[LOGO] Northwestern National Life
20 Washington Avenue South
Minneapolis, Minnesota 55401
--------------
INDIVIDUAL DEFERRED VARIABLE/FIXED ANNUITY CONTRACTS
ISSUED BY
NORTHSTAR/NWNL VARIABLE ACCOUNT
AND
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
The Individual Deferred Variable/Fixed Annuity Contracts described in this
Prospectus are flexible purchase payment contracts. The Contracts are sold to or
in connection with retirement plans which may or may not qualify for special
federal tax treatment under the Internal Revenue Code. (See "Federal Tax Status"
on page 21.) Annuity payments under the Contracts are deferred until a selected
later date.
Purchase payments may be allocated to one or more of the available
Sub-Accounts of Northstar/NWNL Variable Account (the "Variable Account"), a
separate account of Northwestern National Life Insurance Company (the
"Company"), and/or to the Fixed Account (which is the general account of the
Company). The Fixed Account is not available to Contract Owners in the State of
Maryland, Oregon, South Carolina and Washington.
Purchase payments allocated to one or more of the available Sub-Accounts of
the Variable Account, as selected by the Contract Owner, will be invested in
shares at net asset value of one or more of a group of investment funds (the
"Investment Funds"). The Investment Funds are currently the four funds of the
Northstar/NWNL Trust which are managed by Northstar Investment Management
Corporation of Greenwich, Connecticut, and two portfolios of the Variable
Insurance Products Fund and two portfolios of the Variable Insurance Products
Fund II which are managed by Fidelity Management & Research Company of Boston,
Massachusetts. Each Investment Fund pays its investment adviser certain fees
charged against the assets of the Investment Fund. The Variable Account Contract
Value and the amount of variable annuity payments will vary, primarily based on
the investment performance of the Investment Funds whose shares are held in the
Sub-Accounts selected. (For more information about the Investment Funds, see
"Investments of the Variable Account" on page 11.)
Additional information about the Contracts, the Company and the Variable
Account, contained in a Statement of Additional Information dated April 30,
1996, has been filed with the Securities and Exchange Commission and is
available upon request without charge by writing to Northstar Distributors,
Inc., Two Pickwick Plaza, Greenwich, Connecticut 06830. The Statement of
Additional Information relating to the Contracts having the same date as this
Prospectus is incorporated by reference in this Prospectus. The Table of
Contents for the Statement of Additional Information may be found on page 27 of
this Prospectus. Information about the Fixed Account may be found in Appendix A,
on page A-1.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR ACCOMPANYING
FUND PROSPECTUSES AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER
OR SOLICITATION WOULD BE UNLAWFUL.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE CONTRACTS THAT A
PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING AND SHOULD BE RETAINED FOR
FUTURE REFERENCE.
THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUSES FOR THE
NORTHSTAR/NWNL TRUST, THE VARIABLE INSURANCE PRODUCTS FUND AND THE VARIABLE
INSURANCE PRODUCTS FUND II AND IS VALID ONLY WHEN ACCOMPANIED BY SUCH
PROSPECTUSES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SHARES OF THE INVESTMENT FUNDS AND INTERESTS IN THE CONTRACTS ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY A BANK, AND THE SHARES
AND INTERESTS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THE DATE OF THIS PROSPECTUS IS APRIL 30, 1996.
N200.100b
<PAGE>
TABLE OF CONTENTS
Definitions ..................................................... 3
Summary of Contract Expenses .................................... 4
Summary ......................................................... 6
Condensed Financial Information ................................. 8
Performance Information ......................................... 9
The Company ..................................................... 10
The Variable Account ............................................ 10
Investments of the Variable Account ............................. 11
Charges Made by the Company ..................................... 13
Surrender Charge (Contingent Deferred Sales Charge) ....... 13
Annual Contract Charge .................................... 14
Mortality Risk Premium .................................... 14
Expense Risk Premium ...................................... 14
Administration Charge ..................................... 14
Sufficiency of Charges .................................... 14
Premium and Other Taxes ................................... 14
Reduction of Charges ...................................... 15
Expenses of the Investment Funds .......................... 15
Administration of the Contracts ................................. 15
The Contracts ................................................... 15
Allocation of Purchase Payments ........................... 15
Sub-Account Accumulation Unit Value ....................... 16
Net Investment Factor ..................................... 16
Death Benefit Before the Annuity Commencement Date ........ 16
Death Benefit After the Annuity Commencement Date ......... 17
Surrender (Redemption) .................................... 17
Systematic Withdrawals .................................... 17
Transfers ................................................. 18
Written Transfers ...................................... 18
Telephone Transfers .................................... 18
Dollar Cost Averaging Transfers ........................ 19
Assignments ............................................... 19
Contract Owner and Beneficiaries .......................... 19
Contract Inquiries ........................................ 19
Annuity Provisions .............................................. 19
Annuity Commencement Date ................................. 19
Annuity Form Selection .................................... 20
Annuity Forms ............................................. 20
Frequency and Amount of Annuity Payments .................. 20
Annuity Payments .......................................... 20
Sub-Account Annuity Unit Value ............................ 21
Assumed Investment Rate ................................... 21
Federal Tax Status .............................................. 21
Introduction .............................................. 21
Tax Status of the Contract ................................ 22
Taxation of Annuities ..................................... 22
Transfers, Assignments or Exchanges of a Contract ......... 24
Withholding ............................................... 24
Multiple Contracts ........................................ 24
Taxation of Qualified Plans ............................... 24
Possible Charge for the Company's Taxes ................... 25
Other Tax Consequences .................................... 25
Voting of Fund Shares ........................................... 25
Distribution of the Contracts ................................... 25
Revocation ...................................................... 26
Reports to Owners ............................................... 26
Legal Proceedings ............................................... 26
Financial Statements and Experts ................................ 26
Further Information ............................................. 26
Statement of Additional
Information Table of Contents ................................... 27
Appendix A ...................................................... A-1
Investment Fund Prospectuses
Northstar/NWNL Trust (Northstar):
Northstar Income and Growth Fund .......................... Northstar-1
Northstar Growth Fund ..................................... Northstar-1
Northstar Multi-Sector Bond Fund .......................... Northstar-1
Northstar High Yield Bond Fund ............................ Northstar-1
Fidelity's Variable Insurance Products Fund (VIPF):
Money Market Portfolio .................................... VIP-1
Overseas Portfolio ........................................ VIP-1
Fidelity's Variable Insurance Products Fund II (VIPF II):
Asset Manager Portfolio ................................... VIPII-1
Index 500 Portfolio ....................................... VIPII-1
2
<PAGE>
DEFINITIONS
ANNUITANT - The person who is named by the Owner to receive annuity payments and
whose life determines the annuity benefits payable.
ANNUITY COMMENCEMENT DATE - (COMMENCEMENT DATE) The date on which the annuity
payments begin, which must be the first day of a month. The date will be
the first day of the month following the Annuitant's 75th birthday unless
an earlier or later date has been selected by the Owner and, if the date is
later, it has been agreed to by the Company. If the Annuity Commencement
Date selected by the Owner does not occur on a Valuation Date at least 60
days after the date on which the Contract was issued, the Company reserves
the right to adjust the Commencement Date to the first Valuation Date after
the Commencement Date selected by the Owner that is at least 60 days after
the Contract issue date.
BENEFICIARY - The person who is named by the Owner to receive the Contract Value
upon the death of the Owner before the Annuity Commencement Date or to
receive the balance of the annuity payments, if any, under the Annuity Form
in effect at the Annuitant's death.
CODE - The Internal Revenue Code of 1986, as amended.
CONTRACT ANNIVERSARY - Occurs yearly on the same day and month the Contract was
issued.
CONTRACT OWNER (OWNER) - The person who controls all the rights and privileges
under the Contract. The Annuitant owns the Contract unless another Owner is
named as provided for in the Contract. The Contract may be owned by one,
but no more than two, natural persons only, except when it is held under a
retirement plan described in Section 401(a) or 403(a), or a program
described in Section 403(b) of the Code.
CONTRACT VALUE - The sum of (a) the Variable Account Contract Value, which is
the value of the Sub-Account Accumulation Units under the Contract plus (b)
the Fixed Account Contract Value, which is the sum of purchase payments
allocated to the Fixed Account under the Contract, plus credited interest,
minus surrenders, surrender charges previously applied, and any annual
administrative charges applicable to the Fixed Account, and minus any
transfers to the Variable Account.
CONTRACT YEAR - Each twelve-month period starting with the date the Contract was
issued and each Contract Anniversary after that.
DEATH BENEFIT - The amount payable upon the death of a Contract Owner before the
Annuity Commencement Date. (See "Death Benefit Before the Annuity
Commencement Date" on page 16.)
DEATH BENEFIT VALUATION DATE - The Death Benefit Valuation Date is the Valuation
Date next following the date the Company receives proof of death and a
written request from the Beneficiary for a single sum payment or an Annuity
Form permitted by Section 72(s) of the Code.
FIXED ACCOUNT - The Fixed Account is the general account of the Company, which
consists of all assets of the Company other than those assets allocated to
separate accounts of the Company.
FIXED ANNUITY - An annuity with payments which do not vary as to dollar amount.
INVESTMENT FUNDS - Any open-end management investment company (or portfolio
thereof) or unit investment trust (or series thereof) in which a
Sub-Account invests as described herein.
NORTHSTAR - Northstar/NWNL Trust
Northstar Income and Growth Fund
Northstar Growth Fund
Northstar Multi-Sector Bond Fund
Northstar High Yield Bond Fund
QUALIFIED PLAN - A retirement plan under Sections 401, 403 or 408 or similar
provisions of the Code.
SPECIFIED CONTRACT ANNIVERSARY - The seventh Contract anniversary and each
consecutive one year anniversary date measured from the date of the seventh
Contract anniversary. The Specified Contract Anniversary is used to
determine the Death Benefit payable if the Contract Owner dies before the
Annuity Commencement Date. (See "Death Benefit Before the Annuity
Commencement Date" on page 16.)
SUB-ACCOUNT - That portion of the Variable Account available under the Contract
which invests in shares of a specific Investment Fund.
3
<PAGE>
SUB-ACCOUNT ACCUMULATION UNIT - A unit of measure used to determine the Variable
Account Contract Value before annuity payments start.
SUCCESSOR BENEFICIARY - The person named to become the Beneficiary if the
Beneficiary is not alive.
VALUATION DATE - The close of the market each day the New York Stock Exchange is
open for trading and the Securities and Exchange Commission has not
suspended trading.
VALUATION PERIOD - The time interval between a Valuation Date and the next
Valuation Date.
VARIABLE ACCOUNT - A separate account of the Company consisting of assets set
aside by the Company, the investment performance of which is kept separate
from that of the general assets of the Company.
VARIABLE ANNUITY - A series of periodic payments to the Annuitant which will
vary in amount, primarily based on the investment results of the Variable
Account Sub-Accounts under the Contract.
VARIABLE ANNUITY UNIT - A unit of measure used in the calculation of the second
and each subsequent variable annuity payment from the Variable Account.
VIPF Variable Insurance Products Fund
Money Market Portfolio
Overseas Portfolio
VIPF II Variable Insurance Products Fund II
Asset Manager Portfolio
Index 500 Portfolio
SUMMARY OF CONTRACT EXPENSES
CONTRACT OWNER TRANSACTION EXPENSES
Sales Charge Imposed on Purchases......................................... None
Surrender Charge (as a percentage of amounts surrendered attributable to
purchase payments made in the last six Contract years) (a)
CONTRACT YEAR OF SURRENDER SURRENDER CHARGE
MINUS CONTRACT YEAR OF AS A PERCENTAGE OF
PURCHASE PAYMENT EACH PURCHASE PAYMENT
---------------- ---------------------
0 7%
1 7
2 5
3 5
4 4
5 3
6 2
7 and later 0
Transfer Charge.(b).................................................... None
ANNUAL CONTRACT CHARGE................................................. $35
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
Mortality and Expense Risk Premiums....................................... 1.25%
Other Account Fees and Expenses (See "Administration Charge" on page 14.). .15%
----
Total Separate Account Annual Expenses.................................... 1.40%
====
4
<PAGE>
ANNUAL INVESTMENT FUND EXPENSES
(as a percentage of Investment Fund average net assets)
<TABLE>
<CAPTION>
TOTAL INVESTMENT
MANAGEMENT OTHER FUND ANNUAL
FEES EXPENSES EXPENSES
---- -------- --------
<S> <C> <C> <C>
Northstar Income and Growth Fund.(c)...................................... 0.75% 0.05% 0.80%
Northstar Growth Fund.(c)................................................. 0.75% 0.05% 0.80%
Northstar Multi-Sector Bond Fund.(c)...................................... 0.75% 0.05% 0.80%
Northstar High Yield Bond Fund.(c)........................................ 0.75% 0.05% 0.80%
<CAPTION>
TOTAL INVESTMENT
MANAGEMENT OTHER FUND ANNUAL
FEES EXPENSES EXPENSES
---- -------- --------
<S> <C> <C> <C>
VIPF Money Market Portfolio............................................... 0.24% 0.09% 0.33%
VIPF Overseas Portfolio................................................... 0.76% 0.15% 0.91%
VIPF II Asset Manager Portfolio.(d)....................................... 0.71% 0.08% 0.79%
VIPF II Index 500 Portfolio.(e)........................................... 0.28% 0.00% 0.28%
</TABLE>
EXAMPLES
If you surrender your Contract at the end of the applicable time period,
you would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Northstar Income and Growth Fund................................................... $86 $115 $148 $259
Northstar Growth Fund.............................................................. 86 115 148 259
Northstar Multi-Sector Bond Fund................................................... 86 115 148 259
Northstar High Yield Bond Fund..................................................... 86 115 148 259
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIPF Money Market Portfolio........................................................ $81 $101 $124 $210
VIPF Overseas Portfolio............................................................ 87 119 153 270
VIPF II Asset Manager Portfolio.................................................... 86 115 147 258
VIPF II Index 500 Portfolio........................................................ 81 100 121 204
</TABLE>
If you annuitize your contract at the end of the applicable time period,
you would pay the following expenses on a $1,000 investment assuming a 5% annual
return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Northstar Income and Growth Fund................................................ $86 $70 $121 $259
Northstar Growth Fund........................................................... 86 70 121 259
Northstar Multi-Sector Bond Fund................................................ 86 70 121 259
Northstar High Yield Bond Fund.................................................. 86 70 121 259
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIPF Money Market Portfolio..................................................... $81 $56 $ 97 $210
VIPF Overseas Portfolio......................................................... 87 74 126 270
VIPF II Asset Manager Portfolio................................................. 86 70 120 258
VIPF II Index 500 Portfolio..................................................... 81 55 94 204
</TABLE>
* If the Contract's Annuity Commencement Date occurs during the first two
Contract years following the date the Contract was issued a Surrender Charge is
deducted and the expenses shown in year 1 reflect this deduction.
5
<PAGE>
If you do not surrender or annuitize your Contract at the end of the
applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Northstar Income and Growth Fund................................................... $23 $70 $121 $259
Northstar Growth Fund.............................................................. 23 70 121 259
Northstar Multi-Sector Bond Fund................................................... 23 70 121 259
Northstar High Yield Bond Fund..................................................... 23 70 121 259
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIPF Money Market Portfolio........................................................ $18 $56 $ 97 $210
VIPF Overseas Portfolio............................................................ 24 74 126 270
VIPF II Asset Manager Portfolio.................................................... 23 70 120 258
VIPF II Index 500 Portfolio........................................................ 18 55 94 204
</TABLE>
(a) Under certain situations amounts may be surrendered free of any surrender
charge. For more information on the Surrender Charge, see page 13,
"Surrender Charge (Contingent Deferred Sales Charge)". The Company reserves
the right to charge a partial surrender processing fee not to exceed the
lesser of 2% of the partial surrender amount or $25. For more information
on the processing fee, see page 17, "Surrender (Redemption)".
(b) The Company currently does not impose a charge on transfers between the
Sub-Accounts or to the Fixed Account, although the Company reserves the
right to impose a charge not to exceed $25 per transfer.
(c) The investment adviser to the Northstar/NWNL Trust has agreed to reimburse
the four Northstar Funds for any expenses in excess of 0.80% of each Fund's
average daily net assets. In the absence of the investment adviser's
expense reimbursements, the actual expenses that would have been paid by
each Fund during its fiscal year ended December 31, 1995 would have been:
Income and Growth Fund - 1.74%; Growth Fund - 2.04%; Multi-Sector Bond Fund
- 2.06%; and High Yield Bond Fund - 2.11%.
(d) During 1995, a portion of the brokerage commissions paid by the Asset
Manager Portfolio was used to reduce the portfolio's expenses. Without the
reduction, total operating expenses would have been 0.81%. For more
information on the portfolio's Management Fees and Expenses, see the
prospectus for the Fund.
(e) During 1995, the investment adviser to the Index 500 Portfolio reimbursed a
portion of the portfolio's expenses. Without the reimbursement, total
operating expenses would have been 0.47%. For more information on the
portfolio's Management Fees and Expenses, see the prospectus for the Fund.
THE EXAMPLES SHOWN IN THE TABLE ABOVE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE MORE OR LESS
THAN THOSE SHOWN. THE 5% ANNUAL RETURN ASSUMED IS HYPOTHETICAL AND SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE
GREATER OR LESS THAN THE ASSUMED RATES.
The purpose of this table is to assist the Contract Owner in understanding
the various costs and expenses that a Contract Owner will bear either directly
or indirectly. The table reflects the expenses of the Variable Account as well
as those of the Investment Funds. The $35 Annual Contract Charge is reflected as
an annual percentage charge in this table based on an anticipated average net
assets in the Variable Account and Fixed Account, which translates to a charge
equal to an annual rate of 0.052% of the Variable Account and Fixed Account
values.
In addition to the costs and expenses shown in this table, state premium
taxes may also be applicable. For more information on state premium taxes, see
page 14, "Premium and Other Taxes".
SUMMARY
The Contracts are flexible premium individual deferred variable/fixed
retirement annuity contracts issued by the Variable Account and the Company.
(See "The Company" on page 10 and "The Variable Account" on page 10.) They are
sold to or in connection with retirement plans which may or may not qualify for
special federal tax treatment under the Internal Revenue Code. (See "Federal Tax
Status" on page 21.) Annuity payments under the Contracts are deferred until a
later date.
Purchase payments may be allocated to one or more of the available
Sub-Accounts of the Variable Account and/or to the Fixed Account (the Fixed
Account is not available to Contract Owners in the State of Maryland, Oregon,
South Carolina and Washington). Purchase payments allocated to one or more
Sub-Accounts of the Variable Account will be invested in shares at net asset
value of one or more of the Investment Funds. The Variable
6
<PAGE>
Account Contract Value and the amount of variable annuity payments will vary,
primarily based on the investment performance of the Investment Funds whose
shares are held in the Sub-Accounts selected. (See "Investments of the Variable
Account" on page 11.)
No deduction for a sales charge is made from the purchase payments for the
Contracts. However, a surrender charge (contingent deferred sales charge) may,
with certain exceptions, apply to whole or partial surrenders of purchase
payments that have been credited under the Contract for less than seven Contract
years. A surrender charge will also be deducted if the Contract's Annuity
Commencement Date occurs within the first two years after the date the Contract
was issued. The amount of the surrender charge will vary as follows:
CONTRACT YEAR OF SURRENDER SURRENDER CHARGE
MINUS CONTRACT YEAR OF AS A PERCENTAGE OF
PURCHASE PAYMENT EACH PURCHASE PAYMENT
---------------- ---------------------
0 - 1 7%
2 - 3 5
4 4
5 3
6 2
7 and later 0
(See "Surrender Charge (Contingent Deferred Sales Charge)" on page 13.)
In addition, on each Contract Anniversary (and on the surrender of the
Contract for its full value if it is not surrendered on a Contract Anniversary)
the Company will deduct from the Contract Value an Annual Contract Charge of
$35. During the annuity period the Annual Contract Charge will be separately
assessed against fixed annuity payments and variable annuity payments and will
be deducted from each fixed annuity payment and from each variable annuity
payment in equal installments if both forms of annuity payment are selected.
Otherwise such charge will be deducted from each fixed annuity or variable
annuity payment as applicable. The Annual Contract Charge is to reimburse the
Company for administrative expenses relating to the issue and maintenance of the
Contracts. (See "Annual Contract Charge" on page 14.)
The Company also deducts a Mortality Risk Premium, an Expense Risk Premium
and an Administration Charge, equal to an annual rate of 1.40% of the daily net
assets of the available Sub-Accounts of the Variable Account (See "Mortality
Risk Premium", "Expense Risk Premium" and "Administration Charge" on page 14.)
The initial purchase payment must be $5,000 or more for a Non-qualified
Contract and no subsequent individual payment may be less than $500. If the
Contract is being purchased by or in connection with a Qualified Plan, the
minimum initial purchase payment is $2,000, and no subsequent individual payment
may be less than $200. The Company may choose not to accept any subsequent
purchase payment if the additional purchase payment, when added to the Contract
Value at the next Valuation Date would exceed $1,000,000. The Company reserves
the right to accept smaller initial and subsequent purchase payments in
connection with special circumstances, including sales through group or
sponsored arrangements.
If the Contract Value at the Annuity Commencement Date is less than $5,000,
the Contract Value may be distributed in a single sum payment in lieu of annuity
payments. If any annuity payment would be less than $50, the Company has the
right to change the frequency of payments to such intervals as will result in
payments of at least $50 each. (See "Frequency and Amount of Annuity Payments"
on page 20.)
Premium taxes payable to any governmental entity will be charged against
the Contracts. (See "Premium and Other Taxes" on page 14.)
The Contract Owner may request early withdrawal of all or part of the
Contract Value before the Annuity Commencement Date. (See "Surrender
(Redemption)" on page 17.) Under the Code, penalty taxes may apply to the early
withdrawal of amounts accumulated under a Contract whether or not such Contract
is part of a Qualified Plan. (See "Taxation of Annuities" on page 22.)
The Contract Owner may return the Contract within ten days after it was
delivered to the Owner, and receive a refund of the Contract Value unless
otherwise required by law. (See "Revocation" on page 26.)
7
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following table shows, for each Sub-Account of the Variable Account,
the value of a Sub-Account Accumulation Unit as it is invested in portfolios at
the dates shown, and the total number of Sub-Account Accumulation Units
outstanding at the end of each period:
YEAR ENDED
DECEMBER 31
---------------
1995 1994
---- ----
SUB-ACCOUNT INVESTING IN
NORTHSTAR'S:
(all Sub-Accounts from May 6, 1994):
Income and Growth Fund
Beginning of period................................. $10.1101 $10.0000
End of period....................................... $12.0916 $10.1101
Units outstanding at end of period.................. 301,285 100,955
Growth Fund
Beginning of period................................. $10.2534 $10.0000
End of period....................................... $12.6072 $10.2534
Units outstanding at end of period.................. 27,043 8,739
Multi-Sector Bond Fund
Beginning of period................................. $10.0748 $10.0000
End of period....................................... $11.4356 $10.0748
Units outstanding at end of period.................. 37,704 15,492
High Yield Bond Fund
Beginning of period................................. $9.8476 $10.0000
End of period....................................... $11.5675 $9.8476
Units outstanding at end of period.................. 149,292 8,985
FIDELITY'S VIPF:
(all Sub-Accounts from May 1, 1995):
Money Market Portfolio
Beginning of period................................. $10.0000 -
End of period....................................... $10.2889 -
Units outstanding at end of period.................. - -
Overseas Portfolio
Beginning of period................................. $10.0000 -
End of period....................................... $10.6517 -
Units outstanding at end of period.................. - -
FIDELITY'S VIPF II:
(all Sub-Accounts from May 1, 1995):
Asset Manager Portfolio
Beginning of period................................. $10.0000 -
End of period....................................... $11.1433 -
Units outstanding at end of period.................. - -
Index 500 Portfolio
Beginning of period................................. $10.0000 -
End of period....................................... $12.0488 -
Units outstanding at end of period.................. 335 -
The Sub-Accounts investing in VIPF Money Market Portfolio, VIPF Overseas
Portfolio, VIPF II Asset Manager Portfolio and VIPF II Index 500 Portfolio were
not available under the Contract prior to 1995.
