PART A
<PAGE>
Great American
Reserve
1997 Account E
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GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT E
INDIVIDUAL & GROUP VARIABLE DEFERRED ANNUITY CONTRACTS
OFFERED BY
GREAT AMERICAN RESERVE INSURANCE COMPANY
ADMINISTRATIVE OFFICE:
11815 N. PENNSYLVANIA STREET, CARMEL, IN 46032
(317) 817-3700
The Individual and Group Flexible Purchase Payment Variable Deferred
Annuity Contracts (the "Contracts") described by this Prospectus are offered by
Great American Reserve Insurance Company ("Great American Reserve"). The
Contracts are designed for use in retirement planning. Purchase Payments
received with respect to the Contracts (subject to certain deductions) are
deposited by Great American Reserve in the separate investment account entitled
Great American Reserve Variable Annuity Account E (the "Variable Account") for
further investment or in the general account of Great American Reserve.
The Variable Account is a unit investment trust separate account. The
Variable Account consists of 30 sub-accounts ("Sub-accounts"), each of which
invests in shares of the eligible open-end management investment companies
("Funds"). The Sub-accounts invest in shares of the following Funds: the Conseco
Series Trust Asset Allocation, Common Stock, Corporate Bond, Government
Securities, and Money Market Portfolios; the Alger American Fund Growth,
Leveraged AllCap, MidCap Growth, and Small Capitalization Portfolios; the
American Century Variable Portfolios, Inc. International and Value Funds; the
Berger IPT - 100, Berger IPT - Growth and Income, Berger IPT - Small Company
Growth, and Berger/BIAM IPT - International Funds; the Dreyfus Socially
Responsible Growth Fund, Inc.; the Dreyfus Stock Index Fund; the Federated
Insurance Series High Income Bond II, International Equity II, and Utility II
Funds; the Janus Aspen Series Aggressive Growth, Growth, and Worldwide Growth
Portfolios; the Neuberger & Berman Advisers Management Trust Limited Maturity
Bond and Partners Portfolios; the Strong Special Fund II; the Strong Variable
Insurance Funds, Inc. Growth Fund II; and the Van Eck Worldwide Insurance Trust
Worldwide Hard Assets (formerly, Gold and Natural Resources), Worldwide Bond,
and Worldwide Emerging Markets Funds.
SEVEN OF THESE FUNDS, INCLUDING THE AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
INTERNATIONAL AND VALUE FUNDS; THE BERGER/BIAM IPT - INTERNATIONAL FUND; THE
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST LIMITED MATURITY BOND AND PARTNERS
PORTFOLIOS; THE STRONG SPECIAL FUND II; AND THE STRONG VARIABLE INSURANCE
FUNDS, INC. GROWTH FUND II, WILL BE AVAILABLE ON MAY 1, 1997. The availability
of such Funds may be delayed beyond May 1, 1997, pending receipt of state
approvals. Before investing in any of the Sub-accounts, carefully review the
prospectuses of the eligible Funds.
This Prospectus contains information regarding the Contracts which
investors should know before investing. It should be read and retained for
future reference. A Statement of Additional Information, incorporated herein by
reference and dated May 1, 1997, has been filed with the Securities and Exchange
Commission ("SEC"). Investors can obtain a free copy by contacting Great
American Reserve at the address or telephone number given above. The Table of
Contents of the Statement of Additional Information appears in this Prospectus
on page 33.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
1
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Great American
Reserve
1997 Account E
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TABLE OF CONTENTS
Page
Definitions....................................................................4
Summary........................................................................5
Condensed Financial Information...............................................11
Great American Reserve, Variable Account,
and the Investment Options
A. Great American Reserve...................................................14
B. Variable Account.........................................................14
C. Investment Options.......................................................15
Voting Rights.................................................................17
The Contracts
A. Accumulation Provisions
PURCHASE PAYMENTS.......................................................18
ALLOCATION OF PURCHASE PAYMENTS.........................................18
ACCUMULATION UNITS......................................................18
VALUE OF AN INDIVIDUAL ACCOUNT..........................................18
NET INVESTMENT FACTOR FOR EACH
VALUATION PERIOD........................................................19
INFORMATION ON THE FIXED ACCOUNT........................................19
TRANSFER AMONG INVESTMENT OPTIONS.......................................20
DOLLAR COST AVERAGING...................................................21
REBALANCING.............................................................21
SWEEPS..................................................................21
WITHDRAWALS.............................................................21
SYSTEMATIC WITHDRAWAL PLAN..............................................22
CHECK WRITING...........................................................22
LOANS...................................................................22
CONTRACT CHARGES
WITHDRAWAL CHARGE....................................................23
ADMINISTRATIVE CHARGES...............................................24
MORTALITY AND EXPENSE RISK
CHARGE..............................................................24
REDUCTION OR ELIMINATION
OF CONTRACT CHARGES.................................................25
PREMIUM TAXES.........................................................25
OTHER CHARGES.........................................................25
DEATH BENEFIT BEFORE MATURITY DATE..........................................25
OPTIONS UPON TERMINATION OF
PARTICIPATION IN THE PLAN
(FOR GROUP CONTRACTS ONLY)..................................................25
RESTRICTIONS UNDER OPTIONAL
RETIREMENT PROGRAMS..................................................26
RESTRICTIONS UNDER SECTION 403(B)
PLANS................................................................26
B. Settlement Provisions
OPTIONAL ANNUITY PERIOD ELECTIONS.......................................26
ANNUITY OPTIONS.........................................................27
PROCEEDS APPLIED TO ANNUITY OPTION......................................28
DETERMINATION OF AMOUNT OF THE FIRST
MONTHLY VARIABLE ANNUITY PAYMENT.....................................28
VALUE OF AN ANNUITY UNIT................................................28
AMOUNTS OF SUBSEQUENT MONTHLY
VARIABLE ANNUITY PAYMENTS............................................29
TRANSFERS AFTER MATURITY DATE...........................................29
DEATH BENEFIT ON OR AFTER
MATURITY DATE.........................................................30
C. Other Contract Provisions
TEN-DAY RIGHT TO REVIEW.................................................30
OWNERSHIP...............................................................30
MODIFICATION............................................................30
COMPANY APPROVAL........................................................30
Federal Tax Matters
A. General.................................................................31
B. Status of Contracts.....................................................31
NON-QUALIFIED CONTRACTS................................................32
QUALIFIED CONTRACTS....................................................33
C. Taxation of Distributions...............................................34
D. Other Considerations....................................................35
General Matters
PERFORMANCE INFORMATION.....................................................36
DISTRIBUTION OF CONTRACTS...................................................36
CONTRACT OWNER INQUIRIES....................................................36
LEGAL PROCEEDINGS...........................................................36
OTHER INFORMATION...........................................................36
Table of Contents of the Statement of
Additional Information......................................................36
2
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DEFINITIONS
ACCUMULATION UNIT: An accounting unit of measure used to calculate the values
before the Maturity Date.
ANNUITANT: The named individual who receives annuity payments.
ANNUITY: A series of payments for life; or for life with a minimum number of
payments certain; or for a certain period; or for a certain payment amount.
ANNUITY UNIT: An accounting unit of measure used to calculate the amount of
annuity payments.
CONTRACT VALUE: The total of your Individual Account values held under the
Contract in each investment option of the Variable Account plus the Fixed
Account.
CONTRACT YEAR: A period of 12 months commencing with the effective date of
your contract.
FIXED ACCOUNT: The general account of Great American Reserve in which you may
choose to allocate purchase payments and Contract Values. It provides guaranteed
values and periodically adjusted interest rates. Great American Reserve: Great
American Reserve Insurance Company. Also referred to as we or us.
GREAT AMERICAN RESERVE: Great American Reserve Insurance Company. Also
referred to as "we" or "us".
INDIVIDUAL ACCOUNT: The record established by Great American Reserve which
represents a Contract Owner's interest in an investment option prior to the
Maturity Date.
INVESTMENT OPTIONS: The investment choices available to Contract Owners.
MATURITY DATE: The date on which annuity payments of the Contract begin.
OWNER(S) OR CONTRACT OWNER(S): The person, persons (co-owner) or entity
entitled to all of the ownership rights under the Contract. Also referred to as
"you" or "yours".
PARTICIPANT: (For group contracts only) Any eligible person participating in
a plan and for whom an Individual Account is established under a Contract.
PLAN: A voluntary program of an employer that qualifies for special tax
treatment.
PURCHASE PAYMENTS: Premium payments made to Great American Reserve under the
terms of the Contract.
VALUATION PERIOD: The period of time from the end of one business day of the
New York Stock Exchange to the end of the next day or to the same time on any
day in which there are sufficient purchases or redemptions in Accumulation Units
that the current net asset value of those units might be materially affected by
changes in the value of the portfolio securities.
VARIABLE ACCOUNT (GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT E): A
separate account established pursuant to the insurance laws of Texas. Assets
attributable to the variable portions of contracts are segregated from other
assets of Great American Reserve and are held in the Great American Reserve
Variable Annuity Account E.
VARIABLE ANNUITY: An annuity which provides retirement payments which vary in
dollar amount with investment results.
3
<PAGE>
Great American
Reserve
1997 Account E
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SUMMARY
THE CONTRACTS. The Contracts offered by this Prospectus are tax-deferred
flexible purchase payment individual or group variable annuity contracts. The
Contracts provide for the accumulation of contract values and the payment of
annuity benefits on a variable and/or fixed basis. Except as specifically noted
herein and set forth under the caption "Information on the Fixed Account" this
Prospectus describes only the variable portion of the Contracts.
RETIREMENT PLANS. The Contracts may be issued pursuant to either
non-qualified retirement plans or plans qualifying for special income tax
treatment under the Internal Revenue Code (the "Code"), such as individual
retirement annuities ("IRAs"), pension and profit sharing plans, tax-sheltered
annuities ("TSAs"), and state and local government deferred compensation plans
(see "Qualified Contracts").
PURCHASE PAYMENTS. The Contracts permit Purchase Payments to be made on a
flexible purchase payment basis. For TSAs, the minimum initial payment and
amount for each subsequent payment is $50 per month. For IRAs, the minimum
initial investment is $2,000 and the minimum amount of each additional payment
is $50. For non-qualified Contracts, the minimum initial investment is $5,000
and the minimum amount of each additional lump sum payment is $2,000 (or $200
per month). Purchase Payments may be made at any time, except that if a Purchase
Payment exceeds $500,000, it will be accepted only with the prior approval of
Great American Reserve (see "Purchase Payments").
