, Inc., Sr. Note, 9.125%, 7/15/2006 $ 350,188
TOTAL 2,211,251
SURFACE TRANSPORTATION--2.8%
150,000 Allied Holdings, Inc., Sr. Note, 8.625%, 10/1/2007 153,000
700,000 AmeriTruck Distribution Corp., Sr. Sub. Note, 12.25%, 696,500
11/15/2005
450,000 Chemical Leaman Corp., Sr. Note, 10.375%, 6/15/2005 479,250
500,000 Gearbulk Holding Limited, Sr. Note, 11.25%, 12/1/2004 551,250
500,000 Statia Terminals International N.V., 1st Mtg. Note, 11.75%, 525,000
11/15/2003
1,150,000 Stena AB, Sr. Note, 10.50%, 12/15/2005 1,256,375
250,000 Stena AB, Sr. Note, 8.75%, 6/15/2007 253,125
450,000 Trism, Inc., Sr. Sub. Note, 10.75%, 12/15/2000 443,250
TOTAL 4,357,750
TELECOMMUNICATIONS & CELLULAR--13.3%
700,000 American Communications Services, Inc., Sr. Disc. Note, 542,500
0/12.75%, 4/1/2006
250,000 American Communications Services, Inc., Sr. Note, 13.75%, 298,750
7/15/2007
250,000 Arch Communications Group, Inc., Sr. Disc. Note, 0/10.875%, 153,750
3/15/2008
1,050,000 Brooks Fiber Properties, Inc., Sr. Disc. Note, 0/10.875%, 882,000
3/1/2006
875,000 Brooks Fiber Properties, Inc., Sr. Disc. Note, 0/11.875%, 704,375
11/1/2006
1,500,000 Call-Net Enterprises, Inc., Sr. Disc. Note, 0/9.27%, 8/15/2007 1,020,000
575,000 Cellular Communications International, Inc., Sr. Disc. Note, 468,625
13.25% accrual, 8/15/2000
225,000 Cellular Communications of Puerto Rico, Inc., Company 217,125
Guarantee, 10.00%, 2/1/2007
750,000 Comcast Cellular Holdings, Inc., Sr. Note, 9.50%, 5/1/2007 787,500
500,000 Esprit Telecom Group PLC, Sr. Note, 11.50%, 12/15/2007 517,500
650,000 (b)Hermes Europe Railtel B.V., Sr. Note, 11.50%, 8/15/2007 724,750
400,000 HighwayMaster Communications, Inc., Sr. Note, 13.75%, 411,000
9/15/2005
225,000 Intermedia Communications of Florida, Inc., Sr. Disc. Note, 162,563
0/11.25%, 7/15/2007
1,400,000 Intermedia Communications of Florida, Inc., Sr. Disc. Note, 1,106,000
0/12.50%, 5/15/2006
450,000 (b)Intermedia Communications of Florida, Inc., Sr. Note, 463,500
8.875%, 11/1/2007
900,000 McLeod, Inc., Sr. Disc. Note, 0/10.50%, 3/1/2007 654,750
400,000 (b)McLeod, Inc., Sr. Note, 9.25%, 7/15/2007 419,000
250,000 (b)MetroNet Communications, Sr. Disc. Note, 0/10.75%, 156,875
11/1/2007
800,000 (b)MetroNet Communications, Unit, 12.00%, 8/15/2007 926,000
1,350,000 Millicom International Cellular S. A., Sr. Disc. Note, 992,250
0/13.50%, 6/1/2006
</TABLE>
FEDERATED HIGH INCOME BOND FUND II
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
<C> <S> <C>
CORPORATE BONDS--CONTINUED
TELECOMMUNICATIONS & CELLULAR--CONTINUED
$ 650,000 (b)NEXTEL Communications, Inc., Sr. Disc. Note, 0/10.65%, $ 410,313
9/15/2007
800,000 NEXTEL Communications, Inc., Sr. Disc. Note, 0/9.75%, 714,000
8/15/2004
1,000,000 Paging Network, Inc., Sr. Sub. Note, 10.00%, 10/15/2008 1,042,500
1,175,000 (b)Qwest Communications International, Inc., Sr. Disc. Note, 799,000
0/9.47%, 10/15/2007
600,000 Qwest Communications International, Inc., Sr. Note, 10.875%, 681,000
4/1/2007
700,000 (b)RCN Corp., Sr. Disc. Note, 0/11.125%, 10/15/2007 442,750
125,000 Source Media, Inc., Sr. Secd. Note, 12.00%, 11/1/2004 124,375
450,000 Sygnet Wireless, Inc., Sr. Note, 11.50%, 10/1/2006 488,250
2,000,000 Teleport Communications Group, Inc., Sr. Disc. Note, 1,652,500
0/11.125%, 7/1/2007
75,000 Teleport Communications Group, Inc., Sr. Note, 9.875%, 84,750
7/1/2006
650,000 (b)Telesystem International Wireless, Inc., Sr. Disc. Note, 364,000
0/10.50%, 11/1/2007
950,000 (b)Telesystem International Wireless, Inc., Sr. Disc. Note, 598,500
0/13.25%, 6/30/2007
725,000 Teligent, Inc., Sr. Note, 11.50%, 12/1/2007 730,438
350,000 USA Mobile Communications, Inc., Sr. Note, 9.50%, 2/1/2004 344,750
700,000 Vanguard Cellular Systems, Inc., Deb., 9.375%, 4/15/2006 731,500
TOTAL 20,817,439
UTILITIES--1.1%
575,000 CalEnergy Co., Inc., Sr. Note, 9.50%, 9/15/2006 631,063
500,000 California Energy Co., Inc., Sr. Note, 10.25%, 1/15/2004 540,000
525,000 El Paso Electric Co., 1st Mtg. Note, 9.40%, 5/1/2011 593,670
TOTAL 1,764,733
TOTAL CORPORATE BONDS (IDENTIFIED COST $134,190,793) 139,780,749
PREFERRED STOCKS--4.6%
BANKING--0.2%
10,000 California Federal Preferred Capital Corp., REIT Perpetual 262,500
Pfd. Stock, Series A, $2.28
BROADCAST RADIO & TV--2.3%
6,300 American Radio Systems Corp., PIK Pfd., 11.375% 730,800
5,250 Capstar Broadcasting Partners, Inc., Sr. Pfd., $12.00 605,063
6,035 Chancellor Media Corp., Exchangeable Pfd. Stock, $12.00 691,008
2,500 Chancellor Media Corp., PIK Pfd., Series A, 12.25% 326,250
4,253 SFX Broadcasting, Inc., Exchangeable Pfd. Stock, Series E 492,227
7,300 Sinclair Broadcast Group, Inc., Pfd., $11.63 799,350
TOTAL 3,644,698
</TABLE>
FEDERATED HIGH INCOME BOND FUND II
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
PREFERRED STOCKS--CONTINUED
CABLE TELEVISION--0.6%
150 (b)Echostar Communications Corp., Sr. Red. Pfd. Stk., $12.13 $ 158,250
698 Pegasus Communications Corp., PIK Pfd., Series A, 12.75% 757,317
TOTAL 915,567
INDUSTRIAL PRODUCTS & EQUIPMENT--0.1%
150 Fairfield Manufacturing Co., Inc., Exchangeable Pfd. Stock 161,250
PRINTING & PUBLISHING--0.7%
3,150 (b)Primedia, Inc., Pfd., $9.20 316,575
7,000 Primedia, Inc., Pfd., Series D, $10.00 736,750
TOTAL 1,053,325
REAL ESTATE--0.2%
5,000 Crown American Realty Trust, Sr. Pfd., Series A, $1.38 263,750
TELECOMMUNICATIONS & CELLULAR--0.3%
489 NEXTEL Communications, Inc., Pfd., 13.00% 559,905
UTILITIES--0.2%
3,032 El Paso Electric Co., PIK Pfd., Series A, 11.40% 336,552
TOTAL PREFERRED STOCKS (IDENTIFIED COST $6,530,709) 7,197,547
COMMON STOCKS--0.1%
BROADCAST RADIO & TV--0.0%
800 (a) Sullivan Broadcast Holdings Inc., Class B 8,000
BUSINESS EQUIPMENT & SERVICES--0.0%
300 (a)(b)Electronic Retailing Systems International, Inc., 6,000
Warrants
CABLE TELEVISION--0.0%
200 Australis Holdings Property Ltd., Warrants 0
338 (a)Pegasus Communications Corp. 7,014
550 Pegasus Communications Corp., Warrants 18,150
1,175 UIH Australia/Pacific, Warrants 1,234
450 (a)Wireless One, Inc., Warrants 0
TOTAL 26,398
CHEMICALS & PLASTICS--0.0%
425 (a)Sterling Chemicals Holdings, Inc., Warrants 12,750
CONSUMER PRODUCTS--0.0%
50 (a)Hosiery Corp. of America, Inc. 350
ECOLOGICAL SERVICES & EQUIPMENT--0.0%
960 (a)ICF Kaiser International, Inc., Warrants 240
</TABLE>
FEDERATED HIGH INCOME BOND FUND II
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
PRINTING & PUBLISHING--0.0%
50 (a)Affiliated Newspaper Investments, Inc. $ 5,525
STEEL--0.0%
100 (a)(b)Bar Technologies, Inc., Warrants 6,000
TELECOMMUNICATIONS & CELLULAR--0.0%
375 (a)Cellular Communications International, Inc., Warrants 7,500
400 HighwayMaster Communications, Inc., Warrants 400
968 (a)NEXTEL Communications, Inc., Class A 25,168
TOTAL 33,068
TOTAL COMMON STOCKS (IDENTIFIED COST $41,125) 98,331
(C)REPURCHASE AGREEMENT--3.8%
$ 6,025,000 BT Securities Corp., 6.60%, dated 12/31/1997, due 1/2/1998 (at 6,025,000
amortized cost)
TOTAL INVESTMENTS (IDENTIFIED COST $146,787,627)(D) $ 153,101,627
</TABLE>
(a) Non-income producing security.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At December 31, 1997, these securities
amounted to $19,142,702 which represents 12.3% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to
$146,798,502. The net unrealized appreciation/depreciation of investments on
a federal tax basis amounts to $6,303,125 which is comprised of $6,846,031
appreciation and $542,906 depreciation at December 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($156,163,628) at December 31, 1997.
The following acronyms are used throughout this portfolio:
GTD --Guaranty
LLC --Limited Liability Corporation
LP --Limited Partnership
PIK --Payment in Kind
PLC --Public Limited Company
REIT --Real Estate Investment Trust
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED HIGH INCOME BOND FUND II
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Total investments in securities, at value (identified cost $146,787,627 and $ 153,101,627
tax cost $146,798,502)
Cash 951
Income receivable 2,706,406
Receivable for investments sold 77,587
Receivable for shares sold 274,815
Deferred organizational costs 15,940
Total assets 156,177,326
LIABILITIES:
Payable for shares redeemed 13,698
Net Assets for 14,261,667 shares outstanding $ 156,163,628
NET ASSETS CONSIST OF:
Paid in capital $ 144,815,089
Net unrealized appreciation of investments 6,314,000
Accumulated net realized gain on investments 991,093
Undistributed net investment income 4,043,446
Total Net Assets $ 156,163,628
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
$156,163,628 / 14,261,667 shares outstanding $10.95
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED HIGH INCOME BOND FUND II
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 295,951
Interest 9,806,094
Total income 10,102,045
EXPENSES:
Investment advisory fee $ 637,608
Administrative personnel and services fee 125,002
Custodian fees 13,225
Transfer and dividend disbursing agent fees and expenses 24,098
Directors'/Trustees' fees 2,118
Auditing fees 12,848
Legal fees 2,673
Portfolio accounting fees 52,944
Share registration costs 24,480
Printing and postage 37,463
Insurance premiums 3,008
Taxes 41
Miscellaneous 14,427
Total expenses 949,935
Waiver of investment advisory fee (95,075)
Net expenses 854,860
Net investment income 9,247,185
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 993,291
Net change in unrealized appreciation of investments 3,934,285
Net realized and unrealized gain on investments 4,927,576
Change in net assets resulting from operations $ 14,174,761
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED HIGH INCOME BOND FUND II
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 9,247,185 $ 3,695,706
Net realized gain on investments ($1,099,230 net gain and 993,291 290,512
$290,512 net gain, respectively, as computed for federal tax
purposes)
Net change in unrealized appreciation 3,934,285 2,051,764
Change in net assets resulting from operations 14,174,761 6,037,982
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (5,313,534) (3,613,374)
Distributions from net realized gains (286,146) --
Change in net assets resulting from distributions to (5,599,680) (3,613,374)
shareholders
SHARE TRANSACTIONS--
Proceeds from sale of shares 110,484,533 55,826,183
Net asset value of shares issued to shareholders in payment of 5,598,277 3,612,247
distributions declared
Cost of shares redeemed (34,537,573) (15,984,743)
Change in net assets resulting from share transactions 81,545,237 43,453,687
Change in net assets 90,120,318 45,878,295
NET ASSETS:
Beginning of period 66,043,310 20,165,015
End of period (including undistributed net investment income of $ 156,163,628 $ 66,043,310
$4,043,446 and $109,795, respectively)
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.24 $9.79 $8.87 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.88 0.88 0.85 0.75
Net realized and unrealized gain (loss)
on investments 0.48 0.45 0.89 (1.12)
Total from investment operations 1.36 1.33 1.74 (0.37)
LESS DISTRIBUTIONS
Distributions from net investment income (0.61) (0.88) (0.82) (0.75)
Distributions in excess of net investment income(d) -- -- -- (0.01)
Distributions from net realized gain on investments (0.04) -- -- --
Total distributions (0.65) (0.88) (0.82) (0.76)
NET ASSET VALUE, END OF PERIOD $10.95 $10.24 $9.79 $8.87
TOTAL RETURN(B) 13.83% 14.31% 20.38% (3.73%)
RATIOS TO AVERAGE NET ASSETS
Expenses 0.80% 0.80% 0.80% 0.41%*
Net investment income 8.70% 9.23% 9.27% 9.11%*
Expense waiver(c) 0.09% 0.59% 3.40% 10.01%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $156,164 $66,043 $20,165 $1,457
Portfolio turnover 52% 51% 48% 18%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from February 2, 1994 (date of
initial public investment) to December 31, 1994. For the period from
December 9, 1993 (the start of business) to February 1, 1994, the Fund had
no public investment.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED HIGH INCOME BOND FUND II
DECEMBER 31, 1997
ORGANIZATION
Federated Insurance Series (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act") as an open-end, management
investment company. The Trust consists of eight portfolios. The financial
statements included herein are only those of Federated High Income Bond Fund
II (the "Fund"). The financial statements of the other portfolios are
presented separately. The assets of each portfolio are segregated and a
shareholder's interest is limited to the portfolio in which shares are held.
The investment objective is to seek high current income.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
Listed corporate bonds, are generally valued at the mean of the latest bid
and asked price as furnished by an independent pricing service. Listed
equity securities are valued at the last sale price reported on a national
securities exchange. Short-term securities are valued at the prices provided
by an independent pricing service. However, short-term securities with
remaining maturities of sixty days or less at the time of purchase may be
valued at amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less
than the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code"). Dividend income and distributions to shareholders are
recorded on the ex-dividend date.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable
to regulated investment companies and to distribute to shareholders each
year substantially all of its income. Accordingly, no provisions for federal
tax are necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The
Fund records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
RESTRICTED SECURITIES
Restricted securities are securities that may only be resold upon
registration under federal securities laws or in transactions exempt from
such registration. In some cases, the issuer of restricted securities has
agreed to register such securities for resale, at the issuer's expense
either upon demand by the Fund or in connection with another registered
offering of the securities. Many restricted securities may be resold in the
secondary market in transactions exempt from registration. Such restricted
securities may be determined to be liquid under criteria established by the
Board of Trustees. The Fund will not incur any registration costs upon such
resales. The Fund's restricted securities are valued at the price provided
by dealers in the secondary market or, if no market prices are available, at
the fair value as determined by the Fund's pricing committee.