8
<PAGE>
PERFORMANCE INFORMATION
From time to time, the Company may advertise or include in sales literature
yields, effective yields, and total returns for the available Sub-Accounts.
THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND DO NOT INDICATE OR PROJECT
FUTURE PERFORMANCE. Each Sub-Account may, from time to time, advertise or
include in sales literature performance relative to certain performance rankings
and indices compiled by independent organizations. More detailed information as
to the calculation of performance information, as well as comparisons with
unmanaged market indices, appears in the Statement of Additional Information.
Yields, effective yields and total returns for the Sub-Accounts are based
on the investment performance of the corresponding portfolios of the Investment
Funds. The performance in part reflects the Investment Funds' expenses. See the
Prospectuses for the Investment Funds.
The yield of the Sub-Account investing in the VIPF Money Market Portfolio
refers to the annualized income generated by an investment in the Sub-Account
over a specified seven-day period. The yield is calculated by assuming that the
income generated for that seven-day period is generated each seven day period
over a 52-week period and is shown as a percentage of the investment. The
effective yield is calculated similarly but, when annualized, the income earned
by an investment in the Sub-Account is assumed to be reinvested. The effective
yield will be slightly higher than the yield because of the compounding effect
of this assumed reivestment.
The yield of a Sub-Account (except the Money Market Sub-Account investing
in the VIPF Money Market Portfolio) refers to the annualized income generated by
an investment in the Sub-Account over a specified 30-day or one-month period.
The yield is calculated by assuming that the income generated by the investment
during that 30-day or one-month period is generated each period over a 12-month
period and is shown as a percentage of the investment.
The total return of a Sub-Account refers to return quotations assuming an
investment under a Contract has been held in the Sub-Account for various periods
of time including, but not limited to, a period measured from the date the
Sub-Account commenced operations. Average annual total return refers to total
return quotations that are annualized based on an average return over various
periods of time.
The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods for which total return quotations are provided. Average
annual total return information shows the average percentage change in the value
of an investment in the Sub-Account from the beginning date of the measuring
period to the end of that period. This version of average annual total return
reflects all historical investment results, less all charges and deductions
applied against the Sub-Account (including any surrender charge that would apply
if an Owner terminated the Contract at the end of each period indicated, but
excluding any deductions for premium taxes).
When a Sub-Account has been in operation for one, five, and ten years, the
average annual total return for these periods will be provided. For periods
prior to the date the Sub-Account commenced operations, performance information
for Contracts funded by the Sub-Accounts will be calculated based on the
performance of the Investment Funds' Portfolios and the assumption that the
Sub-Accounts were in existence for the same periods as those indicated for the
Investment Funds' Portfolios, with the level of Contract Charges that were in
effect at the inception of the Sub-Accounts for the Contracts.
Average total return information may be presented, computed on the same
basis as described above, except deductions will not include the surrender
charge. In addition, the Company may from time to time disclose average annual
total return in non-standard formats and cumulative total return for Contracts
funded by the Sub-Accounts.
The Company may, from time to time, also disclose yield and total returns
for the portfolios of the Investment Funds, including such disclosure for
periods prior to the dates the Sub-Accounts commenced operations.
For additional information regarding the calculation of other performance
data, please refer to the Statement of Additional Information.
In advertising and sales literature, the performance of each Sub-Account
may be compared to the performance of other variable annuity issuers in general
or to the performance of particular types of variable annuities investing in
mutual funds, or investment series of mutual funds with investment objectives
similar to each of the Sub-Accounts.
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Lipper Analytical Services, Inc. ("Lipper") and the Variable Annuity
Research Data Service ("VARDS") are independent services which monitor and rank
the performance of variable annuity issuers in each of the major categories of
investment objectives on an industry-wide basis. Lipper's rankings include
variable life insurance issuers as well as variable annuity issuers. VARDS
rankings compare only variable annuity issuers. The performance analyses
prepared by Lipper and VARDS each rank such issuers on the basis of total
return, assuming reinvestment of distributions, but do not take sales charges,
redemption fees, or certain expense deductions at the separate account level
into consideration. In addition, VARDS prepares risk adjusted rankings, which
consider the effects of market risk on total return performance. This type of
ranking provides data as to which funds provide the highest total return within
various categories of funds defined by the degree of risk inherent in their
investment objectives.
Advertising and sales literature may also compare the performance of each
Sub-Account to the Standard & Poor's Composite Index of 500 Stocks, a widely
used measure of stock performance. This unmanaged index assumes the reinvestment
of dividends but does not reflect any "deduction" for the expense of operating
or managing an investment portfolio. Other independent ranking services and
indices may also be used as a source of performance comparison.
The Company may also report other information including the effect of
tax-deferred compounding on a Sub-Account's investment returns, or returns in
general, which may be illustrated by tables, graphs, or charts. All income and
capital gains derived from Sub-Account investments are reinvested and can lead
to substantial long-term accumulation of assets, provided that the underlying
portfolio's investment experience is positive.
THE COMPANY
The Company, organized in 1885, is a stock life insurance company
incorporated under the laws of the State of Minnesota. The Company is a direct,
wholly-owned subsidiary of ReliaStar Financial Corp. (formerly known as The NWNL
Companies, Inc.), a publicly-traded holding company incorporated under the laws
of the State of Delaware, whose shares are listed on the New York Stock
Exchange. The Company offers individual life insurance and annuities, employee
benefits, and retirement contracts. The Company is admitted to do business in
the District of Columbia and all states except New York. Its home office is at
20 Washington Avenue South, Minneapolis, Minnesota 55401 (telephone 612/
372-5507).
The Contracts described in this Prospectus are nonparticipating. The
capital and surplus of the Company should be considered as bearing only upon the
ability of the Company to meet its obligations under the Contracts.
THE VARIABLE ACCOUNT
The Variable Account is a Separate Account of the Company established by
the Board of Directors of the Company on November 12, 1992, pursuant to the laws
of the State of Minnesota. The Variable Account is registered with the
Securities and Exchange Commission as a unit investment trust under the
Investment Company Act of 1940, as amended ("1940 Act"). Such registration does
not involve supervision by the Commission of the management or investment
policies or practices of the Variable Account, the Company or the Investment
Funds. The Company has complete ownership and control of the assets in the
Variable Account, but these assets are held separately from the Company's other
assets and are not part of the Company's General Account.
The portion of the assets of the Variable Account equal to the reserves and
other contract liabilities of the Variable Account will not be charged with
liabilities incurred in any other business that the Company may conduct. The
Company has the right to transfer to its General Account any assets of the
Variable Account which are in excess of such reserves and other liabilities. The
income, if any, and gains and losses, realized or unrealized, of the Variable
Account will be credited to or charged against the amount allocated to the
Variable Account, in accordance with the contracts supported by the Variable
Account, without regard to the other income, gains, or losses of the Company.
Purchase payments allocated to the Variable Account under a Contract are
invested in one or more Sub-Accounts of the Variable Account. The purchase
payments under a Contract are allocated to the Sub-Account or Sub-Accounts
selected by the Owner, and the future Variable Account Contract Value depends
primarily on the investment performance of the Investment Funds whose shares are
held in the Sub-Accounts selected.
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INVESTMENTS OF THE VARIABLE ACCOUNT
When a Contract is applied for, the Owner may elect to have purchase
payments allocated to one or more of the available Sub-Accounts each of which
invests in shares of one of the Investment Funds at its net asset value. The
Owner may change a purchase payment allocation for future purchase payments and
may at any time transfer all or part of any existing values in a Sub-Account to
another Sub-Account that invests in shares of another Investment Fund.
Northstar Investment Management Corporation, an affiliate of the Company,
is the investment adviser for the four funds of Northstar. Fidelity Management &
Research Company is the investment adviser for the two portfolios of VIPF and
the two portfolios of VIPF II offered through the Contracts. The investment
advisers are paid fees for their services by the Investment Funds. The
Investment Funds currently offered, together with their investment objectives
are briefly described below. More detailed information concerning the investment
objectives, policies and restrictions pertaining to the Investment Funds and the
expenses, investment advisory services and charges and the risks attendant to
investing in the Investment Funds and other aspects of their operations can be
found in the current prospectus for each Investment Fund which accompany this
Prospectus and the current Statement of Additional Information for each
Investment Fund. The Investment Fund prospectuses should be read carefully
before any decision is made concerning the allocation of purchase payments or
transfers among the Sub-Accounts.
NORTHSTAR/NWNL TRUST (NORTHSTAR)
Northstar is a diversified management investment company currently offering
four investment funds, each with a different investment objective. The
following four Northstar Funds are available under this Contract:
NORTHSTAR INCOME AND GROWTH FUND is a diversified portfolio with an
investment objective of seeking current income balanced with the objective
of achieving capital appreciation. This Fund will seek to achieve its
objective through investments in common and preferred stocks, convertible
securities, investment grade corporate debt securities, and government
securities, selected for their prospects of producing income and capital
appreciation.
NORTHSTAR GROWTH FUND is a diversified portfolio with an investment
objective of long-term growth of capital through investments in equity
securities of companies that are believed to provide above average
potential for capital appreciation. Navellier Fund Management, Inc. serves
as sub-adviser to the Fund and is responsible for the day-to-day investment
management of the Fund, subject to the supervision of the investment
adviser and the Trustees of the Fund. All fees and expenses of the
subadvisory arrangement are borne by the investment adviser.
NORTHSTAR MULTI-SECTOR BOND FUND is a diversified portfolio with an
investment objective of maximizing current income. This Fund will seek to
achieve its objective by investment in the following sectors of the fixed
income securities markets: (a) securities issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities; (b) investment grade corporate debt securities; (c)
investment grade or comparable quality debt securities issued by foreign
corporate issuers, and securities issued by foreign governments and their
political subdivisions, limited to 35% of assets determined at the time of
investment; and (d) high yield-high risk fixed income securities of U.S.
and foreign issuers, limited to 50% of assets determined at the time of
investment.
NORTHSTAR HIGH YIELD BOND FUND is a diversified portfolio with an
investment objective of seeking high income consistent with the
preservation of capital. Under normal market conditions, this Investment
Fund invests predominantly in high yield, high risk lower-rated U.S.
dollar-denominated debt securities. Most of the securities in which the
Investment Fund invests are rated, at the time of investment, at least Caa
by Moody's Investors Service, Inc. ("Moody's") or CCC by Standard & Poor's
Corporation ("S&P") or, if not rated, are of comparable quality in the
opinion of the investment adviser. The Investment Fund may, however, invest
in securities in the lowest ratings categories of Moody's and S&P, which
are C in the case of Moody's and D in the case of S&P.
VARIABLE INSURANCE PRODUCTS FUND (VIPF)
VIPF is a mutual fund currently offering five investment portfolios, each
with a different investment objective. The following two portfolios are
available under this Contract:
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MONEY MARKET PORTFOLIO seeks to obtain as high a level of current income as
is consistent with preserving capital and providing liquidity. The
portfolio will invest only in high-quality U.S. dollar denominated money
market instruments of domestic and foreign issuers. An investment in the
portfolio is not insured or guaranteed by the U.S. Government, and there
can be no assurance that the portfolio will maintain a stable asset value
per share of $1.00.
OVERSEAS PORTFOLIO seeks long term growth of capital primarily through
investments in foreign securities. Overseas Portfolio provides a means for
investors to diversify their own portfolios by participating in companies
and economies outside of the United States.
VARIABLE INSURANCE PRODUCTS FUND II (VIPF II)
VIPF II is a mutual fund currently offering five investment portfolios,
each with a different investment objective. The following two portfolios
are available under this Contract:
ASSET MANAGER PORTFOLIO seeks high total return with reduced risk over the
long-term by allocating its assets among domestic and foreign stocks, bonds
and short-term, fixed-income instruments.
INDEX 500 PORTFOLIO seeks to provide investment results that correspond to
the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this
objective, the portfolio attempts to duplicate the composition and total
return of the Standard & Poor's Composite Index of 500 Stocks while keeping
transaction costs and other expenses low. The portfolio is designed as a
long-term investment option.
THERE IS NO ASSURANCE THAT THE STATED OBJECTIVES AND POLICIES OF ANY OF THE
INVESTMENT FUNDS WILL BE ACHIEVED.
The Company reserves the right, subject to compliance with the law, to
offer additional funds.
An investment in the Variable Account, or in any Investment Fund, is not
insured or guaranteed by the U.S. Government.
The Investment Funds are currently offered only to the Variable Account but
may, in the future, be available to other registered separate accounts of the
Company offering variable annuity contracts and variable life insurance
policies.
REINVESTMENT
The Investment Funds described above have as a policy the distribution of
income dividends and capital gains. However, under the Contracts described in
this Prospectus there is an automatic reinvestment of such distributions.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENT FUND SHARES
The Company reserves the right, subject to applicable law, to make
additions to, deletions from, or substitutions for the shares that are held in
the Variable Account or that the Variable Account may purchase. If the shares of
an Investment Fund are no longer available for investment or if in the Company's
judgment further investment in any Investment Fund should become inappropriate
in view of the purposes of the Variable Account, the Company may redeem the
shares, if any, of that Investment Fund and substitute shares of another
registered open-end management investment company. The Company will not
substitute any shares attributable to a Contract's interest in a Sub-Account of
the Variable Account without notice and prior approval of the SEC and state
insurance authorities, as required by law.
The Company also reserves the right to establish additional Sub-Accounts of
the Variable Account, each of which would invest in shares corresponding to a
new Investment Fund or in shares of another investment company having a
specified investment objective. Subject to applicable law and any required SEC
approval, the Company may, in its sole discretion, establish new Sub-Accounts or
eliminate one or more Sub-Accounts if marketing needs, tax considerations or
investment conditions warrant. Any new Sub-Accounts may be made available to
existing Contract Owners on a basis to be determined by the Company.
If any of these substitutions or changes are made, the Company may by
appropriate endorsement change the Contract to reflect the substitution or
change. If the Company deems it to be in the best interest of Contract Owners
and Annuitants, and subject to any approvals that may be required under
applicable law, the Variable Account may be operated as a management investment
company under the 1940 Act, it may be deregistered under the Act if registration
is no longer required, or it may be combined with other separate accounts of the
Company.
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If a purchase payment for a selected Sub-Account is unable to be invested
because shares of the applicable Investment Fund are no longer available for
investment or if in the judgment of the Company's management further investment
in such Investment Fund shares would be inappropriate in view of the purposes of
the Contract, the portion of the purchase payment designated to be invested in
such Investment Fund will be returned to the Owner. The Owner may then direct
investment of such purchase payment to a different Sub-Account.
CHARGES MADE BY THE COMPANY
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
No deduction for a sales charge is made from the purchase payments for the
Contracts. However, the surrender charge described below (which may be deemed a
contingent deferred sales charge), when it is applicable, is intended to
reimburse the Company for expenses relating to the sale of the Contracts,
including commissions to sales personnel, costs of sales material and other
promotional activities and sales administration costs.
If part or all of a Contract's value is surrendered, or if the Contract's
Annuity Commencement Date occurs within the first two years after the Contract
was issued, surrender charges may be made by the Company. For purposes of the
following surrender charge description, "New Purchase Payments" are those
Contract purchase payments received by the Company during the Contract Year in
which the surrender occurs or in the six immediately preceding Contract Years;
"Old Purchase Payments" are those Contract purchase payments not defined as New
Purchase Payments; and "Contract Earnings" at any Valuation Date is the Contract
Value less the sum of New Purchase Payments and Old Purchase Payments.
For purposes of determining surrender charges, surrenders shall first be
taken from Old Purchase Payments until they are exhausted, then from New
Purchase Payments until they are exhausted, and thereafter from Contract
Earnings.
Surrenders taken from the following amounts ("Free Surrenders") are not
subject to a surrender charge during any Contract Year: (a) any Old Purchase
Payments not already surrendered; (b) 10% of all New Purchase Payments that have
been received by the Company (with the exception of Systematic Withdrawals, this
does not apply to surrenders made during the first Contract Year nor to any
surrenders after the first surrender made in each Contract Year thereafter); and
(c) any Contract Earnings being surrendered.
TOTAL SURRENDERS The surrender charge for a total surrender is determined
by multiplying the amount of each New Purchase Payment surrendered, that is not
eligible for a free surrender, by the applicable surrender charge percentage as
set forth in the following table:
SURRENDER CHARGE PERCENTAGE TABLE
CONTRACT YEAR OF SURRENDER SURRENDER CHARGE AS A
MINUS CONTRACT YEAR OF PERCENTAGE OF EACH
PURCHASE PAYMENT PURCHASE PAYMENT
---------------- ----------------
0 7%
1 7
2 5
3 5
4 4
5 3
6 2
7 and later 0
PARTIAL SURRENDERS - The amount of the partial surrender subject to a
surrender charge is determined by dividing (a) the portion of each New Purchase
Payment to be surrendered which is not eligible for a Free Surrender by (b) one
minus the applicable surrender charge percentage from the Surrender Charge
Percentage Table set forth above. The resulting amount for each New Purchase
Payment to be surrendered is then multiplied by the applicable surrender charge
percentage from the Surrender Charge Percentage Table shown above to arrive at
the amount of surrender charge to be assessed by the Company.
If the surrender charge is less than the Contract Value that remains
immediately after surrender, it will be deducted proportionately from the
Sub-Accounts that make up such Contract Value. If the surrender charge is more
than such remaining Contract Value, the portion of the surrender charge that can
be deducted from such remaining
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Contract Value will be so deducted and the balance will be deducted from the
surrender payment. In computing surrenders, any portion of a surrender charge
that is deducted from the remaining Contract Value will be deemed a part of the
surrender.
ANNUAL CONTRACT CHARGE
Each year on the Contract Anniversary, the Company deducts an Annual
Contract Charge of $35 from the Contract Value to reimburse it for
administrative expenses relating to the Contract, the Variable Account and the
Sub-Accounts. The Company will not increase the Annual Contract Charge. In any
Contract Year when a Contract is surrendered for its full value on other than
the Contract Anniversary, the Annual Contract Charge will be deducted at the
time of such surrender. During the annuity period if both a fixed annuity
payment and a variable annuity payment are selected, then an Annual Contract
Charge will be separately assessed against each payment type. The charges will
be deducted in equal installments from each such payment made during a
twelve-month period. If only a fixed annuity payment or a variable annuity
payment is selected, then only one Annual Contract Charge will be assessed and
deducted in equal installments.
MORTALITY RISK PREMIUM
The variable annuity payments made to Annuitants will vary in accordance
with the investment performance of the Sub-Accounts selected by the Owner.
However, they will not be affected by the mortality experience (death rate) of
persons receiving annuity payments from the Variable Account. The Company
assumes this "mortality risk" and has guaranteed the annuity rates incorporated
in the Contract, which cannot be changed.
To compensate the Company for assuming this mortality risk and the
mortality risk that Beneficiaries of Annuitants dying before the Annuity
Commencement Date may receive amounts in excess of the then current Contract
Value (see "Death Benefit Before the Annuity Commencement Date" on page 16), the
Company deducts a Mortality Risk Premium from the Variable Account Contract
Value. The deduction is made daily in an amount that is equal to an annual rate
of .85% of the daily Contract Values under the Variable Account. The Company may
not change the rate charged for the Mortality Risk Premium under any Contract.
EXPENSE RISK PREMIUM
The Company will not increase charges for administrative expenses
regardless of its actual expenses. To compensate the Company for assuming this
expense risk, the Company deducts an Expense Risk Premium from the Variable
Account Contract Value. The deduction is made daily in an amount that is equal
to an annual rate of .40% of the daily Variable Account Contract Values. The
Company may not change the rate of the Expense Risk Premium under any Contract.
ADMINISTRATION CHARGE
The Company deducts a daily Administration Charge from the Variable Account
Contract Value in an amount equal to an annual rate of .15% of the daily
Contract Values under the Variable Account. This charge is deducted to reimburse
the Company for the cost of providing administrative services under the
Contracts and the Variable Account. The Company may not change the rate of the
Administration Charge under any Contract.
SUFFICIENCY OF CHARGES
If the amount of the surrender charge assessed in connection with the
Contracts is not enough to cover all distribution expenses incurred in
connection therewith, the loss will be borne by the Company. Any excess
distribution expenses borne by the Company will be paid out of its general
account which may include, among other things, proceeds derived from the
Mortality Risk Premium and the Expense Risk Premium deducted from the Variable
Account.
PREMIUM AND OTHER TAXES
Various states and other governmental entities levy a premium tax,
currently ranging up to 3.50%, on annuity contracts issued by insurance
companies. If the Owner of the Contract lives in a governmental jurisdiction
that levies such a tax, the Company will pay the taxes when due but reserves the
right to deduct the amount of the tax either from purchase payments as they are
received or from the Contract Value at a later date.
The current range of premium tax rates is a guide only and should not be
relied on to determine actual premium taxes on any purchase payment or Contract
because the taxes are subject to change from time to time by legislative and
other governmental action. The timing of tax levies also varies from one taxing
authority to another. Consequently, in many cases the purchaser of a Contract
will not be able to accurately determine the premium tax applicable to the
Contract by reference to the range of tax rates described above. The Company
reserves the right to deduct charges for any other tax or economic burden
resulting from the application of the tax laws that it determines to be
applicable to the Contract.
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REDUCTION OF CHARGES
Any of the charges under the Contract, as well as the minimum purchase
payment requirements set forth in this Prospectus, may be reduced due to special
circumstances that result in lower sales, administrative or mortality expenses.
For example, special circumstances may exist in connection with group or
sponsored arrangements, sales to the Company's policy and Contract Owners or
those of affiliated insurance companies, or sales to employees or clients of the
Company's affiliates. The amount of any reductions will reflect the reduced
sales effort and administrative costs resulting from, or the different mortality
experience expected as a result of, the special circumstances. Reductions will
not be unfairly discriminatory against any person, including the affected policy
or Contract Owners and owners of all other contracts funded by the Variable
Account.
EXPENSES OF THE INVESTMENT FUNDS
There are fees deducted from and expenses paid out of the assets of the
Investment Funds that are described in the accompanying prospectuses for the
Funds.
ADMINISTRATION OF THE CONTRACTS
The Company has entered into a contract with Continuum Administrative
Services Corporation (formerly known as Vantage Computer Systems, Inc.), Kansas
City, Missouri ("CASC") under which CASC has agreed to perform certain
administrative functions relating to the Contracts and the Variable Account.
These functions include, among other things, maintaining the books and records
of the Variable Account and the Sub-Accounts, and maintaining records of the
name, address, taxpayer identification number, Contract number, type of Contract
issued to each Owner, Contract Value and other pertinent information necessary
to the administration and operation of the Contracts.
THE CONTRACTS
The Contracts described in this Prospectus are designed for retirement
plans which may or may not be Qualified Plans. Often a single purchase payment
is made for a deferred annuity, but this Contract freely permits subsequent
purchase payments up to the maximum level of funding set forth below. The
minimum amount the Company will accept as an initial purchase payment is $5,000
for Non-Qualified Contracts and $2,000 for Qualified Contracts. The Company may
choose not to accept any subsequent purchase payment for a Non-Qualified
Contract if it is less than $500 and for a Qualified Contract if it is less than
$200. The Company may also choose not to accept any subsequent purchase payment
if the purchase payment together with the Contract Value at the next Valuation
Date exceeds $1,000,000. Any purchase payment not accepted by the Company will
be refunded. The Company reserves the right to accept smaller or larger initial
and subsequent purchase payments in connection with special circumstances, such
as sales through group or sponsored arrangements.
ALLOCATION OF PURCHASE PAYMENTS
Purchase payments may be allocated to the available Sub-Accounts of the
Variable Account selected by the Owner and/or the Fixed Account (see Appendix
A). The Fixed Account is not available to Contract Owners in the states of
Maryland, Oregon, South Carolina and Washington. Any purchase payment or portion
thereof for which no allocation election is made will be returned to the Owner.