INVESTMENT OPTIONS. Purchase Payments may be allocated among the 31
investment options available under the Contracts: 30 variable investment options
and one fixed option. The 30 variable investment options consist of Sub-accounts
which invest in shares of the following Funds: the Conseco Series Trust Asset
Allocation, Common Stock, Corporate Bond, Government Securities, and Money
Market Portfolios; the Alger American Fund Growth, Leveraged AllCap, MidCap
Growth, and Small Capitalization Portfolios; the American Century Variable
Portfolios, Inc. International and Value Funds; the Berger IPT - 100, Berger IPT
- - Growth and Income, Berger IPT - Small Company Growth, and Berger/BIAM IPT -
International Funds; the Dreyfus Socially Responsible Growth Fund, Inc.; the
Dreyfus Stock Index Fund; the Federated Insurance Series High Income Bond II,
International Equity II, and Utility II Funds; the Janus Aspen Series Aggressive
Growth, Growth, and Worldwide Growth Portfolios; the Neuberger & Berman Advisers
Management Trust Limited Maturity Bond and Partners Portfolios; the Strong
Special Fund II; the Strong Variable Insurance Funds, Inc. Growth Fund II; and,
the Van Eck Worldwide Insurance Trust Worldwide Hard Assets (formerly, Gold and
Natural Resources), Worldwide Bond, and Worldwide Emerging Markets Funds (see
the accompanying prospectuses of the eligible Funds). The portion of the
Contract Value in the Variable Account will reflect the investment performance
of the investment options selected (see "Variable Account"). Purchase Payments
may also be allocated to the Fixed Account (see "Information on the Fixed
Account"). Subject to certain regulatory limitations, Great American Reserve may
elect to add, subtract or substitute investment options.
TRANSFERS. Prior to the Maturity Date, amounts may be transferred among the
Variable Account investment options and from the Variable Account investment
options to the Fixed Account investment option without charge. In addition,
amounts may be transferred prior to the Maturity Date from the Fixed Account
investment option to the Variable Account investment options, subject to a limit
of 20 percent of the Fixed Account value per any six-month period (see
"Information on the Fixed Account"). After the Maturity Date, transfers are not
permitted from variable annuity options to fixed annuity options or from fixed
annuity options to variable annuity options. Great American Reserve may impose
certain additional limitations on transfers (see "Transfers Among Investment
Options" and "Transfers After Maturity Date"). Transfer privileges may also be
used under special services offered by Great American Reserve to dollar cost
average an investment in the contract (see "Dollar Cost Averaging"), transfer
earnings from the Fixed Account to another investment option (see "Sweeps"), or
rebalance an investment option on a periodic basis (see "Rebalancing").
WITHDRAWALS. Prior to the earlier of the Maturity Date or the death of the
Annuitant, the Contract Owner may withdraw all or a portion of the Contract
Value. The amount withdrawn from any Individual Account must be at least $250
or, if less, the entire balance of the Individual Account. If a partial
withdrawal plus any applicable withdrawal charge would reduce the Contract Value
to less than $500, the withdrawal request may be treated as a request to
withdraw the entire Contract Value (see "Withdrawals"). A withdrawal charge and
an administrative fee may be imposed (see "Withdrawal Charge"). A withdrawal may
also be subject to a penalty tax (see "Federal Tax Matters"). Withdrawal
privileges may also be exercised pursuant to Great American Reserves systematic
withdrawal plan (see "Systematic Withdrawal Plan") and check writing privileges
(see "Check Writing").
LOANS. Your contract may contain a loan provision issued in connection with
certain qualified plans. Owners of such contracts may be eligible to obtain
loans using the contract as the only security for the loan (see "Loans").
4
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DEATH BENEFIT BEFORE MATURITY DATE. Generally, if the Annuitant dies before
the Maturity Date, Great American Reserve will pay to the beneficiary the
minimum death benefit less any outstanding loans (see "Death Benefit Before
Maturity Date").
ANNUITY PAYMENTS. Great American Reserve offers a variety of fixed and
variable annuity options. Periodic annuity payments will begin on the Maturity
Date. The Contract Owner selects the Maturity Date, frequency of payment and
annuity option (see "Settlement Provisions").
TEN-DAY REVIEW. Within 10 days of receipt of a Contract, a Contract Owner
may cancel the Contract by returning it to Great American Reserve (see "Ten-Day
Right to Review").
CHARGES AND DEDUCTIONS. The following table and examples are designed to
assist Contract Owners in understanding the various expenses that Contract
Owners bear directly and indirectly. The table reflects expenses of the Variable
Account and the underlying Portfolios. The items listed under "Contract Owner
Transaction Expenses" and "Variable Account Annual Expenses" are completely
described in this Prospectus (see "Contract Charges"). The items listed under
"Annual Fund Expenses After Reimbursement" are described in detail in the
accompanying prospectuses of the eligible Funds to which reference should be
made.
CONTRACT OWNER TRANSACTION EXPENSES (1)
Sales Charge Imposed on Purchases........................................None
Exchange Fee.............................................................None
Surrender Fee............................................................None
Deferred Sales Load (as a percentage
of purchase payments) (2)
First and Second Year..............................................9%
Third Year.........................................................8%
Fourth Year........................................................7%
Fifth Year.........................................................5%
Sixth Year.........................................................3%
Seventh Year or More...............................................0%
Annual Administrative Fee (2).............................................$30
VARIABLE ACCOUNT ANNUAL EXPENSES (as a
percentage of average account value)
Mortality and Expense Risk Fees1........................................25%
Administrative Charge.................................................0.15%
Total Annual Expenses of Variable
Account (2)..........................................................1.40%
==============================================================================
(1)Premium taxes are not shown. Any premium tax due will be deducted from
Purchase Payments or from Individual Account values at the Maturity Date or
at such other time as the tax becomes due. The current range of premium taxes
in jurisdictions in which the Contracts are made available is from 0 percent
to 3.5 percent.
(2)Great American Reserve may reduce or eliminate the sales, administrative, or
other expenses with certain contracts in cases when Great American Reserve
expects to incur lower sales and administrative expenses or perform fewer
services (see "Reduction or Elimination of Contract Charges"). Great American
Reserve will waive the annual administrative fee if the Owners Individual
Account value is $25,000 or greater.
5
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Great American
Reserve
1997 Account E
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<TABLE>
<CAPTION>
ANNUAL FUND EXPENSES AFTER REIMBURSEMENT (1)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C>
MANAGEMENT FEES OTHER EXPENSES TOTAL EXPENSES
====================================================================================================================================
CONSECO SERIES TRUST
Asset Allocation Portfolio (2) .................................. .55% .20% .75%(3)
Common Stock Portfolio (2)....................................... .60% .20% .80%(3)
Corporate Bond Portfolio ........................................ .50% .20% .70%(3)
Government Securities Portfolio ................................. .50% .20% .70%(3)
Money Market Portfolio (2)....................................... .25% .20% .45%(3)
THE ALGER AMERICAN FUND
Alger American Growth Portfolio ................................. .75% .04% .79%
Alger American Leveraged AllCap Portfolio ....................... .85% .24%(4) 1.09%
Alger American MidCap Growth Portfolio .......................... .80% .04% .84%
Alger American Small Capitalization Portfolio ................... .85% .03% .88%
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC .............................
International Fund .............................................. 1.50% .00% 1.50%
Value Fund ...................................................... 1.00% .00% 1.00%
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger IPT - 100 Fund (5) ....................................... .00% 1.00% 1.00%
Berger IPT - Growth and Income Fund (5) ......................... .00% 1.00% 1.00%
Berger IPT - Small Company Growth Fund (5) ..................... .00% 1.15% 1.15%
Berger/BIAM IPT - International Fund (6) ........................ .00% 1.20% 1.20%
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC ..................... .75% .24% .99%(7)
DREYFUS STOCK INDEX FUND .............................................. .245% .055% .30%(8)
FEDERATED INSURANCE SERIES
Federated High Income Bond Fund II .............................. .01% .79% .80%(9)
Federated International Equity Fund II .......................... .00% 1.25% 1.25%(9)
Federated Utility Fund II ....................................... .24% .61% .85%(9)
JANUS ASPEN SERIES
Aggressive Growth Portfolio ..................................... .72% .04% .76%(10)
Growth Portfolio ................................................ .65% .04% .69%(10)
Worldwide Growth Portfolio ...................................... .66% .14% .80%(10)
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST (11)
Limited Maturity Bond Portfolio ................................. .65% .13% .78%
Partners Portfolio .............................................. .84% .11% .95%
STRONG SPECIAL FUND II ................................................ 1.00% .17% 1.17%
STRONG VARIABLE INSURANCE FUNDS, INC ..................................
Growth Fund II .................................................. 1.00% 1.00% 2.00%
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Hard Assets Fund formerly, Gold and Natural
Resources Fund) ........................................... 1.00% .23% 1.23%
Worldwide Bond Fund ............................................. 1.00% .16% 1.16%
Worldwide Emerging Markets Fund ................................. 1.00% .50% 1.50%(12)
====================================================================================================================================
</TABLE>
(1) The Fund expenses shown above are assessed at the underlying Fund level and
are not direct charges against separate account assets or reductions from
Contract Values. These Fund expenses are taken into consideration in
computing each fund's net asset value, which is the share price used to
calculate the Variable Account's unit value.
(2) Conseco Capital Management, Inc., since January 1, 1993, has voluntarily
waived its Management Fees in excess of the annual rates set forth above.
Absent such Fee waivers, the Management Fees would have totaled: 0.65
percent for Asset Allocation; 0.65 percent for Common Stock; and 0.50
percent for Money Market.