Additional information on each restricted security held at December 31, 1997
is as follows:
FUND
SECURITY ACQUISITION DATE ACQUISITION COST
ACME Television, LLC 09/24/1997 - $ 679,212
11/17/1997
Fox Liberty Networks, LLC, Sr. 08/15/1997 - 1,170,425
Disc. Note 12/03/1997
Fox Liberty Networks, LLC Sr. 08/15/1997 375,000
Note
American Architectural Products 12/04/1997 - 552,625
Corp., Sr. Note 01/06/1998
Building Materials Corp. of 12/12/1997 498,750
America, Sr. Note
Dialog Corp. PLC, Sr. Note 11/10/1997 - 1,016,000
01/22/1998
Pegasus Communications Inc., 10/16/1997 400,750
Sr. Note
Glenoit Corp., Sr. Note 03/26/1997 - 590,615
08/19/1997
Pillowtex Corp., Sr. Sub. Note 12/18/1997 153,563
ClimaChem Inc. 11/21/1997 350,000
Amscan Holdings, Inc., Sr. Note 12/15/1997 - 409,000
01/22/1998
NBTY, Inc., Sr. Sub Note 09/17/1997 - 745,438
10/20/1997
NewPark Resources, Inc., Sr. 12/10/1997 100,000
Sub Note
Sealy Corporation, Sr. Sub. 12/11/1997 200,000
Note
Sealy Mattress Co., Sr. Sub. 12/11/1997 196,292
Disc. Note
Allied Waste Industries, Inc. 05/01/1997 - 1,293,290
12/02/1997
Community Distributers, Inc. 10/10/1997 350,000
Werner Enterprises, Inc. 11/14/1997 400,000
Elgin National Industries, Inc. 11/03/1997 - 302,967
11/13/1997
Roller Bearing Co. of America 06/18/1997 125,000
Livent, Inc. 10/10/1997 - 554,125
10/14/1997
National Equipment Services, 11/20/1997 493,835
Inc.
AEI Holding Co., Inc. 11/06/1997 - 504,375
12/18/1997
Daily Petroleum Services Corp. 08/14/1997 353,786
XCL, Ltd. Unit 05/13/1997 250,000
Garden State Newspapers 09/26/1997 - 1,123,894
12/11/1997
Coinmach Corp. 10/01/1997 357,094
Hermes Europe Railtel B.V. 08/14/1997 - 812,406
01/23/1998
Intermedia Communications of 10/24/1997 450,000
Florida, Inc.
McLeod, Inc., Sr. Disc. Note 07/15/1997 400,000
MetroNet Communications, Sr. 10/23/1997 151,942
Disc. Note
MetroNet Communications, Unit 07/18/1997 - 830,313
07/22/1997
FUND
SECURITY ACQUISITION DATE ACQUISITION COST
NEXTEL Communications, Inc. 09/10/1997 - $ 405,698
11/05/1997
Qwest Communications 10/09/1997 - 1,267,278
International, Inc. 01/22/1998
RCN Corp. 10/10/1997 420,298
Telesystem International 10/22/1997 399,532
Wireless, Inc.
Telesystem International 06/24/1997 - 549,288
Wireless, Inc. 07/07/1997
Echostar Communications Corp. 09/26/1997 150,000
Primedia, Inc. 09/22/1997 - 316,225
11/06/1997
Electronic Retailing Systems 06/17/1997 10,407
International, Inc. warrants
Bar Technologies, Inc. warrants 08/28/1996 5,588
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, expenses, and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 1996
<S> <C> <C>
Shares sold 10,549,129 5,638,009
Shares issued to shareholders in payment of distributions declared 543,973 365,049
Shares redeemed (3,281,443) (1,611,816)
Net change resulting from share transactions 7,811,659 4,391,242
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Advisers, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.60% of the
Fund's average daily net assets. The Adviser may voluntarily choose to waive
any portion of its fee. The Adviser can modify or terminate this voluntary
waiver at any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net
assets of all funds advised by subsidiaries of Federated Investors for the
period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent for the Fund. The
fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Trust's accounting records for which it receives a fee.
The fee is based on the level of the Trust's average daily net assets for
the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES
Organizational expenses and/or start-up administrative service expenses of
$47,820 were borne initially by Adviser. The Fund has reimbursed the Adviser
for these expenses. These expenses have been deferred and are being
amortized over the five-year period following the Fund's effective date. For
the period ended December 31, 1997, the Fund expensed $12,752 of
organizational expenses.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors
or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended December 31, 1997, were as follows:
PURCHASES $ 128,132,503
SALES $ 52,734,136
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of the Federated Insurance Series and Shareholders
of FEDERATED HIGH INCOME BOND FUND II:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated High Income Bond Fund
II, (a portfolio of the Federated Insurance Series) as of December 31, 1997,
and the related statement of operations for the year then ended, the
statement of changes in net assets for the years ended December 31, 1997 and
1996, and the financial highlights for the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned as of December 31, 1997, by correspondence with the
custodian and brokers; where replies were not received, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated High
Income Bond Fund II as of December 31, 1997, the results of its operations,
the changes in its net assets and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 6, 1998
TRUSTEES
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
J. Christopher Donahue
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
J. Christopher Donahue
President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Richard B. Fisher
Vice President
Matthew S. Hardin
Assistant Secretary
Variable funds are not bank deposits or obligations, are not guaranteed by
any bank, and are not insured or guaranteed by the U.S. government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other government agency. Investment in variable funds involves investment
risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectus which contains facts
concerning its objective and policies, management fees, expenses, and other
information.
NOTES
[Graphic]
Federated High Income Bond Fund II
Federated Insurance Series
ANNUAL REPORT TO SHAREHOLDERS
DECEMBER 31, 1997
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 313916306
G00844-01 (2/98)
PRESIDENT'S MESSAGE
Dear Shareholder:
I am pleased to present the Annual Report to Shareholders for Federated
Prime Money Fund II, a portfolio of Federated Insurance Series.
This report covers the 12-month period from January 1, 1997 through December
31, 1997. It begins with a commentary by the fund's portfolio manager, which
is followed by a complete listing of the fund's money market holdings and
the fund's financial statements.
Over the reporting period, the fund kept shareholders' cash working--and
accessible--every day while maintaining a stable share price of $1.00.*
To provide a competitive daily yield, the fund invests in a diversified
portfolio of high-quality money market securities. Over the 12-month
reporting period, the fund paid a total of $0.05 per share in dividends to
shareholders. On December 31, 1997, net assets reached $60 million.
Thank you for choosing Federated Prime Money Fund II as a convenient,
professionally managed way to keep your ready cash working. We will continue
to keep you up-to-date on your investment, and welcome your comments and
suggestions.
Sincerely,
[Graphic]
J. Christopher Donahue
President
February 15, 1998
* Money market funds seek to maintain a stable net asset value of $1.00 per
share. There is no assurance that they will be able to do so. An investment
in the fund is not insured or guaranteed by the U.S. government.
MANAGEMENT DISCUSSION AND ANALYSIS
Federated Prime Money Fund II invests in money market instruments maturing
in thirteen months or less. The average maturity of these securities,
computed on a dollar-weighted basis, is restricted to 90 days or less.
Portfolio securities must be rated in one of the two highest short-term
rating categories by one or more of the nationally recognized statistical
rating organizations or be of comparable quality to securities having such
ratings. Typical security types include, but are not limited to, commercial
paper, certificates of deposit, time deposits, variable rate instruments and
repurchase agreements.
U.S. economic growth continued at an above average pace during early 1997,
but moderately slowed as the year progressed. The unemployment rate fell to
a quarter-century low of 4.6%. Consumer spending, which accounts for
two-thirds of the U.S. economy, is on the rise, fueled in part by gains in
income. These strong economic indicators on the domestic side are being
offset by the turmoil in Southeast Asia. The combination of the slowdown in
Asia and slow steady growth in the U.S. should keep inflation in check
during 1998.
Thirty-day commercial paper started the reporting period at 5.37% on January
2, 1997, and then rose as high as 5.95% on December 29, 1997, reflecting
year-end technical pressures. Rates fell in January 1997 and February 1997
with the 30-day commercial paper rate reaching a low of 5.24% on February
21, 1997. Rates rose dramatically in late March 1997 and early April 1997 to
a 5.57%, reflecting the 0.25% hike in the federal funds rate. Commercial
paper rates continued to trade around 5.57% through the remainder of the
year.
The target average maturity range for the fund remained in the 35- to 45-day
target range for the entire reporting period, reflecting a neutral position
regarding Federal Reserve Board policy. In structuring the fund, there is
continued emphasis placed on positioning 30 - 35% of the fund's core assets
in variable rate demand notes and accomplishing a modest barbell structure.
During the reporting period ended December 31, 1997, the net assets of the
fund increased from $45.7 to $60 million while the 7-day net yield increased
from 4.77% to 5.10%.* The effective average maturity of the fund on December
31, 1997, was 41 days.
* Performance quoted represents past performance and is not indicative of
future results. Yield will vary.
PORTFOLIO OF INVESTMENTS
FEDERATED PRIME MONEY FUND II
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM NOTES--21.0%
BANKING--4.5%
$ 1,000,000 BankBoston, N.A., 6.020%, 10/21/1998 $ 1,000,000
500,000 Bayerische Landesbank - NY, 6.250%, 4/15/1998 499,959
1,200,000 SALTS II Cayman Islands Corp., Series 1997-1b, 5.988%, 1,200,000
3/19/1998
TOTAL 2,699,959
BROKERAGE--1.7%
1,000,000 Goldman Sachs & Co., 5.781%, 1/26/1998 1,000,000
FINANCE - AUTOMOTIVE--5.9%
182,174 Chase Manhattan Auto Owner Trust 1997-B, Class A-1, 5.744%, 182,174
7/10/1998
757,362 Ford Credit Auto Owner Trust 1997-B, Class A-1, 5.748%, 757,362
10/15/1998
2,500,000 Ford Motor Credit Corp., 6.420%, 2/4/1998 2,501,295
TOTAL 3,440,831
FINANCE - COMMERCIAL--6.0%
1,000,000 CIT Group Holdings, Inc., 6.125%, 9/1/1998 1,001,445
500,000 CIT Group Holdings, Inc., 6.200%, 4/15/1998 500,565
1,000,000 CIT Group Holdings, Inc., 6.500%, 7/13/1998 1,003,466
1,000,000 Triangle Funding Ltd., 5.750%, 11/16/1998 1,000,000
TOTAL 3,505,476
FINANCE - EQUIPMENT--2.0%
1,200,000 Caterpillar Financial Asset Trust 1997-B, Class A-1, 5.805%, 1,200,000
11/25/1998
FINANCE - RETAIL--0.9%
500,000 Associates Corp. of North America, 8.800%, 8/1/1998 507,916
TOTAL SHORT-TERM NOTES 12,354,182
CERTIFICATE OF DEPOSIT--11.7%
BANKING--11.7%
1,000,000 Bankers Trust Co., New York, 6.000%, 9/9/1998 999,671
1,000,000 Royal Bank of Canada, Montreal, 6.000%, 4/6/1998 1,000,339
1,000,000 Sanwa Bank Ltd., Osaka, 6.180%, 1/20/1998 1,000,005
1,000,000 Societe Generale, Paris, 5.920%, 8/6/1998 999,716
1,000,000 Sumitomo Bank Ltd., Osaka, 6.170%, 1/20/1998 1,000,005
2,000,000 Sumitomo Bank Ltd., Osaka, 6.450%, 1/23/1998 1,999,183
TOTAL CERTIFICATES OF DEPOSIT 6,998,919
</TABLE>
FEDERATED PRIME MONEY FUND II
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
COMMERCIAL PAPER--3.7%
ENERGY MINERALS--1.0%
$ 600,000 Occidental Petroleum Corp., 6.222%, 1/27/1998 $ 597,326
FINANCE - EQUIPMENT--1.0%
600,000 Comdisco, Inc., 6.100%, 3/13/1998 592,900
INDUSTRIAL PRODUCTS--0.8%
500,000 Praxair, Inc., 5.969%, 2/27/1998 495,329
INSURANCE--0.9%
500,000 CNA Financial Corp., 6.021%, 3/19/1998 493,658
TOTAL COMMERCIAL PAPER 2,179,213
(A)NOTES - VARIABLE--24.8%
BANKING--18.2%
160,000 Alabama State IDA, (Wellborn Cabinet, Inc.), Tax Revenue Bonds, 160,000
(Amsouth Bank N.A., Birmingham LOC), 6.030%, 1/7/1998
188,000 Capital One Funding Corp., Series 1995-A, (Bank One, 188,000
Indianapolis, N.A. LOC), 6.030%, 1/1/1998
180,000 Denver Urban Renewal Authority, (Series 1992-B), (Banque 180,000
Paribas, Paris LOC), 6.250%, 1/1/1998
400,000 Edgefield County, SC, Series 1997 (Bondex Inc Project), (Marine 400,000
Midland Bank N.A., Buffalo, NY LOC), 5.906%, 1/1/1998
185,000 Franklin County, OH, Edison Wielding, Series 1995, (Huntington 185,000
National Bank, Columbus, OH LOC), 6.160%, 1/1/1998
1,000,000 Kenny, Donald R. and Cheryl A., Series 1996-C, (Star Bank, 1,000,000
N.A., Cincinnati LOC), 6.080%, 1/1/1998
400,000 La-Man Corp., (SouthTrust Bank of Alabama, Birmingham LOC), 400,000
6.050%, 1/2/1998
1,920,378 (b)Liquid Asset Backed Securities Trust, Series 1997-1, 1,920,378
(Westdeutsche Landesbank Girozentrale Swap Agreement), 5.688%,
1/15/1998
1,000,000 Long Lane Master Trust III, Series 1997-C, 5.780%, 1/7/1998 1,000,000
575,000 Madison, WI Community Development Authority, Series 1997-B 575,000
Hamilton Point Apts., (Bank One, Wisconsin, N.A. LOC), 6.130%,
1/1/1998
238,000 Maryland State IDFA, Human Genome, Series1994, (First National 238,000
Bank of Maryland, Baltimore LOC), 5.900%, 1/5/1998
330,000 Mississippi Business Finance Corp., Metalloy Project, (Comerica 330,000
Bank, Detroit, MI LOC), 5.825%, 1/1/1998
550,000 REAL I Funding Corp., Casto Realty Investments Series 1996, 550,000
(Huntington National Bank, Columbus, OH LOC), 6.030%, 1/1/1998
935,433 (b)Rabobank Optional Redemption Trust, Series 1997-101, 5.754%, 935,433
1/15/1998
370,000 Roby Company Ltd. Partnership, (Huntington National Bank, 370,000
Columbus, OH LOC), 6.030%, 1/1/1998
</TABLE>
FEDERATED PRIME MONEY FUND II
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(A)NOTES - VARIABLE--CONTINUED
BANKING--CONTINUED
$ 135,000 Southeast Regional Holdings, LLC, Series 1995-A, (Columbus Bank $ 135,000
and Trust Co., GA LOC), 5.830%, 1/1/1998
2,125,000 Trap Rock Industries, Inc., Series 1997, (Corestates Bank N.A., 2,125,000
Philadelphia, PA LOC), 5.900%, 1/7/1998
195,000 Vista Funding Corp., Series 1994-A, (Fifth Third Bank of 195,000
Northwestern OH LOC), 6.030%, 1/1/1998
TOTAL 10,886,811
INSURANCE--6.6%
1,000,000 General American Life Insurance Co., 6.141%, 1/21/1998 1,000,000
1,000,000 Jackson National Life Insurance Co., 5.820%, 1/25/1998 1,000,000
915,294 (b)Liquid Asset Backed Securities Trust, Series 1997-3 Senior 915,294
Notes, (Guaranteed by AMBAC), 5.906%, 3/27/1998
1,000,000 Travelers Insurance Company, 5.837%, 2/20/1998 1,000,000
TOTAL 3,915,294
TOTAL NOTES - VARIABLE 14,802,105
(C)REPURCHASE AGREEMENTS--39.2%
6,505,000 Fuji Government Securities, Inc., 6.600%, dated 12/31/1997, due 6,505,000
1/2/1998
856,000 Goldman Sachs Group, LP, 5.250%, dated 12/31/1997, due 1/2/1998 856,000
2,500,000 HSBC Securities, Inc., 6.800%, dated 12/31/1997, due 1/2/1998 2,500,000
6,000,000 PaineWebber Group, Inc., 6.600%, dated 12/31/1997, due 1/2/1998 6,000,000
2,500,000 Societe Generale, New York, 6.600%, dated 12/31/1997, due 2,500,000
1/2/1998
2,500,000 Swiss Bank Capital Markets, 6.550%, dated 12/31/1997, due 2,500,000
1/2/1998
2,500,000 UBS Securities, Inc., 6.800%, dated 12/31/1997, due 1/2/1998 2,500,000
TOTAL REPURCHASE AGREEMENTS 23,361,000
TOTAL INVESTMENTS (AT AMORTIZED COST)(D) $ 59,695,419
</TABLE>
(a) Floating rate note with current rate and next reset date shown.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At December 31, 1997, these securities
amounted to $3,771,105 which represents 6.3% of net assets.