The initial purchase payment will be allocated to the selected Sub-Accounts
and/or the Fixed Account not later than two business days after receipt, if the
application and all information necessary for processing the Contract are
complete. The Company may retain purchase payments for up to five business days
while attempting to complete an incomplete application. If the application
cannot be made complete within this period, the applicant will be informed of
the reasons for the delay and the purchase payment will be returned immediately
unless the applicant consents to retention of the payment by the Company until
the application is made complete. Once the completed application is received,
the payment must be allocated within two business days. For any subsequent
purchase payments, the payments will be credited at the Sub-Account Accumulation
Unit Value next determined after receipt of the purchase payment.
Upon allocation to Sub-Accounts of the Variable Account, a purchase payment
is converted into Accumulation Units of the Sub-Account. The amount of the
purchase payment allocated to a particular Sub-Account is divided by the value
of an Accumulation Unit for the Sub-Account to determine the number of
Accumulation Units of the Sub-Account to be held in the Variable Account with
respect to the Contract. The net investment results of each Sub-Account vary
primarily with the investment performance of the Investment Fund whose shares
are held in the Sub-Account.
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An Investment Fund may impose a minimum purchase requirement. If that
minimum purchase requirement exceeds the aggregate of all purchase payments
received by the Company, less any redemption of Investment Fund shares resulting
from transfers or surrenders, on any given day that are to be applied to a
Sub-Account for the purchase of shares of such Investment Fund, such purchase
payments will be refunded.
SUB-ACCOUNT ACCUMULATION UNIT VALUE
Each Sub-Account Accumulation Unit was initially valued at $10 when the
first Investment Fund shares were purchased. Thereafter the value of each
Sub-Account Accumulation Unit will vary up or down according to a Net Investment
Factor, which is primarily based on the investment performance of the applicable
Investment Fund. Investment Fund shares in the Sub-Accounts will be valued at
their net asset value.
Dividend and capital gain distributions from an Investment Fund will be
automatically reinvested in additional shares of such Investment Fund and
allocated to the appropriate Sub-Account. The number of Sub-Account Accumulation
Units does not increase because of the additional shares, but the Accumulation
Unit value may increase.
NET INVESTMENT FACTOR
The Net Investment Factor is an index number which reflects charges under
the Contract and the investment performance during a Valuation Period of the
Investment Fund whose shares are held in the particular Sub-Account. If the Net
Investment Factor is greater than one, the value of a Sub-Account Accumulation
Unit has increased. If the Net Investment Factor is less than one, the value of
a Sub-Account Accumulation Unit has decreased. The Net Investment Factor is
determined by dividing (1) by (2) then subtracting (3) from the result, where:
(1) is the net result of:
(a) the net asset value per share of the Investment Fund shares held
in the Sub-Account, determined at the end of the current
Valuation Period, plus
(b) the per share amount of any dividend or capital gain
distributions made on the Investment Fund shares held in the
Sub-Account during the current Valuation Period, plus or minus
(c) a per share charge or credit for any taxes reserved for which the
Company determines to have resulted from the investment
operations of the Sub-Account and to be applicable to the
Contract;
(2) is the net result of:
(a) the net asset value per share of the Investment Fund shares held
in the Sub-Account, determined at the end of the last prior
Valuation Period, plus or minus
(b) a per share charge or credit for any taxes reserved for during
the last prior Valuation Period which the Company determines to
have resulted from the investment operations of the Sub-Account
and to be applicable to the Contract; and
(3) is a factor representing the Mortality Risk Premium, the Expense Risk
Premium and the Administration Charge deducted from the Sub-Account,
which factor is equal, on an annual basis, to 1.40% of the daily net
asset value of the Sub-Account.
DEATH BENEFIT BEFORE THE ANNUITY COMMENCEMENT DATE
If the Owner, including any joint Owner, dies before the Annuity
Commencement Date, the Beneficiary will be entitled to receive the Death
Benefit. For this purpose the Death Benefit will be:
(1) if any Owner (including the Annuitant) dies on or before the first day
of the month following the Owner's 85th birthday, the greatest of (i)
the Contract Value on the Death Benefit Valuation Date; or (ii) the
sum of the purchase payments received by the Company under the
Contract to the Death Benefit Valuation Date, less any surrender
payments previously made by the Company; or (iii) the Contract Value
on the Specified Contract Anniversary (immediately preceding the
Owner's death), plus any purchase payments and less any surrender
payments since that anniversary;
(2) if any Owner (including the Annuitant) dies after the first day of the
month following the Annuitant's 85th birthday, the Contract Value on
the Death Benefit Valuation Date.
If a single sum is requested, it will be paid within seven days after the
Death Benefit Valuation Date. If an Annuity Form is requested, it may be any
Annuity Form permitted by Section 72(s) of the Code and which the
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Company is willing to issue. An Annuity Form selection must be in writing and
must be received by the Company within 60 days after the date of the Owner's
death, otherwise the Death Benefit as of the Death Benefit Valuation Date will
be paid in a single sum to the Beneficiary and the Contract will be canceled.
If the only Beneficiary is the Owner's surviving spouse, such spouse may
continue the Contract as the Owner, and then (1) select a single sum payment, or
(2) select any Annuity Form which does not exceed such spouse's life expectancy.
If the Beneficiary elects to receive annuity payments under an Annuity
Form, the amount and duration of payments may vary depending on the Annuity Form
selected and whether fixed and/or variable annuity payments are requested. See
"Annuity Provisions" beginning on page 19.
DEATH BENEFIT AFTER THE ANNUITY COMMENCEMENT DATE
If the Annuitant dies after the Annuity Commencement Date, the Death
Benefit, if any, shall be as stated in the Annuity Form in effect.
SURRENDER (REDEMPTION)
If a written request therefor from the Owner is received by the Company
before the Annuity Commencement Date, all or part of the Contract Value will be
paid to the Owner after deducting any applicable surrender charge and taxes.
(See "Surrender Charge (Contingent Deferred Sales Charge)" on page 13.) Partial
surrenders may be made in amounts not less than $500 and no partial surrender
may cause the Contract Value to fall below $1,000. In addition, if a total
surrender occurs other than on a Contract Anniversary the Annual Contract Charge
will be deducted from the Contract Value before the surrender payment is made.
Surrenders must be consented to by each collateral assignee. The Company
reserves the right to require that surrenders in excess of $50,000 be signature
guaranteed by a member firm of the New York, American, Boston, Midwest,
Philadelphia, or Pacific Stock Exchange, or by a commercial bank (not a savings
bank) which is a member of the Federal Deposit Insurance Corporation, or, in
certain cases, by a member firm of the National Association of Securities
Dealers, Inc. that has entered into an appropriate agreement with the Company.
The Company may require that the Contract be returned before a surrender
takes place. A surrender will take place on the next Valuation Date after the
requirements for surrender are completed and payment will be made within seven
days after such Valuation Date. Unless the Owner requests a partial surrender to
be made from the Fixed Account or particular Sub-Accounts, a partial surrender
will be taken proportionately from the Fixed Account and all Sub-Accounts on a
basis that reflects their proportionate percentage of the Contract Value.
The Company reserves the right to limit the number of partial surrenders,
and to assess a processing fee not to exceed the lesser of 2% of the partial
surrender amount or $25. No processing fee will be charged in connection with
total surrenders.
The Company may cancel the Contract on any Contract Anniversary, or if such
Contract Anniversary is not a Valuation Date, on the next Valuation Date
thereafter, by paying to the Owner the Contract Value as of such Valuation Date
if such Contract Value after all charges is less than $1,000.
If this Contract is purchased as a "tax-sheltered annuity" under Section
403(b) of the Internal Revenue Code (the "Code"), it is subject to certain
restrictions on redemption imposed by Section 403(b)(11) of the Code. (See
"Tax-Sheltered Annuities" on page 24.) These restrictions on redemption are
imposed by the Variable Account and the Company in full compliance with and in
reliance upon the terms and conditions of a no-action letter issued by the
Office of Insurance Products and Legal Compliance of the Securities and Exchange
Commission to the American Council of Life Insurance (publicly available
November 28, 1988).
For tax purposes, surrender payments may be taxable. Such payments shall be
deemed to be from earnings and then gains until cumulative surrender payments
equal all accumulated earnings and gains, and thereafter from purchase payments
received by the Company. Consideration should be given to the tax implications
of a surrender prior to making a surrender request, including a surrender in
connection with a Qualified Plan.
SYSTEMATIC WITHDRAWALS
A Systematic Withdrawal is a specialized form of partial surrender. (See
"Surrender (Redemption)" on page 17.) The Owner may elect to take Systematic
Withdrawals by surrendering a specified dollar amount or percentage of
cumulative purchase payments on a monthly, quarterly, semi-annual or annual
basis from Sub-Accounts. Systematic Withdrawals may be taken from Variable
Account Contract Value and/or Fixed Account Contract Value, but are limited
annually to 10% of total cumulative purchase payments made under the Contract. A
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Surrender Charge will be imposed on the amount of any Systematic Withdrawal,
partial surrender or any combination thereof which is not a Free Surrender. (See
"Surrender Charge (Contingent Deferred Sales Charge)" on page 13.) Systematic
Withdrawals may be discontinued by the Owner at any time by notifying the
Company in writing.
The Company reserves the right to modify or discontinue offering Systematic
Withdrawals, however, any such modification or discontinuation will not affect
any Systematic Withdrawal programs already commenced. While the Company does not
currently charge a processing fee for partial surrenders under this program, it
reserves the right to charge a processing fee not to exceed the lesser of 2% of
the Systematic Withdrawal payment or $25.
Systematic Withdrawals may be subject to tax, including a penalty tax, and
the Owner should consult with his or her tax adviser before requesting any
Systematic Withdrawal. (See "FEDERAL TAX STATUS Taxation of Annuities" on page
22.)
Contract Owners interested in participating in the Systematic Withdrawal
program may obtain a separate application form and full information concerning
the program and its restrictions from their registered representative.
TRANSFERS
Before the Annuity Commencement Date, the Owner may transfer amounts
between the Sub-Accounts or from the Sub-Accounts to the Fixed Account. Subject
to certain restrictions, amounts may also be transferred from the Fixed Account
to the Sub-Accounts. Currently, there are three methods by which transfers may
be made: in writing, by telephone and by Dollar Cost Averaging.
WRITTEN TRANSFERS - Before the Annuity Commencement Date the Owner may
request a transfer in writing, subject to any conditions or charges the
Investment Funds whose shares are involved may impose, of all or part of a
Sub-Account's value to other Sub-Accounts or to the Fixed Account. The transfer
will be made by the Company on the first Valuation Date after the request for
such a transfer is received by the Company. Currently, there is no charge for
such a transfer, other than those that may be made by the Investment Funds. The
Company reserves the right, however, to charge a transfer fee not to exceed $25
per transfer and to limit the number of transfers made by the Owner. To
accomplish the transfer, the Variable Account will surrender Accumulation Units
in the particular Sub-Accounts and reinvest that value in Accumulation Units of
one or more of the available Sub-Accounts as directed in the request. After the
Annuity Commencement Date, an Annuitant who has selected Variable Annuity
Payments may request transfer of Annuity Unit values in the same manner and
subject to the same requirements as for an Owner-transfer of Sub-Account
Accumulation Unit values. However, no transfers may be made to the Fixed Account
after the Annuity Commencement Date.
Before the Annuity Commencement Date, transfers may also be made from the
Fixed Account to the Variable Account, provided, however, that (a) transfers may
only be made during the period starting 30 days before and ending 30 days after
the Contract Anniversary, and only one transfer may be made during each such
period, (b) no more than 50% of the Fixed Account Contract Value may be the
subject of any such transfer (unless the balance, after such transfer, would be
less than $1,000, in which case the full Fixed Account Contract Value may be
transferred), and (c) such transfer must involve at least $500 (or the total
Fixed Account Contract Value, if less). No transfers may be made from the Fixed
Account after the Annuity Commencement Date.
The conditions applicable to written transfers also apply to telephone
transfers and Dollar Cost Averaging transfers.
TELEPHONE TRANSFERS - Telephone transfers are available when the Owner
completes a telephone transfer form. If the Owner elects to complete the
telephone transfer form, the Owner thereby agrees that the Company and its
Contract Administrator will not be liable for any loss, liability, cost or
expense when the Company, and/or the Contract Administrator act in accordance
with the telephone transfer instructions which are received and recorded on
voice recording equipment. If a telephone transfer, processed after the Owner
has completed the telephone transfer form, is later determined not to have been
made by the Owner or was made without the Owner's authorization, and a loss
results from such unauthorized transfer, the Owner bears the risk of this loss.
The Company will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. In the event the Company does not employ
such procedures, the Company may be liable for any losses due to unauthorized or
fraudulent instructions. Such procedures may include, among others, requiring
forms of personal identification prior to acting upon telephone instructions,
providing written confirmation of such instructions and/or tape recording
telephone instructions.
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DOLLAR COST AVERAGING TRANSFERS - The Owner may direct the Company to
automatically transfer a fixed dollar amount or a specified percentage of
Sub-Account Value to any one or more other Sub-Accounts or to the Fixed Account.
No transfers from the Fixed Account are permitted under this service. Transfers
of this type may be made on a monthly, quarterly, semi-annual or annual basis.
This service is intended to allow the Owner to utilize "Dollar Cost Averaging,"
a long-term investment method which provides for regular, level investments over
time. The Company makes no guarantees that Dollar Cost Averaging will result in
a profit or protect against loss. The Owner may discontinue Dollar Cost
Averaging at any time by notifying the Company in writing.
Contract Owners interested in Dollar Cost Averaging may obtain a separate
application form and full information concerning this service and its
restrictions from their registered representatives.
The Company reserves the right to modify or discontinue offering Dollar
Cost Averaging. Any such modification or discontinuation would not affect Dollar
Cost Averaging transfer programs already commenced. Although the Company
currently charges no fees for transfers made under the Dollar Cost Averaging
program, the Company reserves the right to charge a processing fee for Dollar
Cost Averaging transfers not to exceed $25 per such transfer.
ASSIGNMENTS
If the Contract is issued pursuant to or in connection with a Qualified
Plan, it may not be sold, transferred, pledged or assigned to any person or
entity other than the Company. In other circumstances, an assignment of the
Contract is permitted, but only before the Annuity Commencement Date, by giving
the Company the original or a certified copy of the assignment. The Company
shall not be bound by any assignment until it is actually received by the
Company and shall not be responsible for the validity of any assignment. Any
payments made or actions taken by the Company before the Company actually
receives any assignment shall not be affected by the assignment.
CONTRACT OWNER AND BENEFICIARIES
Unless someone else is named as the Owner in the application for the
Contract, the applicant is the Owner of the Contract and before the Annuity
Commencement Date may exercise all of the Owner's rights under the Contract. No
more than two (2) natural persons may be named as Owner.
The Owner may name a Beneficiary and a Successor Beneficiary. In the event
an Owner dies before the Annuity Commencement Date, the Beneficiary shall
receive a Death Benefit as provided in the Contract. In the event an Owner dies
on or after the Annuity Commencement Date, the Beneficiary, if the Annuity Form
in effect at the Owner's death so provides, may continue receiving payments, be
paid a lump sum, or be paid nothing. If the Beneficiary or Successor Beneficiary
is not living on the date payment is due or if no Beneficiary or Successor
Beneficiary has been named, the Owner's estate will receive the applicable
proceeds.
A person named as an Annuitant, a Beneficiary or a Successor Beneficiary
shall not be entitled to exercise any rights relating to the Contract or to
receive any payments or settlements under the Contract or any Annuity Form,
unless such person is living on the earlier of (a) the day due proof of death of
the Owner, the Annuitant or the Beneficiary, whichever is applicable, is
received by the Company or (b) the tenth day after the death of the Owner, the
Annuitant or the Beneficiary, whichever is applicable.
Unless different arrangements have been made with the Company by the Owner,
if more than one Beneficiary is entitled to payments from the Company the
payments shall be in equal shares.
Before the Annuity Commencement Date, the Owner may change the Annuitant,
the Beneficiary or the Successor Beneficiary by giving the Company written
notice of the change, but the change shall not be effective until actually
received by the Company. Upon receipt by the Company of a notice of change, it
will be effective as of the date it was signed but shall not affect any payments
made or actions taken by the Company before the Company received the notice, and
the Company shall not be responsible for the validity of any change.
CONTRACT INQUIRIES
Inquiries regarding a Contract may be made by writing to the Annuity
Service Center, P.O. Box 419275, Kansas City, Missouri 64141-6275.
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
The Owner selects the Annuity Commencement Date, which must be the first
day of a month, when making application for the Contract. The date will be the
first day of the month following the Annuitant's 75th birthday unless an earlier
or later date has been selected by the Owner and, if the date is later, it has
been agreed to by the Company. The Owner may change an Annuity Commencement Date
selection by written notice received by the
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Company at least 30 days before both the Annuity Commencement Date currently in
effect and the new Annuity Commencement Date. The new date selected must satisfy
the requirements for an Annuity Commencement Date. If the Annuity Commencement
Date selected by the Owner does not occur on a Valuation Date at least 60 days
after the date on which the Contract was issued, the Company reserves the right
to adjust the Annuity Commencement Date to the first Valuation Date after the
Annuity Commencement Date selected by the Owner which is at least 60 days after
the Contract issue date. If the Annuity Commencement Date occurs before the
second Contract Anniversary, the Company will deduct Surrender Charges. (See
"Surrender Charge (Contingent Deferred Sales Charge)" on page 13.)
ANNUITY FORM SELECTION
The Owner may select a Variable Annuity Form, a Fixed Annuity Form, or
both, with payments starting at the Annuity Commencement Date when making
application for the Contract. Thereafter, the Owner may change the Annuity
Form(s) by written notice received by the Company before the Annuity
Commencement Date. If no election has been made before the Annuity Commencement
Date, the Company will apply the Fixed Account Contract Value to provide a Fixed
Annuity and the Variable Account Contract Value to provide a Variable Annuity,
both in the form of a Life Annuity with Payments Guaranteed for 10 years (120
Months), which shall be automatically effective.
ANNUITY FORMS
Variable annuity payments and fixed annuity payments are available in any
of the following Annuity Forms:
LIFE ANNUITY - An annuity payable on the first day of each month during the
Annuitant's life, starting with the first payment due according to the Contract.
Payments cease with the payment made on the first day of the month in which the
Annuitant's death occurs. IT WOULD BE POSSIBLE UNDER THIS ANNUITY FORM FOR THE
ANNUITANT TO RECEIVE ONLY ONE PAYMENT IF HE OR SHE DIED BEFORE THE SECOND
ANNUITY PAYMENT, ONLY TWO PAYMENTS IF HE OR SHE DIED BEFORE THE THIRD ANNUITY
PAYMENT, ETC.
LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 YEARS (120 MONTHS) OR 20 YEARS
(240 MONTHS) - An annuity payable on the first day of each month during the
Annuitant's life, starting with the first payment due according to the Contract.
If the Annuitant receives all of the guaranteed payments, payments will continue
thereafter but cease with the payment made on the first day of the month in
which the Annuitant's death occurs. If all of the guaranteed payments have not
been made before the Annuitant's death, the unpaid installments of the
guaranteed payments will be continued to the Beneficiary.
JOINT AND FULL SURVIVOR ANNUITY - An annuity payable on the first day of
each month during the Annuitant's life and the life of a named person (the
"Joint Annuitant"), starting with the first payment due according to the
Contract. Payments will continue while either the Annuitant or the Joint
Annuitant is living and cease with the payment made on the first day of the
month in which the death of the Annuitant or the Joint Annuitant, whichever
lives longer, occurs. THERE IS NO MINIMUM NUMBER OF PAYMENTS GUARANTEED UNDER
THIS ANNUITY FORM. PAYMENTS CEASE UPON THE DEATH OF THE LAST SURVIVOR OF THE
ANNUITANT AND THE JOINT ANNUITANT REGARDLESS OF THE NUMBER OF PAYMENTS RECEIVED.
The Company also has other annuity forms available and information about
them can be obtained by writing to the Company.
FREQUENCY AND AMOUNT OF ANNUITY PAYMENTS
Annuity payments will be paid as monthly installments, unless the Annuitant
and the Company agree to a different payment schedule. However, if the Contract
Value at the Annuity Commencement Date is less than $5,000, the Company may pay
the Contract Value in a single sum and the Contract will be canceled. Also if a
monthly payment would be or become less than $50, the Company may change the
frequency of payments to intervals that will result in payments of at least $50
each.
ANNUITY PAYMENTS
The amount of the first fixed annuity payment is determined by applying the
Contract Value to be used for a fixed annuity at the Annuity Commencement Date
to the annuity table in the Contract for the Fixed Annuity Form selected. The
table shows the amount of the initial annuity payment for each $1,000 applied
and all subsequent payments shall be equal to this amount. The amount of the
first variable annuity payment is determined by applying the Contract Value to
be used for a variable annuity at the Annuity Commencement Date to the annuity
table in the Contract for the Annuity Form selected.
Subsequent variable annuity payments vary in amount in accordance with
the investment performance of the applicable Sub-Account. Assuming annuity
payments are based on the unit values of a single Sub-Account, the
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dollar amount of the first annuity payment, determined as set forth above, is
divided by the Sub-Account Annuity Unit Value as of the Annuity Commencement
Date to establish the number of Variable Annuity Units representing each annuity
payment. This number of Variable Annuity Units remains fixed during the annuity
payment period. The dollar amount of the second and subsequent payments is not
predetermined and may change from month to month. The dollar amount of the
second and each subsequent payment is determined by multiplying the fixed number
of Variable Annuity Units by the Sub-Account Annuity Unit Value for the
Valuation Period with respect to which the payment is due. If the monthly
payment is based upon the Annuity Unit Values of more than one Sub-Account, the
foregoing procedure is repeated for each applicable Sub-Account and the sum of
the payments based on each Sub-Account is the amount of the monthly annuity
payment.
The Annual Contract Charge is deducted in equal installments from each
annuity payment. When a fixed annuity payment is made in conjunction with a
variable annuity payment, an Annual Contract Charge is assessed against each
type of payment and is deducted in equal installments from each annuity payment.
The annuity tables in the Contracts are based on the 1983 Individual
Annuity Mortality Table (set back three years).
The Company guarantees that the dollar amount of each variable annuity
payment after the first payment will not be affected by variations in expenses
(including those related to the Variable Account) or in mortality experience
from the mortality assumptions used to determine the first payment.
SUB-ACCOUNT ANNUITY UNIT VALUE
A Sub-Account's Variable Annuity Units will initially be valued at $10 each
at the time Accumulation Units with respect to the Sub-Account are first
converted into Variable Annuity Units. The Sub-Account Annuity Unit Value for
any subsequent Valuation Period is determined by multiplying the Sub-Account
Annuity Unit Value for the immediately preceding Valuation Period by the Net
Investment Factor for the Sub-Account for the Valuation Period for which the
Sub-Account Annuity Unit Value is being calculated, and multiplying the result
by an interest factor to neutralize the assumed investment rate of 4% per annum
built into the annuity tables contained in the Contracts. (See "Net Investment
Factor" on page 16.)
ASSUMED INVESTMENT RATE
A 4% assumed investment rate is built into the annuity tables contained in
the Contracts. If the actual net investment rate on the assets of the Variable
Account is the same as the assumed investment rate of 4% per year, variable
annuity payments will remain level. If the actual net investment rate exceeds
the assumed investment rate, variable annuity payments will increase and
conversely, if it is less than the assumed investment rate the payments will
decrease.
FEDERAL TAX STATUS
INTRODUCTION
THIS DISCUSSION IS GENERAL AND NOT INTENDED AS TAX ADVICE. The discussion
is not intended to address the tax consequences resulting from all of the
situations in which a person may be entitled to or may receive a distribution
under the Contract. The Contracts are designed for use by individuals in
connection with retirement plans which may or may not be Qualified Plans under
the provisions of the Internal Revenue Code (the "Code"). The ultimate effect of
federal income taxes on the Contract Value, on annuity payments and on the
economic benefit to the Owner, the Annuitant or the Beneficiary depends upon the
type of retirement plan for which the Contract is purchased, and upon the tax
and employment status of the individual concerned. No attempt is made to
consider any applicable state or other tax laws. The discussion is based on the
Company's understanding of Federal Income Tax Laws as currently interpreted. No
representation is made regarding the likelihood of the continuation of the
present Federal Income Tax Laws or the current interpretation by the Internal
Revenue Service ("IRS").