(3) Conseco Capital Management, Inc., the investment adviser of the Conseco
Series Trust, has voluntarily agreed to reimburse all expenses, including
management fees, in excess of the following percentage of the average
annual net assets of each listed Portfolio, so long as such reimbursement
would not result in a portfolio's inability to qualify as a regulated
investment company under the Code: 0.75 percent for Asset Allocation; 0.80
percent for Common Stock; 0.70 percent for Corporate Bond and Government
Securities; and 0.45 percent for Money Market. The total percentage in the
above table is after reimbursement. In the absence of expense
reimbursement, the total fees and expenses in 1996 would have totaled: 0.95
percent for Asset Allocation; 0.81 percent for Common Stock; 0.77 percent
for Corporate Bond; 0.91 percent for Government Securities; 0.58 percent
for Money Market.
6
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(4) The Alger American Leveraged AllCap Portfolio "Other expenses" includes
.03 percent of interest expense.
(5) Berger Associates, the Fund's investment adviser, has voluntarily agreed to
waive its advisory fee and has voluntarily reimbursed the Fund for
additional expenses to the extent that normal operating expenses in any
fiscal year, including the investment advisory fee but excluding brokerage
commissions, interest, taxes and extraordinary expenses, of each of the
Berger IPT - 100 Fund and the Berger IPT - Growth and Income Fund exceed
1.00%, and the normal operating expenses in any fiscal year of the Berger
IPT - Small Company Growth Fund exceed 1.15%, of the respective Fund's
average daily net assets. Absent the voluntary waiver and reimbursement,
the Management Fee for the Berger IPT - 100 Fund, Berger IPT - Growth and
Income Fund and the Berger IPT - Small Company Growth Fund would have been
0.75%, 0.75% and 0.90%, respectively, and their Total Expenses would have
been 7.69%, 7.70% and 8.57%, respectively.
(6) Based on estimated expenses for the first year of operations of the
Berger/BIAM IPT - International Fund, after fee waivers and expense
reimbursements. Berger Associates, the Fund's investment adviser, has
voluntarily agreed to waive its advisory fee and expects to voluntarily
reimburse the Fund for additional expenses to the extent that normal
operating expenses in any fiscal year, including the investment advisory
fee but excluding brokerage commissions, interest, taxes and extraordinary
expenses, of the Berger/BIAM IPT - International Fund exceed 1.20%, of the
Fund's average daily net assets. Absent the voluntary waiver and
reimbursement, the Management Fee for the Berger/BIAM IPT - International
Fund would be 0.90%, and its Total Expenses would be estimated to be 8.96%.
(7) In 1996, The Dreyfus Corporation waived .03% of its management fee. The
Dreyfus Corporation does not intend to waive a portion of its management
fee for fiscal year 1997.
(8) Dreyfus Corporation, the Fund's investment adviser, has voluntarily agreed
until such time as it gives investors 180 days notice to the contrary, to
reimburse all or a portion of its advisory fee to the extent that the total
expenses of the Fund (excluding brokerage commissions, transaction fees and
extraordinary expenses) are in excess of .40 or 1% of the value of the
Fund's average daily net assets.
(9) In the absence of a voluntary waiver by Federated Advisers, the Funds'
investment adviser, the Management Fee and Total Expenses would have been
0.60% and 1.39%, respectively, for High Income Bond and 0.75% and 1.36%,
respectively, for Utility. Absent a voluntary waiver of the management fee
and the voluntary reimbursement of certain other operating expenses by
Federated Advisers, the Management Fee and Total Expenses for International
Equity would have been 1.00% and 4.30%, respectively.
(10) The expense figures shown are net of certain fee waivers or reductions from
Janus Capital Corporation, the investment adviser of the Janus Aspen
Series. Without such waivers or reductions, the total fees and expenses in
1996 would have totaled: 0.83% for Aggressive Growth; 0.83% for Growth; and
0.91% for Worldwide Growth.
(11) Neuberger & Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in a
corresponding series of Advisers Managers Trust. The figures reported under
"Management Fees" include the aggregate of the administration fees paid by
the Portfolio and the management fees paid by its corresponding series.
Similarly, "Other Expenses" includes all other expenses of the Portfolio
and its corresponding series.
(12) Expenses for Worldwide Emerging Markets Fund are being voluntarily capped
by the Fund's investment adviser at 1.50% of average net assets. In the
absence of the investment adviser's absorption of these expenses, Other
Expenses and Total Expenses would be 1.64% and 2.64%, respectively.
Great American Reserve has guaranteed certain expenses not to exceed a total of
1.44 percent on an annual basis of the average annual net assets of the Conseco
Series Trust Common Stock, Corporate Bond and Money Market Portfolios that is
equal to the same charges that would have been imposed under the Contracts had
the Combination not occurred (see "Expense Guarantee Agreement").
7
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Great American
Reserve
1997 Account E
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VARIABLE DEFERRED ANNUITY CONTRACT
EXAMPLE 1- Assuming surrender of the Contract at the end of the periods shown
(1): You would pay the following expenses on a $1,000 investment, assuming a 5
percent annual return on assets:
<TABLE>
1 YEAR 3 YEARS 5 YEARS 10YEARS
====================================================================================================================================
<S> <C> <C> <C> <C>
CONSECO SERIES TRUST
Asset Allocation Portfolio ....................................... $108 $143 $166 $261
Common Stock Portfolio ........................................... 109 144 169 266
Corporate Bond Portfolio ......................................... 108 141 164 256
Government Securities Portfolio .................................. 108 141 164 256
Money Market Portfolio ........................................... 105 133 151 230
THE ALGER AMERICAN FUND
Alger American Growth Portfolio .................................. 109 144 168 265
Alger American Leveraged AllCap Portfolio ........................ 112 153 183 295
Alger American MidCap Growth Portfolio ........................... 109 145 171 270
Alger American Small Capitalization Portfolio .................... 109 146 173 274
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC
International Fund ............................................... 116 165 204 334
Value Fund ....................................................... 111 150 179 286
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger IPT - 100 Fund ............................................ 111 150 179 286
Berger IPT - Growth and Income Fund .............................. 111 150 179 286
Berger IPT - Small Company Growth Fund ........................... 112 155 186 301
Berger/BIAM IPT - International Fund ............................. 113 156 189 306
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC ...................... 111 150 178 285
DREYFUS STOCK INDEX FUND ............................................... 104 129 143 215
FEDERATED INSURANCE SERIES
Federated High Income Bond Fund II ............................... 109 144 169 266
Federated International Equity Fund II ........................... 113 158 191 310
Federated Utility Fund II ........................................ 109 146 171 271
JANUS ASPEN SERIES
Aggressive Growth Portfolio ...................................... 108 143 167 262
Growth Portfolio ................................................. 108 141 163 255
Worldwide Growth Portfolio ....................................... 109 144 169 266
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Limited Maturity Bond Portfolio .................................. 108 143 168 264
Partners Portfolio ............................................... 110 149 176 281
STRONG SPECIAL FUND II ................................................. 112 155 187 303
STRONG VARIABLE INSURANCE FUNDS, INC
Growth Fund II ................................................... 121 180 228 380
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Hard Assets Fund (formerly,
Gold and Natural Resources Fund) ................................. 113 157 190 308
Worldwide Bond Fund .............................................. 112 155 187 302
Worldwide Emerging Markets Fund .................................. 116 165 204 334
====================================================================================================================================
</TABLE>
8
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VARIABLE DEFERRED ANNUITY CONTRACT
EXAMPLE 2-Assuming annuitization of the Contract at the end of the periods shown
(1): You would pay the following expenses on a $1,000 investment, assuming a 5
percent annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
====================================================================================================================================
<S> <C> <C> <C> <C>
CONSECO SERIES TRUST
Asset Allocation Portfolio ....................................... $108 $143 $122 $261
Common Stock Portfolio ........................................... 109 144 124 266
Corporate Bond Portfolio ......................................... 108 141 119 256
Government Securities Portfolio .................................. 108 141 119 256
Money Market Portfolio ........................................... 105 133 107 230
THE ALGER AMERICAN FUND
Alger American Growth Portfolio .................................. 109 144 124 265
Alger American Leveraged AllCap Portfolio ........................ 112 153 139 295
Alger American MidCap Growth Portfolio ........................... 109 145 126 270
Alger American Small Capitalization Portfolio .................... 109 146 128 274
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC
International Fund ............................................... 116 165 159 334
Value Fund ....................................................... 111 150 134 286
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger IPT - 100 Fund ............................................ 111 150 134 286
Berger IPT - Growth and Income Fund .............................. 111 150 134 286
Berger IPT - Small Company Growth Fund ........................... 112 155 142 301
Berger/BIAM IPT - International Fund ............................. 113 156 144 306
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC ...................... 111 150 134 285
DREYFUS STOCK INDEX FUND ............................................... 104 129 99 215
FEDERATED INSURANCE SERIES
Federated High Income Bond Fund II ............................... 109 144 124 266
Federated International Equity Fund II ........................... 113 158 147 310
Federated Utility Fund II ........................................ 109 146 127 271
JANUS ASPEN SERIES
Aggressive Growth Portfolio ...................................... 108 143 122 262
Growth Portfolio ................................................. 108 141 119 255
Worldwide Growth Portfolio ....................................... 109 144 124 266
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Limited Maturity Bond Portfolio .................................. 108 143 123 264
Partners Portfolio ............................................... 110 149 132 281
STRONG SPECIAL FUND II ................................................. 112 155 143 303
STRONG VARIABLE INSURANCE FUNDS, INC
Growth Fund II ................................................... 121 180 183 380
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Hard Assets Fund (formerly,
Gold and Natural Resources Fund) ................................. 113 157 146 308
Worldwide Bond Fund .............................................. 112 155 142 302
Worldwide Emerging Markets Fund .................................. 116 165 159 334
====================================================================================================================================
</TABLE>
9
<PAGE>
Great American
Reserve
1997 Account E
- --------------------------------------------------------------------------------
VARIABLE DEFERRED ANNUITY CONTRACT - CONT.
EXAMPLE 3-Assuming no surrender of the Contract at the end of the periods shown
(1): You would pay the following expenses on a $1,000 investment, assuming a 5
percent annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10YEARS
====================================================================================================================================
<S> <C> <C> <C> <C>
CONSECO SERIES TRUST
Asset Allocation Portfolio ....................................... $ 23 $ 71 $122 $261
Common Stock Portfolio ........................................... 24 73 124 266
Corporate Bond Portfolio ......................................... 23 70 119 256
Government Securities Portfolio .................................. 23 70 119 256
Money Market Portfolio ........................................... 20 62 107 230
THE ALGER AMERICAN FUND
Alger American Growth Portfolio .................................. 24 72 124 265
Alger American Leveraged AllCap Portfolio ........................ 27 81 139 295
Alger American MidCap Growth Portfolio ........................... 24 74 126 270
Alger American Small Capitalization Portfolio .................... 24 75 128 274
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC ..............................