(c) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investments in the repurchase agreements are through
participation in joint accounts with other Federated funds.
(d) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($59,659,343) at December 31, 1997.
The following acronyms are used throughout this portfolio:
AMBAC --American Municipal Bond Assurance Corporation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
IDFA --Industrial Development Finance Authority
LLC --Limited Liability Corporation
LOC --Letter of Credit
LP --Limited Partnership
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED PRIME MONEY FUND II
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Investments in repurchase agreements $ 23,361,000
Investments in securities 36,334,419
Total investments in securities, at amortized cost and value $ 59,695,419
Income receivable 481,706
Receivable for investments sold 375,010
Receivable for shares sold 1,588,781
Deferred organizational costs 7,477
Total assets 62,148,393
LIABILITIES:
Payable for shares redeemed 745,573
Payable to bank 1,706,393
Income distribution payable 514
Accrued expenses 36,570
Total liabilities 2,489,050
Net Assets for 59,659,343 shares outstanding $ 59,659,343
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
$59,659,343 / 59,659,343 shares outstanding $1.00
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED PRIME MONEY FUND II
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 3,464,429
EXPENSES:
Investment advisory fee $ 306,771
Administrative personnel and services fee 125,002
Custodian fees 23,110
Transfer and dividend disbursing agent fees and expenses 28,008
Trustees' fees 2,390
Auditing fees 12,794
Legal fees 4,953
Portfolio accounting fees 47,302
Share registration costs 5,283
Printing and postage 51,445
Insurance premiums 2,640
Miscellaneous 7,509
Total expenses 617,207
Waiver--
Waiver of investment advisory fee (123,674)
Net expenses 493,533
Net investment income $ 2,970,896
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED PRIME MONEY FUND II
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 2,970,896 $ 1,446,378
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (2,970,896) (1,446,378)
SHARE TRANSACTIONS--
Proceeds from sale of shares 247,591,033 214,683,781
Net asset value of shares issued to shareholders in payment of 2,968,806 1,446,378
distributions declared
Cost of shares redeemed (236,555,828) (188,312,731)
Change in net assets resulting from share transactions 14,004,011 27,817,428
Change in net assets 14,004,011 27,817,428
NET ASSETS:
Beginning of period 45,655,332 17,837,904
End of period $ 59,659,343 $ 45,655,332
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.05 0.05 0.05 0.01
LESS DISTRIBUTIONS
Distributions from net investment income (0.05) (0.05) (0.05) (0.01)
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
TOTAL RETURN(B) 4.93% 4.75% 5.20% 0.50%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.80% 0.80% 0.80% 0.80%*
Net investment income 4.84% 4.68% 5.12% 4.26%*
Expense waiver(c) 0.20% 0.57% 2.69% 71.84%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $59,659 $45,655 $17,838 $552
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from November 18, 1994 (date of
initial public investment) to December 31, 1994. For the period from
December 10, 1993 (start of business) to November 17, 1994, the Fund had no
public investment.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED PRIME MONEY FUND II
DECEMBER 31, 1997
ORGANIZATION
Federated Insurance Series (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act") as an open-end, management
investment company. The Trust consists of eight portfolios. The financial
statements included herein are only those of Federated Prime Money Fund II
(the "Fund"), a diversified portfolio. The financial statements of the other
portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The investment objective of the Fund is to provide current
income consistent with stability of principal and liquidity.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
The Fund uses the amortized cost method to value its portfolio securities in
accordance with Rule 2a-7 under the Act.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less
than the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code"). Distributions to shareholders are recorded on the
ex-dividend date.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable
to regulated investment companies and to distribute to shareholders each
year substantially all of its income. Accordingly, no provisions for federal
tax are necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The
Fund records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
RESTRICTED SECURITIES
Restricted securities are securities that may only be resold upon
registration under federal securities laws or in transactions exempt from
such registration. Many restricted securities may be resold in the secondary
market in transactions exempt from registration. In some cases, the
restricted securities may be resold without registration upon exercise of a
demand feature. Such restricted securities may be determined to be liquid
under criteria established by the Trustees. The Fund will not incur any
registration costs upon such resales. Restricted securities are valued at
amortized cost in accordance with Rule 2a-7 under the Act.
Additional information on the restricted security held at December 31, 1997
is as follows:
SECURITY ACQUISITION DATE ACQUISITION COST
Liquid Asset Backed Securities 2/19/1997 $ 1,920,378
Trust, Series 1997-1
Liquid Asset Backed Securities 6/27/1997 915,294
Trust, Series 1997-3
Rabobank Optional Redemption 4/17/1997 935,433
Trust, Series 1997-101
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, expenses, and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value). At
December 31, 1997, capital paid in aggregated $59,659,343.
Transactions in shares were as follows:
<TABLE>
Year Ended December 31,
1997 1996
<S> <C> <C>
Shares sold 247,591,033 214,683,781
Shares issued to shareholders in payment of distributions declared 2,968,806 1,446,378
Shares redeemed (236,555,828) (188,312,731)
Net change resulting from share transactions 14,004,011 27,817,428
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Advisers, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.50% of the
Fund's average daily net assets. The Adviser may voluntarily choose to waive
any portion of its fee. The Adviser can modify or terminate this voluntary
waiver at any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net
assets of all funds advised by subsidiaries of Federated Investors for the
period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent for the Fund. The
fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee.
The fee is based on the level of the Fund's average daily net assets for the
period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES
Organizational expenses of $22,431 were borne initially by the Adviser. The
Fund has reimbursed the Adviser for these expenses. These expenses have been
deferred and are being amortized over the five-year period following the
Fund's effective date. For the period ended December 31, 1997, the Fund
expensed $5,981 of organizational expenses.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors
or Trustees of the above companies.
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of the Federated Insurance Series and Shareholders
of FEDERATED PRIME MONEY FUND II:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated Prime Money Fund II, (a
portfolio of the Federated Insurance Series) as of December 31, 1997, and
the related statement of operations for the year then ended, the statement
of changes in net assets for the years ended December 31, 1997 and 1996, and
the financial highlights for the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned as of December 31, 1997, by correspondence with the
custodian and brokers; where replies were not received, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated Prime
Money Fund II as of December 31, 1997, the results of its operations, the
changes in its net assets and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP Pittsburgh, Pennsylvania
February 6, 1998
TRUSTEES
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
J. Christopher Donahue
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
J. Christopher Donahue
President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Richard B. Fisher
Vice President
Matthew S. Hardin
Assistant Secretary
Variable funds are not bank deposits or obligations, are not guaranteed by
any bank, and are not insured or guaranteed by the U.S. government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other government agency. Investment in variable funds involves investment
risk, including the possible loss of principal. Although money market funds
seek to maintain a stable net asset value of $1.00 per share, there is no
assurance that they will be able to do so.
This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectus which contains facts
concerning its objective and policies, management fees, expenses, and other
information.
[Graphic]
Federated Prime Money Fund II
Federated Insurance Series
ANNUAL REPORT TO SHAREHOLDERS
DECEMBER 31, 1997
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 313916504
G00842-01 (2/98)
[Graphic]Federated Investors
Federated International Equity Fund II
Federated Insurance Series
ANNUAL REPORT
TO SHAREHOLDERS
DECEMBER 31, 1997
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 313916603
G01077-01 (2/98)
[Graphic]
PRESIDENT'S MESSAGE
Dear Shareholder:
I am pleased to present the Annual Report to Shareholders for Federated
International Equity Fund II, a portfolio of Federated Insurance Series.
This report covers the 12-month fiscal year period from January 1, 1997
through December 31, 1997. It begins with a commentary by the fund's
portfolio manager, which is followed by a complete listing of the fund's
international stock holdings and the financial statements.
Federated International Equity Fund II brings you long-term growth
opportunities through a broadly diversified portfolio of stocks issued by
companies throughout the world. Investing in international stocks can smooth
out periodic ups and downs in U.S. stock performance because international
markets respond to different influences than U.S. markets.*
Despite an international stock market impacted by difficulties in the Asian
region, Federated International Equity Fund II produced a positive total
return of 10.08%.** A net asset value increase of 10% contributed most
heavily to the total return. The fund also paid dividends totaling $0.01 per
share. At the end of the reporting period, total assets reached $36 million.
Thank you for choosing Federated International Equity Fund II as a
diversified, professionally managed way to participate in the long-term
growth opportunities of international stocks. We look forward to keeping you
informed about your investment's progress.
Sincerely,
[Graphic]
J. Christopher Donahue
President
February 15, 1998
* Foreign investing involves special risks including currency risk,
increased volatility of foreign securities, and differences in auditing and
other financial standards.
** Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Performance information does not reflect the charges
and expenses of a variable annuity or variable life insurance contract.
MANAGEMENT DISCUSSION AND ANALYSIS
Q What is your review of the international equity markets during the fund's
fiscal year period?
A The international equity markets were marked by two distinct periods during
the current fiscal year. The first period was one of relatively strong and
consistent performance in the major European economies, huge outperformance
in Latin America and the emerging markets of eastern Europe and continued
sluggishness in Japan. This period lasted through September. The second
period, from September through the present, was marked by increased volatility
and uncertainty worldwide as a result of the Asian currency crisis. This
crisis quickly spread to the Latin American markets, as renewed fears of
devaluation affected entire countries, and the emerging markets in eastern
Europe. In the United Kingdom and western Europe, the effect was more
industry and stock specific. Investors tried to quantify exposure (through
exports, joint ventures, manufacturing, etc.) to Asian markets and how this
would affect companies' earnings prospects. This situation favored defensive
investing and those funds that avoided exposure to the Asian and Latin
American turmoil faired relatively well.
Q How did Federated International Equity Fund II perform during the period
compared to its benchmark, and what strategies influenced the fund's return?
A For the fiscal year ended December 31, 1997, Federated International Equity
Fund II produced a total return of 10.08% based on net asset value.* This
positive return was higher than the 1.78% return of the fund's benchmark, the
Morgan Stanley Capital International Europe, Australia and Far East Index
("EAFE Index") for the same period.** Additionally, the fund's return was
4.59% higher than the average total return of the 501 international equity
funds tracked by Lipper Analytical Services, 5.49%.***
The fund's positive performance was due primarily to two strategic decisions.
Firstly, the fund was heavily invested in European financial stocks (banks,
insurance companies, asset managers, etc.) that benefited significantly from
hot merger activity and consolidation within the financial services industry.
Secondly, the fund was significantly underweight in Asia, 17% of the
portfolio versus 35% for the EAFE Index, which was hurt by anemic growth in
Japan and the Asian financial crisis.
Q What accounted for the fund's ability to outperform the benchmark index?
A On a country level, the fund benefited from an underweighted position
relative to the EAFE Index weighting in Japan, as Japan's economy continued
its slow growth. However, with significant weakness in the yen/dollar
exchange rate, exporters--companies that receive revenue in dollars and have
their costs denominated in yen--continued to outperform the market.
Specifically, Sony and Nintendo were core holdings in this area, and they
continue to be beneficiaries of a strong U.S. dollar. In addition, the fund
benefited from investments in six Latin American markets, which performed
quite well during the early part of the year as economic growth was strong
and forecasted to remain that way (obviously, the situation has changed
since September and we have sold all positions in Latin America).
On an industry level, the fund outperformed the EAFE Index as a result of a
relative overweighting in European financial stocks. Mega-mergers across
Europe fueled stock price appreciation in this industry and led to the
realization of value in commercial banks, investment banks, insurers and
asset management firms. Going forward, this is still a significant part of
the fund's exposure and the potential for further consolidation looks
increasingly strong for the coming year.
* Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost. Performance information does not reflect the charges or
expenses of a variable annuity or variable life insurance contract.
** The Morgan Stanley Capital International Europe, Australia and Far East
Index (EAFE) is a market capitalization weighted foreign securities index,
which is widely used to measure the performance of European, Australian, New
Zealand and Far Eastern stock markets. The index covers approximately 1,020
companies drawn from 18 countries in the above regions. The index values its
securities daily in both U.S. dollars and local currency and calculates
total returns monthly. This index is unmanaged and investments cannot be
made in an index.
*** Lipper figures represent the average of the total returns reported by
all of the mutual funds designated by Lipper Analytical Services as falling
into the respective categories indicated. Lipper returns do not take sales
charges into account.
Q How were the fund's assets weighted among key regions?
A Approximately 8% of the fund's assets were in Japan, and 19% in the United
Kingdom. The balance was spread across 19 other countries. Country weightings
and top ten holdings as of December 31, 1997 were as follows:
PERCENTAGE PERCENTAGE
COUNTRY/REGION OF PORTFOLIO COUNTRY/REGION OF PORTFOLIO
Australia 3.86% Netherlands 3.02%
Austria 1.07% New Zealand 0.32%
Canada 5.74% Norway 5.37%
Denmark 1.64% Portugal 1.05%
Finland 4.57% Singapore 0.48%
France 10.67% South Africa 0.48%
Germany 8.18% Spain 1.58%
Hong Kong 0.51% Sweden 3.20%
Hungary 0.73% Switzerland 9.10%
Italy 7.31% United Kingdom 18.80%
Japan 7.57%
PERCENTAGE
TOP 10 HOLDINGS COUNTRY OF PORTFOLIO
Cable & Wireless Communications United Kingdom 1.99%
Rhone-Poulenc, Class A France 1.90%
Cadbury Schweppes PLC United Kingdom 1.85%
Credit Suisse Group-Registered Switzerland 1.81%
Nintendo Corp. Ltd. Japan 1.74%
Credito Italiano Ord Italy 1.71%
Novartis AG - REG Switzerland 1.69%
Bayerische Vereinsbank AG, Munich Germany 1.66%
Cap Gemini Sogeti France 1.54%
Lloyds TSB Group PLC United Kingdom 1.52%
Q What are some of your notable recent purchases for the fund?
A Recent purchases to the Federated International Equity Fund II include:
* CABLE & WIRELESS COMMUNICATIONS (1.99%): C&W Communications is an
integrated telecommunications company that operates throughout the
United Kingdom. The company provides telecommunication, television
entertainment and information services nationally in approximately 138
cities and towns. Of particular interest are C&W's internet services
and mobile telecommunications services.
* BENCKISER NV (0.77%): Benckiser is one of the world's leading
manufacturers of household detergents and cleaning agents.
Additionally, they are the leading supplier of products for the
automatic dishwashing process, one of the fastest growing sectors of
the household cleaning products industry.
* INCENTIVE AB (0.50%): Incentive AB is a holding company for a group of
international industrial companies within four main business areas:
medical technology, environment, material handling and development.
Incentive also has significant shareholdings in ABB, AB, and
Electrolux, while Gambro is a wholly-owned subsidiary.
* LINDT & SPRUENGLI AG (0.55%): Lindt & Spruengli manufactures and sells
a wide variety of chocolate, both in Switzerland and abroad. In
September, they announced a particularly interesting deal with the
Swiss and German postal services to provide greeting cards and praline
gift-boxes, guaranteed for delivery in 48 hours.
Q Looking ahead to 1998, what is your outlook for international equities?
Are initiatives underway that may have a positive impact on the economic
difficulties in the Asia Pacific region?
A The outlook for international equities remains strong for the coming year.
Economic growth is expected to rise from 2.6% this year to 2.8% next year.
This is primarily driven by strong growth in Germany, where gross domestic
product is forecasted to grow 3.0%. According to the Organization for Economic
Co-operation and Development, the financial turbulence in Asia may knock
roughly 1.0% off potential output from the world's leading economies. However,
overall economic growth is still forecasted at a healthy rate of 2.9%. In
addition, Asian currency weakness will help lower inflation as the rest of the
world continues to expand.
Recently, a ground-breaking global pact was reached, which will open banking,
insurance and securities markets to foreign competition. In a move that will
help restore confidence in Asia's crisis-ridden financial sector, the World
Trade Organization will lock market-opening commitments from 102 nations into
binding rules, which it has jurisdiction over. Almost immediately, this should
contribute to confidence in the region and, over the longer term, this pact
should enable Asian nations to attract renewed capital inflows.
FEDERATED INTERNATIONAL EQUITY FUND II
GROWTH OF $10,000 INVESTED IN THE FEDERATED INTERNATIONAL EQUITY FUND II
The graph below illustrates the hypothetical investment of $10,000* in the
Federated International Equity Fund II (the "Fund") from May 8, 1995 (start
of performance) to December 31, 1997, compared to the Morgan Stanley Capital
International Europe Australia Far-East Index (EAFE).+
[GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX FIEFII]
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED DECEMBER 31, 1997
1 Year 10.08%
Start of Performance (5/8/95) 8.26%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT
OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The EAFE has been adjusted to reflect reinvestment of
dividends on securities in the index.