The Contract may be purchased on a non-qualified basis ("Non-Qualified
Contract") or purchased and used in connection with plans qualifying for
favorable tax treatment ("Qualified Contract"). The Qualified Contract is
designed for use by individuals whose premium payments are comprised solely of
proceeds from and/or contributions under retirement plans which are intended to
qualify as plans entitled to special income tax treatment under Sections 401(a),
403(b), or 408 of the Code. The ultimate effect of federal income taxes on the
amounts held under a Contract, or annuity payments, and on the economic benefit
to the Owner, the Annuitant, or the Beneficiary depends on the type of
retirement plan, on the tax and employment status of the individual concerned,
and on the Company's tax status. In addition, certain requirements must be
satisfied in purchasing a Qualified Contract with proceeds from a tax-qualified
plan and receiving distributions from a Qualified Contract in order to continue
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receiving favorable tax treatment. Therefore, purchasers of Qualified Contracts
should seek competent legal and tax advice regarding the suitability of a
Contract for their situation, the applicable requirements, and the tax treatment
of the rights and benefits of a Contract. The following discussion assumes that
Qualified Contracts are purchased with proceeds from and/or contributions under
retirement plans that qualify for the intended special federal income tax
treatment.
TAX STATUS OF THE CONTRACT
DIVERSIFICATION REQUIREMENTS. Section 817(h) of the Code provides that
separate account investments underlying a contract must be "adequately
diversified" in accordance with Treasury regulations in order for the contract
to qualify as an annuity contract under Section 72 of the Code. The Variable
Account, through each of the Investment Funds, intends to comply with the
diversification requirements prescribed in regulations under Section 817(h) of
the Code, which affect how the assets in the various Sub-Accounts may be
invested. The Company expects that each Investment Fund in which the Variable
Account owns shares will meet the diversification requirements and that the
Contract will be treated as an annuity contract under the Code.
The Treasury has also announced that the diversification regulations do not
provide guidance concerning the extent to which Owners may direct their
investments to particular Sub-Accounts of a variable account or how concentrated
the investments of the Investment Funds underlying a variable account may be. It
is possible that if additional guidance in this regard is issued, the Contract
may need to be modified to comply with such additional guidance. For these
reasons, the Company reserves the right to modify the Contract as necessary to
attempt to prevent the Owner from being considered the owner of the assets of
the Investment Funds or otherwise to qualify the Contract for favorable tax
treatment.
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract for
federal income tax purposes, Section 72(s) of the Code also requires any
Non-Qualified Contract to provide that: (a) if any Owner dies on or after the
Annuity Commencement Date but prior to the time the entire interest in the
Contract has been distributed, the remaining portion of such interest will be
distributed at least as rapidly as under the method of distribution being used
as of the date of that Owner's death; and (b) if any Owner dies prior to the
Annuity Commencement Date, the entire interest in the Contract will be
distributed within five years after the date of the Owner's death. These
requirements will be considered satisfied as to any portion of the Owner's
interest which is payable to or for the benefit of a "designated Beneficiary"
and which is distributed over the life of such Beneficiary or over a period not
extending beyond the life expectancy of that Beneficiary, provided that such
distributions begin within one year of that Owner's death. The Owner's
"designated Beneficiary" is the person designated by such Owner as a Beneficiary
and to whom ownership of the Contract passes by reason of death and must be a
natural person. However, if the Owner's "designated Beneficiary" is the
surviving spouse of the Owner, the Contract may be continued with the surviving
spouse as the new Owner. If the Owner is not an individual, any change in the
primary Annuitant is treated as a change of Owner for tax purposes.
The Non-Qualified Contracts contain provisions which are intended to comply
with the requirements of Section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. The Company intends to
review such provisions and modify them if necessary to assure that they comply
with the requirements of Code Section 72(s) when clarified by regulation or
otherwise. Other rules may apply to Qualified Contracts.
TAXATION OF ANNUITIES
IN GENERAL. Section 72 of the Code governs taxation of annuities in
general. The Company believes that an Owner who is a natural person generally is
not taxed on increases in the value of a Contract until distribution occurs by
withdrawing all or part of the Contract Value (e.g., partial withdrawals and
complete surrenders) or as annuity payments under the Annuity Form selected. For
this purpose, the assignment, pledge, or agreement to assign or pledge any
portion of the Contract Value (and in the case of a Qualified Contract, any
portion of an interest in the qualified plan) generally will be treated as a
distribution. The taxable portion of a distribution (in the form of a single sum
payment or annuity) is taxable as ordinary income.
The Owner of any annuity contract who is not a natural person generally
must include in income any increase in the excess of the net surrender value
over the "investment in the contract" during the taxable year. The Company
restricts ownership of Non-Qualified Contracts to no more than two natural
persons.
The following discussion generally applies to Contracts owned by natural
persons.
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SURRENDERS. In the case of a surrender from a Qualified Contract, under
Section 72(e) of the Code a ratable portion of the amount received is taxable,
generally based on the ratio of the "investment in the contract" to the
participant's total accrued benefit or balance under the retirement plan. The
"investment in the contract" generally equals the portion, if any, of any
premium payments paid by or on behalf of any individual under a Contract which
was not under excluded from the individual's gross income. For Contracts issued
in connection with qualified plans, the "investment in the contract" can be
zero. Special tax rules may be available for certain distributions from
Qualified Contracts.
In the case of a surrender (including Systematic Withdrawals) from a
Non-Qualified Contract before the Annuity Commencement Date, under Code Section
72(e) amounts received are generally first treated as taxable income to the
extent that the Contract Value immediately before surrender exceeds the
"investment in the contract" at that time. Any additional amount surrendered is
not taxable.
In the case of a full surrender under a Qualified or Non-Qualified
Contract, the amount received generally will be taxable only to the extent it
exceeds the "investment in the contract."
A Federal penalty tax may apply to certain surrenders from Qualified and
Non-Qualified Contracts. (See "Penalty Tax on Certain Distributions" below.)
ANNUITY PAYMENTS. Although tax consequences may vary depending on the
Annuity Form selected under the Contract, in general, only the portion of the
Annuity Payment that represents the amount by which the Contract Value exceeds
the investment in the Contract will be taxed; after the investment in the
Contract is recovered, the full amount of any additional annuity payments is
taxable. For variable annuity payments, the taxable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is not taxed. The dollar amount is determined by dividing the
investment in the Contract by the total number of expected periodic payments.
However, the entire distribution will be taxable once the recipient has
recovered the dollar amount of his or her investment in the Contract. For fixed
annuity payments, in general, there is no tax on the portion of each payment
which represents the same ratio that the investment in the Contract bears to the
total expected value of the annuity payments for the term of the payments;
however, the remainder of each annuity payment is taxable until the recovery of
the investment in the Contract, and thereafter the full amount of each annuity
payment is taxable.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from a
Contract because of the death of an Owner or an Annuitant. Generally, such
amounts are includible in the income of the recipient as follows: (i) if
distributed in a lump sum, they are taxed in the same manner as a full surrender
of the Contract; or (ii) if distributed under a payment option, they are taxed
in the same way as annuity payments.
PENALTY TAX ON CERTAIN DISTRIBUTIONS. In the case of a distribution
pursuant to a Non-Qualified Contract, a Federal penalty equal to 10% of the
amount treated as taxable income may be imposed. In general, however, there is
no penalty on distributions:
1. made on or after the taxpayer reaches age 59-1/2;
2. made on or after the death of the holder (a holder is considered an
Owner) (or if the holder is not an individual, the death of the
primary annuitant);
3. attributable to the taxpayer's becoming disabled;
4. a part of a series of substantially equal periodic payments (not less
frequently than annually) for the life ( or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of the
taxpayer and his or her designated beneficiary;
5. made under an annuity contract that is purchased with a single premium
when the annuity starting date is no later than a year from purchase
of the annuity and substantially equal periodic payments are made, not
less frequently than annually, during the annuity period; and
6. made under certain annuities issued in connection with structured
settlement agreements.
Other tax penalties may apply to certain distributions under a Qualified
Contract, as well as to certain contributions to, loans from, and other
circumstances, applicable to the Qualified Plan of which the Qualified Contract
is part.
POSSIBLE CHANGES IN TAXATION. In past years, legislation has been proposed
that would have adversely modified the Federal taxation of certain annuities.
For example, one such proposal would have changed the tax
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treatment of non-qualified annuities that did not have "substantial life
contingencies" by taxing income as it is credited to the annuity. Although as of
the date of this prospectus, Congress is not considering any legislation
regarding the taxation of annuities, there is always the possibility that tax
treatment of annuities could change by legislation or other means (such as IRS
regulations, revenue rulings, judicial decisions, etc.). Moreover, it is also
possible that any change could be retroactive (that is, effective prior to the
date of the change).
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT
A transfer of ownership or assignment of a Contract, the designation of an
Annuitant, Payee or other Beneficiary who is not also the Owner, or the exchange
of a Contract may result in certain tax consequences to the Owner that are not
discussed herein. An Owner contemplating any such transfer, assignment, or
exchange of a Contract should contact a competent tax adviser with respect to
the potential tax effects of such a transaction.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for
the recipient's Federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Effective January 1, 1993, distributions from certain qualified
plans are generally subject to mandatory withholding. Withholding for Contracts
issued to retirement plans established under Section 401 of the Code is the
responsibility of the plan trustee.
MULTIPLE CONTRACTS
Section 72(e)(11) of the Code treats all non-qualified deferred annuity
contracts entered into after October 21, 1988 that are issued by the Company (or
its affiliates) to the same Owner during any calendar year as one annuity
contract for purposes of determining the amount includible in gross income under
Code Section 72(e). The effects of this rule are not yet clear; however, it
could affect the time when income is taxable and the amount that might be
subject to the 10% penalty tax described above. In addition, the Treasury
Department has specific authority to issue regulations that prevent the
avoidance of Section 72(e) through the serial purchase of annuity contracts or
otherwise. There may also be other situations in which the Treasury may conclude
that it would be appropriate to aggregate two or more annuity contracts
purchased by the same Owner. Accordingly, an Owner should consult a competent
tax adviser before purchasing more than one annuity contract.
TAXATION OF QUALIFIED PLANS
The Contracts are designed for use with several types of qualified plans.
The tax rules applicable to participants in these qualified plans vary according
to the type of plan and the terms and conditions of the plan itself. Special
favorable tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in excess
of specified limits; distributions prior to age 59-1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; aggregate distributions in excess of a specified
annual amount; and in other specified circumstances. Therefore, no attempt is
made to provide more than general information about the use of the Contracts
with the various types of qualified retirement plans. Contract Owners, the
Annuitants, and Beneficiaries are cautioned that the rights of any person to any
benefits under these qualified retirement plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract, but the Company shall not be bound by the terms and conditions of
such plans to the extent such terms contradict the Contract, unless the Company
consents. Brief descriptions follow of the various types of qualified retirement
plans in connection with a Contract. The Company will amend the Contract as
necessary to conform it to the requirements of such plan.
PENSION AND PROFIT SHARING PLANS. Section 401(a) of the Code permits
employers and self-employed persons to establish various types of retirement
plans for employees. Such retirement plans may permit the purchaser of the
Contract to provide benefits under the plans. Persons intending to use the
Contract with such plans should seek competent advice.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA". These IRAs are subject to limits on
the amount that may be contributed, the persons who may be eligible, and on the
time when distributions may commence. Also, distributions from certain other
types of qualified retirement plans may be "rolled over" on a tax-deferred basis
into an IRA. Sales of the Contract for use with IRAs may be subject to special
requirements of the IRS.
TAX SHELTERED ANNUITIES. Section 403(b) of the Code allows employees of
certain Section 501(c)(3) organizations and public schools to exclude from their
gross income the premiums paid, within certain limits, on a Contract that will
provide an annuity for the employee's retirement. Code Section 403(b)(11)
restricts the distribution under
24
<PAGE>
Code Section 403(b) annuity contracts of: (1) elective contributions made in
years beginning after December 31, 1988; (2) earnings on those contributions;
and (3) earnings in such years on amounts held as of the last year beginning
before January 1, 1989. Distribution of those amounts may only occur upon death
of the employee, attainment of age 59-1/2, separation from service, disability,
or financial hardship. In addition, income attributable to elective
contributions may not be distributed in the case of hardship.
POSSIBLE CHARGE FOR THE COMPANY'S TAXES
At the present time, the Company makes no charge to the Sub-Accounts for
any Federal, state, or local taxes that the Company incurs which may be
attributable to such Sub-Accounts or to the Contracts. The Company, however,
reserves the right in the future to make a charge for any such tax that it
determines to be properly attributable to the Sub-Accounts to the Contracts.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the Federal tax consequences
under these Contracts are not exhaustive, and special rules are provided with
respect to other tax situations not discussed in this Prospectus. Further, the
Federal income tax consequences discussed herein reflect the Company's
understanding of current law and the law may change. Federal estate and state
and local estate, inheritance, and other tax consequences of ownership or
receipt of distributions under a Contract depend on the individual circumstances
of each Owner or recipient of the distribution. A competent tax adviser should
be consulted for further information.
VOTING OF FUND SHARES
As long as the Variable Account is registered as a unit investment trust
under the Investment Company Act of 1940 and the assets of the Variable Account
are allocated to Sub-Accounts that are invested in Investment Fund shares, the
Investment Fund shares held in the Sub-Accounts will be voted by the Company in
accordance with instructions received from the person having voting interests
under the Contracts as described below. If the Company determines pursuant to
applicable law or regulation that Investment Fund shares held in the
Sub-Accounts and attributable to the Contracts need not be voted pursuant to
instructions received from persons otherwise having the voting interests, then
the Company may vote such Investment Fund shares held in the Sub-Accounts in its
own right.
Before the Annuity Commencement Date, the Owner shall have the voting
interest with respect to the Investment Fund shares attributable to the
Contract.
On and after the Annuity Commencement Date, the person then entitled to
receive annuity payments shall have the voting interest with respect to the
Investment Fund shares. Such voting interest will generally decrease during the
annuity payout period.
Any Investment Fund shares held in the Variable Account for which we do not
receive timely voting instructions, or which are not attributable to Contract
Owners, will be voted by us in proportion to the instructions received from all
Contract Owners having a voting interest in the Investment Fund. Any Investment
Fund shares held by us or any of our affiliates in general accounts will, for
voting purposes, be allocated to all separate accounts having voting interests
in the Investment Fund in proportion to each account's voting interest in the
respective Investment Fund and will be voted in the same manner as are the
respective account's vote.
All Investment Fund proxy material will be sent to persons having voting
interests together with appropriate forms which may be used to give voting
instructions. Persons entitled to voting interests and the number of votes which
they may cast shall be determined as of a record date, to be selected by the
Company, not more than 90 days before the meeting of the applicable Fund.
Persons having voting interests under the Contracts as described above will
not, as a result thereof, have voting interests with respect to meetings of the
stockholders of the Company.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by licensed insurance agents in those states
where the Contracts may be lawfully sold. Such agents will be registered
representatives of broker-dealers registered under the Securities Exchange Act
of 1934 who are members of the National Association of Securities Dealers, Inc.
The Contracts will be distributed by the General Distributor, Northstar
Distributors, Inc., Two Pickwick Plaza, Greenwich, Connecticut 06830, which is
an
25
<PAGE>
affiliate of the Company. Commissions and other distribution compensation will
be paid by the Company. Generally such payments will not exceed 7.00% of the
purchase payments. In some cases a trail commission based on the Contract Value
may also be paid.
REVOCATION
The Contract Owner may revoke the Contract at any time between the date of
Application and the date 10 days after receipt of the Contract and receive a
refund of the Contract Value unless otherwise required by state and/or federal
law. All Individual Retirement Annuity refunds will be return of purchase
payments. In order to revoke the Contract, it must be mailed or delivered to the
Company's Contract Administrator at the mailing address shown on the back cover
page of this Prospectus or the agent through whom it was purchased. Mailing or
delivery must occur on or before 10 days after receipt of the Contract for
revocation to be effective. In order to revoke the Contract if it has not been
received, written notice must be mailed or delivered to the Company's Contract
Administrator at the mailing address shown on the back cover page of this
Prospectus.
The liability of the Variable Account under this provision is limited to
the Contract Value in each Sub-Account on the date of revocation. Any additional
amounts refunded to the Contract Owner will be paid by the Company.
REPORTS TO OWNERS
The Company will mail to the Contract Owner, at the last known address of
record at the home office of the Company, at least annually after the first
Contract Year, a report containing such information as may be required by any
applicable law or regulation and a statement showing the Contract Value.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party.
The Company is a defendant in various lawsuits in connection with the normal
conduct of its operations. In the opinion of management, the ultimate resolution
of such litigation will not result in any significant liability to the Company.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Northstar/NWNL Variable Account as of December
31, 1995 and for the period from May 6, 1994 to December 31, 1994 and the annual
financial statements of Northwestern National Life Insurance Company, which are
included in the Statement of Additional Information, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports which
are included herein, and have been so included in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 has been filed
with the Securities and Exchange Commission, with respect to the Contracts
described herein. The Prospectus does not contain all of the information set
forth in the Registration Statement and exhibits thereto, to which reference is
hereby made for further information concerning the Variable Account, the Company
and the Contracts. The information so omitted may be obtained from the
Commission's principal office in Washington, D.C., upon payment of the fee
prescribed by the Commission, or examined there without charge. Statements
contained in this Prospectus as to the provisions of the Contracts and other
legal documents are summaries, and reference is made to the documents as filed
with the Commission for a complete statement of the provisions thereof.
26
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Introduction.............................................................. 2
Administration of the Contracts........................................... 3
Custody of Assets......................................................... 3
Independent Auditors...................................................... 3
Distribution of the Contracts............................................. 4
Calculation of Yield and Return........................................... 5
Financial Statements...................................................... 11
- --------------------------------------------------------------------------------
If you would like to receive a copy of the Northstar/NWNL Variable Account
Statement of Additional Information, please return this request to:
NORTHSTAR DISTRIBUTORS, INC.
TWO PICKWICK PLAZA
GREENWICH, CT 06830
Your name ......................................................................
Address ........................................................................
City ................................... State .............. Zip .............
Please send me a copy of the Northstar/NWNL Variable Account Statement of
Additional Information.
- --------------------------------------------------------------------------------
27
<PAGE>
APPENDIX A
THE FIXED ACCOUNT
CONTRIBUTIONS UNDER THE FIXED PORTION OF THE CONTRACT AND TRANSFERS TO THE
FIXED PORTION BECOME PART OF THE GENERAL ACCOUNT OF THE COMPANY (THE "FIXED
ACCOUNT"), WHICH SUPPORTS INSURANCE AND ANNUITY OBLIGATIONS. BECAUSE OF
EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED ACCOUNT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT") NOR IS THE FIXED
ACCOUNT REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF
1940 ("1940 ACT"). ACCORDINGLY, NEITHER THE FIXED ACCOUNT NOR ANY INTEREST
THEREIN ARE GENERALLY SUBJECT TO THE PROVISIONS OF THE 1933 OR 1940 ACTS AND THE
COMPANY HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE
COMMISSION HAS NOT REVIEWED THE DISCLOSURES IN THIS PROSPECTUS WHICH RELATE TO
THE FIXED PORTION OF THE CONTRACT. DISCLOSURES REGARDING THE FIXED PORTION OF
THE ANNUITY CONTRACT AND THE FIXED ACCOUNT, HOWEVER, MAY BE SUBJECT TO CERTAIN
GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE
ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
The Fixed Account is made up of all of the general assets of the Company
other than those allocated to any separate account. Purchase payments will be
allocated to the Fixed Account as elected by the Owner at the time of purchase
or as subsequently changed. The Company will invest the assets of the Fixed
Account in those assets chosen by the Company and allowed by applicable law.
Investment income from such Fixed Account assets will be allocated between the
Company and the Contracts participating in the Fixed Account, in accordance with
the terms of such Contracts.
Fixed annuity payments made to Annuitants under the Contract will not be
affected by the mortality experience (death rate) of persons receiving such
payments or of the general population. The Company assumes this "mortality risk"
by virtue of annuity rates incorporated in the Contract which cannot be changed.
In addition, the Company guarantees that it will not increase charges for
maintenance of the Contracts regardless of its actual expenses.
Investment income from the Fixed Account allocated to the Company includes
compensation for mortality and expense risks borne by the Company in connection
with Fixed Account Contracts. The Company expects to derive a profit from this
compensation. The amount of such investment income allocated to the Contracts
will vary from year to year in the sole discretion of the Company. However, the
Company guarantees that it will credit interest at a rate of not less than 3%
per year, compounded annually, to amounts allocated to the Fixed Account under
the Contract. The Company may credit interest at a rate in excess of 3% per
year; however, the Company is not obligated to credit any interest in excess of
3% per year. There is no specific formula for the determination of excess
interest credits. Such credits, if any, will be determined by the Company based
on information as to expected investment yields. Some of the factors that the
Company may consider in determining whether to credit interest to amounts
allocated to the Fixed Account and the amount thereof, are general economic
trends, rates of return currently available and anticipated on the Company's
investments, regulatory and tax requirements and competitive factors. ANY
INTEREST CREDITED TO AMOUNTS ALLOCATED TO THE FIXED ACCOUNT IN EXCESS OF 3% PER
YEAR WILL BE DETERMINED IN THE SOLE DISCRETION OF THE COMPANY. THE OWNER ASSUMES
THE RISK THAT INTEREST CREDITED TO FIXED ACCOUNT ALLOCATIONS MAY NOT EXCEED THE
MINIMUM GUARANTEE OF 3% FOR ANY GIVEN YEAR.
The Company is aware of no statutory limitations on the maximum amount of
interest it may credit, and the Board of Directors has set no limitations.
However, inherent in the Company's exercise of discretion in this regard is the
equitable allocation of distributable earnings and surplus among its various
policyholders and Contract Owners and to its stockholders.
Excess interest, if any, will be credited on the Fixed Account Contract
Value. The Company guarantees that, at any time, the Fixed Account Contract
Value will not be less than the amount of purchase payments and transfers
allocated to the Fixed Account, plus interest at the rate of 3% per year,
compounded annually, plus any additional interest which the Company may, in its
discretion, credit to the Fixed Account, less the sum of all annual
administrative or surrender charges levied, any applicable premium taxes, and
less any amounts surrendered or transferred from the Fixed Account. If the Owner
surrenders the Contract the amount available from the Fixed Account will be
reduced by any applicable surrender charge and annual administration charge.
(See "Charges Made by the Company" on page 13).
A-1
<PAGE>
This Prospectus is accompanied by the following Prospectuses for the Funds:
FUND PROSPECTUS CIK ACCESSION NUMBER
- --------------- --- ----------------
Northstar/NWNL Trust 0000916403 0000912057-96-003160
Dated April 30, 1996
Fidelity Investments 0000356494 0000927384-96-000024
Variable Insurance
Products Funds Dated April
30, 1996
Fidelity Investments 0000831016 0000927384-96-000022
Variable Insurance
Products Funds II Dated
April 30, 1996
<PAGE>
Northwestern National NORTHSTAR/NWNL
Life Insurance Company V A R I A B L E A C C O U N T
Individual Deferred
Variable/Fixed Annuity Contract
CONTRACT ADMINISTRATOR
Annuity Service Center
P.O. Box 419275
Kansas City, Missouri 64141-6275
GENERAL DISTRIBUTOR
Northstar Distributors, Inc.
Two Pickwick Plaza
Greenwich, Connecticut 06830
NORTHSTAR/
NWNL
V A R I A B L E A C C O U N T
Individual Deferred
Variable/Fixed Annuity Contract
N200.100b P R O S P E C T U S
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
----------
INDIVIDUAL DEFERRED VARIABLE/FIXED ANNUITY CONTRACTS
ISSUED BY
NORTHSTAR/NWNL VARIABLE ACCOUNT
AND
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
This Statement of Additional Information is not a Prospectus, but should be
read in conjunction with the Prospectus, dated April 30, 1996 (the "Prospectus")
relating to the Individual Deferred Variable/Fixed Annuity Contracts issued by
Northstar/NWNL Variable Account (the "Variable Account") and Northwestern
National Life Insurance Company (the "Company"). Much of the information
contained in this Statement of Additional Information expands upon subjects
discussed in the Prospectus. A copy of the Prospectus may be obtained from
Northstar Distributors, Inc., Two Pickwick Plaza, Greenwich, Connecticut 06830.