International Fund ............................................... 31 94 159 334
Value Fund ....................................................... 26 79 134 286
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger IPT - 100 Fund ............................................ 26 79 134 286
Berger IPT - Growth and Income Fund .............................. 26 79 134 286
Berger IPT - Small Company Growth Fund ........................... 27 83 142 301
Berger/BIAM IPT - International Fund ............................. 28 85 144 306
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC ...................... 26 78 134 285
DREYFUS STOCK INDEX FUND ............................................... 19 58 99 215
FEDERATED INSURANCE SERIES
Federated High Income Bond Fund II ............................... 24 73 124 266
Federated International Equity Fund II ........................... 28 86 147 310
Federated Utility Fund II ........................................ 24 74 127 271
JANUS ASPEN SERIES
Aggressive Growth Portfolio ...................................... 23 71 122 262
Growth Portfolio ................................................. 23 69 119 255
Worldwide Growth Portfolio ....................................... 24 73 124 266
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Limited Maturity Bond Portfolio .................................. 23 72 123 264
Partners Portfolio ............................................... 25 77 132 281
STRONG SPECIAL FUND II ................................................. 27 84 143 303
STRONG VARIABLE INSURANCE FUNDS, INC
Growth Fund II ................................................... 36 108 183 380
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Hard Assets Fund (formerly,
Gold and Natural Resources Fund) ................................. 28 86 146 308
Worldwide Bond Fund .............................................. 27 83 142 302
Worldwide Emerging Markets Fund .................................. 31 94 159 334
====================================================================================================================================
</TABLE>
10
<PAGE>
- --------------------------------------------------------------------------------
PLEASE REMEMBER THAT THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES AND THAT ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN. SIMILARLY, THE 5 PERCENT ANNUAL RATE OF RETURN IS NOT AN ESTIMATE
OR A GUARANTEE OF FUTURE INVESTMENT PERFORMANCE.
(1) This Contract is designed for retirement planning. Surrenders prior to the
Annuity Date are not consistent with the long-term purposes of the Contract
and the applicable tax laws.
The above table reflects estimates of expenses of the Variable Account and
the Funds. The standard table and examples assume the highest deductions
possible under a Contract, whether or not such deductions actually would be
made under such a Contract. Annual maintenance charges have been
approximated as a 16 basis point annual asset charge.
11
<PAGE>
Great American
Reserve
1997 Account E
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
The tables below provide per unit information about the financial history
of each Sub-account. No per-unit information is provided with respect to the
Sub-accounts investing in the American Century Variable Portfolios, Inc.
International and Value Funds; the Berger/BIAM IPT - International Fund; the
Neuberger & Berman Advisers Management Trust Limited Maturity Bond and Partners
Portfolios; the Strong Special Fund II; and the Strong Variable Insurance Funds,
Inc. Growth Fund II because these Funds were not available as of December 31,
1996.
<TABLE>
<CAPTION>
==================================================================================================================
1996 1995 1994
<S> <C> <C> <C>
CONSECO SERIES TRUST
ASSET ALLOCATION (A)
Accumulation unit value at beginning of period ........................ $1.342 $1.035 $1.000
Accumulation unit value at end of period............................... $1.698 $1.342 $1.035
Percentage change in accumulation unit value .......................... 26.50% 29.67% 3.52%
Number of accumulation units outstanding at end of period ............. 2,475,992 461,876 21,037
COMMON STOCK (A)
Accumulation unit value at beginning of period ........................ $1.449 $1.078 $1.000
Accumulation unit value at end of period .............................. $2.071 $1.449 $1.078
Percentage change in accumulation unit value .......................... 42.96% 34.42% 7.79%
Number of accumulation units outstanding at end of period ............. 3,374,110 1,009,305 41,601
CORPORATE BOND (A)
Accumulation unit value at beginning of period ........................ $1.166 $1.000 $1.000
Accumulation unit value at end of period .............................. $1.207 $1.166 $1.000
Percentage change in accumulation unit value .......................... 3.50% 16.61% (0.03)%
Number of accumulation units outstanding at end of period ............. 1,540,494 350,623 12,553
GOVERNMENT SECURITIES (A)
Accumulation unit value at beginning of period ........................ $1.154 $0.997 $1.000
Accumulation unit value at end of period .............................. $1.169 $1.154 $0.997
Percentage change in accumulation unit value .......................... 1.31% 15.72% (0.26)%
Number of accumulation units outstanding at end of period ............. 135,680 30,614 0
MONEY MARKET (A)
Accumulation unit value at beginning of period ........................ $1.056 $1.014 $1.000
Accumulation unit value at end of period .............................. $1.095 $1.056 $1.014
Percentage change in accumulation unit value .......................... 3.67% $4.14% 1.38%
Number of accumulation units outstanding at end of period ............. 1,144,951 641,747 0
==================================================================================================================
</TABLE>
(CONTINUED)
12
<PAGE>
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION - CONT.
<TABLE>
<CAPTION>
1996 1995 1994
====================================================================================================================================
<S> <C> <C> <C>
THE ALGER AMERICAN FUND
ALGER AMERICAN GROWTH (C)
Accumulation unit value at beginning of period ............................. $1.000 N/A N/A
Accumulation unit value at end of period ................................... $1.044 N/A N/A
Percentage change in accumulation unit value ............................... 4.35% N/A N/A
Number of accumulation units outstanding at end of period .................. 73,227 N/A N/A
ALGER AMERICAN LEVERAGED ALLCAP (B)
Accumulation unit value at beginning of period ............................. $1.408 $1.000 N/A
Accumulation unit value at end of period ................................... $1.555 $1.408 N/A
Percentage change in accumulation unit value ............................... 10.47% 40.79% N/A
Number of accumulation units outstanding at end of period .................. 832,794 207,147 N/A
ALGER AMERICAN MIDCAP GROWTH (C)
Accumulation unit value at beginning of period ............................. $1.000 N/A N/A
Accumulation unit value at end of period ................................... $0.987 N/A N/A
Percentage change in accumulation unit value ............................... (1.33)% N/A N/A
Number of accumulation units outstanding at end of period .................. 42,736 N/A N/A
ALGER AMERICAN SMALL CAPITALIZATION (B)
Accumulation unit value at beginning of period ............................. $1.219 $1.000 N/A
Accumulation unit value at end of period ................................... $1.252 $1.219 N/A
Percentage change in accumulation unit value ............................... 2.72% 21.89% N/A
Number of accumulation units outstanding at end of period .................. 1,946,993 517,903 N/A
BERGER INSTITUTIONAL PRODUCTS TRUST
BERGER IPT - 100 FUND (C)
Accumulation unit value at beginning of period ............................. $1.000 N/A N/A
Accumulation unit value at end of period ................................... $1.029 N/A N/A
Percentage change in accumulation unit value ............................... 2.93% N/A N/A
Number of accumulation units outstanding at end of period .................. 69,521 N/A N/A
BERGER IPT - GROWTH AND INCOME FUND (C)
Accumulation unit value at beginning of period ............................. $1.000 N/A N/A
Accumulation unit value at end of period ................................... $1.104 N/A N/A
Percentage change in accumulation unit value ............................... 10.36% N/A N/A
Number of accumulation units outstanding at end of period .................. 59,956 N/A N/A
BERGER IPT - SMALL COMPANY GROWTH FUND (C)
Accumulation unit value at beginning of period ............................. $1.000 N/A N/A
Accumulation unit value at end of period ................................... $0.985 N/A N/A
Percentage change in accumulation unit value ............................... (1.53)% N/A N/A
Number of accumulation units outstanding at end of period .................. 42,982 N/A N/A
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH
FUND, INC. (B)
Accumulation unit value at beginning of period ............................. $1.175 $1.000 N/A
Accumulation unit value at end of period ................................... $1.404 $1.175 N/A
Percentage change in accumulation unit value ............................... 19.53% 17.49% N/A
Number of accumulation units outstanding at end of period .................. 221,018 21,878 N/A
====================================================================================================================================
</TABLE>
(CONTINUED)
13
<PAGE>
Great American
Reserve
1997 Account E
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONDENSED FINANCIAL INFORMATION - CONT.
1996 1995 1994
====================================================================================================================================
<S> <C> <C> <C>
DREYFUS STOCK INDEX FUND (B)
Accumulation unit value at beginning of period ......................... $1.158 $1.000 N/A
Accumulation unit value at end of period................................ $1.393 $1.158 N/A
Percentage change in accumulation unit value ........................... 20.31% 15.76% N/A
Number of accumulation units outstanding at end of period .............. 1,862,980 91,752 N/A
FEDERATED INSURANCE SERIES
FEDERATED HIGH INCOME BOND II (B)
Accumulation unit value at beginning of period ......................... 1.067 $1.000 N/A
Accumulation unit value at end of period ............................... 1.202 $1.067 N/A
Percentage change in accumulation unit value ........................... 12.71% 6.66% N/A
Number of accumulation units outstanding at end of period .............. 508,205 26,380 N/A
FEDERATED INTERNATIONAL EQUITY II (B)
Accumulation unit value at beginning of period ......................... 1.025 $1.000 N/A
Accumulation unit value at end of period ............................... 1.095 $1.025 N/A
Percentage change in accumulation unit value ........................... 6.80% 2.51% N/A
Number of accumulation units outstanding at end of period .............. 93,215 36,798 N/A
FEDERATED UTILITY II (B)
Accumulation unit value at beginning of period ......................... 1.122 $1.000 N/A
Accumulation unit value at end of period ............................... 1.234 $1.122 N/A
Percentage change in accumulation unit value ........................... 10.00% 12.21% N/A
Number of accumulation units outstanding at end of period .............. 294,882 11,711 N/A
JANUS ASPEN SERIES
AGGRESSIVE GROWTH (B)
Accumulation unit value at beginning of period ......................... $1.266 $1.000 N/A
Accumulation unit value at end of period ............................... $1.348 $1.266 N/A
Percentage change in accumulation unit value ........................... 6.44% 26.64% N/A
Number of accumulation units outstanding at end of period .............. 1,041,050 122,278 N/A
GROWTH (B)
Accumulation unit value at beginning of period ......................... $1.167 $1.000 N/A
Accumulation unit value at end of period ............................... $1.364 $1.167 N/A
Percentage change in accumulation unit value ........................... 16.79% 16.75% N/A
Number of accumulation units outstanding at end of period .............. 1,466,042 138,532 N/A
WORLDWIDE GROWTH (B)
Accumulation unit value at beginning of period ......................... $1.211 $1.000 N/A
Accumulation unit value at end of period ............................... $1.541 $1.211 N/A
Percentage change in accumulation unit value ........................... 27.23% 21.12% N/A
Number of accumulation units outstanding at end of period .............. 2,173,781 155,653 N/A
THE VAN ECK WORLDWIDE INSURANCE TRUST
WORLDWIDE HARD ASSETS (FORMERLY,
GOLD AND NATURAL RESOURCES) (B)
Accumulation unit value at beginning of period ......................... $1.077 $1.000 N/A
Accumulation unit value at end of period ............................... $1.254 $1.077 N/A
Percentage change in accumulation unit value ........................... 16.41% 7.72% N/A
Number of accumulation units outstanding at end of period .............. 651,603 68,730 N/A
====================================================================================================================================
</TABLE>
(CONTINUED)
14
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONDENSED FINANCIAL INFORMATION - CONT.