+ The EAFE is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The index
is unmanaged.
PORTFOLIO OF INVESTMENTS
FEDERATED INTERNATIONAL EQUITY FUND II
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE IN
SHARES U.S. DOLLARS
<C> <S> <C>
COMMON STOCKS--93.7%
AUSTRALIA--3.9%
BANKING--0.8%
53,616 St. George Bank Ltd. $ 304,119
BROADCASTING & PUBLISHING--0.8%
51,000 News Corp., Ltd. 281,536
ENERGY - OIL & GAS--0.5%
43,875 Santos Limited 180,724
ENERGY SOURCES--0.8%
42,000 Woodside Petroleum Ltd. 296,181
FINANCIAL SERVICES--1.0%
140,000 (a)Suncorp-Metway Ltd. 351,293
TOTAL AUSTRALIA 1,413,853
CANADA--5.7%
BUSINESS & PUBLIC SERVICES--0.5%
14,000 Mackenzie Financial Corp. 179,770
FINANCIAL SERVICES--1.0%
5,900 Investors Group, Inc. 186,613
5,400 Newcourt Credit Group, Inc. 180,812
TOTAL 367,425
LEISURE & TOURISM--1.3%
69,500 (a)Legacy Hotels 471,747
MISCELLANEOUS MATERIALS & COMMODITIES--0.9%
4,100 Potash Corporation of Saskatchewan, Inc. 341,559
TELECOMMUNICATIONS--2.0%
5,500 BCE, Inc. 183,391
1,700 (a)Bell Canada International, Inc. 25,993
24,000 TELUS Corp. 532,382
TOTAL 741,766
TOTAL CANADA 2,102,267
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND II
<TABLE>
<CAPTION>
VALUE IN
SHARES U.S. DOLLARS
<C> <S> <C>
COMMON STOCKS--CONTINUED
DENMARK--1.6%
ELECTRONIC COMPONENTS, INSTRUMENTS--0.8%
11,600 (a)Olicom A/S $ 300,150
HEALTH & PERSONAL CARE--0.8%
2,100 Novo-Nordisk, Class B 300,355
TOTAL DENMARK 600,505
FINLAND--4.6%
BANKING--0.7%
50,000 Merita Ltd., Class A 273,347
BUSINESS & PUBLIC SERVICES--0.8%
2,500 TT Tieto OY, Class B 281,144
ELECTRICAL & ELECTRONICS--0.7%
3,400 Nokia AB-A 241,389
FOOD & HOUSEHOLD PRODUCTS--0.5%
4,300 (a)Huhtamaki Oy, Class I 177,492
MANUFACTURING--0.8%
9,000 Nokian Renkaat 285,638
MISCELLANEOUS MATERIALS & COMMODITIES--1.1%
23,400 Asko Oyj 416,404
TOTAL FINLAND 1,675,414
FRANCE--10.7%
BANKING--1.3%
2,520 CLF-Dexia France 291,840
2,250 Compagnie Financiere de Paribas, Class A 195,522
TOTAL 487,362
BROADCASTING & PUBLISHING--1.5%
2,875 Canal Plus 534,539
BUSINESS & PUBLIC SERVICES--0.5%
2,500 Cap Gemini Sogeti 204,993
CHEMICALS--2.1%
17,171 Rhone-Poulenc, Class A 769,179
2,271 Rhone-Poulenc, Warrants 7,811
TOTAL 776,990
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND II
<TABLE>
<CAPTION>
VALUE IN
SHARES U.S. DOLLARS
<C> <S> <C>
COMMON STOCKS--CONTINUED
FRANCE--CONTINUED
ELECTRONIC COMPONENTS, INSTRUMENTS--0.2%
1,518 Schneider SA $ 82,426
ENERGY EQUIPMENT & SERVICES--1.0%
3,200 Coflexip SA 353,576
ENERGY SOURCES--0.9%
2,900 Total SA-B 315,610
HEALTH & PERSONAL CARE--1.1%
3,500 Sanofi SA 389,632
INSURANCE--2.1%
4,900 AXA 379,153
8,060 Scor SA 385,423
TOTAL 764,576
TOTAL FRANCE 3,909,704
GERMANY--7.6%
AUTOMOBILE--0.6%
3,330 (a)Daimler Benz AG 233,606
BANKING--2.4%
8,700 Bankgesellschaft Berlin AG 191,512
8,100 Bayerische Vereinsbank AG, Munich 529,959
3,280 Dresdner Bank AG, Frankfurt 151,333
TOTAL 872,804
CONSTRUCTION & HOUSING--0.4%
6,900 Tarkett AG Manufacturers 159,176
ELECTRICAL & ELECTRONICS--0.9%
5,630 Siemens AG 333,303
ELECTRONIC COMPONENTS, INSTRUMENTS--0.6%
5,200 (a)Singulus Technologies AG 213,613
MACHINERY & ENGINEERING--1.0%
227 Mannesmann SA 114,702
1,200 Thyssen AG 256,816
TOTAL 371,518
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND II
<TABLE>
<CAPTION>
VALUE IN
SHARES U.S. DOLLARS
<C> <S> <C>
COMMON STOCKS--CONTINUED
GERMANY--CONTINUED
UTILITIES - ELECTRICAL & GAS--1.7%
5,350 RWE AG $ 286,987
620 Viag AG 333,961
TOTAL 620,948
TOTAL GERMANY 2,804,968
HONG KONG--0.5%
MULTI-INDUSTRY--0.5%
30,000 Hutchison Whampoa 188,153
TOTAL HONG KONG 188,153
HUNGARY--0.7%
BANKING--0.7%
7,000 OTP Bank RT, GDR 266,000
TOTAL HUNGARY 266,000
ITALY--7.3%
AUTOMOBILE--0.6%
140,000 Magneti Marelli SPA 239,401
BANKING--4.0%
15,200 Bca Pop Bergamo-CV 265,506
63,500 Bca Pop Di Milano 398,445
137,000 Credito Italiano 422,462
31,000 Imi 368,005
TOTAL 1,454,418
BUSINESS & PUBLIC SERVICES--0.7%
23,500 (a)Aeroporti di Roma SPA 243,768
MULTI-INDUSTRY--0.6%
250,000 Montedison SPA 224,562
TELECOMMUNICATIONS--1.4%
107,000 Telecom Italia SPA 515,319
TOTAL ITALY 2,677,468
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND II
<TABLE>
<CAPTION>
VALUE IN
SHARES U.S. DOLLARS
<C> <S> <C>
COMMON STOCKS--CONTINUED
JAPAN--7.6%
AUTOMOBILE--0.3%
23,000 Sanden Corp. $ 98,644
ELECTRICAL & ELECTRONICS--1.6%
12,000 Aiwa Co. Ltd. 302,367
3,000 Sony Corp. 266,524
TOTAL 568,891
FINANCIAL SERVICES--1.2%
1,500 Shohkoh Fund & Co. 457,226
INDUSTRIAL COMPONENTS--1.1%
18,000 (a)Bridgestone Corp. 390,136
RECREATION, OTHER CONSUMER GOODS--2.3%
8,000 Fuji Photo Film Co. 306,349
5,500 Nintendo Corp. Ltd. 539,174
TOTAL 845,523
TELECOMMUNICATIONS--1.1%
48 Nippon Telegraph & Telephone Corp. 411,733
TOTAL JAPAN 2,772,153
NETHERLANDS--3.0%
ELECTRICAL & ELECTRONICS--0.3%
10,000 (a)Toolex Alpha NV 101,102
ENERGY SOURCES--0.5%
3,440 Royal Dutch Petroleum Co. 188,825
FINANCIAL SERVICES--0.7%
6,000 ING Groep, NV 252,706
FOOD & HOUSEHOLD PRODUCTS--0.8%
7,000 (a)Benckiser NV 289,646
MULTI-INDUSTRY--0.2%
2,254 Hunter Douglas NV 78,926
RECREATION, OTHER CONSUMER GOODS--0.5%
4,100 PolyGram NV 196,138
TOTAL NETHERLANDS 1,107,343
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND II
<TABLE>
<CAPTION>
VALUE IN
SHARES U.S. DOLLARS
<C> <S> <C>
COMMON STOCKS--CONTINUED
NEW ZEALAND--0.3%
TELECOMMUNICATIONS--0.3%
24,000 Telecom Corp. of New Zealand $ 116,362
TOTAL NEW ZEALAND 116,362
NORWAY--5.4%
DATA PROCESSING & REPRODUCTION--0.9%
10,000 Merkantildata ASA 343,903
ENERGY - OIL & GAS--0.9%
16,000 Aker Maritime Group ASA 340,112
TELECOMMUNICATIONS--3.6%
43,000 (a)NetCom ASA 1,042,135
21,000 (a)Tandberg Television 241,680
TOTAL 1,283,815
TOTAL NORWAY 1,967,830
PORTUGAL--1.1%
TELECOMMUNICATIONS--1.1%
8,300 Portugal Telecom SA 385,124
TOTAL PORTUGAL 385,124
SINGAPORE--0.5%
ELECTRONIC COMPONENTS, INSTRUMENTS--0.5%
8,000 (a)Creative Technology Ltd. 176,000
TOTAL SINGAPORE 176,000
SOUTH AFRICA--0.5%
DATA PROCESSING & REPRODUCTION--0.5%
40,993 Dimension Data Holdings Ltd. 176,894
TOTAL SOUTH AFRICA 176,894
SPAIN--1.6%
CONSTRUCTION & HOUSING--0.4%
3,520 Fomento de Construcciones y Contratas SA 134,007
ENERGY SOURCES--0.6%
4,940 Repsol SA 210,765
TELECOMMUNICATIONS--0.6%
8,200 Telefonica de Espana 234,132
TOTAL SPAIN 578,904
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND II
<TABLE>
<CAPTION>
VALUE IN
SHARES U.S. DOLLARS
<C> <S> <C>
COMMON STOCKS--CONTINUED
SWEDEN--3.2%
BANKING--0.4%
12,000 Skand Enskilda BKN, Class A $ 151,891
BROADCASTING & PUBLISHING--0.3%
4,250 Marieberg Tidnings AB, Class A 99,560
BUSINESS & PUBLIC SERVICES--0.4%
7,600 WM-Data AB 137,357
INDUSTRIAL COMPONENTS--0.5%
2,000 Incentive AB, Class A 180,103
INSURANCE--0.9%
7,150 Skandia Forsakrings AB 337,243
TELECOMMUNICATIONS--0.7%
7,000 (a)Europolitan Holdings AB 267,132
TOTAL SWEDEN 1,173,286
SWITZERLAND--9.1%
BANKING--2.3%
2,500 Credit Suisse Group 386,668
300 UBS - Union Bank of Switzerland 433,616
TOTAL 820,284
CHEMICALS--0.9%
400 Clariant AG 333,972
FOOD & HOUSEHOLD PRODUCTS--1.5%
376 Nestle SA 563,279
FOOD PROCESSING--0.5%
10 Lindt & Spruengli AG 192,992
HEALTH & PERSONAL CARE--1.3%
163 Novartis AG 264,379
20 Roche Holding AG 198,535
TOTAL 462,914
INSURANCE--1.3%
180 Schw Rueckversicherungs 336,545
315 Zurich Versicherungsgesellschaft 150,041
TOTAL 486,586
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND II
<TABLE>
<CAPTION>
VALUE IN
SHARES U.S. DOLLARS
<C> <S> <C>
COMMON STOCKS--CONTINUED
SWITZERLAND--CONTINUED
LEISURE & TOURISM--0.3%
32 Reiseburo Kuoni AG, Class B $ 119,901
MANUFACTURING--0.6%
12,400 (a)Mettler Toledo International, Inc., ADR 213,900
TRANSPORTATION - AIRLINES--0.4%
100 Sairgroup 136,874
TOTAL SWITZERLAND 3,330,702
UNITED KINGDOM--18.8%
AEROSPACE & MILITARY TECHNOLOGY--0.5%
7,000 British Aerospace 199,482
BANKING--3.1%
40,000 Bank of Scotland, Edinburgh 363,321
11,500 Barclays PLC 306,147
36,000 Lloyds TSB Group PLC 468,345
TOTAL 1,137,813
BEVERAGE & TOBACCO--2.3%
31,000 Allied Domecq PLC 267,826
67,000 Gallaher Group PLC 356,004
17,000 Scottish & Newcastle PLC 208,162
TOTAL 831,992
BEVERAGES--0.4%
14,157 Diageo PLC 129,518
BROADCASTING & PUBLISHING--0.9%
35,000 Reed International PLC 333,428
ELECTRICAL & ELECTRONICS--0.9%
50,800 General Electric Co. PLC 329,167
FOOD & HOUSEHOLD PRODUCTS--1.8%
46,000 Cadbury Schweppes PLC 464,270
13,000 Reckitt & Colman PLC 203,916
TOTAL 668,186
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND II
<TABLE>
<CAPTION>
VALUE IN
SHARES U.S. DOLLARS
<C> <S> <C>
COMMON STOCKS--CONTINUED
UNITED KINGDOM--CONTINUED
HEALTH & PERSONAL CARE--1.5%
12,500 Glaxo Wellcome PLC $ 298,007
49,000 Smith & Nephew PLC 144,869
3,000 (a)Zeneca Group 106,264
TOTAL 549,140
LEISURE & TOURISM--1.2%
7,000 Airtours PLC 142,569
20,000 Rank Group PLC 111,362
35,000 Regent Inns PLC 187,984
TOTAL 441,915
PHARMACEUTICALS--0.4%
55,000 Medeva PLC 146,347
RECREATION, OTHER CONSUMER GOODS--0.4%
17,000 EMI Group PLC 141,846
TELECOMMUNICATIONS--2.3%
170,000 (a)Cable & Wireless Communications PLC 737,154
28,000 (a)Energis PLC 117,275
TOTAL 854,429
TOBACCO--0.9%
37,000 B.A.T. Industries PLC 337,409
TRANSPORTATION - SHIPPING--0.2%
34,000 American Port Services 71,202
UTILITIES - ELECTRICAL & GAS--2.0%
51,000 National Grid Group PLC 242,088
15,000 National Power Co. PLC 147,825
37,000 Scottish Power PLC 326,956
TOTAL 716,869
TOTAL UNITED KINGDOM 6,888,743
TOTAL COMMON STOCKS (IDENTIFIED COST $31,185,257) 34,311,673
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND II
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL VALUE IN
AMOUNT U.S. DOLLARS
<C> <S> <C>
PREFERRED STOCKS--1.6%
AUSTRIA--1.1%
BANKING--1.1%
8,700 (a)Bank Austria AG, Pfd. $ 392,590
TOTAL AUSTRIA 392,590
GERMANY--0.5%
BROADCASTING & PUBLISHING--0.5%
4,120 (a)Pro Sieben Media AG, Preference 192,383
TOTAL GERMANY 192,383
TOTAL PREFERRED STOCKS (IDENTIFIED COST $535,741) 584,973
(B)REPURCHASE AGREEMENT--3.3%
$ 1,205,000 BT Securities Corp., 6.60%, dated 12/31/1997, due 1/2/1998 (at 1,205,000
amortized cost)
TOTAL INVESTMENTS (IDENTIFIED COST $32,925,998)(C) $ 36,101,646
</TABLE>
(a) Non-income producing security.
(b) The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
(c) The cost of investments for federal tax purposes amounts to $32,958,000.
The net unrealized appreciation of investments on a federal tax basis
amounts to $3,143,646 which is comprised of $4,208,754 appreciation and
$1,065,108 depreciation at December 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($36,574,957) at December 31, 1997.