Capitalized terms used in this Statement of Additional Information that are
not otherwise defined herein shall have the meanings given to them in the
Prospectus.
-------------
TABLE OF CONTENTS
Page
----
Introduction............................................................. 2
Administration of the Contracts.......................................... 3
Custody of Assets........................................................ 3
Independent Auditors..................................................... 3
Distribution of the Contracts............................................ 4
Calculation of Yield and Return.......................................... 5
Financial Statements..................................................... 11
---------
The date of this Statement of Additional Information is April 30, 1996.
Page 1
<PAGE>
INTRODUCTION
The Individual Deferred Variable/Fixed Annuity Contracts described in the
Prospectus are flexible purchase payment contracts. The Contracts are sold to or
in connection with retirement plans which may or may not qualify for special
federal tax treatment under the Internal Revenue Code. (See "Federal Tax Status"
on page 21 of the Prospectus.) Annuity payments under the Contracts are deferred
until a selected later date.
Purchase payments may be allocated to one or more of the available
Sub-Accounts of the Variable Account, a separate account of the Company, and/or
to the Fixed Account (which is the general account of the Company).
Purchase payments allocated to one or more of the available Sub-Accounts of
the Variable Account, as selected by the Contract Owner, will be invested in
shares at net asset value of one or more of a group of investment funds (the
"Investment Funds"). The Investment Funds are currently the four portfolios of
the Northstar/NWNL Trust which are managed by Northstar Investment Management
Corporation of Greenwich, Connecticut, which is an affiliate of the Company, and
the two portfolios of The Variable Insurance Products Fund and the two
portfolios of the Variable Insurance Products Fund II which are managed by
Fidelity Management and Research Company of Boston, Massachusetts. Each
Investment Fund pays its investment adviser certain fees charged against the
assets of the Investment Fund. The Variable Account Contract Value and the
amount of variable annuity payments will vary, primarily based on the investment
performance of the Investment Funds whose shares are held in the Sub-Accounts
selected. (For more information about the Investment Funds, see "Investments of
the Variable Account" on page 11 of the Prospectus.)
Purchase payments allocated to the Fixed Account, which is the general
account of the Company, will be credited with interest at a rate not less than
3% per year. Interest credited in excess of 3%, if any, will be determined at
the sole discretion of the Company. That part of the Contract relating to the
Fixed Account is not registered under the Securities Act of 1933 and the Fixed
Account is not subject to the restrictions of the Investment Company Act of
1940. (See Appendix A of the Prospectus.)
Page 2
<PAGE>
ADMINISTRATION OF THE CONTRACTS
The Company has entered into a contract with Continuum Administrative
Services Corporation (formerly known as Vantage Computer Systems, Inc.), Kansas
City, Missouri ("CASC") under which CASC as assignee of the Company's contract
with State Street Bank and Trust Company, Boston, Massachusetts has agreed to
perform certain administrative functions relating to the Contracts and the
Variable Account. These functions include, among other things, maintaining the
books and records of the Variable Account and the Sub-Accounts, and maintaining
records of the name, address, taxpayer identification number, Contract number,
type of Contract issued to each Owner, Contract Value and other pertinent
information necessary to the administration and operation of the Contracts. For
the years ended December 31, 1994 and 1995, the Company paid fees to CASC under
the agreement in the amount of $1,711 and $4,249, respectively in connection
with administration of the Contracts.
CUSTODY OF ASSETS
The Company, whose address appears on the cover of the Prospectus,
maintains custody of the assets of the Variable Account.
INDEPENDENT AUDITORS
The financial statements of Northstar/NWNL Variable Account and
Northwestern National Life Insurance Company, which are included in the
Statement of Additional Information, have been audited by Deloitte & Touche LLP,
400 One Financial Plaza, 120 South 6th Street, Minneapolis, Minnesota 55402,
independent auditors, as stated in their reports which are included herein, and
have been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
Page 3
<PAGE>
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by licensed insurance agents in those states
where the Contracts may be lawfully sold. Such agents will be registered
representatives of broker-dealers registered under the Securities Exchange Act
of 1934 who are members of the National Association of Securities Dealers, Inc.
The Contracts will be distributed by the General Distributor, Northstar
Distributors, Inc., which is an affiliate of the Company. For the year ended
December 31, 1994, General Distributor was paid fees by the Company with respect
to the distribution of the Contracts, in the amount of $4,000. For the year
ended December 31, 1995, General Distributor was not paid any fees by the
Company with respect to the distribution of the Contracts.
The offering of the Contracts is continuous.
There are no special purchase plans or exchange privileges not described in
the Prospectus. (See "Transfers" at page 18 of the Prospectus.)
No deduction for a sales charge is made from the purchase payments for the
Contracts. However, if part or all of a Contract's value is surrendered,
surrender charges (which may be deemed to be contingent deferred sales charges)
may be made by the Company. The method used to determine the amount of such
charge is described in the Prospectus under the heading "Charges Made By The
Company - Surrender Charge (Contingent Deferred Sales Charge)" on page 13.
Any of the charges under the Contract, as well as the minimum purchase
payment requirements set forth in the Prospectus, may be reduced due to special
circumstances that result in lower sales, administrative or mortality expenses.
For example, special circumstances may exist in connection with group or
sponsored arrangements, sales to the Company's policy and Contract Owners or
those of affiliated insurance companies, or sales to employees or clients of the
Company's affiliates. The amount of any reductions will reflect the reduced
sales effort and administrative costs resulting from, or the different mortality
experience expected as a result of, the special circumstances. Reductions will
not be unfairly discriminatory against any person,
Page 4
<PAGE>
including the affected policy or Contract owners and owners of all other
contracts funded by the Variable Account.
CALCULATION OF YIELD AND RETURN
CURRENT YIELD AND EFFECTIVE YIELD. Current yield and effective yield will
be calculated only for the VIPF Money Market Portfolio Sub-Account.
The current yield is based on a seven-day period (the "base period") and is
calculated by determining the "net change in value" on a hypothetical account
having a balance of one Accumulation Unit at the beginning of the period,
dividing the net change in account value by the value of the account at the
beginning of the base period to obtain the base period return, and multiplying
the base period return by 365/7 with the resulting yield figure carried to the
nearest hundredth of one percent. The effective yield is computed in a similar
manner, except that the base period return is compounded by adding 1, raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
EFFECTIVE YIELD = [(Base Period Return + 1)^ 365/7 ] - 1
Net changes in value of a hypothetical account will include net investment
income of the account (accrued daily dividends as declared by the VIPF Money
Market Portfolio, less daily expense and contract charges to the account) for
the period, but will not include realized or unrealized gains or losses on its
underlying fund shares.
The VIPF Money Market Portfolio Sub-Account's yield and effective yield
will vary in response to any fluctuations in interest rates and expenses of the
Sub-Account.
The yield and effective yield of the Sub-Account for the seven day period
ended December 29, 1995 were as follows:
Yield: 4.12%
Effective Yield: 4.20%
Page 5
<PAGE>
STANDARDIZED YIELD. A standardized yield computation may be used for bond
Sub-Accounts. The yield quotation will be based on a recent 30 day (or one
month) period, and is computed by dividing the net investment income per
Accumulation Unit earned during the period by the maximum offering price on the
last day of the period according to the following formula:
YIELD = 2[((((a - b)/cd) + 1)^6) - 1]
Where:
a = net investment earned during the period by the Fund or Portfolio
attributable to shares owned by the Sub-Account.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Accumulation Units outstanding during
the period.
d = the maximum offering price per Accumulation Unit on the last day of
the period.
Yield on each Sub-Account is earned from dividends declared and paid by the
underlying Fund or Portfolio, which are automatically reinvested in Fund or
Portfolio shares.
Following are the standardized yields for the bond sub-accounts for the
month ended December 31, 1995:
Northstar Northstar
Multi-Sector High Yield
Bond Fund Bond Fund
--------- ---------
5.93% 7.49%
AVERAGE ANNUAL TOTAL RETURNS. From time to time, sales literature or
advertisements may also quote average annual total returns for one or more of
the Sub-Accounts for various periods of time.
Average annual total returns represent the average annual compounded rates
of return that would equate an initial investment of $1,000 under a Contract to
the redemption value of that investment as of the last day of each of the
periods. The ending date for each period for which total return quotations are
provided will be for the most recent month-end practicable, considering the type
and media of the communication and will be stated in the communication.
Page 6
<PAGE>
Average annual total returns will be calculated using Sub-Account unit
values which the Company calculates on each Valuation Date based on the
performance of the Sub-Account's underlying Portfolio, the deductions for the
Mortality and Expense Risk Premiums, the Administration Charge, and the Annual
Contract Charge. The calculation assumes that the Annual Contract Charge is $35
per year per Contract deducted at the end of each Contract Year. For purposes of
calculating average annual total return, an average per dollar Annual Contract
Charge attributable to the hypothetical account for the period is used. The
calculation also assumes surrender of the Contract at the end of the period for
the return quotation. Total returns will therefore reflect a deduction of the
Surrender Charge for any period less than seven years. The total return will
then be calculated according to the following formula:
TR = ((ERV/P)^1/N) - 1
Where:
TR = The average annual total return net of Sub-Account recurring
charges.
ERV = the ending redeemable value (net of any applicable surrender
charge) of the hypothetical account at the end of the
period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
Such average annual total return information for the Sub-Accounts is as
follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
DATE OF INCEPTION
FOR THE 1-YEAR PERIOD FOR THE 5-YEAR PERIOD FOR THE 10-YEAR PERIOD OF SUB-ACCOUNT
SUB-ACCOUNT ENDED 12/31/95 ENDED 12/31/95 ENDED 12/31/95 TO 12/31/95
- ----------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Northstar Income and Growth Fund
(Sub-Account Inception: 05/06/94) 13.25% N/A N/A 8.53%
Northstar Growth Fund
(Sub-Account Inception: 05/06/94) 16.60% N/A N/A 11.45%
Northstar Multi-Sector Bond Fund
(Sub-Account Inception: 05/06/94) 7.15% N/A N/A 4.73%
Northstar High Yield Bond Fund
(Sub-Account Inception: 05/06/94) 11.11% N/A N/A 5.50%
VIPF Overseas Portfolio
(Sub-Account Inception: 05/01/95) N/A N/A N/A 0.25%
VIPF II Asset Manager Portfolio
(Sub-Account Inception: 05/01/95) N/A N/A N/A 7.70%
VIPF II Index 500 Portfolio
(Sub-Account Inception: 05/01/95) N/A N/A N/A 21.87%
</TABLE>
Page 7
<PAGE>
From time to time, sales literature or advertisements may quote average
annual total returns for periods prior to the date the Sub-Accounts commenced
operations. Such performance information for the Sub-Accounts will be calculated
based on the performance of the Portfolios and the assumption that the
Sub-Accounts were in existence for the same periods as those indicated for the
Portfolios, with the level of Contract charges currently in effect.
Such average annual total return information for the Sub-Accounts is as
follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
DATE OF INCEPTION
FOR THE 1-YEAR PERIOD FOR THE 5-YEAR PERIOD FOR THE 10-YEAR PERIOD OF FUND PORTFOLIO
SUB-ACCOUNT ENDED 12/31/95 ENDED 12/31/95 ENDED 12/31/95 TO 12/31/95
- ----------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Northstar Income and Growth Fund
(Portfolio Inception: 05/06/94) 13.25% N/A N/A 8.53%
Northstar Growth Fund
(Portfolio Inception: 05/06/94) 16.60% N/A N/A 11.45%
Northstar Multi-Sector Bond Fund
(Portfolio Inception: 05/06/94) 7.15% N/A N/A 4.73%
Northstar High Yield Bond Fund
(Portfolio Inception: 05/06/94) 11.11% N/A N/A 5.50%
VIPF Overseas Portfolio
(Portfolio Inception: 01/28/87) 2.71% 6.04% N/A 5.79%
VIPF II Asset Manager Portfolio
(Portfolio Inception: 09/06/89) 9.89% 10.70% N/A 9.69%
VIPF II Index 500 Portfolio
(Portfolio Inception: 08/27/92) 29.85% N/A N/A 12.83%
</TABLE>
The Company may also disclose average annual total returns for the
Investment Funds' Portfolios since their inception, including such disclosure
for periods prior to the date the Variable Account commenced operations.
Page 8
<PAGE>
Such average annual total return information for the Portfolios of the
Investment Funds is as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
DATE OF INCEPTION
FOR THE 1-YEAR PERIOD FOR THE 5-YEAR PERIOD FOR THE 10-YEAR PERIOD OF FUND PORTFOLIO
SUB-ACCOUNT ENDED 12/31/95 ENDED 12/31/95 ENDED 12/31/95 TO 12/31/95
- ----------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Northstar Income and Growth Fund
(Portfolio Inception: 05/06/94) 21.27% N/A N/A 13.78%
Northstar Growth Fund
(Portfolio Inception: 05/06/94) 24.29% N/A N/A 13.40%
Northstar Multi-Sector Bond Fund
(Portfolio Inception: 05/06/94) 15.28% N/A N/A 10.10%
Northstar High Yield Bond Fund
(Portfolio Inception: 05/06/94) 18.86% N/A N/A 10.58%
VIPF Overseas Portfolio
(Portfolio Inception: 01/28/87) 9.68% 8.14% N/A 7.31%
VIPF II Asset Manager Portfolio
(Portfolio Inception: 09/06/89) 16.96% 12.76% N/A 11.26%
VIPF II Index 500 Portfolio
(Portfolio Inception: 08/27/92) 37.19% N/A N/A 15.48%
</TABLE>
OTHER TOTAL RETURNS. From time to time, sales literature or advertisements
may quote average annual total returns for the Sub-Accounts that do not reflect
the Surrender Charge. Such performance information may quote average annual
total returns for periods during which the Sub-Accounts were operating and for
periods prior to the date the Sub-Accounts commenced operations. These returns
are calculated in exactly the same way as average annual total returns described
above, except that the ending redeemable value of the hypothetical account for
the period is replaced with an ending value for the period that does not take
into account any charges on amounts surrendered or withdrawn. Such information
is as follows:
Page 9
<PAGE>
RETURNS SINCE DATE SUB-ACCOUNTS COMMENCED OPERATIONS
----------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
DATE OF INCEPTION
FOR THE 1-YEAR PERIOD FOR THE 5-YEAR PERIOD FOR THE 10-YEAR PERIOD OF SUB-ACCOUNT
SUB-ACCOUNT ENDED 12/31/95 ENDED 12/31/95 ENDED 12/31/95 TO 12/31/95
- ----------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Northstar Income and Growth Fund
(Sub-Account Inception: 05/06/94) 12.10% N/A N/A 19.55%
Northstar Growth Fund
(Sub-Account Inception: 05/06/94) 22.90% N/A N/A 14.96%
Northstar Multi-Sector Bond Fund
(Sub-Account inception: 05/06/94) 13.45% N/A N/A 8.38%
Northstar High Yield Bond Fund
(Sub-Account Inception: 05/06/94) 17.41% N/A N/A 9.13%
VIPF Overseas Portfolio
(Sub-Account Inception: 05/01/95) N/A N/A N/A 9.82%
VIPF II Asset Manager Portfolio
(Sub-Account Inception: 05/01/95) N/A N/A N/A 17.50%
VIPF II Index 500 Portfolio
(Sub-Account Inception: 05/01/95) N/A N/A N/A 32.07%
</TABLE>
RETURNS INCLUDING PERIOD PRIOR TO DATE SINCE SUB-ACCOUNTS COMMENCED OPERATIONS
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
DATE OF INCEPTION
FOR THE 1-YEAR PERIOD FOR THE 5-YEAR PERIOD FOR THE 10-YEAR PERIOD OF FUND PORTFOLIO
SUB-ACCOUNT ENDED 12/31/95 ENDED 12/31/95 ENDED 12/31/95 TO 12/31/95
- ----------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Northstar Income and Growth Fund
(Portfolio Inception: 05/06/94) 12.10% N/A N/A 19.55%
Northstar Growth Fund
(Portfolio Inception: 05/06/94) 22.90% N/A N/A 14.96%
Northstar Multi-Sector Bond Fund
(Portfolio Inception: 05/06/94) 13.45% N/A N/A 8.38%
Northstar High Yield Bond Fund
(Portfolio Inception: 05/06/94) 17.41% N/A N/A 9.13%
VIPF Overseas Portfolio
(Portfolio Inception: 01/28/87) 8.11% 6.60% N/A 5.79%
VIPF II Asset Manager Portfolio
(Portfolio Inception: 09/06/89) 15.29% 11.18% N/A 9.69%
VIPF II Index 500 Portfolio
(Portfolio Inception: 08/27/92) 35.25% N/A N/A 12.83%
</TABLE>
The Investment Funds have provided the total return information for the
Portfolios, including the Portfolio total return information used to calculate
the total returns of the Sub-Accounts for periods prior to
Page 10
<PAGE>
the inception of the Sub-Accounts. The Variable Insurance Products Fund and the
Variable Insurance Products Fund II are not affiliated with the Company.
The Company may disclose Cumulative Total Returns in conjunction with the
standard formats described above. The Cumulative Total Returns will be
calculated using the following formula:
CTR = ERV/P - 1
Where:
CTR = the Cumulative Total Return net of Sub-Account recurring
charges for the period.
ERV = the ending redeemable value of the hypothetical investment
at the end of the period.
P = a hypothetical single payment of $1,000.
EFFECT OF THE ANNUAL CONTRACT CHARGE ON PERFORMANCE DATA. The Contract
provides for a $35 Annual Contract Charge to be deducted annually at the end of
each Contract Year, from the Sub-Accounts and the Fixed Account based on the
proportion that the value of each such account bears to the total Contract
Value. For purposes of reflecting the Annual Contract Charge in yield and total
return quotations, the annual charge is converted into an annual charge per
$1,000 invested based on the Annual Contract Charges collected from the average
total assets of the Variable Account and Fixed Account during the calendar year
ending December 31, 1995.
FINANCIAL STATEMENTS
The Statement of Additional Information contains Financial Statements for
the Variable Account for the period of May 6, 1994 (the date on which the
Variable Account commenced operations) to December 31, 1995. Deloitte & Touche
LLP serves as independent auditors for the Variable Account. Although the
financial statements are audited, the period they cover is not necessarily
indicative of the longer term performance of the assets in the Variable Account.
The Company's statements of financial condition as of December 31, 1995 and
1994, and the related statements of operations, shareholder's equity and cash
flows for the years ended December 31, 1995 and 1994 which are included in this
Statement of Additional Information, should be considered only as bearing on the
Company's ability to meet its obligations under the Contracts. They should not
be considered as bearing on the investment performance of the assets held in the
Variable Account.
Page 11
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Northwestern National Life Insurance
Company and Contract Owners of
Northstar/NWNL Variable Account:
We have audited the accompanying statement of assets and liabilities of
Northstar/NWNL Variable Account as of December 31, 1995 and the related combined
statements of operations and changes in Contract Owners' equity for the year
ended December 31, 1995 and the period from May 6, 1994 to December 31, 1994.
These financial statements are the responsibility of the management of
Northwestern National Life Insurance Company. Our responsibility is to express
an opinion on these financial statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures include
confirmation of the securities owned as of December 31, 1995, by correspondence
with the Account custodians. 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 referred to above present fairly, in
all material respects, the financial position of Northstar/NWNL Variable Account
as of December 31, 1995, and the results of its operations and changes in
Contract Owners' equity for the year ended December 31, 1995 and the period from
May 6, 1994 to December 31, 1994, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Minneapolis, Minnesota
February 2, 1996
i
<PAGE>
NORTHSTAR/NWNL VARIABLE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
(In Thousands, Except Share and Unit Data)
<TABLE>
<CAPTION>
NORTHSTAR'S NORTHSTAR'S NORTHSTAR'S
ASSETS: INCOME AND NORTHSTAR'S MULTI-SECTOR HIGH YIELD
- ------- GROWTH FUND GROWTH FUND BOND FUND BOND FUND
Investments in mutual funds at market value: ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NORTHSTAR'S:
Income and Growth Fund
320,192 shares (cost $3,431) $3,647
Growth Fund
29,554 shares (cost $343) $341
Multi-Sector Bond Fund
83,892 shares (cost $420) $431
High Yield Bond Fund
342,853 shares (cost $1,692) $1,728
FIDELITY'S VIPF AND VIPF II:
Money Market Portfolio
0 shares (cost $-)
Overseas Portfolio
0 shares (cost $-)
Asset Manager Portfolio
0 shares (cost $-)
Index 500 Portfolio
51 shares (cost $4)
---------- ---------- ---------- ----------
Total Assets $3,647 $341 $431 $1,728
====== ==== ==== ======
LIABILITIES AND CONTRACT
OWNER'S EQUITY:
Due to Northwestern National Life
Insurance Company for contract charges $ 4 $ - $ - $1
Contract Owners' Equity 3,643 341 431 1,727
---------- ---------- ---------- ----------
Total Liabilities and Contract Owners' Equity $3,647 $341 $431 $1,728
====== ==== ==== ======
Units Outstanding: 301,285.181 27,043.488 37,703.818 149,292.389
Net Asset Value per Unit:
Northstar/NWNL Variable Annuity
Tax Qualified $12.091637 $12.607218 $11.435577 $11.567470
Non-Tax Qualified $12.091637 $12.607218 $11.435577 $11.567470
</TABLE>
The accompanying notes are an integral part of the financial statements.
ii
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES, CONTINUED
<TABLE>
<CAPTION>
IDELITY'S VIP FIDELITY'S VIPF FIDELITY'S VIPF II FIDELITY'S VIPF II
ASSETS: MONEY MARKET OVERSEAS ASSET MANAGER INDEX 500
- ------- PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO TOTAL
Investments in mutual funds at market value: ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NORTHSTAR'S:
Income and Growth Fund
320,192 shares (cost $3,431) $3,647
Growth Fund
29,554 shares (cost $343) 341
Multi-Sector Bond Fund
83,892 shares (cost $420) 431
High Yield Bond Fund
342,853 shares (cost $1,692) 1,728
FIDELITY'S VIPF AND VIPF II:
Money Market Portfolio
0 shares (cost $-) $- -
Overseas Portfolio
0 shares (cost $-) $- -
Asset Manager Portfolio
0 shares (cost $-) $- -
Index 500 Portfolio
51 shares (cost $4) $4 4
---------- ---------- ---------- ---------- ----------
Total Assets $- $- $- $4 $6,151
== == == == ======
LIABILITIES AND CONTRACT
OWNER'S EQUITY:
Due to Northwestern National Life
Insurance Company for contract charges $- $- $- $- $5
Contract Owners' Equity - - - 4 6,146
---------- ---------- ---------- ---------- ----------
Total Liabilities and Contract Owners' Equity $- $- $- $4 $6,151
== == == == ======
Units Outstanding: - - - 335.333 515,660.209
Net Asset Value per Unit:
Northstar/NWNL Variable Annuity
Tax Qualified $10.288920 $10.651696 $11.143293 $12.048834
Non-Tax Qualified $10.288920 $10.651696 $11.143293 $12.048834
</TABLE>
The accompanying notes are an integral part of the financial statements.
iii
<PAGE>
NORTHSTAR/NWNL VARIABLE ACCOUNT
STATEMENT OF OPERATIONS AND
CHANGES IN CONTRACT OWNERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Year ended Period from
December 31, May 6, 1994 to
1995 Dec. 31, 1994
--------------- ---------------
<S> <C> <C>
Net investment income:
Reinvested dividend income............................... $ 226 $ 16
Reinvested capital gains................................. 102 9
Administrative expenses.................................. (60) (3)
--------- ---------
Net investment income
and capital gains ........................... 268 22
--------- ---------
Realized and unrealized gains (losses):.......................