1996 1995 1994
====================================================================================================================================
<S> <C> <C> <C>
THE VAN ECK WORLDWIDE INSURANCE TRUST - CONT.
WORLDWIDE BOND (B)
Accumulation unit value at beginning of period .............................. $1.018 $1.000 N/A
Accumulation unit value at end of period .................................... $1.029 $1.018 N/A
Percentage change in accumulation unit value ................................ 1.09% 1.82% N/A
Number of accumulation units outstanding at end of period ................... 1,790,259 130,071 N/A
WORLDWIDE EMERGING MARKETS (C)
Accumulation unit value at beginning of period ............................. $1.000 N/A N/A
Accumulation unit value at end of period ................................... $1.136 N/A N/A
Percentage change in accumulation unit value ............................. 13.59% N/A N/A
Number of accumulation units outstanding at end of period ............ 132,953 N/A N/A
====================================================================================================================================
</TABLE>
(a) Inception date was July 25, 1994.
(b) Inception date was June 1, 1995.
(c) Inception date was May 1, 1996.
15
<PAGE>
Great American
Reserve
1997 Account E
- --------------------------------------------------------------------------------
GREAT AMERICAN RESERVE, VARIABLE ACCOUNT AND THE INVESTMENT OPTIONS
A. GREAT AMERICAN RESERVE
Great American Reserve, originally organized in 1937, is principally
engaged in the life insurance business in 47 states and the District of
Columbia. Great American Reserve is a stock company organized under the laws of
the state of Texas and an indirect wholly owned subsidiary of Conseco, Inc.
("Conseco"). The operations of Great American Reserve are handled by Conseco.
Conseco is a publicly owned financial services holding company, the principal
operations of which are the development, marketing and administration of
specialized annuity and life insurance products. Conseco is located at 11815 N.
Pennsylvania Street, Carmel, Indiana 46032.
All inquiries regarding Individual Accounts, the Contracts, or any related
matter should be directed to Great American Reserves Variable Annuity Department
at the address and telephone number shown on page 1 of this Prospectus. The
financial statements of Great American Reserve included in the Statement of
Additional Information should be considered only as bearing upon the ability of
Great American Reserve to meet the obligations under the Contracts. Furthermore,
neither the assets of Conseco nor those of any company in the Conseco group of
companies other than Great American Reserve support these obligations. As of
December 31, 1996, Great American Reserve had total assets of $2.7 billion and
total shareholders equity of $396.9 million. Great American Reserve does not
guarantee the investment performance of the Variable Account investment options.
B. VARIABLE ACCOUNT
Great American Reserve established the Variable Account on November 12,
1993, as a separate account under Texas law. The assets of the Variable Account
are not chargeable with liabilities arising out of any other business Great
American Reserve may conduct. In addition, any income, gains or losses realized
or unrealized on assets of the Variable Account are credited to or charged
against the Variable Account without regard to other income, gains or losses of
Great American Reserve. Nevertheless, obligations arising under the Contracts
are general obligations of Great American Reserve. In addition to the net assets
and other liabilities for variable annuity contracts, the Variable account's
assets will include assets derived from charges made by Great American Reserve.
Great American Reserve may transfer out to its general account any of the
Variable account's assets that are in excess of the reserves and other
liabilities relating to the Contracts. The Variable Account is regulated by the
Insurance Department of Texas. Regulation by the state, however, does not
involve any supervision of the Variable Account, except to determine compliance
with broad statutory criteria.
The Variable Account is registered with the SEC as a unit investment trust
under the Investment Company Act of 1940 (the "1940 Act"). A unit investment
trust is a type of investment company which invests its assets in specified
securities, such as shares of one or more investment companies. Registration
under the 1940 Act does not involve supervision by the SEC of the management or
investment policies or practices of the Variable Account.
The Variable Account is segmented into Sub-accounts. Each Sub-account
invests in shares of one of the Funds and such shares are purchased at net asset
value. The Sub-accounts and Funds may be added or withdrawn as permitted by
applicable law. The Variable Account consists of 30 Sub-accounts, each of which
invests in shares of the eligible Funds of the Conseco Series Trust Asset
Allocation, Common Stock, Corporate Bond, Government Securities, and Money
Market Portfolios; the Alger American Fund Growth, Leveraged AllCap, MidCap
Growth, and Small Capitalization Portfolios; the American Century Variable
Portfolios, Inc. International and Value Funds; the Berger IPT - 100, Berger IPT
- - Growth and Income, Berger IPT - Small Company Growth, and Berger/BIAM IPT -
International Funds; the Dreyfus Socially Responsible Growth Fund, Inc.; the
Dreyfus Stock Index Fund; the Federated Insurance Series High Income Bond II,
International Equity II, and Utility II Funds; the Janus Aspen Series Aggressive
Growth, Growth, and Worldwide Growth Portfolios; the Neuberger & Berman Advisers
Management Trust Limited Maturity Bond and Partners Portfolios; the Strong
Special Fund II; the Strong Variable Insurance Funds, Inc. Growth Fund II; and
the Van Eck Worldwide Insurance Trust Worldwide Hard Assets (formerly, Gold and
Natural Resources), Worldwide Bond, and Worldwide Emerging Markets Funds. Great
American Reserve reserves the right to add other Sub-accounts, eliminate
existing Sub-accounts, combine Sub-accounts or transfer assets in one
Sub-account to another Sub-account established by Great American Reserve or an
affiliated company. Great American Reserve will not eliminate existing
Sub-accounts or combine Sub-accounts without any required prior approval of the
appropriate state or federal regulatory authorities.
C. INVESTMENT OPTIONS
The investment objectives of the Funds available through the Variable
Account are briefly described below. More detailed information is contained in
the current prospectuses of the Funds.
16
<PAGE>
- --------------------------------------------------------------------------------
CONSECO SERIES TRUST
ASSET ALLOCATION PORTFOLIO seeks a high total investment return, consistent
with the preservation of capital and prudent investment risk. The Portfolio
seeks to achieve this objective by pursuing an active asset allocation strategy
whereby investments are allocated, based upon thorough investment research,
valuation and analysis of market trends and the anticipated relative total
return available, among various asset classes including debt securities, equity
securities, and money market instruments.
COMMON STOCK PORTFOLIO seeks to provide a high total return consistent with
preservation of capital and a prudent level of risk primarily by investing in
selected equity securities and other securities having the investment
characteristics of common stocks.
CORPORATE BOND PORTFOLIO seeks to provide as high a level of income as is
consistent with preservation of capital by investing primarily in debt
securities.
GOVERNMENT SECURITIES PORTFOLIO seeks safety of capital, liquidity and
current income by investing primarily in securities issued by the U.S.
Government or an agency or instrumentality of the U.S. Government, including
mortgage-related securities.
MONEY MARKET PORTFOLIO seeks current income consistent with stability of
capital and liquidity. An investment in this Portfolio is neither insured nor
guaranteed by the U.S. Government and there can be no assurance that the
Portfolio will be able to maintain a stable net asset value of $1.00 per share.
THE ALGER AMERICAN FUND
ALGER AMERICAN GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in a diversified, actively managed portfolio of equity securities,
primarily of companies with total market capitalization of $1 billion or
greater.
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio of equity
securities. The Portfolio may engage in leveraging (up to 33 1/3 percent of its
assets) and options and futures transactions, which are deemed to be speculative
and which may cause the portfolio's value to fluctuate.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO seeks long-term capital
appreciation. Except during temporary defensive periods, the Portfolio invests
at least 65% of its total assets in equity securities of companies that, at the
time of purchase of the securities, have total market capitalization within the
range of companies included in the S&P MidCap 400 Index. This Index is designed
to track the performance of medium capitalization companies. As of March 31,
1997, the range of market capitalization of these companies was $120 million to
$7.193 billion. The Portfolio may invest up to 35% of its total assets in equity
securities of larger or smaller issuers and in excess of that amount (up to 100%
of its assets) during temporary defensive periods.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO seeks long-term capital
appreciation. Except during temporary defensive periods, the Portfolio invests
at least 65% of its total assets in equity securities of companies that, at the
time of purchase of the securities, have total market capitalization within the
range of companies included in the Russell 2000 Growth Index. This Index is
designed to track the performance of small capitalization companies. As of March
31, 1997, the range of market capitalization of these companies was $10 million
to $1.94 billion. The Portfolio may invest up to 35% of its total assets in
equity securities of larger or smaller issuers and in excess of that amount (up
to 100% of its assets) during temporary defensive periods.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
INTERNATIONAL FUND seeks capital growth by investing primarily in
securities of foreign companies that meet certain fundamental and technical
standards of selection and have, in the opinion of the fund's investment
manager, potential for appreciation. The fund will invest primarily in common
stocks and other equity equivalents. The fund tries to stay fully invested in
such securities, regardless of the movement of stock prices generally. Under
normal conditions, the fund will invest at least 65% of its assets in common
stocks or other equity equivalents of issuers from at least three countries
outside of the United States.