The following acronyms are used throughout this portfolio:
ADR --American Depository Receipt
GDR --Global Depository Receipt
PLC --Public Limited Company
SPA --Standby Purchase Agreement
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED INTERNATIONAL EQUITY FUND II
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost $32,925,998 $ 36,101,646
and tax cost $32,958,000)
Cash 188,307
Cash denominated in foreign currencies (identified cost $29,540) 29,210
Income receivable 62,534
Receivable for investments sold 273,748
Receivable for shares sold 26,721
Net receivable for foreign currency exchange contracts 1,811
Deferred organizational costs 10,052
Total assets 36,694,029
LIABILITIES:
Payable for shares redeemed $ 90,329
Payable for taxes withheld 5,116
Accrued expenses 23,627
Total liabilities 119,072
NET ASSETS for 2,980,850 shares outstanding $ 36,574,957
NET ASSETS CONSIST OF:
Paid in capital $ 33,354,140
Net unrealized appreciation of investments and translation of assets and 3,168,626
liabilities in foreign currency
Accumulated net realized gain on investments and foreign currency 52,191
transactions
Total Net Assets $ 36,574,957
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
$36,574,957 / 2,980,850 shares outstanding $12.27
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED INTERNATIONAL EQUITY FUND II
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld of $59,688) $ 433,772
Interest 121,500
Total income 555,272
EXPENSES:
Investment advisory fee $ 273,830
Administrative personnel and services fee 125,002
Custodian fees 66,335
Transfer and dividend disbursing agent fees and expenses 18,017
Directors'/Trustees' fees 1,508
Auditing fees 12,855
Legal fees 3,211
Portfolio accounting fees 61,794
Share registration costs 6,147
Printing and postage 39,714
Insurance premiums 2,430
Miscellaneous 6,043
Total expenses 616,886
Waiver of investment advisory fee (273,316)
Net expenses 343,570
Net investment income 211,702
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Net realized loss on investments and foreign currency (37,491)
transactions (net of foreign taxes withheld of $152)
Net change in unrealized appreciation of investments and 2,044,058
translation of assets and liabilities in foreign currency
Net realized and unrealized gain on investments and foreign 2,006,567
currency
Change in net assets resulting from operations $ 2,218,269
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED INTERNATIONAL EQUITY FUND II
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 211,702 $ 94,720
Net realized gain (loss) on investments and foreign currency (37,491) (231,600)
transactions ($225,019 net gain and $155,662 net loss, respectively,
as computed for federal tax purposes)
Net change in unrealized appreciation/depreciation of investments 2,044,058 1,010,299
and translation of assets and liabilities in foreign currency
Change in net assets resulting from operations 2,218,269 873,419
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (25,486) (31,449)
SHARE TRANSACTIONS--
Proceeds from sale of shares 18,823,244 12,772,774
Net asset value of shares issued to shareholders in payment of 25,486 31,448
distributions declared
Cost of shares redeemed (2,218,272) (654,035)
Change in net assets resulting from share transactions 16,630,458 12,150,187
Change in net assets 18,823,241 12,992,157
NET ASSETS:
Beginning of period 17,751,716 4,759,559
End of period (including undistributed net investment income of $0 $ 36,574,957 $ 17,751,716
and $22,969, respectively)
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.16 $10.35 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.07 0.11** 0.07
Net realized and unrealized gain on investments and foreign currency 1.05 0.75 0.28
Total from investment operations 1.12 0.86 0.35
LESS DISTRIBUTIONS
Distributions from net investment income (0.01) (0.05) --
NET ASSET VALUE, END OF PERIOD $12.27 $11.16 $10.35
TOTAL RETURN(B) 10.08% 8.32% 3.50%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.23% 1.25% 1.22%*
Net investment income 0.76% 0.89% 1.63%*
Expense waiver/reimbursement(c) 0.98% 3.05% 11.42%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $36,575 $17,752 $4,760
Average commission rate paid(d) $0.0068 $0.0030 --
Portfolio turnover 179% 103% 34%
</TABLE>
* Computed on an annualized basis.
** Per share information presented is based upon the monthly average number
of shares outstanding.
(a) Reflects operations for the period from May 5, 1995 (date of initial
public investment) to December 31, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were charged.
This disclosure is required for fiscal years beginning on or after
September 1, 1995.
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED INTERNATIONAL EQUITY FUND II
DECEMBER 31, 1997
ORGANIZATION
Federated Insurance Series (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act") as an open-end, management
investment company. The Trust consists of eight portfolios. The financial
statements included herein are only those of Federated International Equity
Fund II (the "Fund"), a diversified portfolio. The financial statements of
the other portfolios are presented separately. The assets of each portfolio
are segregated and a shareholder's interest is limited to the portfolio in
which shares are held. The investment objective of the Fund is to obtain a
total return on its assets.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
Listed equity securities are valued at the last sale price reported on a
national securities exchange. Short-term securities are valued at the prices
provided by an independent pricing service. However, short-term securities
with remaining maturities of sixty days or less at the time of purchase may
be valued at amortized cost, which approximates fair market value. With
respect to valuation of foreign securities, trading in foreign cities may be
completed at times which vary from the closing of the New York Stock
Exchange. Therefore, foreign securities are valued at the latest closing
price on the exchange on which they are traded prior to the closing of the
New York Stock Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. Dollars at the foreign exchange rate in effect at noon,
eastern time, on the day the value of the foreign security is determined.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less
than the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code"). Dividend income and distributions to shareholders are
recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
mortgage-backed securities, market discount, foreign currency transactions,
partnerships, non-taxable dividends, net operating losses, expiring capital
loss carryforwards, wash sales, futures and options, and post-October
losses. The following reclassifications have been made to the financial
statements.
INCREASE (DECREASE)
ACCUMULATED DISTRIBUTIONS IN
PAID IN NET REALIZED EXCESS OF NET
CAPITAL GAIN/LOSS INVESTMENT INCOME
($61,790) $270,975 ($209,185)
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable
to regulated investment companies and to distribute to shareholders each
year substantially all of its income. Accordingly, no provisions for federal
tax are necessary.
However, federal taxes may be imposed on the Fund upon the disposition of
certain investments in passive foreign investment companies. Withholding
taxes on foreign interest and dividends have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and
rates.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The
Fund records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
FOREIGN EXCHANGE CONTRACTS
The Fund may enter into foreign currency commitments for the delayed
delivery of securities or foreign currency exchange transactions. Purchased
contracts are used to acquire exposure to foreign currencies; whereas,
contracts to sell are used to hedge the Fund's securities against currency
fluctuations. Risks may arise upon entering these transactions from the
potential inability of counterparts to meet the terms of their commitments
and from unanticipated movements in security prices or foreign exchange
rates. The foreign currency transactions are adjusted by the daily exchange
rate of the underlying currency and any gains or losses are recorded for
financial statement purpose as unrealized until the settlement date.
At December 31, 1997, the Fund had outstanding foreign currency commitments
as set forth below:
<TABLE>
<CAPTION>
CONTRACTS SETTLEMENT FOREIGN CURRENCY IN EXCHANGE CONTRACTS UNREALIZED
SOLD DATE UNITS TO DELIVER FOR AT VALUE APPRECIATION
<S> <C> <C> <C> <C> <C>
British Pounds 1/2/1998 164,660 $272,265 $270,454 $1,811
</TABLE>
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. All
assets and liabilities denominated in foreign currencies ("FC") are
translated into U.S. dollars based on the rate of exchange of such
currencies against U.S. dollars on the date of valuation. Purchases and
sales of securities, income, and expenses are translated at the rate of
exchange quoted on the respective date that such transactions are recorded.
Differences between income and expense amounts recorded and collected or
paid are adjusted when reported by the custodian bank. The Fund does not
isolate that portion of the results of operations resulting from changes in
foreign exchange rates on investments from the fluctuations arising from
changes in market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from: sales of
portfolio securities; sales and maturities of short-term securities; sales
of FCs; currency gains or losses realized between the trade and settlement
dates on securities transactions; the difference between the amounts of
dividends, interest, and foreign withholding taxes recorded on the Fund's
books; and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized foreign exchange gains and losses arise from changes in
the value of assets and liabilities other than investments in securities at
fiscal year end, resulting from changes in the exchange rate.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, expenses, and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
<S> <C> <C>
Shares sold 1,577,537 1,188,525
Shares issued to shareholders in payment of distributions declared 2,349 3,009
Shares redeemed (189,323) (60,899)
Net change resulting from share transactions 1,390,563 1,130,635
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Global Research Corp., the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee
equal to 1.00% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive any portion of its fee. The Adviser can modify
or terminate this voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net
assets of all funds advised by subsidiaries of Federated Investors for the
period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent for the Fund. The
fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee.
The fee is based on the level of the Fund's average daily net assets for the
period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES
Organizational expenses of $15,465 were borne initially by the Adviser. The
Fund has reimbursed the Adviser for these expenses. These expenses have been
deferred and are being amortized over the five-year period following the
Fund's effective date. For the year ended December 31, 1997, the Fund
expensed $10,052 of organizational expenses.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors
or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended December 31, 1997, were as follows:
PURCHASES $60,751,430
SALES $45,058,428
CONCENTRATION OF CREDIT RISK
The Fund invests in securities of non-U.S. issuers. Although the Fund
maintains a diversified investment portfolio, the political or economic
developments within a particular country or region may have an adverse
effect on the ability of domiciled issuers to meet their obligations.
Additionally, political or economic developments may have an effect on the
liquidity and volatility of portfolio securities and currency holdings.
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of the Federated Insurance Series and Shareholders
of FEDERATED INTERNATIONAL EQUITY FUND II:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated International Equity
Fund II (a portfolio of the Federated Insurance Series) as of December 31,
1997, and the related statement of operations for the year then ended, the
statement of changes in net assets for the years ended December 31, 1997 and
1996, and the financial highlights for the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned as of December 31, 1997, by correspondence with the
custodian and brokers; where replies were not received, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated
International Equity Fund II as of December 31, 1997, the results of its
operations, the changes in its net assets and its financial highlights for
the respective stated periods in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 6, 1998
TRUSTEES
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
J. Christopher Donahue
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
DIRECTORS
John F. Donahue
Chairman
J. Christopher Donahue
President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Richard B. Fisher
Vice President
Matthew S. Hardin
Assistant Secretary
Variable funds are not bank deposits or obligations, are not guaranteed by
any bank, and are not insured or guaranteed by the U.S. government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other government agency. Investment in variable funds involves investment
risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectus which contains facts
concerning its objective and policies, management fees, expenses, and other
information.
NOTES
NOTES
PRESIDENT'S MESSAGE
Dear Shareholder:
I am pleased to present the Annual Report to Shareholders for Federated
Growth Strategies Fund II, a portfolio of Federated Insurance Series.
This report covers the 12-month period from January 1, 1997 through December
31, 1997. It begins with a commentary by the fund's portfolio manager, which
is followed by a complete listing of the fund's stock holdings and the
fund's financial statements.
Federated Growth Strategies Fund IIis managed to help shareholders pursue
long-term growth through a highly diversified portfolio of mid- and
large-capitalization stocks selected for their strong price and earnings
momentum. At the end of the reporting period, the fund's 127 stock holdings
were diversified across 12 key business and industrial sectors. Many of the
holdings--including AT&T, BankAmerica, Coca-Cola, Compaq, Harley-Davidson,
HBO & Co., Intel, Pfizer, Sony, and Quaker Oats--are household names.
In a strong and volatile year for stocks, this diversified portfolio
produced a strong total return of 27.03%, primarily through a significant
26.10% increase in net asset value. The fund also paid dividends from income
of $0.02 per share, and capital gains distributions of $0.07 per share.*
During the reporting period, fund net assets continued to increase, reaching
$47 million.
Thank you for choosing Federated Growth Strategies Fund II as a diversified,
professionally managed way to participate in the long-term growth potential
of American companies. We trust you were pleased with the positive
performance of your investment. As always, we welcome your comments and
suggestions.
Sincerely,
[Graphic]
J. Christopher Donahue
President
February 15, 1998
* Performance quoted reflects past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost. Performance information does not reflect the charges and
expenses of a variable life insurance contract.
MANAGEMENT DISCUSSION AND ANALYSIS
CURRENT STRATEGY
The tone for the fourth quarter of 1997 was set during the last two weeks of
October 1997, when the markets suddenly realized that near-term economic
growth in certain Asian countries was more problematic than certain. This
led to a dramatic downward revaluation of the effected countries' currencies
and capital markets. The impact on the U.S. stock market, aside from a
terrific one-day thumping, was that there was now material uncertainty with
regard to how fast U.S. companies could grow earnings over the next year or
two. This doubt was caused by fears that exports to Asia would likely slow
(thanks to moderating local demands and a stronger dollar) and that cheaper
Asian imports to the U.S. would threaten domestically produced goods.
The result of the Asian transformation from hero to scapegoat was that
investors began to pay premiums for securities that offered stability, and
demand discounts for those that entailed higher risk. Summary effects
included:
* the Standard & Poor's 500 Index* (an index of larger stocks) returned
2.9% for the fourth quarter (33.4% for the year), while the Standard &
Poor's 600 Small Cap Index* lost 3.1% (up 25.6% in 1997) and the NASDAQ
Over-the-Counter Composite Index** lost 6.8% (up 22.4% in 1997),
* cyclicals lost ground (the Morgan Stanley Cyclical Index*** was down
8.6%), while staples gained (the Morgan Stanley Consumer Index*** was
up 10.0%), and
* aided by their high quality and continued lower inflation, U.S.
Treasury bonds rallied, lowering long-term interest rates from almost
6.4% to nearly 5.9%.
The fund felt the effects of the changes in market sentiment. The fund left
the third quarter with the wind in its sails, benefiting from the trend of
moderating domestic economic growth favoring smaller growth stocks. The
Asian turmoil, however, as mentioned above, caused investors to rapidly
migrate toward the stability of larger stocks. As a result, the fund was
down 5.7% for the fourth quarter and had a total return for the year of
27.0%. Despite a weak fourth quarter, the fund did outperform the average
fund in the universe of Lipper Growth Funds,+ which was up 25.6% for the
year.
The fund came into the fourth quarter with overweights in the Technology and
Energy sectors. Since purchase of technology products was viewed as
deferrable, the market sold technology stocks down 10% or more. Energy
service stocks traded off 20% or more as the market started to question the
growth in demand for oil from developing countries. The fund also came into
the fourth quarter underweighted in two of the sectors that performed very
well, Consumer Non-Durables and Utilities. The stability of their albeit
more modest earnings growth made them attractive to investors, pushing these
stocks up 10% or more in the fourth quarter.
We believe that the uncertainty of the effect of the Asian problems on the
U.S. economy will not be resolved until well into 1998. Consequently, the
market should continue to favor companies that offer stable growth. This
situation should bode well for larger-capitalized Health Care, Consumer
Non-Durable and domestically focused Services stocks. As a result, we are
working to moderate the overweights we have in the sectors less likely to
benefit and focusing on the areas mentioned above.
We do believe, however, that as the uncertainty passes, investors will
return to the stocks that offer higher secular growth. They will then be
less willing to pay for stability and more willing to take on risk. As this
happens, the market should again favor the smaller, faster growing companies
that did so well in the third quarter.
* Standard and Poor's 500 Index and Standard and Poor's 600 Small Cap Index
are unmanaged composite indices of common stocks in industrial,
transportation, and financial and public utility companies, and can be used
to compare total returns of funds whose portfolios are invested primarily in
common stocks. Investments cannot be made in an index.
** NASDAQ Over-the-Counter Composite Index is an unmanaged index covering
4,500 stocks traded over the counter. It represents many small company
stocks, but is heavily influenced by about 100 of the largest NASDAQ
stocks. Investments cannot be made in an index.
*** Morgan Stanley Cyclical Index is an unmanaged broadly diversified index
of 30 common stocks designed to measure the performance of economically
sensitive industries through changes in the average returns of the
component stocks. Morgan Stanley Consumer Index is an unmanaged
equally-weighted index of 30 common stocks designed to measure the
performance of consumer-oriented stable growth industries through changes
in the average returns of the component stocks. Investments cannot be made
in an index.
+ Lipper figures represent the average of the total returns reported by all
of the mutual funds designated by Lipper Analytical Services, Inc. as
falling into the respective categories indicated. Lipper returns do not take
sales charges into account.
COMMENTS REGARDING SELECTED HOLDINGS OR PURCHASES
Chancellor Media Corp.: AMFM is the largest pure-play radio company and the
second largest overall with 99 stations in the largest 21 markets. Its
stations are well positioned for growth due to steady ratings gains and a
rising national advertising presence.
EMC Corp.: A leading manufacturer of enterprise-scale data storage devices,
EMC Corp. is enjoying the growth seen as networks increase in number and
grow in size. The company should continue to benefit from the shift from
mainframes to servers, a trend that should last for years to come.
Consolidated Cigar Holdings Inc.: The country's leading manufacturer and
distributor of premium cigars, with brands such as H. Upman, Montecristo and
Don Diego. The company sells nearly 1 billion cigars a year, has nearly 25%
of the U.S. market, and should continue to benefit from the strong demand
for premium, branded cigars.
Advanced Fibre Communications: AFCI designs and sells one of the most
flexible and scaleable next generation digital loop carrier systems on the
market. The company is well positioned to benefit from the prevailing trends
in the carrier equipment industry, most notably the shift in spending
towards local loop equipment and the build-out of undeveloped countries'
telecommunications infrastructure.