Net realized gains (losses) on
redemptions of fund shares ........................ 44 (1)
Increase (decrease) in unrealized
appreciation of investments ....................... 286 (25)
------- ---------
Net realized and unrealized gains (losses) ........ 330 (26)
--------- ---------
Net additions (reductions) from operations... 598 (4)
--------- ---------
Contract Owners' transactions:
Net purchase payments ................................... 4,461 1,381
Surrenders .............................................. (268) (22)
Transfers between Sub-Accounts
and Fixed Account ................................. - -
Annuity payments......................................... - -
Transfers to (from) required reserves.................... - -
--------- ---------
Net additions for Contract
Owners' transactions ........................ 4,193 1,359
--------- ---------
Net additions for the year ............ 4,791 1,355
Contract Owners' Equity, beginning of the year ............... 1,355 -
--------- ---------
Contract Owners' Equity, end of the year ..................... $6,146 $1,355
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
iv
<PAGE>
NORTHSTAR/NWNL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND CONTRACTS:
Northstar/NWNL Variable Account (the Account) is a separate account of
Northwestern National Life Insurance Company (NWNL or Northwestern), a
wholly-owned subsidiary of ReliaStar Financial Corp. (formerly The NWNL
Companies, Inc.). The Account commenced operations on May 6, 1994 and is
registered as a unit investment trust under the Investment Company Act of
1940.
Purchase payments received under the contracts are allocated to Sub-Accounts
of the Account, each of which is invested in one of the Funds listed below
during the period.
NORTHSTAR FUNDS: FIDELITY'S VIPF AND VIPF II:
---------------- ----------------------------
Income and Growth Fund Money Market Portfolio
Growth Fund Overseas Portfolio
Multi-Sector Bond Fund Asset Manager Portfolio
High Yield Bond Fund Index 500 Portfolio
Northstar Investment Management Corporation, an affiliate of NWNL, is the
investment adviser for the four Funds of the Northstar/NWNL Trust and is paid
fees for its services by the Northstar Funds. Fidelity Management & Research
Company is the investment adviser for Fidelity's Variable Insurance Products
Fund (VIPF) and Variable Insurance Products Fund II (VIPF II) and is paid for
its services by the VIPF and VIPF II Portfolios. On April 30, 1995,
Sub-Accounts investing in VIPF and VIPF II Portfolios were made available
under the contracts.
SECURITIES VALUATION TRANSACTIONS AND RELATED INVESTMENT INCOME:
The market value of investments in the Sub-Accounts is based on the closing
net asset values of the Fund shares held at the end of the period. Investment
transactions are accounted for on the trade date (date the order to purchase
or redeem is executed) and dividend income and capital gain distributions are
recorded on the ex-dividend date. Net realized gains and losses on
redemptions of shares of the Funds are determined on the basis of specific
identification of Fund share costs.
VARIABLE ANNUITY RESERVES:
The amount of the reserves for contracts in the distribution period is
determined by actuarial assumptions which meet statutory requirements. Gains
or losses resulting from actual mortality experience, the full responsibility
for which is assumed by NWNL, are offset by transfers to (or from) NWNL.
2. FEDERAL INCOME TAXES:
Under current tax law, the income, gains and losses from the separate account
investments are not taxable to either the Account or NWNL.
3. CONTRACT CHARGES:
No deduction is made for a sales charge from the purchase payments made for
the contracts. However, on certain surrenders, NWNL will deduct from the
contract value a surrender charge as set forth in the contract.
Certain charges are made by NWNL to Contract Owners' Variable Accumulation
Values in the Account in accordance with the terms of the Contracts. These
charges may include: an annual administrative/contract charge of $35 from
each contract on the anniversary date or at the time of surrender, if
surrender is at a time other than the anniversary date; a daily
administrative charge; and a daily charge for mortality and expense risk
assumed by NWNL. NWNL bears the risk of adverse mortality experience and any
costs for sales and administrative services and expenses which exceed these
periodic charges.
Various states and other governmental units levy a premium tax on annuity
contracts issued by insurance companies. If the owner of a contract lives in
a state which levies such a tax, NWNL may deduct the amount of the tax from
the purchase payments received or the value of the contract at annuitization.
v
<PAGE>
NORTHSTAR/NWNL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS:
The net realized gains (losses) on redemptions of fund shares for the year
ended December 31, 1995 and the period from May 6, 1994 (date operations
commenced) to December 31, 1994, were as follows, (in thousands):
<TABLE>
<CAPTION>
NORTHSTAR'S
INCOME AND NORTHSTAR'S
TOTAL GROWTH FUND GROWTH FUND
----------------------------- ------------------------------ -----------------------------
Year ended Period from Year ended Period from Year ended Period from
Dec. 31, May 6, 1994 Dec. 31, May 6, 1994 Dec. 31, May 6, 1994
1995 to Dec. 31, 1994 1995 to Dec. 31, 1994 1995 to Dec. 31, 1994
------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from redemptions........ $1461 $65 $986 $24 $23 $14
Cost............................. 1,417 66 954 25 20 14
--------- --------- --------- --------- --------- ---------
Net realized gains (losses) on
redemptions of fund shares.. $ 44 ($1) $32 ($1) $ 3 $ -
======= === === === === ====
<CAPTION>
FIDELITY'S VIPF FIDELITY'S VIPF II FIDELITY'S VIPF II
OVERSEAS ASSET MANAGER INDEX 500
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------ ----------------------------- ------------------------------
Year ended Period from Year ended Period from Year ended Period from
Dec. 31, May 6, 1994, Dec. 31, May 6, 1994 Dec. 31, May 6, 1994
1995 to Dec. 31, 1994 1995 to Dec. 31, 1994 1995 to Dec. 31, 1994
------------ ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from redemptions .......... $- $- $- $- $- $-
Cost................................ - - - - - -
--------- --------- --------- --------- --------- ---------
Net realized gains (losses) on
redemptions of fund shares... $- $- $- $- $- $-
== == == == == ==
</TABLE>
vi
<PAGE>
NORTHSTAR/NWNL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
NORTHSTAR'S NORTHSTAR'S FIDELITY'S VIPF
MULTI-SECTOR HIGH YIELD MONEY MARKET
BOND FUND BOND FUND PORTFOLIO
------------------------------- ------------------------------ ----------------------------
Year ended Period from Year ended Period from Year ended Period from
Dec. 31, May 6, 1994 Dec. 31, May 6, 1994 Dec. 31, May 6, 1994
1995 to Dec. 31, 1994 1995 to Dec. 31, 1994 1995 to Dec. 31, 1994
------------ -------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from redemptions.......... $271 $4 $181 $23 $- $-
Cost............................... 267 4 176 23 - -
--------- --------- --------- --------- --------- ---------
Net realized gains (losses) on
redemptions of fund shares.... $ 4 $- $ 5 $ - $- $-
====== == ====== ==== == ==
</TABLE>
vii
<PAGE>
NORTHSTAR/NWNL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. CONTRACT OWNERS' TRANSACTIONS:
Unit transactions in each Sub-Account during the year ended December 31,
1995 and the period from May 6, 1994 (date operations commenced) to
December 31, 1994, were as follows:
<TABLE>
<CAPTION>
NORTHSTAR'S NORTHSTAR'S
INCOME AND NORTHSTAR'S MULTI-SECTOR
GROWTH FUND GROWTH FUND BOND FUND
----------------------------- ----------------------------- ----------------------------
Year ended Period from Year ended Period from Year ended Period from
Dec. 31, May 6, 1994 Dec. 31, May 6, 1994 Dec. 31, May 6, 1994
1995 to Dec. 31, 1994 1995 to Dec. 31, 1994 1995 to Dec. 31, 1994
------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding,
beginning of the year...... 100,955.441 - 8,738.734 - 15,492.534 -
Units purchased............... 272,482.821 102,017.017 16,561.980 8,900.561 34,047.693 15,492.534
Units redeemed................ (12,532.790) (1,061.576) (1,662.223) (626.685) (10.440) -
Units transferred between
Sub-Accounts and/or
Fixed Account ............. (59,620.291) - 3,404.997 464.858 (11,825.969) -
----------- ----------- ----------- ----------- ----------- -----------
Units outstanding,
end of the year............ 301,285.181 100,955.441 27,043.488 8,738.734 37,703.818 15,492.534
=========== =========== ========== ========= ========== ==========
<CAPTION>
FIDELITY'S VIPF FIDELITY'S VIPF II FIDELITY'S VIPF II
OVERSEAS ASSET MANAGER INDEX 500
PORTFOLIO PORTFOLIO PORTFOLIO
----------------------------- ---------------------------- ----------------------------
Year ended Period from Year ended Period from Year ended Period from
Dec. 31, May 6, 1994 Dec. 31, May 6, 1994 Dec. 31, May 6, 1994
1995 to Dec. 31, 1994 1995 to Dec. 31, 1994 1995 to Dec. 31, 1994
------------- ------------ ------------- ------------ ------------- ------------
<S> <C>
Units outstanding,
beginning of the year....... - - - - - -
Units purchased ............... - - - - - -
Units redeemed ................ - - - - - -
Units transferred between
Sub-Accounts and/or
Fixed Account .............. - - - - 335.333 -
----------- ----------- ----------- ----------- ----------- -----------
Units outstanding,
end of the year ............ - - - - 335.333 -
======= ======= ======= ======= ======= =======
</TABLE>
viii
<PAGE>
NORTHSTAR/NWNL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
NORTHSTAR'S FIDELITY'S VIPF
HIGH YIELD MONEY MARKET
BOND FUND PORTFOLIO
----------------------------- -----------------------------
Year ended Period from Year ended Period from
Dec. 31, May 6, 1994 Dec. 31, May 6, 1994
1995 to Dec. 31, 1994 1995 to Dec. 31, 1994
------------- ------------ ------------- ------------
<S> <C> <C>
Units outstanding,
beginning of the year............ 8,985.149 - - -
Units purchased..................... 83,081.624 10,139.023 - -
Units redeemed...................... (10,401.395) (658.699) - -
Units transferred between
Sub-Accounts and/or
Fixed Account ................... 67,627.011 (495.175) - -
----------- ----------- ----------- -----------
Units outstanding,
end of the year.................. 149,292.389 8,985.149 - -
=========== ========= =========== ===========
</TABLE>
ix
<PAGE>
NORTHSTAR/NWNL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. COMBINING STATEMENT OF OPERATIONS AND CHANGES IN CONTRACT OWNERS' EQUITY.
Operations and changes in Contract Owners' equity for the year ended
December 31, 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
NORTHSTAR'S NORTHSTAR'S NORTHSTAR'S
INCOME AND NORTHSTAR'S MULTI-SECTOR HIGH YIELD
TOTAL GROWTH FUND GROWTH FUND BOND FUND BOND FUND
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net investment income:
Reinvested dividend income $226 $91 $3 $28 $104
Reinvested capital gains ... 102 81 21 - -
Administrative expenses .... (60) (38) (3) (5) (14)
--------- --------- --------- --------- ---------
Net investment income
and capital gains .... 268 134 21 23 90
--------- --------- --------- --------- ---------
Realized and unrealized gains:
Net realized gains on
redemptions of fund shares 44 32 3 4 5
Increase in unrealized
appreciation of investments 286 233 - 15 38
--------- --------- --------- --------- ---------
Net realized and unrealized
gains ................ 330 265 3 19 43
--------- --------- --------- --------- ---------
Net additions
from operations 598 399 24 42 133
--------- --------- --------- --------- ---------
Contract Owners' transactions:
Net purchase payments ...... 4,461 2,985 202 358 916
Surrenders ................. (268) (136) (19) - (113)
Transfers between Sub-Accounts
and/or Fixed Account .... - (626) 44 (125) 703
Annuity payments............ - - - - -
Transfers to (from)
required reserves......... - - - - -
--------- --------- --------- --------- ---------
Net additions for
Contract Owners' transactions 4,193 2,223 227 233 1,506
--------- --------- --------- --------- ---------
Net additions
for the year ... 4,791 2,622 251 275 1,639
Contract Owners' Equity,
beginning of the year ...... 1,355 1,021 90 156 88
--------- --------- --------- --------- ---------
Contract Owners' Equity,
end of the year ............ $6,146 $3,643 $341 $431 $1,727
====== ====== ==== ==== ======
</TABLE>
x
<PAGE>
NORTHSTAR/NWNL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
FIDELITY'S VIPF FIDELITY'S VIPF FIDELITY'S VIPF II FIDELITY'S VIPF II
MONEY MARKET OVERSEAS ASSET MANAGER INDEX 500
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net investment income:
Reinvested dividend income $- $- $- $-
Reinvested capital gains ... - - - -
Administrative expenses .... - - - -
--------- --------- --------- ---------
Net investment income
and capital gains .... - - - -
--------- --------- --------- ---------
Realized and unrealized gains:
Net realized gains on
redemptions of fund shares - - - -
Increase in unrealized
appreciation of investments - - - -
--------- --------- --------- ---------
Net realized and unrealized
gains ................ - - - -
--------- --------- --------- ---------
Net additions
from operations - - - -
--------- --------- --------- ---------
Contract Owners' transactions:
Net purchase payments ...... - - - -
Surrenders ................. - - - -
Transfers between Sub-Accounts
and/or Fixed Account .... - - - 4
Annuity payments............ - - - -
Transfers to (from)
required reserves......... - - - -
--------- --------- --------- ---------
Net additions for
Contract Owners' transactions - - - 4
--------- --------- --------- ---------
Net additions
for the year ... - - - 4
Contract Owners' Equity,
beginning of the year ...... - - - -
--------- --------- --------- ---------
Contract Owners' Equity,
end of the year ............ $- $- $- $4
== == == ==
</TABLE>
xi
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholder
Northwestern National Life Insurance Company
(A Wholly Owned Subsidiary of ReliaStar Financial Corp.)
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of
Northwestern National Life Insurance Company and Subsidiaries as of December 31,
1995 and 1994, and the related statements of income, shareholder's equity, and
cash flows for each of the two years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Northwestern
National Life Insurance Company and Subsidiaries as of December 31, 1995 and
1994 and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 1, 1996
i
<PAGE>
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1995 1994
---- ----
<S> <C> <C>
Investments
Fixed Maturity Securities
Available-for-Sale (Amortized Cost: 1995, $8,485.4; 1994, $3,638.6) .............. $ 9,053.7 $ 3,470.6
Held-to-Maturity (Fair Value: $2,253.0) .......................................... -- 2,310.4
Equity Securities (Cost: 1995, $34.8; 1994, $45.9) ................................. 35.9 43.7
Mortgage Loans on Real Estate ...................................................... 1,948.4 1,570.3
Real Estate and Leases ............................................................. 97.9 111.0
Policy Loans ................................. ................ .................... 499.8 306.8
Other Invested Assets .............................................................. 47.0 42.3
Short-Term Investments ............................................................. 122.4 59.9
----- ----
Total Investments .............................................................. 11,805.1 7,915.0
Cash ................................................................................ 43.0 19.8
Accounts and Notes Receivable ....................................................... 150.9 118.2
Reinsurance Receivable .............................................................. 162.9 93.9
Deferred Policy Acquisition Costs ................................................... 860.7 885.2
Present Value of Future Profits ..................................................... 192.0 --
Property and Equipment, Net ......................................................... 122.6 121.1
Accrued Investment Income ........................................................... 164.7 112.2
Other Assets ........................................................................ 275.0 128.4
Participation Fund Account Assets ................................................... 319.6 323.4
Assets Held in Separate Accounts .................................................... 1,369.0 623.6
------- -----
Total Assets ................................................................... $ 15,465.5 $ 10,340.8
=========== ===========
<CAPTION>
LIABILITIES
<S> <C> <C>
Future Policy and Contract Benefits ................................................. $ 11,033.2 $ 7,823.6
Pending Policy Claims ............................................................... 257.7 193.5
Other Policyholder Funds ............................................................ 174.4 157.2
Notes and Mortgages Payable - Unaffiliated .......................................... 144.6 74.8
Note Payable - Parent ............................................................... 100.0 100.0
Income Taxes ........................................................................ 169.2 --
Other Liabilities ................................................................... 328.9 235.0
Participation Fund Account Liabilities .............................................. 319.6 323.4
Liabilities Related to Separate Accounts ............................................ 1,362.9 623.6
------- -----
Total Liabilities .............................................................. 13,890.5 9,531.1
-------- -------
<CAPTION>
SHAREHOLDER'S EQUITY
<S> <C> <C>
Common Stock (2.0 Million Shares Issued in 1995 and 1994) ........................... 2.5 2.5
Additional Paid-In Capital .......................................................... 538.9 216.4
Net Unrealized Investment Gains (Losses) ............................................ 246.8 (79.4)
Retained Earnings ................................................................... 786.8 670.2
----- -----
Total Shareholder's Equity ..................................................... 1,575.0 809.7
------- -----
Total Liabilities and Shareholder's Equity ................................ $ 15,465.5 $ 10,340.8
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
ii
<PAGE>
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1995 1994
---- ----
REVENUES
<S> <C> <C>
Premiums ....................................................................................... $ 851.5 $ 726.9
Net Investment Income .......................................................................... 890.3 618.1
Realized Investment Gains (Losses) ............................................................. 7.4 (27.4)
Policy and Contract Charges .................................................................... 218.5 136.2
Other Income ................................................................................... 94.4 111.1
---- -----
Total ...................................................................................... 2,062.1 1,564.9
------- -------
BENEFITS AND EXPENSES
Benefits to Policyholders ...................................................................... 1,321.9 1,025.8
Sales and Operating Expenses ................................................................... 344.4 281.8
Amortization of Deferred Policy Acquisition Costs and Present Value of Future Profits .......... 90.5 56.7
Interest Expense ............................................................................... 13.5 15.2
Dividends and Experience Refunds to Policyholders .............................................. 23.4 19.0
---- ----
Total ...................................................................................... 1,793.7 1,398.5
------- -------
Income from Continuing Operations before Income Taxes ........................................... 268.4 166.4
Income Tax Expense ............................................................................ 94.4 57.9
---- ----
Income from Continuing Operations .......................................................... 174.0 108.5
----- -----
Loss from Discontinued Operations ............................................................. (5.4) (2.6)
---- ----
Net Income ................................................................................. $ 168.6 $ 105.9
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
iii
<PAGE>
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
SHAREHOLDER'S EQUITY 1995 1994
---- ----
<S> <C> <C>
Common Stock
Beginning and End of Year ........................................................ $ 2.5 $ 2.5
---------- --------
Additional Paid-In Capital
Beginning of Year ................................................................ 216.4 216.4
Capital Contributions from Parent ................................................ 322.5 --
----- -----
End of Year .................................................................. 538.9 216.4
----- -----
Net Unrealized Investment Gains (Losses)
Beginning of Year ................................................................ (79.4) 1.8
Cumulative Effect of Accounting Change - Securities .............................. -- 85.3
Change for the Year .............................................................. 326.2 166.5)
----- -----
End of Year .................................................................. 246.8 (79.4)
----- -----
Retained Earnings
Beginning of Year ................................................................ 670.2 588.3
Net Income ....................................................................... 168.6 105.9
Dividends to Shareholder ......................................................... (52.0) (24.0)
----- -----
End of Year .................................................................. 786.8 670.2
----- -----
Total Shareholder's Equity ............................................................. $ 1,575.0 $ 809.7
========== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
iv
<PAGE>
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1995 1994
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income ................................................................................. $ 168.6 $ 105.9
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Interest Credited to Insurance Contracts ......................................... 500.1 364.7
Future Policy Benefits ........................................................... (117.5) (60.1)
Capitalization of Policy Acquisition Costs ....................................... (176.6) (119.0)
Amortization of Deferred Policy Acquisition Costs
and Present Value of Future Profits ........................................... 90.5 56.7
Deferred Income Taxes ............................................................ 11.5 9.2
Net Change in Receivables and Payables ........................................... 8.5 45.2
Other Assets ..................................................................... (83.4) 4.0
Realized Investment (Gains) Losses, Net .......................................... (7.4) 27.4
Other ............................................................................ (3.5) 15.7
---- ----
Net Cash Provided by Operating Activities ................................... 390.8 449.7
----- -----
INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturity Securities ........................................... 190.5 158.5
Proceeds from Maturities or Repayment of Fixed Maturity Securities
Available-for-Sale .................................................................... 329.9 177.2
Held-to-Maturity ...................................................................... 415.6 390.2
Cost of Fixed Maturity Securities Acquired
Available-for-Sale .................................................................... (971.4) (720.7)
Held-to-Maturity ...................................................................... (519.8) (617.5)
Sales (Purchases) of Equity Securities, Net ................................................ 31.0 (9.0)
Proceeds of Mortgage Loans Sold, Matured or Repaid ......................................... 314.2 358.2
Cost of Mortgage Loans Acquired ............................................................ (385.2) (149.4)
Sales of Real Estate and Leases, Net ....................................................... 28.8 14.5
Policy Loans Issued, Net ................................................................... (63.0) (49.4)
Sales of Other Invested Assets, Net ........................................................ 39.0 19.6
Sales (Purchases) of Short-Term Investments, Net ........................................... (56.4) 13.8
Cash Acquired with Acquisition of USLICO ................................................... .4 --
------ ------
Net Cash Used by Investing Activities ................................................. (646.4) (414.0)
------ ------
FINANCING ACTIVITIES
Deposits to Insurance Contracts ............................................................ 1,265.6 862.6
Maturities and Withdrawals from Insurance Contracts ........................................ (1,015.3) (849.7)
Increase in Notes and Mortgages Payable .................................................... 72.1 --
Repayment of Notes and Mortgages Payable ................................................... (2.3) (35.8)
Dividends to Shareholder ................................................................... (41.3) (24.0)
----- -----
Net Cash Provided (Used) by Financing Activities ..................................... 278.8 (46.9)
----- -----
Increase (Decrease) in Cash ................................................................ 23.2 (11.2)
Cash at Beginning of Year .................................................................. 19.8 31.0
---- ----
Cash at End of Year ........................................................................ $ 43.0 $ 19.8
========= ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
v
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 1. CHANGES IN ACCOUNTING PRINCIPLES
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
Effective January 1, 1995, Northwestern National Life Insurance Company
(Northwestern) and its subsidiaries (the Company) adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosure." SFAS No. 114 and SFAS No. 118 require a
company to measure impairment based upon the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. If foreclosure is probable, the measurement of impairment
must be based upon the fair value of the collateral. The adoption of these
standards did not have a significant effect on the financial results of the
Company.
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires a
company to classify its securities into categories based upon the company's
intent relative to the eventual disposition of the securities.
SFAS No. 115 establishes three categories of securities. The first
category, held-to-maturity securities, is composed of debt securities which a
company has the positive intent and ability to hold to maturity. These
securities are carried at amortized cost. The second category,
available-for-sale securities, may be sold to address the liquidity and other
needs of a company. Debt and equity securities classified as available-for-sale
are carried at fair value on the balance sheet with unrealized gains and losses
excluded from income and reported as a separate component of shareholder's
equity. The third category, trading securities, is for debt and equity
securities acquired for the purpose of selling them in the near term. The
Company has not classified any of its securities as trading securities.
The December 31, 1995 balance of shareholder's equity was increased by
$246.8 million (comprised of an increase in the carrying value of the securities
of $569.9 million, reduced by $189.4 million of related adjustments to deferred
policy acquisition costs and $133.7 million in deferred income taxes), while the
December 31, 1994 balance of shareholder's equity was reduced by $79.4 million
(comprised of a decrease in the carrying value of the securities of $170.2
million, reduced by $48.1 million of related adjustments to deferred policy
acquisition costs and $42.7 million in deferred income taxes) to reflect the net
unrealized gain/loss on fixed maturity securities classified as available-for-
sale.
NOTE 2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is principally engaged in the business of providing life
insurance and related financial service products. The Company operates primarily
in the United States and, through its subsidiaries is authorized to do business
in all 50 states.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Northwestern
and its subsidiaries. Northwestern is a wholly owned subsidiary of ReliaStar
Financial Corp. (ReliaStar). Northwestern's principal subsidiaries are Northern
Life Insurance Company (Northern), United Services Life Insurance Company (USL),
Bankers Security Life Insurance Society (BSL), ReliaStar Mortgage Corporation
and Washington Square Advisors, Inc. During 1995, The North Atlantic Life
Insurance Company of America was merged into BSL. These consolidated financial
statements exclude the effects of all material intercompany transactions.
vi
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENTS
Fixed maturity securities (bonds and redeemable preferred stocks) which may
be sold to meet liquidity and other needs of the Company are categorized as
available-for-sale and are valued at fair value. Fixed maturity securities which
the Company has the positive intent and ability to hold to maturity are
categorized as held-to-maturity and are valued at amortized cost less write-offs
for other than temporary declines in fair value.