VALUE FUND seeks long-term capital growth by investing primarily in equity
securities of well-established companies with intermediate-to-large market
capitalizations that are believed by the fund's management to be undervalued at
the time of purchase. Income is a secondary objective. Under normal market
conditions, the fund expects to invest at least 80% of the value of its total
assets in equity securities, which includes equity equivalents.
BERGER INSTITUTIONAL PRODUCTS TRUST
BERGER IPT - 100 FUND seeks long-term capital appreciation by investing
primarily in common stocks of established companies which the fund's adviser
believes offer favorable growth prospects. Current income is not an investment
objective.
17
<PAGE>
Great American
Reserve
1997 Account E
- --------------------------------------------------------------------------------
BERGER IPT - GROWTH AND INCOME FUND seeks capital appreciation and
secondarily a moderate level of current income by investing primarily in common
stocks and other securities, such as convertible securities or preferred stocks,
which the fund's adviser believes offer favorable growth prospects and are
expected to also provide current income.
BERGER IPT - SMALL COMPANY GROWTH FUND seeks capital appreciation by
investing primarily in equity securities (including common and preferred stocks,
convertible debt securities and other securities having equity features) of
small growth companies with market capitalization of less than $1 billion at the
time of initial purchase.
BERGER/BIAM IPT - INTERNATIONAL FUND seeks long-term capital appreciation
by investing primarily in common stocks of well established companies located
outside the United States. The fund intends to diversify its holdings among
several countries and to have, under normal market conditions, at least 65% of
the fund's total assets invested in the securities of companies located in at
least five countries, not including the United States.
DREYFUS STOCK INDEX FUND
Dreyfus Stock Index Fund seeks to provide investment results that
correspond to the price and yield performance of publicly traded common stocks
in the aggregate, as represented by the Standard & Poor's 500 Composite Price
Index. The Fund is neither sponsored by nor affiliated with the Standard &
Poor's Corporation.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
The Dreyfus Socially Responsible Growth Fund, Inc. seeks to provide capital
growth through equity investment in companies that, in the opinion of the fund's
management, not only meet traditional investment standards but also show
evidence that they conduct business in a manner that contributes to the
enhancement of the quality of life in America. Current income is secondary to
the primary goal.
FEDERATED INSURANCE SERIES
FEDERATED HIGH INCOME BOND FUND II seeks to provide high current income by
investing at least 65 percent of its assets in lower rated fixed income
corporate debt obligations. Capital growth will be considered, but only when
consistent with the investment objective of high current income. The fixed
income securities in which the Fund will primarily invest are commonly referred
to as "junk bonds".
FEDERATED INTERNATIONAL EQUITY FUND II seeks to obtain a total return on
its assets by investing at least 65 percent of its assets (and under normal
market conditions substantially all of its assets) in equity securities of
issuers located in at least three different countries outside of the United
States.
FEDERATED UTILITY FUND II seeks to provide high current income and moderate
capital appreciation by investing at least 65 percent of its assets (under
normal conditions) in equity and debt securities of utility companies.
JANUS ASPEN SERIES
AGGRESSIVE GROWTH PORTFOLIO seeks long-term growth of capital. The
Portfolio is a nondiversified fund that pursues its objective by normally
investing at least 50% of its equity assets in securities issued by medium-sized
companies. Medium-sized companies are those whose market capitalizations fall
within the range of companies in the S&P MidCap 400 Index (the "MidCap Index").
Companies whose capitalization falls outside this range after the Portfolios
initial purchase continue to be considered medium-sized companies of the purpose
of this policy. As of March 31, 1997, the MidCap Index included companies with
capitalizations between approximately $120 million and $7.193 billion.
GROWTH PORTFOLIO seeks long-term growth of capital in a manner consistent
with the preservation of capital. It pursues this objective by investing
primarily in common stocks of a large number of issuers of any size. Generally,
this Portfolio emphasizes issuers with larger market capitalizations.
WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in a manner
consistent with the preservation of capital. It pursues this objective by
investing primarily in common stocks of foreign and domestic issuers of any
size. The Portfolio normally invests in issuers from at least five different
countries including the United States.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
LIMITED MATURITY BOND PORTFOLIO seeks the highest current income consistent
with low risk to principal and liquidity, and, secondarily, total return by
investing all of its net investable assets in another fund, AMT Limited Maturity
Bond Investments, which has investment objectives, policies, and limitations
that are identical to those of the Limited Maturity Bond Portfolio. AMT Limited
Maturity Bond Investments seeks to achieve its investment objective by investing
in short to intermediate-term debt securities, primarily of investment grade.
PARTNERS PORTFOLIO seeks capital growth by investing all of its net
investable assets in another fund, AMT Partners Investments, which has
investment objectives, policies and limitations that are identical to those of
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the Partners Portfolio. AMT Partners Investments seeks to achieve its investment
objective by investing in common stocks and other equity securities of medium-
to large-capitalization established companies.
STRONG SPECIAL FUND II seeks capital growth by investing primarily in equity
securities and currently emphasizes investments in medium-sized companies which
the fund's investment adviser believes are under-researched and attractively
valued. The fund will invest at least 80% of its net assets in equity
securities, including common stocks (which must constitute at least 65% of its
total assets), preferred stocks, and securities that are convertible into common
or preferred stocks, such as warrants and convertible bonds.
STRONG VARIABLE INSURANCE FUNDS, INC.
GROWTH FUND II seeks capital growth by investing primarily in equity
securities that the fund's investment adviser believes have above-average growth
prospects. Under normal market conditions, the fund will invest at least 65% of
its total assets in equity securities, including common stocks, preferred
stocks, and securities that are convertible into common or preferred stocks,
such as warrants and convertible bonds.
VAN ECK WORLDWIDE INSURANCE TRUST
WORLDWIDE HARD ASSETS FUND (FORMERLY, GOLD AND NATURAL RESOURCES FUND)
seeks long-term capital appreciation by investing globally, primarily in equity
securities and indexed securities of "hard asset" companies which are directly
or indirectly engaged to a significant extent in the exploration, development,
production and distribution of precious metals, ferrous and non-ferrous metals,
gas, petroleum, petrochemicals, forest products, real estate and other basic
non-agricultural commodities which, historically, have been produced and
marketed profitably during periods of significant inflation.
WORLDWIDE BOND FUND seeks high total return through a flexible policy of
investing globally, primarily in debt securities.
WORLDWIDE EMERGING MARKETS FUND seeks long-term capital appreciation by
investing primarily in equity securities in emerging markets around the world.
The fund emphasizes countries that, compared to the world's major economies,
exhibit relatively low gross national per capita as well as the potential for
rapid economic growth.
There is no assurance that the Funds will achieve their stated objectives.
The Funds' shares are also available to certain separate accounts funding
variable life insurance policies and variable annuity contracts offered by other
insurance company separate accounts. This is called "mixed and shared funding"
Although we do not anticipate any inherent difficulties arising from mixed and
shared funding, it is theoretically possible that, due to differences in tax
treatment or other considerations, the interests of owners of various contracts
participating in the Funds might at some time be in conflict. The Board of
Directors or Trustees of each Fund, each Fund's investment adviser, and Great
American Reserve are required to monitor events to identify any material
conflicts that arise from the use of the Funds for mixed and shared funding. For
more information about the risks of mixed funding, please refer to the relevant
Fund prospectus.
If the shares of any of the Funds should no longer be available for
investment by the Variable Account or, if in the judgment of Great American
Reserve's management, further investment of such Funds shall become
inappropriate in view of the purpose of the Contract, Great American Reserve may
add or substitute shares of another Sub-account or of another Fund for eligible
Sub-account shares already purchased under the Contract. No substitution of
Sub-account shares may take place without prior approval of the SEC and notice
to Contract Owners, to the extent required by the 1940 Act.
VOTING RIGHTS
Contract Owners may instruct Great American Reserve as to the voting of
Fund shares attributable to their respective interests under the Contracts at
meetings of shareholders of the Funds. Contract Owners entitled to vote will
receive proxy material and a form on which voting instructions may be given.
Great American Reserve will vote the shares of each Sub-account held by the
Variable Account attributable to the Contracts in accordance with instructions
received from Contract Owners. Shares held in each Sub-account for which timely
instructions have not been received from Contract Owners will be voted by Great
American Reserve for or against any proposition, or Great
American Reserve will abstain, in the same proportion as shares in that
Sub-account for which instructions are received. Great American Reserve will
vote, or abstain from voting, any shares that are not attributable to Contract
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Owners in the same proportion as all Contract Owners in the Variable Account
vote or abstain. However, if Great American Reserve determines that it is
permitted to vote such shares of the Funds in its own right, it may elect to do
so, subject to the then-current interpretation of the 1940 Act and the rules
thereunder.
Under certain Contracts, not including contracts issued in connection with
governmental employers' deferred compensation plans described in this
Prospectus, Participants and Annuitants have the right to instruct the Contract
Owner with respect to the number of votes attributable to their Individual
Accounts. Votes attributable to Participants and Annuitants who do not instruct
the Contract Owner will be cast by the Contract Owner for or against each
proposal to be voted upon, in the same proportion as votes for which
instructions have been received. Participants and Annuitants entitled to
instruct the casting of votes will receive a notice of each meeting of Contract
Owners, and proxy solicitation materials, and a statement of the number of votes
attributable to their participation under the Contract.
The number of shares held in a Sub-account deemed attributable to a
Contract Owners interest under a Contract will be determined on the basis of the
value of the Accumulation Units credited to the Contract Owner's account as of
the record date. On or after the Maturity Date, the number of attributable
shares will be based on the amount of assets held to meet annuity obligations to
the payee under the Contract as of the record date. On or after the Maturity
Date, the number of votes attributable to a Contract will generally decrease
since funds set aside for Annuitants will decrease as payments are made.