FEDERATED GROWTH STRATEGIES FUND II
GROWTH OF $10,000 INVESTED IN THE FEDERATED GROWTH STRATEGIES FUND II
The graph below illustrates the hypothetical investment of $10,000* in the
Federated Growth Strategies Fund II (the "Fund") from November 9, 1995
(start of performance) to December 31, 1997, compared to the Standard and
Poor's 500 Index (S&P 500)+ and the Lipper Growth Fund Index (LGFI).++
[Graphic representation omitted. See Appendix fgsfii.]
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT
OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The S&P 500 and the LGFI have been adjusted to reflect
reinvestment of dividends on securities in the indices.
+ The S&P 500 is not adjusted to reflect sales charges, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. The
index is unmanaged.
++ The LGFI is not adjusted to reflect any sales charges. However, these
total returns are reported net of expenses or other fees that the SEC
requires to be reflected in a fund's performance. Lipper figures represent
the average of the total returns reported by all of the mutual funds
designated by Lipper Analytical Services, Inc. as falling into the
respective categories indicated. The index is unmanaged.
PORTFOLIO OF INVESTMENTS
FEDERATED GROWTH STRATEGIES FUND II
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--96.7%
BASIC INDUSTRY--3.0%
5,300 Avery Dennison Corp. $ 237,175
7,700 (a)Lone Star Technologies, Inc. 218,488
6,600 Martin Marietta Materials 241,313
10,000 (a)Royal Group Technologies Ltd. 231,875
4,700 Southdown, Inc. 277,300
2,300 Vulcan Materials Co. 234,888
TOTAL 1,441,039
CONSUMER DURABLES--2.1%
18,100 (a)Furniture Brands International, Inc. 371,050
7,000 Harley Davidson, Inc. 191,625
5,700 Oakwood Homes Corp. 189,169
2,400 Sony Corp., ADR 217,800
TOTAL 969,644
CONSUMER NON-DURABLES--12.6%
8,700 Coca-Cola Co. 579,638
11,600 (a)Consolidated Cigar Holdings, Inc. 319,725
3,700 Gillette Co. 371,619
9,200 (a)Jones Apparel Group, Inc. 395,600
12,900 Philip Morris Cos., Inc. 584,531
9,600 Procter & Gamble Co. 766,200
6,000 Quaker Oats Co. 316,500
12,400 RJR Nabisco Holdings Corp. 465,000
9,000 (a)Smithfield Foods, Inc. 297,000
6,700 St. John Knits, Inc. 268,000
7,700 (a)Tommy Hilfiger Corp. 270,463
7,700 UST, Inc. 284,419
8,600 Universal Corp. 353,675
9,600 Wolverine World Wide, Inc. 217,200
5,700 Wrigley (Wm.), Jr. Co. 453,506
TOTAL 5,943,076
</TABLE>
FEDERATED GROWTH STRATEGIES FUND II
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
ENERGY MINERALS--5.9%
4,100 (a)BJ Services Co. $ 294,944
7,400 Baker Hughes, Inc. 322,825
3,645 British Petroleum Co. PLC, ADR 290,461
5,700 Diamond Offshore Drilling, Inc. 274,313
8,300 (a)Friede Goldman International, Inc. 247,963
6,700 Halliburton Co. 347,981
3,900 Schlumberger Ltd. 313,950
5,100 (a)Smith International, Inc. 313,013
7,000 Tosco Corp. 264,688
8,000 (a)TransCoastal Marine Services, Inc. 114,000
TOTAL 2,784,138
FINANCE--19.4%
10,300 Ahmanson (H.F.) & Co. 689,456
4,900 Allstate Corp. 445,288
3,100 American International Group, Inc. 337,125
7,800 Bank of New York Co., Inc. 450,938
5,500 BankAmerica Corp. 401,500
14,800 (a)Catellus Development Corp. 296,000
12,200 Conseco, Inc. 554,338
8,200 (a)E*Trade Group, Inc. 188,600
5,000 Equitable Cos., Inc. 248,750
14,800 Frontier Insurance Group, Inc. 338,550
10,400 (a)Golden State Bancorp, Inc. 388,700
25,687 MBNA Corp. 701,576
3,200 MGIC Investment Corp. 212,800
7,000 Mellon Bank Corp. 424,375
6,600 Merrill Lynch & Co., Inc. 481,388
11,425 Morgan Stanley, Dean Witter, Discover & Co. 675,503
9,100 Old Republic International Corp. 338,406
5,900 Raymond James Financial, Inc. 234,156
4,500 SunAmerica, Inc. 192,375
6,900 T. Rowe Price Associates 433,838
8,600 Torchmark Corp. 361,738
</TABLE>
FEDERATED GROWTH STRATEGIES FUND II
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
FINANCE--CONTINUED
14,349 Travelers Group, Inc. $ 773,052
TOTAL 9,168,452
HEALTH CARE--15.3%
4,900 (a)Centocor, Inc. 162,925
6,300 (a)Dura Pharmaceuticals, Inc. 289,013
5,700 Guidant Corp. 354,825
11,800 HBO & Co. 566,400
12,500 (a)HEALTHSOUTH Corp. 346,875
4,200 Johnson & Johnson 276,675
6,900 Lilly (Eli) & Co. 480,413
7,500 (a) MedPartners, Inc. 167,813
4,300 Merck & Co., Inc. 456,875
15,600 Omnicare, Inc. 483,600
7,900 Pfizer, Inc. 589,044
8,300 (a)Phycor, Inc. 224,100
9,200 (a)Quintiles Transnational Corp. 351,900
10,100 (a)Safeskin Corp. 573,175
7,800 Schering Plough Corp. 484,575
9,000 Smithkline Beecham Corp., ADR 462,938
7,400 (a)Universal Health Services, Inc., Class B 372,775
4,900 Warner-Lambert Co. 607,600
TOTAL 7,251,521
PRODUCER MANUFACTURING--5.5%
7,200 (a)EVI, Inc. 372,600
12,300 General Electric Co. 902,513
10,000 (a)Halter Marine Group, Inc. 288,750
4,900 Miller Herman, Inc. 267,356
5,300 Precision Castparts Corp. 319,656
10,000 Tyco International, Ltd. 450,625
TOTAL 2,601,500
RETAIL TRADE--5.8%
10,100 (a)CompUSA, Inc. 313,100
16,700 (a)General Nutrition Cos., Inc. 567,800
</TABLE>
FEDERATED GROWTH STRATEGIES FUND II
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
RETAIL TRADE--CONTINUED
11,000 Home Depot, Inc. $ 647,625
19,350 Pier 1 Imports, Inc. 437,794
5,800 (a)Safeway, Inc. 366,850
12,700 TJX Cos., Inc. 436,563
TOTAL 2,769,732
SERVICES--5.0%
10,600 (a)Allied Waste Industries, Inc. 247,113
14,658 (a)Cendant Corp. 503,888
3,500 (a)Chancellor Media Corp., Class A 261,188
11,700 (a)Corrections Corp. America 433,631
8,700 (a)Liberty Media Group, Class A, Series A (LBTYA) 315,375
4,500 Service Corp. International 166,219
12,200 (a)Snyder Communications, Inc. 445,300
TOTAL 2,372,714
TECHNOLOGY--14.9%
13,000 (a)Advanced Fibre Communications 378,625
4,500 (a)America Online, Inc. 401,344
1 (a)Analog Devices, Inc. 28
7,300 (a)Applied Materials, Inc. 219,913
3,000 (a)BMC Software, Inc. 196,875
11,100 (a)Cadence Design Systems, Inc. 271,950
6,800 (a)Check Point Software Technologies Ltd. 277,100
8,400 (a)Cisco Systems, Inc. 468,300
9,100 Compaq Computer Corp. 513,581
4,700 Dallas Semiconductor Corp. 191,525
8,000 (a)EMC Corp. Mass 219,500
8,400 (a)HNC Software 361,200
4,400 Intel Corp. 309,100
4,500 Lucent Technologies, Inc. 359,438
11,000 (a)Mastech Corp. 349,250
4,900 (a)Microsoft Corp. 633,325
11,500 (a)Ortel Corp. 181,125
6,000 (a)Peoplesoft, Inc. 234,000
</TABLE>
FEDERATED GROWTH STRATEGIES FUND II
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
TECHNOLOGY--CONTINUED
6,300 (a)Rambus, Inc. $ 288,225
9,400 (a)SCI Systems, Inc. 409,488
11,500 (a)Sandisk Corp. 233,594
5,700 (a)Sun Microsystems, Inc. 227,288
6,000 (a)Tellabs, Inc. 317,250
TOTAL 7,042,024
TRANSPORTATION--1.3%
6,100 Expeditors International Washington, Inc. 234,850
15,600 Southwest Airlines Co. 384,150
TOTAL 619,000
UTILITIES--5.9%
4,600 AT&T Corp. 281,750
9,300 (a)Airtouch Communications, Inc. 386,531
9,500 Cincinnati Bell, Inc. 294,500
6,700 Coastal Corp. 414,981
9,200 (a)ICG Communications, Inc. 250,700
16,200 (a)IXC Communications, Inc. 508,275
6,200 (a)PanAmSat Corp. 267,375
6,800 (a)Teleport Communications Group, Inc., Class A 373,150
TOTAL 2,777,262
TOTAL COMMON STOCKS (IDENTIFIED COST $40,401,343) 45,740,102
U.S. TREASURY OBLIGATIONS--1.7%
$ 750,000 United States Treasury Bond, 6.625%, 2/15/2027 814,613
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST $809,883) 814,613
(B)REPURCHASE AGREEMENTS--3.0%
1,395,000 BT Securities Corp., 6.60%, dated 12/31/1997, due 1/2/1998 (at 1,395,000
amortized cost)
TOTAL INVESTMENTS (IDENTIFIED COST $42,606,226)(C) $ 47,949,715
</TABLE>
(a) Non-income producing security.
(b) The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
(c) The cost of investments for federal tax purposes amounts to $42,643,341.
The net unrealized appreciation of investments on a federal tax basis
amounts to $5,306,374 which is comprised of $6,498,386 appreciation and
$1,192,012 depreciation at December 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($47,280,356) at December 31, 1997.
The following acronyms are used throughout this portfolio:
ADR --American Depository Receipt
PLC --Public Limited Company
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED GROWTH STRATEGIES FUND II
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost $ 47,949,715
$42,606,226 and tax cost $42,643,341)
Cash 3,047
Income receivable 47,978
Receivable for investments sold 460,023
Receivable for shares sold 10,563
Total assets 48,471,326
LIABILITIES:
Payable for investments purchased $ 1,163,508
Payable for shares redeemed 876
Payable for taxes withheld 543
Accrued expenses 26,043
Total liabilities 1,190,970
Net Assets for 2,928,503 shares outstanding $ 47,280,356
NET ASSETS CONSIST OF:
Paid in capital $ 38,957,206
Net unrealized appreciation of investments 5,343,489
Accumulated net realized gain on investments 2,932,263
Undistributed net investment income 47,398
Total Net Assets $ 47,280,356
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
$47,280,356 / 2,928,503 shares outstanding $16.14
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED GROWTH STRATEGIES FUND II
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld of $2,379) $ 220,745
Interest 107,023
Total income 327,768
EXPENSES:
Investment advisory fee $ 245,993
Administrative personnel and services fee 125,002
Custodian fees 12,497
Transfer and dividend disbursing agent fees and expenses 20,296
Trustees' fees 1,816
Auditing fees 10,384
Legal fees 2,970
Portfolio accounting fees 50,399
Share registration costs 6,252
Printing and postage 20,148
Insurance premiums 2,556
Taxes 90
Miscellaneous 1,996
Total expenses 500,399
Waivers and reimbursements--
Waiver of investment advisory fee $ (168,091)
Reimbursement of other operating expenses (51,988)
Total waivers and reimbursements (220,079)
Net expenses 280,320
Net investment income 47,448
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 2,940,396
Net change in unrealized appreciation of investments 3,823,952
Net realized and unrealized gain on investments 6,764,348
Change in net assets resulting from operations $ 6,811,796
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED GROWTH STRATEGIES FUND II
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 47,448 $ 37,473
Net realized gain on investments ($2,977,511 and $110,051 net gains, 2,940,396 101,778
respectively, as computed for federal tax purposes)
Net change in unrealized appreciation of investments 3,823,952 1,511,965
Change in net assets resulting from operations 6,811,796 1,651,216
NET EQUALIZATION CREDITS (DEBITS)-- 141,139 72,517
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (37,404) (700)
Distributions from net realized gains on investments (109,551) --
Change in net assets resulting from distributions to shareholders (146,955) (700)
SHARE TRANSACTIONS (EXCLUSIVE OF AMOUNTS ALLOCATED TO NET INVESTMENT
INCOME)--
Proceeds from sale of shares 24,630,467 15,118,252
Net asset value of shares issued to shareholders in payment of 146,049 698
distributions declared
Cost of shares redeemed (1,286,989) (224,666)
Change in net assets resulting from share transactions 23,489,527 14,894,284
Change in net assets 30,295,507 16,617,317
NET ASSETS:
Beginning of period 16,984,849 367,532
End of period (including undistributed net investment income of $ 47,280,356 $ 16,984,849
$47,398 and $37,360, respectively)
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.80 $10.30 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.02** 0.05 0.03
Net realized and unrealized gain on investments 3.41 2.45 0.27
Total from investment operations 3.43 2.50 0.30
LESS DISTRIBUTIONS
Distributions from net investment income (0.02) (0.004) --
Distributions from net realized gain on investments (0.07) -- --
Total distributions (0.09) (0.004) --
NET ASSET VALUE, END OF PERIOD $16.14 $12.80 $10.30
TOTAL RETURN(B) 27.03% 24.32% 3.00%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.85% 0.85% 0.85%*
Net investment income 0.14% 0.55% 1.91%*
Expense waiver/reimbursement(c) 0.67% 3.87% 76.95%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $47,280 $16,985 $368
Average commission rate paid(d) $0.0566 $0.0376 --
Portfolio turnover 148% 96% 4%
</TABLE>
* Computed on an annualized basis.
** Per share information presented is based upon the monthly average number
of shares outstanding.
(a) Reflects operations for the period from November 9, 1995 (date of
initial public investment) to December 31, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were
charged. This disclosure is required for fiscal years beginning on or
after September 1, 1995.
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED GROWTH STRATEGIES FUND II
DECEMBER 31, 1997
ORGANIZATION
Federated Insurance Series (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act") as an open-end, management
investment company. The Trust consists of eight portfolios. The financial
statements included herein are only those of Federated Growth Strategies
Fund II (the "Fund"), a diversified portfolio. The financial statements of
the other portfolios are presented separately. The assets of each portfolio
are segregated and a shareholder's interest is limited to the portfolio in
which shares are held. The investment objective of the Fund is capital
appreciation.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
Listed equity securities are valued at the last sale price reported on a
national securities exchange. Short-term securities are valued at the prices
provided by an independent pricing service. However, short-term securities
with remaining maturities of sixty days or less at the time of purchase may
be valued at amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to guidelines and/or
standards reviewed or established by the Board of Trustees ("Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less
than the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code"). Dividend income and distributions to shareholders are
recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principals. These differences are primarily due to differing treatments for
accumulated equalization and foreign currency transactions. The following
reclassifications have been made to the financial statements.
INCREASE (DECREASE)
ACCUMULATED
NET REALIZED UNDISTRIBUTED NET
PAID-IN CAPITAL GAIN/LOSS INVESTMENT INCOME
$141,139 $6 $(141,145)
Net investment income, net realized gains/losses, and
net assets were not affected by this reclassification.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable
to regulated investment companies and to distribute to shareholders each
year substantially all of its income. Accordingly, no provisions for federal
tax are necessary.
EQUALIZATION
The Fund follows the accounting practice known as equalization. With
equalization, a portion of the proceeds from sales and costs of redemptions
of fund shares (equivalent, on a per share basis, to the amount of
undistributed net investment income on the date of the transaction) is
credited or charged to undistributed net investment income. As a result,
undistributed net investment income per share is unaffected by sales or
redemptions of fund shares.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The
Fund records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, expenses, and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 1996
<S> <C> <C>
Shares sold 1,679,568 1,310,281
Shares issued to shareholders in payment of distributions declared 11,313 64
Shares redeemed (89,183) (19,226)
Net change resulting from share transactions 1,601,698 1,291,119
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Advisers, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.75% of the
Fund's average daily net assets. The Adviser may voluntarily choose to waive
any portion of its fee and/or reimburse certain operating expenses of the
Fund. The Adviser can modify or terminate this voluntary waiver and/or
reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net
assets of all funds advised by subsidiaries of Federated Investors for the
period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent for the Fund. The
fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee.