Equity securities (common stocks and nonredeemable preferred stocks) are
valued at fair value.
Mortgage loans on real estate are carried at amortized cost less an
impairment allowance for estimated uncollectible amounts.
Investment real estate owned directly by the Company is carried at cost
less accumulated depreciation and allowances for estimated losses. Investments
in real estate joint ventures are accounted for using the equity method. Real
estate acquired through foreclosure is carried at the lower of fair value minus
estimated costs to sell or cost.
Short-term investments are carried at amortized cost.
Unrealized investment gains and losses of equity securities and fixed
maturity securities classified as available-for-sale, net of related deferred
acquisition costs and tax effects, are accounted for as a direct increase or
decrease in shareholder's equity.
Realized investment gains and losses enter into the determination of net
income. Realized investment gains and losses on sales of securities are
determined on the specific identification method. Write-offs of investments that
decline in value below cost on other than a temporary basis and the change in
the allowance for mortgage loans and wholly owned real estate are included with
realized investment gains and losses in the Consolidated Statements of Income.
The Company records write-offs or allowances for its investments based upon
an evaluation of specific problem investments. The Company reviews, on a
continual basis, all invested assets (including marketable bonds, private
placements, mortgage loans and real estate investments) to identify investments
where the Company has credit concerns. Investments with credit concerns include
those the Company has identified as problem investments, which are issues
delinquent in a required payment of principal or interest, issues in bankruptcy
or foreclosure and restructured or foreclosed assets. The Company also
identifies investments as potential problem investments, which are investments
where the Company has serious doubts as to the ability of the borrowers to
comply with the present loan repayment terms.
PROPERTY AND EQUIPMENt
Property and equipment are carried at cost, net of accumulated depreciation
of $79.8 million and $67.5 million at December 31, 1995 and 1994, respectively.
The Company provides for depreciation of
vii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
property and equipment using straight-line and accelerated methods over the
estimated useful lives of the assets. Buildings are generally depreciated over
35 to 50 years. Depreciation expense for 1995 and 1994 amounted to $9.1 million
and $8.4 million, respectively.
PARTICIPATION FUND ACCOUNT
On January 3, 1989, the Commissioner of Commerce of the State of Minnesota
approved a Plan of Conversion and Reorganization (the Plan) which provided,
among other things, for the conversion of Northwestern from a combined stock and
mutual insurance company to a stock life insurance company.
The Plan provided for the establishment of a Participation Fund Account
(PFA) for the benefit of certain participating individual life insurance
policies and annuities issued by Northwestern prior to the effective date of the
Plan. Under the terms of the PFA, the insurance liabilities and assets with
respect to such policies are segregated in the accounting records of
Northwestern to assure the continuation of current policyholder dividend
practices. Assets and liabilities of the PFA are presented in accordance with
statutory accounting practices. Earnings derived from the operation of the PFA
will inure solely to the benefit of the policies covered by the PFA, and no
benefit will inure to the Company. Accordingly, results of operations for the
PFA are excluded from the Company's Consolidated Statements of Income. In the
event that the assets of the PFA are insufficient to provide the contractual
benefits guaranteed by the affected policies, Northwestern must provide such
contractual benefits from its general assets.
SEPARATE ACCOUNTS
The Company operates separate accounts. The assets (principally
investments) and liabilities (principally to contractholders) of each account
are clearly identifiable and distinguishable from other assets and liabilities
of the Company. Assets are valued at fair value.
PREMIUM REVENUE AND BENEFITS TO POLICYHOLDERS
Recognition of traditional life, group and annuity premium revenue and
benefits to policyholders - Traditional life insurance products include those
products with fixed and guaranteed premiums and benefits, and consist
principally of whole life insurance policies and certain annuities with life
contingencies (immediate annuities). Life insurance premiums and immediate
annuity premiums are recognized as premium revenue when due. Group insurance
premiums are recognized as premium revenue over the time period to which the
premiums relate. Benefits and expenses are associated with earned premiums so as
to result in recognition of profits over the life of the contracts. This
association is accomplished by means of the provision for liabilities for future
policy benefits and the amortization of deferred policy acquisition costs.
Recognition of universal life-type contracts revenue and benefits to
policyholders - Universal life-type policies are insurance contracts with terms
that are not fixed and guaranteed. The terms that may be changed could include
one or more of the amounts assessed the policyholder, premiums paid by the
policyholder or interest accrued to policyholder balances. Amounts received as
payments for such contracts are not reported as premium revenues.
Revenues for universal life-type policies consist of charges assessed
against policy account values for deferred policy loading and the cost of
insurance and policy administration. Policy benefits and claims that are charged
to expense include interest credited to contracts and benefit claims incurred in
the period in excess of related policy account balances.
viii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recognition of investment contract revenue and benefits to policyholders--
Contracts that do not subject the Company to risks arising from policyholder
mortality or morbidity are referred to as investment contracts. Guaranteed
Investment Contracts (GICs) and certain deferred annuities are considered
investment contracts. Amounts received as payments for such contracts are not
reported as premium revenues.
Revenues for investment contracts consist of investment income and policy
administration charges. Contract benefits that are charged to expense include
benefit claims incurred in the period in excess of related contract balances,
and interest credited to contract balances.
POLICY ACQUISITION COSTS
Those costs of acquiring new business, which vary with and are primarily
related to the production of new business, have been deferred to the extent that
such costs are deemed recoverable. Such costs include commissions, certain costs
of policy issuance and underwriting and certain variable agency expenses.
Costs deferred related to traditional life insurance are amortized over the
premium paying period of the related policies, in proportion to the ratio of
annual premium revenues to total anticipated premium revenues. Such anticipated
premium revenues are estimated using the same assumptions used for computing
liabilities for future policy benefits.
Costs deferred related to universal life-type policies and investment
contracts are amortized over the lives of the policies, in relation to the
present value of estimated gross profits from mortality, investment and expense
margins.
PRESENT VALUE OF FUTURE PROFITS
The present value of future profits (PVFP) reflects the estimated fair
value of the acquired insurance business in force and represents the portion of
the cost to acquire USLICO Corporation (USLICO) that is allocated to the value
of future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected net cash flows from the acquired insurance contracts. The weighted
average discount rate used to determine such value was approximately 15%.
An analysis of the present value of the future profits asset account is
presented below:
YEAR ENDED
DECEMBER 31,
1995
-----------
(IN MILLIONS)
Balance at Acquisition............................................... $300.0
Imputed Interest..................................................... 17.6
Amortization......................................................... (32.6)
Adjustment for Unrealized Gains on Available-for-Sale Securities..... (93.0)
-----
Balance, December 31, 1995........................................... $192.0
======
Based on current conditions and assumptions as to future events on acquired
policies in force, the Company expects that the net amortization of the
beginning balance of the PVFP will be between 5% and 6% in each of the years
1996 through 2000. The interest rates used to determine the amount of imputed
interest on the unamortized PVFP balance ranged from 5% to 8%.
ix
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 2. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill is the excess of the amount paid to acquire a Company over the
fair value of the net assets acquired. Goodwill is amortized on a straight-line
basis over 40 years. The carrying value of goodwill is monitored for impairment
of value based on the Company's estimate of future earnings. The carrying value
of goodwill is reduced and a charge to income is recorded when an impairment in
value is identified. No goodwill impairment charges have been recorded.
FUTURE POLICY AND CONTRACT BENEFITS
Liabilities for future policy benefits for traditional life contracts are
calculated using the net level premium method and assumptions as to investment
yields, mortality, withdrawals and dividends. The assumptions are based on
projections of past experience and include provisions for possible unfavorable
deviation. These assumptions are made at the time the contract is issued or, for
purchased contracts, at the date of acquisition.
Liabilities for future policy and contract benefits on universal life-type
and investment-type contracts are based on the policy account balance.
The liabilities for future policy and contract benefits for group disabled
life reserves and long-term disability reserves are based upon interest rate
assumptions and morbidity and termination rates from published tables, modified
for Company experience.
INCOME TAXES
The provision for income taxes includes amounts currently payable and
deferred income taxes resulting from the cumulative differences in the assets
and liabilities determined on a tax return and financial statement basis.
INTEREST RATE SWAP AGREEMENTS
Interest rate swap agreements are used as hedges for asset/liability
management of adjustable rate and short-term invested assets. The Company does
not enter into any interest rate swap agreements for trading purposes. The
interest rate swap transactions involve the exchange of fixed and floating rate
interest payments without the exchange of underlying principal amounts and do
not contain other optional provisions. The difference between amounts paid and
amounts received on interest rate swaps is reflected in net investment income.
INTEREST RATE FUTURES CONTRACTS
Futures contracts are used as hedges for asset/liability management of
fixed maturity securities and liabilities arising from GICs. Realized and
unrealized gains and losses on futures contracts are deferred and amortized over
the life of the hedged asset or liability.
NOTE 3. ACQUISITION
On January 17, 1995, ReliaStar acquired USLICO. USLICO was a holding
company with two primary subsidiaries: USL of Arlington, Virginia and BSL of
Uniondale, New York. Concurrent with the acquisition, ReliaStar contributed all
of the capital stock of USL and BSL to the Company. The acquisition was
accounted for using the purchase method of accounting and, therefore, the
consolidated financial statements include the accounts of USL and BSL since the
date of acquisition. Goodwill totaling $44.3 million representing the excess of
the purchase price allocated to USL and BSL over the fair value of the net
assets acquired has been recorded.
x
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 3. ACQUISITION (CONTINUED)
The following pro forma consolidated financial information has been
prepared assuming the acquisition had taken place at the beginning of 1994:
YEAR ENDED
DECEMBER 31,
1994
-----------
(IN MILLIONS)
Revenues.............................................. $1,961.1
Net Income............................................ 139.0
The pro forma financial information is not necessarily indicative of the
results of operations that would have occurred had the acquisition taken place
at the beginning of 1994 or of future operations of the combined companies.
NOTE 4. INVESTMENTS
Investment income summarized by type of investment was as follows:
YEAR ENDED
DECEMBER 31,
---------------
1995 1994
---- ----
(IN MILLIONS)
Fixed Maturity Securities........................... $673.4 $449.6
Equity Securities................................... 3.1 1.6
Mortgage Loans on Real Estate....................... 184.3 160.0
Real Estate and Leases.............................. 16.8 15.7
Policy Loans........................................ 28.9 17.6
Other Invested Assets............................... 7.8 3.6
Short-Term Investments.............................. 7.6 4.2
----- -----
Gross Investment Income........................ 921.9 652.3
Investment Expenses................................. 31.6 34.2
---- ----
Net Investment Income.......................... $890.3 $618.1
====== ======
xi
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 4. INVESTMENTS (CONTINUED)
Net pretax realized investment gains (losses) were as follows:
YEAR ENDED
DECEMBER 31,
---------------
1995 1994
---- ----
(IN MILLIONS)
Net Gains (Losses) on Sales of Investments
Fixed Maturity Securities..................... $3.3 $2.1
Equity Securities............................. 15.1 .6
Mortgage Loans................................ (.1) --
Foreclosed Real Estate........................ .6 .7
Real Estate .................................. 1.7 (.2)
Other ........................................ 2.2 3.2
--- ---
22.8 6.4
---- ---
Provisions for Losses on Investments
Fixed Maturity Securities..................... (3.0) (13.9)
Equity Securities............................. (.1) (1.0)
Mortgage Loans................................ (6.3) (4.9)
Foreclosed Real Estate........................ (5.2) (11.8)
Real Estate .................................. (.8) --
Other Assets ................................. -- (2.2)
---- ----
(15.4) (33.8)
----- -----
Net Pretax Realized Investment Gains (Losses). $7.4 $(27.4)
==== ======
Gross realized investment gains of $8.3 million and $5.0 million and gross
realized investment losses of $5.0 million and $2.9 million were recognized on
sales of fixed maturity securities during the years ended December 31, 1995 and
1994, respectively. All 1995 and 1994 fixed maturity security sales were from
the available-for-sale portfolio.
xii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 4. INVESTMENTS (CONTINUED)
The amortized cost and fair value of investments in fixed maturity
securities by type of investment were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------
GROSS UNREALIZED
AMORTIZED ----------------
COST GAINS (LOSSES) FAIR VALUE
---- ----- -------- ----------
(IN MILLIONS)
AVAILABLE-FOR-SALE
<S> <C> <C> <C> <C>
United States Government and Government Agencies and Authorities..... $172.8 $13.2 -- $186.0
States, Municipalities and Political Subdivisions.................... 64.4 4.2 $(.1) 68.5
Foreign Governments.................................................. 82.1 6.8 (.2) 88.7
Public Utilities..................................................... 775.3 74.5 (.9) 848.9
Corporate Securities................................................. 5,330.7 392.2 (21.6) 5,701.3
Mortgage-Backed/Structured Finance Securities........................ 2,058.0 102.7 (2.4) 2,158.3
Redeemable Preferred Stock............ .............................. 2.1 -- (.1) 2.0
--- --- --- ---
Total............................................................ $8,485.4 $593.6 $(25.3) $9,053.7
======== ====== ====== ========
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------
GROSS UNREALIZED
AMORTIZED ----------------
COST GAINS (LOSSES) FAIR VALUE
---- ----- -------- ----------
(IN MILLIONS)
AVAILABLE-FOR-SALE
<S> <C> <C> <C> <C>
United States Government and Government Agencies and Authorities...... $5.8 -- $(.3) $5.5
States, Municipalities and Political Subdivisions..................... 5.7 -- -- 5.7
Foreign Governments................................................... 56.4 -- (3.4) 53.0
Public Utilities...................................................... 309.4 $1.3 (17.5) 293.2
Corporate Securities.................................................. 2,649.8 13.3 (136.4) 2,526.7
Mortgage-Backed/Structured Finance Securities......................... 608.5 2.5 (27.1) 583.9
Redeemable Preferred Stock ........................................... 3.0 -- (.4) 2.6
--- --- --- ---
Total Available-for-Sale......................................... 3,638.6 17.1 (185.1) 3,470.6
======= ==== ====== =======
HELD-TO-MATURITY
States, Municipalities and Political Subdivisions..................... .7 -- (.1) .6
Public Utilities...................................................... 42.5 .8 (1.8) 41.5
Corporate Securities.................................................. 1,202.1 15.0 (37.7) 1,179.4
Mortgage-Backed/Structured Finance Securities......................... 1,065.1 .6 (34.2) 1,031.5
------- -- ----- -------
Total Held-to-Maturity........................................... 2,310.4 16.4 (73.8) 2,253.0
------- ---- ----- -------
Total............................................................ $5,949.0 $33.5 $(258.9) $5,723.6
======== ===== ======= ========
</TABLE>
xiii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 4. INVESTMENTS (CONTINUED)
The amortized cost and fair value of fixed maturity securities by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
DECEMBER 31, 1995
-----------------
AVAILABLE-FOR-SALE
--------------------
AMORTIZED FAIR
COST VALUE
---- -----
Due in One Year or Less.......................... $ 123.1 $ 122.8
Due After One Year Through Five Years............ 2,497.4 2,634.3
Due After Five Years Through Ten Years........... 2,750.4 2,965.4
Due After Ten Years.............................. 1,056.5 1,172.9
Mortgage-Backed/Structured Finance Securities.... 2,058.0 2,158.3
------- -------
Total........................................ $8,485.4 $9,053.7
======== ========
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY TOTAL
------------------------ ------------------------ ------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---- ----- ---- ----- ---- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Due in One Year or Less....................... $63.4 $63.0 $47.7 $47.8 $111.1 $110.8
Due After One Year Through Five Years......... 928.2 898.3 425.9 422.1 1,354.1 1,320.4
Due After Five Years Through Ten Years........ 1,697.3 1,600.7 445.0 437.2 2,142.3 2,037.9
Due After Ten Years........................... 341.2 324.7 326.7 314.4 667.9 639.1
Mortgage-Backed/Structured Finance Securities. 608.5 583.9 1,065.1 1,031.5 1,673.6 1,615.4
----- ----- ------- ------- ------- -------
Total...................................... $3,638.6 $3,470.6 $2,310.4 $2,253.0 $5,949.0 $5,723.6
======== ======== ======== ======== ======== ========
</TABLE>
The fair values for the marketable bonds are determined based upon the
quoted market prices for bonds actively traded. The fair values for marketable
bonds without an active market are obtained through several commercial pricing
services which provide the estimated fair values. Fair values of privately
placed bonds which are not considered problems are determined utilizing a
commercially available pricing model. The model considers the current level of
risk-free interest rates, current corporate spreads, the credit quality of the
issuer and cash flow characteristics of the security. Utilizing these data, the
model generates estimated market values which the Company considers reflective
of the fair value of each privately placed bond. Fair values for privately
placed bonds which are considered problems are determined though consideration
of factors such as the net worth of borrower, the value of collateral, the
capital structure of the borrower, the presence of guarantees and the Company's
evaluation of the borrower's ability to compete in the relevant market.
At December 31, 1995, the largest industry concentration of the private
placement portfolio was consumer products/services, where 18.9% of the portfolio
was invested, and the largest industry concentration of the marketable bond
portfolio was structured finance/mortgage-backed securities, where 31.9% of the
portfolio was invested. At December 31, 1995, the largest geographic
concentration of commercial mortgage loans was in the midwest region of the
United States, where approximately 32.5% of the commercial mortgage loan
portfolio was invested.
xiv
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 4. INVESTMENTS (CONTINUED)
At December 31, 1995 and 1994, gross unrealized appreciation of equity
securities was $3.0 million and $7.5 million, respectively, and gross unrealized
depreciation was $1.9 million and $9.7 million, respectively.
Invested assets which were nonincome producing (no income received for the
12 months preceding the balance sheet date) were as follows:
DECEMBER 31
---------------
1995 1994
---- ----
(IN MILLIONS)
Fixed Maturity Securities............................. $ .7 $ 7.8
Mortgage Loans on Real Estate......................... 2.8 2.5
Real Estate and Leases................................ 17.6 29.9
---- ----
Total............................................. $21.1 $40.2
===== =====
Allowances for losses on investments are reflected on the Consolidated
Balance Sheets as a reduction of the related assets and were as follows:
DECEMBER 31
---------------
1995 1994
---- ----
(IN MILLIONS)
Mortgage Loans........................................ $12.4 $4.1
Foreclosed Real Estate................................ 10.6 11.9
Investment Real Estate................................ 1.0 .2
Other Invested Assets................................. 2.3 2.5
At December 31, 1995, the total investment in impaired mortgage loans
(before allowances for credit losses) and the related allowance for credit
losses on these impaired mortgage loans was $25.4 million and $12.4 million,
respectively. Increases to the allowance for credit losses account charged to
income and the amount of decreases to the allowance account were $6.3 million
and $9.5 million, respectively, during the year ended December 31, 1995. The
average investment in impaired mortgage loans (before allowances for credit
losses) and the amount of the related interest income recognized on impaired
mortgage loans during 1995, were approximately $2.0 million and $1.7 million,
respectively. The Company does not accrue interest income on impaired mortgage
loans when the likelihood of collection is doubtful. Cash receipts for interest
payments are recognized as income in the period received.
Noncash investing activities consisted of the following:
YEAR ENDED
DECEMBER 31
---------------
1995 1994
---- ----
(IN MILLIONS)
Real Estate Assets Acquired Through Foreclosure........... $28.0 $24.9
Mortgage Loans Acquired in Sales of Real Estate Assets.... 15.3 27.9
During 1994, the Company transferred four fixed maturity securities with an
amortized cost of $31.0 million and a fair value of $27.1 million from the
held-to-maturity portfolio to the available-for-sale portfolio. Each of the
securities transferred were private placement securities which experienced a
significant deterioration in the issuers' creditworthiness during the period.
None of the securities transferred were sold during the year.
xv
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 4. INVESTMENTS (CONTINUED)
Effective December 31, 1995, the Company adopted the implementation
guidance contained in the Financial Accounting Series Special Report, "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." Concurrent with the adoption of this implementation
guidance, the Company reclassified all of its held-to-maturity securities to
available-for-sale based upon a reassessment of the appropriateness of the
classifications of all securities held at that time. The amortized cost and net
unrealized appreciation of the securities reclassified were $2.42 billion and
$108.1 million, respectively, at December 31, 1995. In accordance with the
special report, financial statements prior to December 31, 1995 have not been
restated to reflect the effects of initially adopting the implementation
guidance.
NOTE 5. INCOME TAXES
The income tax liability (asset) as reflected on the Consolidated Balance
Sheets consisted of the following:
DECEMBER 31
---------------
1995 1994
---- ----
(IN MILLIONS)
Current Income Taxes.................................... $6.4 $5.4
Deferred Income Taxes................................... 162.8 (5.6)
----- ----
Total.............................................. $169.2 $(.2)
====== ====
The provision for income taxes reflected on the Consolidated Statements of
Income consisted of the following:
YEAR ENDED
DECEMBER 31
---------------
1995 1994
---- ----
(IN MILLIONS)
Currently Payable...................................... $82.9 $47.3
Deferred............................................... 11.5 10.6
---- ----
Total............................................. $94.4 $57.9
===== =====
The Internal Revenue Service has completed its review of the Company's tax
return for all years through 1991.
xvi
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 5. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the impact for financial statement reporting
purposes of "temporary differences" between the financial statement carrying
amounts and tax bases of assets and liabilities. The "temporary differences"
that give rise to a significant portion of the deferred tax liability (asset)
relate to the following:
DECEMBER 31
---------------
1995 1994
---- ----
(IN MILLIONS)
Future Policy and Contract Benefits.................. $(269.7) $(221.2)
Investment Write-Offs and Allowances................. (35.0) (17.7)
Pension and Postretirement Benefit Plans............. (8.3) (6.3)
Employee Benefits.................................... (9.3) (5.2)
Deferred Futures Gains............................... (1.8) (5.1)
Net Unrealized Investment Losses..................... -- (42.7)
Other ............................................... (42.0) (35.8)
----- -----
Gross Deferred Tax Asset............................. (366.1) (334.0)
------ ------
Deferred Policy Acquisition Costs.................... 267.9 260.4
Present Value of Future Profits...................... 99.0 --
Net Unrealized Investment Gains...................... 90.2 --
Property and Equipment............................... 27.1 26.3
Real Estate Joint Ventures........................... 12.2 14.3
Accrual of Market Discount........................... 8.4 3.2
Policyholder Dividends............................... 4.4 3.0
Other................................................ 19.7 21.2
---- ----
Gross Deferred Tax Liability......................... 528.9 328.4
----- -----
Net Deferred Tax Liability (Asset).............. $162.8 $(5.6)
====== =====
Federal income tax regulations allowed certain special deductions for 1983
and prior years which are accumulated in a memorandum tax account designated as
"policyholders' surplus." Generally, this policyholders' surplus account will
become subject to tax at the then current rates only if the accumulated balance
exceeds certain maximum limitations or if certain cash distributions are deemed
to be paid out of the account. At December 31, 1995, Northwestern and its life
insurance subsidiaries have accumulated approximately $51.0 million in their
separate policyholders' surplus accounts. Deferred taxes have not been provided
on this temporary difference.
There have been no deferred taxes recorded for the unremitted equity in
subsidiaries as the earnings are considered to be permanently invested or will
be remitted only when tax effective to do so.
The difference between the U.S. federal income tax rate and the
consolidated tax provision rate is summarized as follows:
YEAR ENDED
DECEMBER 31
---------------
1995 1994
---- ----
(IN MILLIONS)
Statutory Tax Rate...................................... 35.0% 35.0%
Other................................................... .2 (.2)
-- ---
Provision for Income Taxes........................... 35.2% 34.8%
==== ====
xvii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 5. INCOME TAXES (CONTINUED)
Cash paid to ReliaStar for federal income taxes was $90.3 million and $29.8
million for the years ended December 31, 1995 and 1994, respectively.