THE CONTRACTS
A. ACCUMULATION PROVISIONS
PURCHASE PAYMENTS. Purchase Payments are paid to Great American Reserve at
its Administrative Office. For TSAs, the minimum initial and subsequent purchase
payment is $50 per month. For IRAs the minimum initial investment is $2,000 and
the minimum amount of each additional payment is $50. For non-qualified
Contracts, the minimum initial investment is $5,000 and the minimum amount of
each additional lump sum payment is $2,000 (or $200 per month). Purchase
Payments may be made at any time. If a Purchase Payment would exceed $500,000,
the Purchase Payment will be acceptable only with the prior approval of Great
American Reserve. Great American Reserve reserves the right to refuse any
Purchase Payment.
Great American Reserve may, at its option and with prior notice, cancel
certain contracts in which no Purchase Payments have been made, or if the
Contract Value is less than $500. Upon cancellation, Great American Reserve will
pay the Contract Owner the Contract Value computed as of the Valuation Period
during which the cancellation occurs less any outstanding loans, any withdrawal
charge, and the $30 annual administrative fee. Such cancellation could have
adverse tax consequences (see "Federal Tax Matters").
ALLOCATION OF PURCHASE PAYMENTS. The Contract Owner may elect to have
Purchase Payments accumulated (a) on a fully variable basis invested in one or
more of the Sub-accounts of the Variable Account; (b) on a fully fixed basis
which reflects a compound interest rate guaranteed by Great American Reserve; or
(c) in a combination of any of the investment options.
An election to change the allocation of future Purchase Payments may be
made by the Contract Owner 30 days (a) subsequent to the date of establishment
of the Individual Account or (b) subsequent to a prior change in allocation.
ACCUMULATION UNITS. Each Purchase Payment is credited to the Owners
Individual Account in the form of Accumulation Units, at the close of the
Valuation Period in which the Purchase Payment is received at the Administrative
Office of Great American Reserve. The number of Accumulation Units credited is
determined by dividing the Purchase Payment amount by the value of an
Accumulation Unit at the close of that Valuation Period. Accumulation Units are
valued separately for each investment option, so a Contract Owner who has
elected to have amounts in an Individual Account accumulated in more than one
investment option will have several types of Accumulation Units credited to the
Individual Account.
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VALUE OF AN INDIVIDUAL ACCOUNT. The number of Accumulation Units credited
to an Individual Account will not be changed by any subsequent change in the
value of an Accumulation Unit, but the dollar value of an Accumulation Unit may
vary from Valuation Period to Valuation Period to reflect the investment
experience of the appropriate investment option. The value of an Individual
Account at any time prior to the Maturity Date can be determined by (a)
multiplying the total number of Accumulation Units credited to the Individual
Account for each investment option, respectively, by the appropriate current
Accumulation Unit value; and (b) totaling the resulting values for each portion
of the Individual Account. There is no assurance that the value of the
Individual Account will equal or exceed the Purchase Payments made. The Contract
Owner will be advised at least annually as to the number of Accumulation Units
which are credited to the Individual Account, the current Accumulation Unit
values, and the values of the Individual Account.
NET INVESTMENT FACTOR FOR EACH VALUATION PERIOD. The Variable Account value
will fluctuate in accordance with the investment results and expenses of the
underlying eligible Funds and the deduction of certain charges. In order to
determine how these fluctuations affect Contract Value, an Accumulation Unit
value is utilized. Each Sub-account has its own Accumulation Units and value per
unit. The unit value applicable during any Valuation Period is determined at the
end of that period.
When eligible Fund shares were first purchased on behalf of the Variable
Account, Accumulation Units were valued at $1.00 each. The value of an
Accumulation Unit for each Sub-account at any valuation period thereafter is
determined by multiplying the value for the prior period by a net investment
factor. This factor may be greater or less than 1.0; therefore, the Accumulation
Unit may increase or decrease from Valuation Period to Valuation Period. A net
investment factor for each Sub-account is calculated by dividing (a) by (b) and
then subtracting (c) (i.e., (a/b) - c), where:
(a) is equal to:
(i) the net asset value per share of the eligible Portfolio at the
end of the Valuation Period; plus
(ii) the per share amount of any distribution made by the eligible
Portfolio if the "ex-dividend" date occurs during that same
Valuation Period.
(b) is the net asset value per share of the eligible Portfolio at the
end of the prior Valuation Period.
(c) is equal to the Valuation Period equivalent of the per year mortality and
expense risk charge and administrative charges as indicated in the
summary Charges and Deductions table.
INFORMATION ON THE FIXED ACCOUNT. Because of exemptive and exclusionary
provisions, interests in the Fixed Account of the general account have not been
registered under the Securities Act of 1933 (the "1933 Act"), nor is the Fixed
Account of the general account registered as an investment company under the
1940 Act. Accordingly, neither the Fixed Account of the general account of Great
American Reserve nor any interest therein is generally subject to the provisions
of the 1933 or 1940 Acts, and we have been advised that the staff of the SEC has
not reviewed the disclosures in this Prospectus that relate to the fixed
portion. Disclosures regarding the Fixed Account of the Contracts and the
general account of Great American Reserve, 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.
In addition to the 30 variable investment options described in this
Prospectus, the Contracts have a Fixed Account available for allocation of
Purchase Payments. Generally, the information in the Section called "Contracts"
applies in a like manner to the Fixed Account. However, there are some
differences.
The Fixed Account operates like a traditional annuity. Fixed Annuity Cash
Values increase based on interest rates that may change from time to time but
are guaranteed by Great American Reserve. Interest is credited daily and
compounded annually. Purchase Payments and transfers to the Fixed Account become
part of the general account of Great American Reserve. In contrast, Purchase
Payments and transfers for the Variable Account are applied to segregated asset
accounts; they are not commingled with Great American Reserve's main portfolio
of investments that support fixed annuity obligations. The gains achieved or
losses suffered by the segregated asset accounts have no effect on the Fixed
Account.
The Contracts allow you to transfer Contract Values between the Fixed and
Variable Account, but such transfers are restricted as follows:
1. You may transfer Contract Values from the Variable Account to the Fixed
Account once in any 30-day period.
2. You may transfer Contract Values from the Fixed Account to the Variable
Account once in any six-month period subject to a limit of 20 percent of
the Fixed Account value.
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3. No transfers may be made from the Fixed Account once annuity payments
begin.
The administrative charge and the mortality and expense risk charge based
on the value of each Sub-account do not apply to values allocated to the Fixed
Account.
If you buy the annuity as a TSA or certain other qualified plans, the
Contract will contain a provision that allows a loan to be taken against the
Contract Values allocated to the Fixed Account. Loan provisions are described in
detail in the Contract.
TRANSFER AMONG INVESTMENT OPTIONS. Before the Maturity Date, Contract
Owners may transfer Variable Account value from one Sub-account to another
Sub-account and/or to the Fixed Account. The Contract allows Great American
Reserve to limit the number of transfers that can be made in a specified time
period. Contract Owners should be aware that transfer limitations may prevent a
Contract Owner from making a transfer on the date he or she desires, with the
result that the Contract owner's future Contract Value may be lower than it
would have been had the transfer been made on the desired date. Great American
Reserve is not charging a transfer fee, but limits transfers to one every 30
days and limits transfer from the Fixed Account to a maximum of 20 percent of
the Fixed Account value per any six-month period. All transfers requested for a
Contract on the same day will be treated as a single transfer in that period.
Great American Reserve's interest in applying these limitations is to
protect the interests of both Contract Owners who are not engaging in
significant transfer activity and Contract Owners who are engaging in such
activity. Great American Reserve has determined that the actions of Contract
Owners engaging in significant transfer activity among Sub-accounts may cause an
adverse effect on the performance of the underlying Portfolio for the
Sub-account involved. The movement of Sub-account values from one Sub-account to
another may prevent an underlying Portfolio from taking advantage of investment
opportunities because it must maintain a liquid position in order to handle
withdrawals. Such movement may also cause a substantial increase in fund
transaction costs which must be indirectly borne by the Contract Owner.
Transfers must be made by written authorization from the Contract Owner or
from the person acting for the Contract Owner as an attorney-in-fact under a
power-of-attorney if permitted by state law. By authorizing Great American
Reserve to accept telephone transfer instructions, a Contract Owner agrees to
accept and be bound by the conditions and procedures established by Great
American Reserve from time to time. We have instituted reasonable procedures to
confirm that any instructions communicated by telephone are genuine. All
telephone calls will be recorded, and the caller will be asked to produce your
personalized data prior to our initiating any transfer requests by telephone.
Additionally, as with other transactions, you will receive a written
confirmation of your transfer. If reasonable procedures are employed, neither
Great American Reserve nor Conseco Equity Sales, Inc. ("Conseco Equity Sales")
will be liable for following telephone instructions which it reasonably believes
to be genuine. Written transfer requests may be made by a person acting for the
Contract Owner as an attorney-in-fact under a power-of-attorney.
Transfer requests received by Great American Reserve before the close of
trading on the New York Stock Exchange (currently 4:00 p.m. Eastern time) will
be initiated at the close of business that day. Any request received later will
be initiated at the close of the next business day.
DOLLAR COST AVERAGING. Great American Reserve administers a Dollar Cost
Averaging ("DCA") program which enables a Contract Owner to transfer the value
from the Fixed Account or Money Market Sub-account to another investment option
on a predetermined and systematic basis. The DCA program is generally suitable
for Contract Owners making a substantial deposit to the Contract and who desire
to control the risk of investing at the top of a market cycle. The DCA program
allows such investments to be made in equal installments over time in an effort
to reduce such risk.
REBALANCING. Rebalancing is a program, which if elected, provides for
periodic pre-authorized automatic transfers during the Accumulation Period among
the Sub-Accounts pursuant to written instructions from the Contract Owner. Such
transfers are made to maintain a particular percentage allocation among the
Portfolios as selected by the Contract Owner. Amounts in the Fixed Account will
not be transferred pursuant to the Rebalancing Program. The Contract Value must
be at least $5,000 to have transfers made pursuant to the Program. Any transfer
made pursuant to the Program must be in whole percentages in one (1%) percent
allocation increments. The maximum number of Sub-Accounts which can be used for
rebalancing is fifteen (15). A Contract Owner may select quarterly, semi-annual
or annual Rebalancing, on the date requested by the Contract Owner. Transfers
made pursuant to the Rebalancing Program are not taken into account in
determining any Transfer Fee. There is no fee for participating in the Program.