The fee is based on the level of the Fund's average daily net assets for the
period, plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors
or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended December 31, 1997, were as follows:
PURCHASES $69,957,324
SALES $45,927,567
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of the Federated Insurance Series and Shareholders
of Federated Growth Strategies Fund II:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated Growth Strategies Fund
II (a portfolio of the Federated Insurance Series) as of December 31, 1997,
and the related statement of operations for the year then ended, the
statement of changes in net assets for the years ended December 31, 1997 and
1996, and the financial highlights for the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned as of December 31, 1997, by correspondence with the
custodian and brokers; where replies were not received, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated Growth
Strategies Fund II as of December 31, 1997, the results of its operations,
the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 6, 1998
TRUSTEES
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
J. Christopher Donahue
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
J. Christopher Donahue
President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Richard B. Fisher
Vice President
Matthew S. Hardin
Assistant Secretary
Variable funds are not bank deposits or obligations, are not guaranteed by
any bank, and are not insured or guaranteed by the U.S. government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other government agency. Investment in variable funds involves investment
risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectus, which contains facts
concerning its objective and policies, management fees, expenses, and other
information.
[Graphic] Federated Investors
Federated Growth Strategies Fund II
Federated Insurance Series
ANNUAL REPORT TO SHAREHOLDERS DECEMBER 31, 1997
[Graphic]
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-245-7400
www.federatedinvestors.com
Cusip 313916702
G00433-07 (2/98)
[Graphic]
[Graphic]
FEDERATED INVESTORS
FEDERATED EQUITY INCOME FUND II
Federated Insurance Series
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
[Graphic]
ANNUAL REPORT
TO SHAREHOLDERS
DECEMBER 31, 1997
Cusip 313916801
G00433-09 (2/98)
PRESIDENT'S MESSAGE
Dear Fellow Shareholder:
I am pleased to present the first Annual Report to Shareholders for
Federated Equity Income Fund II, a portfolio of Federated Insurance Series.
This report covers the period from January 30, 1997--when the fund began
operation--through December 31, 1997. It begins with a commentary by the
fund's portfolio manager, which is followed by a complete listing of the
fund's stock holdings and the financial statements.
Federated Equity Income Fund II is managed to attempt to help your money
earn income and grow in value by investing primarily in a diversified
portfolio of dividend-paying stocks. At the end of the reporting period, the
fund's 66 stock holdings were diversified across 12 key business and
industrial sectors. Many of the holdings--including Avon, Bristol-Myers
Squibb, DuPont, Exxon, Ford, General Electric, and J.C. Penney--are
household names.
Over the 11-month reporting period, the fund produced a total return of
19.19% through income totaling $0.15 per share and a 17% increase in net
asset value.* By the end of the period, fund assets reached $32 million.
Thank you for choosing Federated Equity Income Fund II as a diversified,
professionally managed way to participate in the income and growth potential
of American companies. We hope you were pleased with the positive
performance of your investment. As always, we welcome your comments and
suggestions.
Sincerely,
[Graphic]
J. Christopher Donahue
President
February 15, 1998
* Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Performance information does not reflect the charges
and expenses of a variable annuity or variable life insurance contract.
MANAGEMENT DISCUSSION AND ANALYSIS
MARKET OBSERVATIONS
The U.S. stock market completed an exceedingly strong year in 1997, adding
numerous first-time statistics to the record books.
* For the first time in history the U.S. stock market posted three years of
gains in excess of 20%.
* The current bull market is unprecedented in its duration since the
1990 bottom.
* The market has completed an unprecedented streak of seven straight years
without a down year.
From inception on January 30, 1997 through December 31, 1997, Federated Equity
Income Fund II had a total return of 21.80%,* beating the Dow Jones Industrial
Average return of 18.01% in the same period, and somewhat lagging the 25.90%
return of the Lipper Equity Income peers,** owing largely to our more defensive
posture. The return of the Standard & Poor's 500 Index ("S&P 500")*** was
25.84% for the period in a narrow advance wherein the largest 50 stocks
accounted for over 70% of the 1997 return. Defensively postured, the Fund
outperformed the S&P 500 during all 12 corrections of 2% or more during the
period and continued to provide a current dividend yield that was
consistently 50% greater than the S&P 500's yield.
We have stated in previous quarters that the market is historically
overvalued and pricing in a perfect environment for stocks. In recent
months, we have seen evidence that the environment is not perfect as the
currency crisis in Asia has devastated many emerging country stock markets
and economies. Interestingly, the nearly 10% decline in the S&P 500 in late
October, which was spurred by Asian concerns, was completely recovered in
just six weeks. This was surely an impressive comeback, but our outlook for
1998 must include some thoughts on the deep and spreading crisis abroad.
Asia represents one-third of the global economy. Now in recession, its
near-term prospects will certainly dampen export growth for many U.S.
companies selling abroad. Currently, 15% of U.S. gross domestic product is
directly linked to foreign trade. However, a twin concern is the impact on
U.S. imports. To Asia, and much of the world, the U.S. is considered the
consumer of last resort and the last growth engine in the global economy. We
may see a flood of cheap Asian imports. (For the first time in a generation,
economists are concerned about the prospect of "deflation.") For American
companies, this tougher foreign competition could further reduce their
already weak pricing power. With rising wage rate pressures, margins will
likely be squeezed.
This brings about another concern, that 1998 earnings estimates for
companies are too high. According to Ned Davis Research, Inc. the current
expansion's earnings growth rate of 10.8% is 52% above the earnings growth
rate since 1947. Much of the profit growth has been driven by productivity
improvements and declining interest rates. The earnings growth rate in 1998
will quite likely be lower than that experienced in recent years. This
concern is logical given the behavior of the stock and bond market in recent
months. Stock prices have been falling while bond prices have been rising,
historically a signal of a weakening economy.
There are some very positive signs for the stock market, however. Inflation
has been decelerating, producing rising real wages. The U.S. economy has
remained strong, and a recent survey shows a 28-year high in consumer
confidence. Though the U.S. stock market appears overvalued at 24.6 times
1997 earnings, the risk is cushioned by continuing declines in long-term
interest rates. Finally, the demand for U.S. stocks is quite strong, both by
U.S. households and by foreign investors seeking a "safe haven."
* Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Performance information does not reflect the charges
and expenses of a variable annuity or variable life insurance contract.
** Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services as falling into
the respective category indicated. Lipper returns do not take into account
sales charges.
*** Standard & Poor's 500 Index is an unmanaged composite index of
common stocks in industrial, transportation, and financial and public
utility companies, and can be used to compare the total returns of
funds whose portfolios are invested primarily in common stocks. Investments
cannot be made in an index.
CURRENT STRATEGY
We are concerned that the market is still priced as if the environment were
perfect. Only time will tell the extent to which U.S. corporate earnings
growth will fall due to Asian problems. We believe that U.S. corporate
earnings will be impacted for some period of time. Recent strength has been
seen in stocks of companies with predictable revenue and earnings growth, and
companies which are larger and domestic in operations. These are the "quality"
companies that we have historically purchased for inclusion in the portfolio.
We plan to remain fully invested and sector neutral in our portfolio
weightings. Finally, we plan to maintain our defensive posture, emphasizing
inexpensive, high-quality, dividend-yielding stocks, and continuing the
prominent use of convertible securities for their yield and downside
protection.
COMMENTS ON SELECTED TRANSACTIONS
In the Basic Industries sector, we eliminated our position in Eastman
Chemical Co. due to concerns about commodity chemical prices in the
wake of the Asian crisis. We purchased Crown Cork & Seal Co., a leading
packaging company which we felt was quite undervalued.
In the Consumer Durables sector, we sold Mattel, Inc. Cvt. Pfd. which had
performed very well, but which, because of appreciation, had lost the
defensive qualities we seek in convertible securities. We purchased Cooper
Tire & Rubber Co., a leading manufacturer of replacement tires, enjoying
increasing market share and the highest margins in the industry.
In the Finance sector, we increased our number of holdings, owing to the
increasing weight of this sector in the S&P 500 and our desire to position a
basket of real estate investment trusts ("REITs"). REITs are valued for
their high dividend yield and stable earnings growth, which provide
defensive qualities. We purchased the following REITs, representing
diversity geographically and by business purpose: Colonial Properties Trust,
Equity Residential Properties Trust, Liberty Property Trust, New Plan Realty
Trust, and Post Properties, Inc. Further, we sold the National Australia
Bank Cvt. Pfd. with concerns about the effect of Asia's problems on its
business. We bought General RE Corp. a large reinsurance company which has
produced long-term consistent earnings. We also purchased Morgan Stanley,
Dean Witter, Discover & Co, a leading investment brokerage company, poised
to enjoy the benefits of its merger.
In the Health Care sector, we eliminated Aetna Cvt. Pfd. after a series of
earnings disappointments. We purchased two value-oriented companies, Baxter
International, a leading pharmaceutical company and U.S. Surgical Corp., a
manufacturer and distributor of medical supplies.
In the Technology sector, we eliminated our Quantum Cvt. Bond positions due
to disk drive pricing pressures emanating from Asia. We purchased the
extremely defensive Microsoft Corp. Cvt. Pfd. and another attractively
structured convertible bond of Adaptec, Inc., a market leader in small
computer systems interface.
Finally, in the Utilities sector, we increased our electric utility
exposure, buying CMS Energy, Pacificorp, and Texas Utilities. We also
purchased Sonat, Inc. after an exploration and production disappointment
reduced the stock price significantly. We sold the CalEnergy Co., Inc. Cvt.
Pfd. since much of its growth was forecasted to be in Asia and is now
vulnerable, and we sold Duke Power Co., which we felt was fully valued.
FEDERATED EQUITY INCOME FUND II
GROWTH OF $10,000 INVESTED IN FEDERATED EQUITY INCOME FUND II
The graph below illustrates the hypothetical investment of $10,000* in
the Federated Equity Income Fund II (the "Fund") from January 30, 1997
(start of performance) to December 31, 1997, compared to the Standard
and Poor's 500 Index (S&P 500)+ and the Lipper Equity Income Fund Index
(LEIFI)+.
[GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX FEIFII]
CUMULATIVE TOTAL RETURN FOR THE PERIOD ENDED DECEMBER 31, 1997
Start of Performance (1/30/97) 19.19%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT
OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The S&P 500 and the LEIFI have been adjusted to reflect
reinvestment of dividends on securities in the indices.
+ The S&P 500 and the LEIFI are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the
Fund's performance. The indices are unmanaged.
PORTFOLIO OF INVESTMENTS
FEDERATED EQUITY INCOME FUND II
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--65.1%
BASIC INDUSTRY--4.0%
14,900 Allegheny Teledyne, Inc. $ 385,538
8,000 Crown Cork & Seal Co., Inc. 401,000
4,100 Du Pont (E.I.) de Nemours & Co. 246,256
4,400 Imperial Chemical Industries, PLC, ADR 285,725
CONSUMER DURABLES--2.2%
TOTAL 1,318,519
14,500 Cooper Tire & Rubber Co. 353,438
7,200 Ford Motor Co. 350,550
CONSUMER NON-DURABLES--9.7%
TOTAL 703,988
7,000 Avon Products, Inc. 429,625
11,875 Diageo PLC, ADR 449,766
17,500 Dial Corp. 364,219
11,500 General Mills, Inc. 823,688
11,600 Heinz (H.J.) Co. 589,425
11,800 Philip Morris Cos., Inc. 534,688
TOTAL 3,191,411
ENERGY MINERALS--5.2%
9,000 Exxon Corp. 550,688
8,600 Mobil Corp. 620,813
15,400 YPF Sociedad Anonima, ADR 526,488
TOTAL 1,697,989
FINANCE--12.7%
1,500 Barnett Banks, Inc. 107,813
8,000 Block (H&R), Inc. 358,500
6,000 Colonial Properties Trust 180,750
3,500 Equity Residential Properties Trust 176,969
14,900 First Union Corp. 763,625
3,400 General RE Corp. 720,800
5,600 Liberty Property Trust 159,950
10,000 Mellon Bank Corp. 606,250
7,300 Morgan Stanley, Dean Witter, Discover & Co. 431,613
</TABLE>
FEDERATED EQUITY INCOME FUND II
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
FINANCE--CONTINUED
4,500 NationsBank Corp. $ 273,656
7,000 New Plan Realty Trust 178,500
4,800 Post Properties, Inc. 195,000
TOTAL 4,153,426
HEALTH CARE--7.2%
3,700 American Home Products Corp. 283,050
12,100 Baxter International, Inc. 610,294
4,600 Bristol-Myers Squibb Co. 435,275
5,300 Merck & Co., Inc. 563,125
16,000 U.S. Surgical Corp. 469,000
TOTAL 2,360,744
PRODUCER MANUFACTURING---4.8%
14,500 Dresser Industries, Inc. 608,094
7,300 General Electric Co. 535,638
6,900 Textron, Inc. 431,250
TOTAL 1,574,982
RETAIL TRADE--1.7%
9,500 Penney (J.C.) Co., Inc. 572,969
SERVICES--0.9%
7,600 Browning-Ferris Industries, Inc. 281,200
TECHNOLOGY--6.0%
11,100 Avnet, Inc. 732,600
4,000 General Dynamics Corp. 345,750
4,600 International Business Machines Corp. 480,988
4,100 Lockheed Martin Corp. 403,850
TOTAL 1,963,188
TRANSPORTATION--1.3%
7,000 Union Pacific Corp. 437,063
UTILITIES--9.4%
8,900 CMS Energy Corp. 392,156
12,263 Enron Corp. 509,681
13,000 Pacificorp 355,063
6,000 SBC Communications, Inc. 439,500
6,400 Sonat, Inc. 292,800
</TABLE>
FEDERATED EQUITY INCOME FUND II
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS--CONTINUED
UTILITIES--CONTINUED
5,100 Sprint Corp. $ 298,988
10,000 Texas Utilities Co. 415,625
13,000 Williams Cos., Inc. (The) 368,875
TOTAL 3,072,688
TOTAL COMMON STOCKS (IDENTIFIED COST $19,716,373) 21,328,167
CONVERTIBLE PREFERRED STOCKS--17.1%
BASIC INDUSTRY--0.7%
6,800 Merrill Lynch & Co., Inc., STRYPES, Series IML 234,600
CONSUMER NON-DURABLES--1.5%
7,000 Ralston Purina Co., SAILS, $1.08 487,375
ENERGY MINERALS--0.9%
5,200 Unocal Corp., Cumulative Conv. Pfd., $3.13 295,230
FINANCE--4.8%
9,600 Conseco, Inc., Cumulative PRIDES, Series F, $3.50 492,000
6,500 Frontier Insurance Group, Inc., Conv. Pfd., $3.13 380,250
800 Jefferson-Pilot Corp., Conv. Pfd., $5.26 85,600
2,800 Merrill Lynch & Co., Inc., STRYPES, Series MGIC, $3.12 310,800
2,200 SunAmerica, Inc., PERCS, Series E, $3.10 286,000
TOTAL 1,554,650
HEALTH CARE--0.9%
13,200 MedPartners, Inc., Conv. Pfd., $1.44 290,400
PRODUCER MANUFACTURING--2.2%
1,750 Case Corp., Cumulative Conv. Pfd., Series A, $4.50 252,670
10,200 (a)EVI, Inc., Cumulative Conv. Pfd., $2.50 472,964
TOTAL 725,634
SERVICES--2.7%
3,700 Browning-Ferris Industries, Inc., ACES, $2.58 125,800
33,200 Hollinger International Publishing, Inc., Conv. Pfd., $.95 427,450
6,300 Wendy's International, Inc., Cumulative Conv. Pfd., Series A, $2.50 346,500
TOTAL 899,750
</TABLE>
FEDERATED EQUITY INCOME FUND II
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
CONVERTIBLE PREFERRED STOCKS--CONTINUED
TECHNOLOGY--2.1%
7,500 Microsoft Corp., Cumulative Conv. Pfd., Series A, $2.20 $ 674,063
UTILITIES--1.3%
3,300 Williams Cos., Inc. (The), Conv. Pfd., $3.50 441,448
TOTAL CONVERTIBLE PREFERRED STOCKS (IDENTIFIED COST $5,538,169) 5,603,150
CONVERTIBLE CORPORATE BONDS--12.4%
CONSUMER DURABLES--0.7%
195,000 Magna International, Inc., Conv. Bond, 5.00%, 10/15/2002 233,926
ENERGY MINERALS--1.4%
450,000 Loews Corp., Conv. Bond, 3.125%, 9/15/2007 454,590
HEALTH CARE--2.0%
200,000 Dura Pharmaceuticals, Inc., Conv. Bond, 3.50%, 7/15/2002 223,094
450,000 Tenet Healthcare Corp., Conv. Bond, 6.00%, 12/1/2005 427,010
TOTAL 650,104
RETAIL TRADE--2.5%
750,000 (a)Costco Cos., Inc., Conv. Bond, 8/19/2017 443,865
275,000 Federated Department Stores, Inc., Conv. Bond, 5.00%, 10/1/2003 371,938
TOTAL 815,803
SERVICES--1.1%
345,000 (a)Omnicom Group, Inc., Conv. Bond, 2.25%, 1/6/2013 363,975
TECHNOLOGY--4.7%
400,000 Adaptec, Inc., Conv. Bond, 4.75%, 2/1/2004 409,348
170,000 EMC Corp. Mass, Conv. Bond, 3.25%, 3/15/2002 230,019
75,000 (a)EMC Corp. Mass, Sub. Note, 3.25%, 3/15/2002 101,479
340,000 (a)Solectron Corp., Conv. Bond, 6.00%, 3/1/2006 468,088
350,000 (a)Xilinx, Inc., Conv. Sub. Note, 5.25%, 11/1/2002 343,427
TOTAL 1,552,361
TOTAL CONVERTIBLE CORPORATE BONDS (IDENTIFIED COST $4,173,795) 4,070,759
</TABLE>
FEDERATED EQUITY INCOME FUND II
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(B)REPURCHASE AGREEMENT--8.6%
$ 2,825,000 BT Securities Corp., 6.60%, dated 12/31/1997, due 1/2/1998
(at amortized cost) $ 2,825,000
TOTAL INVESTMENTS (IDENTIFIED COST $32,253,337)(C) $ 33,827,076
</TABLE>
(a) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At December 31, 1997, these securities amounted
to $2,193,798 which represents 6.7% of net assets.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(c) The cost of investments for federal tax purposes amounts to $32,328,066.