NOTE 6. NOTES AND MORTGAGES PAYABLE
A summary of notes and mortgages payable is as follows:
DECEMBER 31
---------------
1995 1994
---- ----
(IN MILLIONS)
Unaffiliated:
Commercial Paper..................................... $135.6 $ 65.6
Other Indebtedness - Current Portion................. .1 .1
----- ----
Short-Term Debt................................. 135.7 65.7
----- ----
Other Indebtedness - Noncurrent Portion.............. 8.9 9.1
--- ---
Total Unaffiliated.............................. $144.6 $ 74.8
====== ======
Note Payable to Parent.......................... $100.0 $100.0
====== ======
At December 31, 1995 and 1994, other indebtedness is primarily mortgage
notes assumed in connection with certain real estate investments with interest
rates ranging from 6.2% to 11.5%.
The weighted average interest rate on the commercial paper outstanding at
December 31, 1995 and 1994 was 6.06% and 6.10%, respectively, with maturities
ranging from 5 to 44 days at December 31, 1995.
Principal payments required on notes and mortgages payable to unaffiliated
companies in each of the next five years and thereafter are as follows:
(IN MILLIONS)
-------------
1996 - $135.7 1999 - $ .2
1997 - $ .1 2000 - $ .2
1998 - $ .2 2001 and thereafter - $8.2
ReliaStar has loaned $100.0 million to Northwestern under a surplus note.
The original note, dated April 1, 1989, was issued in connection with
Northwestern's demutualization and was used to offset the surplus reduction
related to the cash distribution to the mutual policyholders in the
demutualization. This original note was replaced by a successor surplus note
(the 1994 Note) dated November 1, 1994. The 1994 Note provides, subject to the
regulatory constraints discussed below, that (i) it is a surplus note which will
mature on September 15, 2003 with principal due at maturity, but payable without
penalty, in whole or in part before maturity; (ii) interest is at 6 5/8% payable
semi-annually; and (iii) in the event that Northwestern is in default in the
payment of any required interest or principal, Northwestern cannot pay cash
dividends on its capital stock (all of which is owned directly by ReliaStar).
The 1994 Note further provides that there may be no payment of interest or
principal without the express approval of the Minnesota Department of Commerce.
Interest paid on debt was $14.2 million and $16.0 million for 1995 and
1994, respectively.
xviii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 7. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has noncontributory defined benefit retirement plans covering
substantially all employees. The plans, which may be terminated as to accrual of
additional benefits at any time by the Board of Directors, provide benefits to
employees upon retirement.
The benefits under the plans are based on years of service and the
employee's compensation during the last five years of employment. The Company's
policy is to fund the minimum required contribution necessary to meet the
present and future obligations of the plans. Contributions are intended to
provide not only for benefits attributed to service to date but also for those
expected to be earned in the future. Contributions are made to a tax-exempt
trust. Plan assets consist principally of investments in stock and bond mutual
funds, common stock and corporate bonds. Included in plan assets are 616,491
shares of ReliaStar common stock with a fair value of $27.4 million.
The Company and ReliaStar also have unfunded noncontributory defined
benefit plans providing for benefits to employees in excess of limits for
qualified retirement plans and for benefits to nonemployee members of the
ReliaStar Board of Directors.
Net periodic pension expense for ReliaStar and its subsidiaries included
the following components:
YEAR ENDED
DECEMBER 31
---------------
1995 1994
---- ----
(IN MILLIONS)
Service Cost - Benefits Earned During the Year............ $3.4 $3.1
Interest Cost on Projected Benefit Obligation............. 11.9 5.2
Actual Return on Plan Assets.............................. (33.7) 2.4
Net Amortization and Deferral............................. 19.1 (7.5)
---- ----
Net Periodic Pension Expense......................... $.7 $3.2
==== ====
The following table sets forth for ReliaStar and its subsidiaries the
funded status of the plans as of December 31:
<TABLE>
<CAPTION>
FUNDED PLANS UNFUNDED PLANS
1995 1994 1995 1994
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Accumulated Benefit Obligation
Vested...................................................................... $(157.1) $(48.5) $(10.7) $(3.5)
Nonvested................................................................... (5.1) (3.2) (1.2) (.2)
Effect of Projected Future Compensation Increases................................ (10.6) (8.1) (2.1) (2.3)
----- ---- ------ ------
Projected Benefit Obligation..................................................... (172.8) (59.8) (14.0) (6.0)
Plan Assets at Fair Value........................................................ 169.9 53.3 -- --
----- ---- ------ ------
Plan Assets Less Than Projected Benefit Obligation............................... (2.9) (6.5) (14.0) (6.0)
Unrecognized Net Loss............................................................ 24.2 8.4 6.2 1.8
Unrecognized Transition Obligation (Asset)....................................... (.8) (1.1) .1 .1
Additional Minimum Liability..................................................... -- -- (4.2) (.1)
----- ---- ------ ------
Net Pension Asset (Liability)............................................... $20.5 $.8 $(11.9) $(4.2)
===== ==== ====== =====
</TABLE>
xix
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The above amounts are for ReliaStar and its subsidiaries as the Company's
portion is not determinable. The net periodic pension expense relating to and
billed to ReliaStar was insignificant.
The projected benefit obligation was determined using an assumed discount
rate of 7.25% and 8.5%, and a weighted-average assumed long-term rate of
compensation increase of 4.5% and 5.0% at January 1, 1996 and 1995,
respectively. The assumed long-term rate of return on plan assets was 9.5%.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefits to
retired employees (and their eligible dependents). Substantially all of the
Company's employees will become eligible for those benefits if they meet
specified age and service requirements and reach retirement age while working
for the Company, unless the plans are terminated or amended. The postretirement
health care plan is contributory, with retiree contributions adjusted annually;
the life insurance plan is noncontributory and benefits are primarily based on
the employee's final compensation levels.
The Company's postretirement health care plans currently are not funded.
The accumulated postretirement benefit obligation (APBO) and the accrued
postretirement benefit liability were as follows:
DECEMBER 31
---------------
1995 1994
---- ----
(IN MILLIONS)
Retirees............................................... $10.3 $8.4
Fully Eligible Active Plan Participants................ 4.5 2.4
Other Active Plan Participants......................... 4.9 2.6
--- ---
Unfunded APBO....................................... 19.7 13.4
Unrecognized Prior Service Cost........................ .1 .3
Unrecognized Gain (Loss)............................... (.3) 1.6
--- ---
Accrued Postretirement Benefit Liability.......... $19.5 $15.3
===== =====
Net periodic postretirement benefit costs consisted of the following
components:
YEAR ENDED
DECEMBER 31
---------------
1995 1994
---- ----
(IN MILLIONS)
Service Cost - Benefits Earned........................ $1.2 $1.1
Interest Cost on APBO................................. 1.3 1.0
Amortization of Prior Service Cost.................... (.1) (.1)
--- ---
Net Periodic Postretirement Benefit Costs........ $2.4 $2.0
==== ====
The assumed health care cost trend rate used in measuring the APBO as of
January 1, 1996 was 10.0%, decreasing gradually to 5.0% in the year 2010 and
thereafter. The assumed health care cost trend rate used in measuring the APBO
as of January 1, 1995 was 10.0%, decreasing gradually to 6.0% in the year 2009
and thereafter. The assumed discount rate used in determining the APBO was 7.25%
and 8.5% at January 1, 1996 and 1995, respectively. The assumed health care cost
trend rate has a significant effect on the amounts reported. For example, a
one-percentage-point increase in the assumed health care cost trend rate for
each year would increase the APBO as of December 31, 1995 approximately $2.4
million and 1995 net postretirement health care cost by approximately $.4
million.
xx
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 7. EMPLOYEE BENEFIT PLANS (CONTINUED)
SUCCESS SHARING PLAN AND ESOP
The Success Sharing Plan and ESOP (Success Sharing Plan) was designed to
increase employee ownership and reward employees when certain Company
performance objectives are met. Essentially all employees are eligible to
participate in the Success Sharing Plan. The Success Sharing Plan has both
qualified and nonqualified components. The nonqualified component is equal to
25% of the annual award and is paid in cash to employees. The qualified
component is equal to 75% of the annual award, with 25% contributed to a
deferred investment account and the remaining 50% contributed to the ESOP
portion of the Success Sharing Plan. Costs charged to expense for the Success
Sharing Plan were $8.6 million and $8.4 million in 1995 and 1994, respectively.
NOTE 8. RELATED PARTY TRANSACTIONS
The Company and ReliaStar have entered into agreements whereby ReliaStar
and the Company provide certain management, administrative, legal, and other
services to each other. The net amounts billed resulted in the Company making
payments of $25.1 million and $13.6 million to ReliaStar in 1995 and 1994,
respectively. During 1995 the Company paid dividends of $52.0 million to
ReliaStar consisting of $41.3 million paid in cash and $10.7 million in noncash
dividends.
NOTE 9. SHAREHOLDER'S EQUITY
DIVIDEND RESTRICTIONS
The ability of Northwestern to pay cash dividends to ReliaStar is
restricted by law or subject to approval of the insurance regulatory authorities
of Minnesota. These authorities recognize only statutory accounting practices
for the ability of an insurer to pay dividends to its shareholders.
Under Minnesota insurance law regulating the payment of dividends by
Northwestern, any such payment must be an amount deemed prudent by
Northwestern's Board of Directors and, unless otherwise approved by the
Commissioner of the Minnesota Department of Commerce (the Commissioner), must be
paid solely from the adjusted earned surplus of Northwestern. Adjusted earned
surplus means the earned surplus as determined in accordance with statutory
accounting practices (unassigned funds), less 25% of the amount of such earned
surplus which is attributable to net unrealized capital gains. Further, without
approval of the Commissioner, Northwestern may not pay in any calendar year any
dividend which, when combined with other dividends paid within the preceding 12
months, exceeds the greater of (i) 10% of Northwestern's statutory surplus at
the prior year-end or (ii) 100% of Northwestern's statutory net gain from
operations (not including realized capital gains) for the prior calendar year.
For 1996, the amount of dividends which can be paid by Northwestern without
commissioner approval is $117.7 million.
STATUTORY SURPLUS AND NET INCOME
Net income of Northwestern and its subsidiaries, as determined in
accordance with statutory accounting practices was $97.8 million and $57.6
million for 1995 and 1994, respectively. Northwestern's statutory surplus was
$728.3 million and $565.2 million at December 31, 1995 and 1994, respectively.
NOTE 10. REINSURANCE
The Company is a member of reinsurance associations established for the
purpose of ceding the excess of life insurance over retention limits. In
addition, Northwestern's Life and Health Reinsurance Division assumes and cedes
reinsurance on certain life and health risks as its primary business.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The amount of the allowance for uncollectible
xxi
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 10. REINSURANCE (CONTINUED)
reinsurance receivables was immaterial at December 31, 1995. The Company
evaluates the financial condition of its reinsurers and monitors concentrations
of credit risk to minimize its exposure to significant losses from reinsurer
insolvencies. The Company's retention limit is $400,000 per life for individual
coverage and, to the extent that Northwestern reinsures life policies written by
Northern and North Atlantic, the limit is increased up to $600,000 per life. For
group coverage and reinsurance assumed, the retention is $500,000 per life with
per occurrence limitations, subject to certain maximums. As of December 31,
1995, $12.0 billion of life insurance in force was ceded to other companies. The
Company has assumed $36.7 billion of life insurance in force as of December 31,
1995 (including $32.0 billion of reinsurance assumed pertaining to Federal
Employees' Group Life Insurance and Servicemans' Group Life Insurance). Also
included in these amounts are $513.1 million of reinsurance ceded and $4.7
billion of reinsurance assumed by Northwestern's Life and Health Reinsurance
Division.
The effect of reinsurance on premiums and recoveries is as follows:
YEAR ENDED
DECEMBER 31
---------------
1995 1994
---- ----
(IN MILLIONS)
Direct Premiums........................................ $643.8 $533.2
Reinsurance Assumed.................................... 297.6 261.8
Reinsurance Ceded...................................... (89.9) (68.1)
----- -----
Net Premiums .......................................... $851.5 $726.9
====== ======
Reinsurance Recoveries................................. $80.4 $59.0
===== =====
NOTE 11. LIABILITY FOR UNPAID ACCIDENT AND HEALTH CLAIMS AND CLAIM ADJUSTMENT
EXPENSE
The change in the liability for unpaid accident and health claims and claim
adjustment expenses is summarized as follows:
1995 1994
---- ----
(IN MILLIONS)
Balance at January 1.................................... $322.9 $244.6
Less Reinsurance Recoverables........................... 59.5 32.8
---- ----
Net Balance at January 1....................... 263.4 211.8
Incurred Related to:
Current Year....................................... 273.1 266.2
Prior Year......................................... (2.7) (16.6)
---- -----
Total Incurred................................ 270.4 249.6
Paid Related to:
Current Year....................................... 157.0 140.3
Prior Year......................................... 89.0 66.7
---- ----
Total Paid.................................... 246.0 207.0
Net Balance at December 31.............................. 287.8 254.4
Plus Reinsurance Recoverables........................... 81.6 50.5
---- ----
Balance at December 31............................. $369.4 $304.9
====== ======
xxii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 11. LIABILITY FOR UNPAID ACCIDENT AND HEALTH CLAIMS AND CLAIM ADJUSTMENT
EXPENSE (CONTINUED)
The liability for unpaid accident and health claims and claim adjustment
expenses is included in Future Policy and Contract Benefits on the Consolidated
Balance Sheets.
NOTE 12. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a defendant in a number of lawsuits arising out of the
normal course of the business of the Company. In the opinion of Management, the
ultimate resolution of such litigation will not result in any material adverse
impact to operations or financial condition of the Company.
JOINT GROUP LIFE AND ANNUITY CONTRACTS
Northwestern has issued certain participating group annuity and group life
insurance contracts jointly with another insurance company. Northwestern has
entered into an arrangement with this insurer whereby Northwestern will
gradually transfer these liabilities (approximately $328.4 million at December
31, 1995) to the other insurer over a ten year period which commenced in 1993.
The terms of the arrangement specify the interest rate on the liabilities and
provide for a transfer of assets and liabilities scheduled in a manner
consistent with the expected cash flows of the assets allocated to support the
liabilities. A contingent liability exists with respect to the joint obligor's
portion of the contractual liabilities attributable to contributions received
prior to July 1, 1993 in the event the joint obligor is unable to meet its
obligations.
RESERVE INDEMNIFICATION
In March 1992, the Company sold Chartwell Re Corporation (Chartwell), its
property and casualty reinsurance subsidiary. The Company and the acquiring
company entered into a separate agreement which provides for reciprocal
indemnity (but with different ultimate exposure amounts) between the parties to
the agreement with respect to the adequacy of the loss and loss adjustment
expense reserves of Chartwell for all accident years which ended on or before
December 31, 1991. The indemnity is measured for the period ending on December
31, 1996. Under the terms of the agreement, the maximum amount payable by the
Company would be $23.0 million and the maximum amount payable by the acquirer to
the Company would be $5.0 million.
Based upon analyses completed during the fourth quarter of 1995, the
Company has accrued a cumulative total of $8.0 million of the maximum potential
payment under the indemnification agreement. The ultimate amount to be paid will
be affected by subsequent favorable or adverse claims development.
The amounts accrued under the indemnification agreement are presented as
discontinued operations in the Consolidated Statements of Income.
FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to reduce its exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit, financial guarantees, futures contracts and interest rate swaps. Those
instruments involve, to varying degrees, elements of credit, interest rate or
liquidity risk in excess of the amount recognized in the Consolidated Balance
Sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
financial guarantees written is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. For
xxiii
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
futures contracts and interest rate swap transactions, the contract or notional
amounts do not represent exposure to credit loss. For swaps, the Company's
exposure to credit loss is limited to those swaps where the Company has an
unrealized gain. For futures contracts, the Company has no exposure to credit
risk, as the contracts are marked to market daily.
Unless otherwise noted, the Company does not require collateral or other
security to support financial instruments with credit risk.
<TABLE>
<CAPTION>
CONTRACT OR NOTIONAL AMOUNT
DECEMBER 31
---------------------------
1995 1994
---- ----
(In Millions)
Financial Instruments Whose Contract Amounts Represent Credit Risk
<S> <C> <C>
Commitments to Extend Credit........................................................ $82.6 $36.4
Financial Guarantees................................................................ 41.8 47.5
Financial Instruments Whose Notional or Contract
Amounts Exceed the Amount of Credit Risk
Futures Contracts................................................................... 80.4 84.4
Interest Rate Swap Agreements....................................................... 1,222.5 1,320.0
</TABLE>
COMMITMENTS TO EXTEND CREDIT - Commitments to extend credit are legally
binding agreements to lend to a customer. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
They generally may be terminated by the Company in the event of deterioration in
the financial condition of the borrower. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future liquidity requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis.
FINANCIAL GUARANTEES - Financial guarantees are conditional commitments
issued by the Company guaranteeing the performance of the borrower to a third
party. Those guarantees are primarily issued to support public and private
commercial mortgage borrowing arrangements. The credit risk involved is
essentially the same as that involved in issuing commercial mortgage loans.
Northwestern is a partner in eight real estate joint ventures where it has
guaranteed the repayment of loans of the partnership. As of December 31, 1995,
Northwestern had guaranteed repayment of $41.8 million ($47.5 million at
December 31, 1994) of such loans including the portion allocable to the PFA. If
any payments were made under these guarantees, Northwestern would be allowed to
make a claim for repayment from the joint venture, foreclose on the assets of
the joint venture including its real estate investment and, in certain
instances, make a claim against the joint venture's general partner.
For certain of these partnerships, Northwestern has made capital
contributions from time to time to provide the partnerships with sufficient cash
to meet its obligations, including operating expenses, tenant improvements and
debt service. Capital contributions during 1995 and 1994 were insignificant.
Further capital contributions are likely to be required in future periods for
certain of the joint ventures with the guarantees. The Company cannot predict
the amount of such future contributions.
FUTURES CONTRACTS - Futures contracts are contracts for delayed delivery of
securities or money market instruments in which the seller agrees to make
delivery at a specified future date of a specified
xxiv
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
instrument, at a specified price or yield. These contracts are entered into to
manage interest rate risk as part of the Company's asset and liability
management. Risks arise from the movements in securities values and interest
rates.
INTEREST RATE SWAP AGREEMENTS - The Company also enters into interest rate
swap agreements to manage interest rate exposure. The primary reason for the
interest rate swap agreements is to extend the duration of adjustable rate
investments. Interest rate swap transactions generally involve the exchange of
fixed and floating rate interest payment obligations without the exchange of the
underlying principal amounts. Changes in market interest rates impact income
from adjustable rate investments and have an opposite (and approximately
offsetting) effect on the reported income from the swap portfolio. The risks
under interest rate swap agreements are generally similar to those of futures
contracts. Notional principal amounts are often used to express the volume of
these transactions but do not represent the much smaller amounts potentially
subject to credit risk.
LEASES
The Company has operating leases for office space and certain computer
processing and other equipment. Rental expense for these items was $13.6 million
and $11.0 million for 1995 and 1994, respectively.
Future minimum aggregate rental commitments at December 31, 1995 for
operating leases were as follows:
(IN MILLIONS)
-------------
1996 - $7.6 1999 - $4.6
1997 - $6.8 2000 - $5.4
1998 - $5.7 2001 and thereafter - $4.4
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures are made in accordance with the requirements of
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS No.
107 requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates, in many cases, could not be realized in immediate
settlement of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The fair value estimates presented herein are based on pertinent
information available to Management as of December 31, 1995 and 1994. Although
Management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date; therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
FIXED MATURITY SECURITIES - The estimated fair value disclosures for debt
securities satisfy the fair value disclosure requirements of SFAS No. 107 (See
Note 4).
xxv
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
EQUITY SECURITIES - Fair value equals carrying value as these securities
are carried at quoted market value.
MORTGAGE LOANS ON REAL ESTATE - The fair values for mortgage loans on real
estate are estimated using discounted cash flow analyses, using interest rates
currently being offered in the marketplace for similar loans to borrowers with
similar credit ratings. Loans with similar characteristics are aggregated for
purposes of the calculations.
CASH, SHORT-TERM INVESTMENTS AND POLICY LOANS - The carrying amounts for
these assets approximate the assets' fair values.
OTHER FINANCIAL INSTRUMENTS REPORTED AS ASSETS - The carrying amounts for
these financial instruments (primarily premiums and other accounts receivable
and accrued investment income) approximate those assets' fair values.
INVESTMENT CONTRACT LIABILITIES - The fair value for deferred annuities was
estimated to be the amount payable on demand at the reporting date as those
investment contracts have no defined maturity and are similar to a deposit
liability. The amount payable at the reporting date was calculated as the
account balance less applicable surrender charges.
The fair value for GICs was estimated using discounted cash flow analyses.
The discount rate used was based upon current industry offering rates on GICs of
similar durations.
The fair values for supplementary contracts without life contingencies and
immediate annuities were estimated using discounted cash flow analyses. The
discount rate was based upon treasury rates plus a pricing margin.
The carrying amounts reported for other investment contracts which includes
participating pension contracts and retirement plan deposits, approximate those
liabilities' fair value.
CLAIM AND OTHER DEPOSIT FUNDS - The carrying amounts for claim and other
deposit funds approximate the liabilities' fair value.
NOTES AND MORTGAGES PAYABLE - The fair value for the note payable to
ReliaStar was based upon the quoted market price of the related ReliaStar
publicly traded debt. For other debt obligations, discounted cash flow analyses
were used. The discount rate was based upon the Company's estimated current
incremental borrowing rates.
OTHER FINANCIAL INSTRUMENTS REPORTED AS LIABILITIES - The carrying amounts
for other financial instruments (primarily normal payables of a short-term
nature) approximate those liabilities' fair values.
FINANCIAL GUARANTEES - The fair values for financial guarantees were
estimated using discounted cash flow analyses based upon the expected future net
amounts to be expended. The estimated net amounts to be expended were determined
based on projected cash flows and a valuation of the underlying collateral.
INTEREST RATE SWAPS - The fair value for interest rate swaps was estimated
using discounted cash flow analyses. The discount rate was based upon rates
currently being offered for similar interest rate swaps available from similar
counterparties.
xxvi
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF RELIASTAR FINANCIAL CORP.)
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------
1995 1994
------------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
(In Millions)
<S> <C> <C> <C> <C>
Financial Instruments Recorded as Assets
Fixed Maturity Securities
Available-for-Sale..................................... $9,053.7 $9,053.7 $3,470.6 $3,470.6
Held-to-Maturity............................. ......... -- -- 2,310.4 2,253.0
Equity Securities.......................... ............... 35.9 35.9 43.7 43.7
Mortgage Loans on Real Estate
Commercial ............................................ 1,465.0 1,525.8 1,120.1 1,068.8
Residential and Other ................................. 483.4 496.1 450.2 443.1
Policy Loans .............................................. 499.8 499.8 306.8 306.8
Cash and Short-Term Investments ........................... 165.4 165.4 79.7 79.7
Other Financial Instruments Recorded as Assets ............ 503.3 503.3 349.7 349.7
Financial Instruments Recorded as Liabilities
Investment Contracts
Deferred Annuities................................... . (6,704.9) (6,285.6) (4,690.0) (4,369.3)
GICs....................................... ........... (115.0) (148.6) (239.9) (261.5)
Supplementary Contracts and Immediate Annuities ....... (99.8) (99.7) (99.1) (93.9)
Other Investment Contracts ............................ (529.2) (529.2) (539.4) (539.4)
Claim and Other Deposit Funds ............................. (114.9) (114.9) (101.2) (101.2)
Notes and Mortgages Payable ............................... (243.6) (244.4) (173.7) (159.4)
Other Financial Instruments Recorded as Liabilities ....... (224.8) (224.8) (167.8) (167.8)
Off-Balance Sheet Financial Instruments
Financial Guarantees....................................... -- (4.6) -- (5.2)
Interest Rate Swaps........................................ -- 42.7 -- (46.5)
</TABLE>
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
xxvii