The net unrealized appreciation of investments on a federal tax basis amounts
to $1,499,010 which is comprised of $2,013,698 appreciation and $514,688
depreciation at December 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($32,875,237) at December 31, 1997.
The following acronyms are used throughout this portfolio:
ACES --Adjustable Convertible Extendable Securities
ADR --American Depository Receipt
PERCS --Preferred Equity Redemption Cumulative Stock
PLC --Public Limited Company
PRIDES --Preferred Redeemable Increased Dividend Equity Securities
SAILS --Stock Appreciation Income Linked Security
STRYPES --Structured Yield Product Exchangeable for Stock
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED EQUITY INCOME FUND II
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost $ 33,827,076
$32,253,337 and tax cost $32,328,066)
Cash 1,149
Income receivable 89,196
Receivable for investments sold 206,972
Receivable for shares sold 108,016
Total assets 34,232,409
LIABILITIES:
Payable for investments purchased $ 1,325,768
Accrued expenses 31,404
Total liabilities 1,357,172
NET ASSETS for 2,671,092 shares outstanding $ 32,875,237
NET ASSETS CONSIST OF:
Paid in capital $ 31,155,415
Net unrealized appreciation of investments 1,573,739
Accumulated net realized loss on investments (65,125)
Undistributed net investment income 211,208
Total Net Assets $ 32,875,237
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
$32,875,237 / 2,671,092 shares outstanding $12.31
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED EQUITY INCOME FUND II
PERIOD ENDED DECEMBER 31, 1997*
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 301,707
Interest 118,742
Total income 420,449
EXPENSES:
Investment advisory fee $ 96,582
Administrative personnel and services fee 113,358
Custodian fees 7,194
Transfer and dividend disbursing agent fees and expenses 12,957
Portfolio accounting fees 46,289
Share registration costs 9,667
Printing and postage 5,208
Insurance premiums 4,698
Total expenses 295,953
Waivers and reimbursements--
Waiver of investment advisory fee $ (43,970)
Reimbursement of other operating expenses (141,959)
Total waivers and reimbursements (185,929)
Net expenses 110,024
Net investment income 310,425
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (65,125)
Net change in unrealized appreciation of investments 1,573,739
Net realized and unrealized gain on investments 1,508,614
Change in net assets resulting from operations $ 1,819,039
</TABLE>
* For the period from January 30, 1997 (date of initial public investment)
to December 31, 1997
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED EQUITY INCOME FUND II
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997*
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 310,425
Net realized loss on investments
($9,604 net gain, as computed for federal tax purposes) (65,125)
Net change in unrealized appreciation/depreciation 1,573,739
Change in net assets resulting from operations 1,819,039
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (99,217)
SHARE TRANSACTIONS--
Proceeds from sale of shares 32,443,264
Net asset value of shares issued to shareholders in payment of 94,855
distributions declared
Cost of shares redeemed (1,382,704)
Change in net assets resulting from share transactions 31,155,415
Change in net assets 32,875,237
NET ASSETS:
Beginning of period --
End of period (including undistributed net investment income of $ 32,875,237
$211,208)
</TABLE>
* For the period from January 30, 1997 (date of initial public investment)
to December 31, 1997.
(See Notes which are an integral part of the Financial Statements)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1997(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.47
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.23
Net realized and unrealized gain on investments 1.76
Total from investment operations 1.99
LESS DISTRIBUTIONS
Distributions from net investment income (0.15)
NET ASSET VALUE, END OF PERIOD $12.31
TOTAL RETURN(B) 19.19%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.85%*
Net investment income 2.41%*
Expense waiver/reimbursement(c) 1.44%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $32,875
Average commission rate paid(d) $0.0038
Portfolio turnover 68%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 30, 1997 (date of
initial public investment) to December 31, 1997.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided
by total portfolio shares purchased or sold on which commissions were
charged.
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED EQUITY INCOME FUND II
DECEMBER 31, 1997
ORGANIZATION
Federated Insurance Series (the "Trust") is registered under
the Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Trust consists of eight portfolios. The
financial statements included herein are only those of Federated Equity
Income Fund II (the "Fund"), a diversified portfolio. The financial
statements of the other portfolios are presented separately. The assets of
each portfolio are segregated and a shareholder's interest is limited to the
portfolio in which shares are held. The Fund's investment objective is to
provide above average income and capital appreciation.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
U.S. government securities, listed corporate bonds, other fixed income and
asset-backed securities, and unlisted securities and private placement
securities are generally valued at the mean of the latest bid and asked
price as furnished by an independent pricing service. Listed equity
securities are valued at the last sale price reported on a national
securities exchange. Short-term securities are valued at the prices provided
by an independent pricing service. However, short-term securities with
remaining maturities of sixty days or less at the time of purchase may be
valued at amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less
than the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code,
as amended (the "Code"). Dividend income and distributions to shareholders
are recorded on the ex-dividend date.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions.
The Fund records when-issued securities on the trade date and maintains
security positions such that sufficient liquid assets will be available
to make payment for the securities purchased. Securities purchased on a
when-issued or delayed delivery basis are marked to market daily and
begin earning interest on the settlement date.
RESTRICTED SECURITIES
Restricted securities are securities that may only be
resold upon registration under federal securities laws or in transactions
exempt from such registration. In some cases, the issuer of restricted
securities has agreed to register such securities for resale, at the
issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration. Such restricted securities may be determined to be liquid
under criteria established by the Trustees. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no
market prices are available, at the fair value as determined by the Fund's
pricing committee.
Additional information on each restricted security held at December 31, 1997
is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
<S> <C> <C>
Costco Cos., Inc., Conv. Bond 8/14/1997 - 12/19/1997 $ 400,005
EMC Corp. Mass, Sub. Note 3/6/1997 -6/2/1997 80,093
EVI, Inc., Cumulative Conv. Pfd. 10/29/1997 510,000
Omnicom Group, Inc., Conv. Bond 12/4/1997 - 12/5/1997 346,425
Solectron Corp., Conv. Bond 2/2/1997 - 10/3/1997 441,069
Xilinx, Inc., Conv. Sub. Note 9/11/1997 - 10/1/1997 396,550
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts of assets, liabilities, expenses and revenues reported
in the financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1997*
<S> <C>
Shares sold 2,789,634
Shares issued to shareholders in payment of distributions declared 8,213
Shares redeemed (126,755)
Net change resulting from share transactions 2,671,092
</TABLE>
* For the period from January 30, 1997 (date of initial public investment)
to December 31, 1997.
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Advisers, the Fund's investment adviser (the "Adviser"),
receives for its services an annual investment advisory fee equal to
0.75% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive any portion of its fee or reimburse the Fund for certain
operating expenses. The Adviser can modify or terminate this voluntary
waiver at any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services.
The fee paid to FServ is based on the level of average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors
for the period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Act. Under the terms of the Plan, the Fund will compensate
Federated Securities Corp. ("FSC"), the principal distributor, from the net
assets of the Fund to finance activities intended to result in the sale of
the Fund's shares. The Plan provides that the Fund may incur distribution
expenses up to 0.25% of the average daily net assets of the Fund, annually,
to compensate FSC. For the period ended December 31, 1997, the Fund did not
incur a distribution services fee.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC")
serves as transfer and dividend disbursing agent for the Fund. The fee paid
to FSSC is based on the size, type, and number of accounts and transactions
made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the
period, plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors
or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for
the period ended December 31, 1997, were as follows:
PURCHASES $38,684,990
SALES $ 9,913,316
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of the Federated Insurance Series
and Shareholders of FEDERATED EQUITY INCOME FUND II:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated Equity Income Fund II
(a portfolio of the Federated Insurance Series) as of December 31, 1997, and
the related statements of operation and changes in net assets, and the
financial highlights for the period from January 30, 1997 to December 31,
1997. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1997, by correspondence with the
custodian and brokers; where replies were not received, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated Equity
Income Fund II as of December 31, 1997, the results of its operations, the
changes in its net assets, and its financial highlights for the period from
January 30, 1997 to December 31, 1997, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 6, 1998
TRUSTEES
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
J. Christopher Donahue
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
J. Christopher Donahue
President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer,
and Secretary
Richard B. Fisher
Vice President
Matthew S. Hardin
Assistant Secretary
Variable funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in variable funds involves investment risk,
including the possible loss of principal.
This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectus which contains facts
concerning its objective and policies, management fees, expenses, and other
information.
FEDERATED INSURANCE SERIES APPENDIX
FALFII The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed in the upper left quadrant
of the graphic presentation. The shares of Federated American Leaders Fund II
are represented by a solid line. The Standard & Poor's 500 Index (S&P 500) is
represented by a dotted line. The Lipper Growth and Income Funds Average (LGIFA)
is represented by a dashed line. The line graph is a visual representation of a
comparison of change in value of a $10,000 hypothetical investment in the shares
of the fund, the S&P 500 and the LGIFA. The "x"-axis reflects computation
periods from 2/10/94 to 12/31/97. The "y"-axis reflects the cost of the
investment. The right margin reflects the ending value of the hypothetical
investment in the fund's shares as compared to the S&P 500 and the LGIFA. The
ending values were $21,363, $22,669 and $19,637, respectively. The legend in the
bottom quadrant of the graphic presentation indicates the fund's shares Average
Annual Total Return for the one-year period ended 12/31/97 and from the start of
performance of fund shares (2/10/94) to 12/31/97. The total returns were 32.34%
and 21.54%, respectively.
FUFII The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in Federated Utility Fund II (the "Fund"). The
corresponding components of the line graph are listed underneath. The Fund is
represented by a solid line. The Standard & Poor's 500 Composite Stock Index is
represented by a dotted line. The Standard & Poor's Utility Index is represented
by a broken line. The line graph is a visual representation of a comparison of
change in value of a hypothetical $10,000 purchase in the Fund, the Standard &
Poor's 500 Composite Stock Index and the Standard & Poor's Utility Index. The
"y" axis reflects the cost of the investment. The "x" axis reflects computation
periods from the Fund's start of performance, 12/10/94 through 12/31/97. The
right margin reflects the ending value of the hypothetical investment in the
Fund as compared to the Standard & Poor's 500 Composite Stock Index and the
Standard & Poor's Utility Index; the ending values are $16,955, $22,669 and
$17,381, respectively.
FUSGII The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in Federated Fund for U.S. Government Securities II
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a solid line. The Lehman Brothers 5-Year
Treasury Bellwether Index is represented by a dotted line. The Lipper U.S.
Mortgage Funds Average is represented by a broken line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund, the Lehman Brothers 5-Year Treasury Bellwether
Index and the Lipper U.S. Mortgage Funds Average. The "y" axis reflects the cost
of the investment. The "x" axis reflects computation periods from the Fund's
start of performance, 3/28/94 through 12/31/97. The right margin reflects the
ending value of the hypothetical investment in the Fund as compared to the
Lehman Brothers 5-Year Treasury Bellwether Index and the Lipper U.S. Mortgage
Funds Average; the ending values are $12,629, $12,807 and $12,923, respectively.
FHIBFII The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed in the upper left quadrant
of the graphic presentation. The shares of Federated High Income Bond Fund II
are represented by a solid line. The Lehman Brothers Single B Rated Index
(LBSBRI) is represented by a dotted line. The Lipper High Current Yield Funds
Average (LHCYFA) is represented by a dashed line. The line graph is a visual
representation of a comparison of change in value of a $10,000 hypothetical
investment in the shares of the fund, the LBSBRI and the LHCYFA. The "x"-axis
reflects computation periods from 3/1/94 to 12/31/97. The "y"-axis reflects the
cost of the investment. The right margin reflects the ending value of the
hypothetical investment in the fund's shares as compared to the LBSBRI and the
LHCYFA. The ending values were $15,098, $14,648 and $14,064, respectively. The
legend in the bottom quadrant of the graphic presentation indicates the fund's
shares Average Annual Total Return for the one-year period ended 12/31/97 and
from the start of performance of fund shares (3/1/94) to 12/31/97. The total
returns were 13.83% and 11.33%, respectively.
FIEFII The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in Federated International Equity Fund II (the
"Fund"). The corresponding components of the line graph are listed underneath.
The Fund is represented by a solid line. The Morgan Stanley Capital
International Europe Australia Far-East Index is represented by a dotted line.
The line graph is a visual representation of a comparison of change in value of
a hypothetical $10,000 purchase in the Fund and the Morgan Stanley Capital
International Europe Australia Far-East Index. The "y" axis reflects the cost of
the investment. The "x" axis reflects computation periods from the Fund's start
of performance, 5/8/95 through 12/31/97. The right margin reflects the ending
value of the hypothetical investment in the Fund as compared to the Morgan
Stanley Capital International Europe Australia Far-East Index; the ending values
are $12,341 and $11,357, respectively.
FGSFII The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed in the upper left quadrant
of the graphic presentation. The shares of Federated Growth Strategies Fund II
are represented by a solid line. The Standard & Poor's 500 Index (S&P 500) is
represented by a dotted line. The Lipper Growth Fund Index (LGFI) is represented
by a dashed line. The line graph is a visual representation of a comparison of
change in value of a $10,000 hypothetical investment in the shares of the fund,
the S&P 500 and the LGFI. The "x"-axis reflects computation periods from 11/9/95
to 12/31/97. The "y"-axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the fund's shares as
compared to the S&P 500 and the LGFI. The ending values were $16,266, $17,132
and $15,485, respectively. The legend in the bottom quadrant of the graphic
presentation indicates the fund's shares Average Annual Total Return for the
one-year period ended 12/31/97 and from the start of performance of fund shares
(11/9/95) to 12/31/97. The total returns were 27.03% and 25.46%, respectively.
FEIFII The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in Federated Equity Income Fund II (the "Fund"). The
corresponding components of the line graph are listed underneath. The Fund is
represented by a solid line. The Standard & Poor's 500 Index is represented by a
dotted line. The Lipper Equity Income Fund Index is represented by a broken
line. The line graph is a visual representation of a comparison of change in
value of a hypothetical $10,000 purchase in the Fund, the Standard & Poor's 500
Index and the Lipper Equity Income Fund Index. The "y" axis reflects the cost of
the investment. The "x" axis reflects computation periods from the Fund's start
of performance, 1/30/97 through 8/31/97. The right margin reflects the ending
value of the hypothetical investment in the Fund as compared to , the Standard &
Poor's 500 Index and the Lipper Equity Income Fund Index; the ending values are
$11,919, $12,584 and $12,322, respectively.