The Company reserves the right to terminate, modify or suspend the Rebalancing
Program at any time.
SWEEPS. Sweeps are the transfer of the earnings from the Fixed Account into
another investment option on a periodic and systematic basis.
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WITHDRAWALS. Prior to the earlier of the Maturity Date or the death of the
Annuitant, the Contract Owner may withdraw all or a portion of the Contract
Value upon written request complete with all necessary information to Great
American Reserve's Administrative Office. For certain qualified contracts,
exercise of the withdrawal right may be restricted and may require the consent
of the participant's spouse as required under the Code and regulations
thereunder. In the case of a total withdrawal, Great American Reserve will pay
the Contract Value as of the date of receipt of the request at its
Administrative Office, less the annual $30 administration fee, any outstanding
loans and any applicable withdrawal charge, and the Contract will be canceled.
In the case of a partial withdrawal, Great American Reserve will pay the amount
requested and cancel that number of Accumulation Units credited to each
investment option of the Individual Account necessary to equal the amount
withdrawn from each investment option of the Individual Account plus any
applicable withdrawal charge deducted from such investment option of the
Individual Account. For withdrawals that can be made free of withdrawal charges,
see "Contract Charges".
When making a partial withdrawal, the Contract Owner should specify the
investment options from which the withdrawal is to be made. The amount requested
from an investment option may not exceed the value of that investment option
less any applicable withdrawal charge. If the Contract Owner does not specify
the investment options from which a partial withdrawal is to be taken, a partial
withdrawal will be taken from the Fixed Account until exhausted and then from
the Variable Account investment options. If the partial withdrawal is less than
the total value in the Variable Account investment options, the withdrawal will
be taken pro rata from the Variable Account investment options: taking from each
such Variable Account investment option an amount which bears the same
relationship to the total amount withdrawn as the value of such Variable Account
investment option bears to the total value of the Contract owner's investments
in the Variable Account investment options.
Only one partial withdrawal is permitted per any six-month period; however,
the amount withdrawn must be at least $250 or, if less, the entire balance in
the investment option. If a partial withdrawal plus any applicable withdrawal
charge would reduce the Contract Value to less than $500, Great American Reserve
reserves the right to treat the partial withdrawal as a total withdrawal of the
Contract Value.
The amount of any withdrawal from the Variable Account investment options
will be paid promptly, and in any event within seven days of receipt of the
request, except that Great American Reserve reserves the right to defer the
right of withdrawal or postpone payments for any periods when: (1) the New York
Stock Exchange is closed (other than customary weekend and holiday closings);
(2) trading on the New York Stock Exchange is restricted; (3) any emergency
exists as a result of which disposal of securities held in the Variable Account
is not reasonably practicable or it is not reasonably practical to determine the
value of the Variable account's net assets; or (4) the SEC, by order, so permits
for the protection of security holders, provided that applicable rules and
regulations of the SEC shall govern as to whether the conditions described in
(2) and (3) exist.
Withdrawals from the Contract may be subject to a penalty tax and
withdrawals are permitted from Contracts issued in connection with certain
qualified plans only under limited circumstances (see "Federal Tax Matters").
SYSTEMATIC WITHDRAWAL PLAN. Great American Reserve administers a Systematic
Withdrawal Plan (SWP) which enables a Contract Owner to pre-authorize a periodic
exercise of the contractual withdrawal rights described above. Contract Owners
entering into an SWP agreement instruct Great American Reserve to withdraw a
level dollar amount from specified investment options on a periodic basis. The
total of SWP withdrawals in a Contract Year is limited to free withdrawal
amounts to ensure that no withdrawal charge will ever apply to an SWP withdrawal
(see "Withdrawal Charge"). If an additional withdrawal is made from a Contract
participating in SWP, the SWP will terminate automatically and may be reinstated
only on or after a written request to Great American Reserve. SWP is not
available to Contracts participating in the dollar cost averaging program or for
which Purchase Payments are automatically deducted from a bank account on a
periodic basis. SWP is only available for withdrawals free of withdrawal
charges. SWP withdrawals may, however, be subject to the 10 percent federal tax
penalty on early withdrawals and to income tax (see "Federal Tax Matters").
Contract Owners interested in SWP may elect to participate in this program by
written request to Great American Reserves Administrative Office.
CHECK WRITING. A Contract Owner over age 59 1/2 and invested in the Money
Market Sub-account may authorize Great American Reserve to withdraw amounts from
the Money Market Sub-account by check by completing the required forms requested
from Great American Reserve. Once the forms are properly completed, signed and
returned to Great American Reserve, a supply of checks will be sent to the
Contract Owner. These checks may be payable by the Contract Owner to the order
of any person in any amount of $250 or more. When a check is presented for
payment, full and fractional Accumulation Units required to cover the amount of
the check and any applicable contract charges are withdrawn from the Contract
Owners Individual Account by Great American Reserve at the next valuation
period. Checks will not be honored for withdrawal of Accumulation Units held
less than 15 calendar
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days, unless such Accumulation Units have been paid for by bank wire. If the
amount of the check is greater than the proceeds of the Money Market Sub-account
held in the Individual Account, the check is returned and the Contract Owner may
be subject to additional charges. The check writing privilege may be terminated
or suspended at any time by Great American Reserve. There is an additional
charge for this service to the Contract Owner by Great American Reserve. A "stop
payment" system is not available on these checks.
LOANS. Your Contract may contain a loan provision issued in connection with
certain qualified plans. Owners of such Contracts may obtain loans using the
Contract as the only security for the loan. Loans are subject to provisions of
the Code and to applicable retirement program rules (collectively, "Loan
Rules"). Tax advisers and retirement plan fiduciaries should be consulted prior
to exercising loan privileges. Loan provisions are described in detail in the
contract.
The amount of any loan will be deducted from the minimum death benefit (see
"Death Benefit Before the Maturity Date"). In addition, a loan, whether or not
repaid, will have a permanent effect on the Contract Value because the
investment results of the investment options will apply only to the unborrowed
portion of the Contract Value. The longer the loan is outstanding, the greater
the effect is likely to be. The effect could be favorable or unfavorable. If the
investment results are greater than the rate being credited on amounts held in
the loan account while the loan is outstanding, the Contract Value will not
increase as rapidly as it would have if no loan were outstanding. If investment
results are below that rate, the Contract Value will be higher than it would
have been if no loan had been outstanding.
CONTRACT CHARGES
WITHDRAWAL CHARGE. There is no deduction for sales expenses from Purchase
Payments when made. However, Great American Reserve may assess a withdrawal
charge against the Purchase Payments when they are withdrawn to determine the
amount to be paid.
If a withdrawal is made from the Contract before the Maturity Date, a withdrawal
charge (a deferred sales load) may be assessed against Purchase Payments that
have been in the Contract less than six complete contract years. There is never
a charge with respect to free withdrawal amounts described below or Purchase
Payments that have been in the Contract more than six complete contract years.
The length of time from receipt of a Purchase Payment to the time of withdrawal
determines the withdrawal charge. For this purpose, Purchase Payments will be
deemed to be withdrawn in the order in which they are received and will be first
from Purchase Payments and then from other contract values. The charge is a
percentage of the Purchase Payment (not to exceed 8.5 percent of the aggregate
amount of the Purchase Payments made) and equals:
CHARGE PERCENTAGE YEARS PER PAYMENT
- ----------------- -----------------
9%............ 1
9%............ 2
8%............ 3
7%............ 4
5%............ 5
3%............ 6
0%............ 7 and thereafter
In addition, the following circumstances further limit or reduce withdrawal
charges: For issue ages up to 52, there is no withdrawal charge made after the
15th Contract Year and later; for issue ages 53 to 56, there is no withdrawal
charge made after you attain age 67 and later; for issue ages 57 and later, any
otherwise applicable withdrawal charge will be multiplied by a factor ranging
from .9 to 0 for Contract Years one through 10 and later, respectively.
A Contract Owner may make a free withdrawal from the investment options of
the Individual Account in an amount up to the greater of: 10 percent of the
Contract Value (as determined on the date of receipt of the requested
withdrawal), or the Contract Value divided by the owner's life expectancy based
on the Code, or the amount of any Purchase Payments that have been in the
Contract more than six complete contract years without the application of the
withdrawal charge described above. Additional withdrawals in excess of such
amount in any Contract Year during the period when withdrawal charges are
applicable will be subject to the appropriate charge as set forth above. From
time to time, Great American Reserve may permit Contract Owners to pre-authorize
partial withdrawals subject to certain limitations then in effect. On or after
the Maturity Date, withdrawal charges may be made under the Fourth and Fifth
Annuity Options (see "Annuity Options"). No withdrawal charges otherwise
applicable will be assessed in the event of death of the Annuitant, death of the
Contract Owner or if payments are made under an annuity option provided for
under the Contract that begins at least four years after the effective date of
the Contract and is paid under any life annuity option, or any option with
payments for a minimum period of five years.
In the case of a withdrawal of the entire amount of an Individual Account
with a certain dollar amount, the withdrawal charge is deducted from the
Purchase Payment amount withdrawn and the balance is paid to you. Example: You
request a total withdrawal of $2,000 and the applicable withdrawal charge is 5
percent. Your Individual Account will be reduced by $2,000 and you will receive
$1,880 (i.e., the $2,000 total withdrawal reduced by the 10 percent free
withdrawal less the 5
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percent withdrawal charge and $30 Administrative Fee). In the case of a partial
withdrawal of an Individual Account in which you request to receive a specified
amount, the withdrawal charge will be calculated on the total amount that must
be withdrawn from your Individual Account in order to provide you with the
amount requested. Example: You request to receive $1,000 with a free withdrawal
amount of $200 and the applicable withdrawal charge is 5 percent. Your
Individual Account will be reduced by $1,042.11. In order to make a withdrawal
of $1,000, the amount withdrawn must be greater than the amount requested by the
amount of the withdrawal charge. The amount withdrawn is calculated by dividing
(a) the amount requested ($1,000 less the free withdrawal amount of $200) by (b)
1.00, minus the applicable deduction rate of 5 percent (or .95), which produces
$1,042.11 ( $842.11 plus the $200 free withdrawal amount). The value of the
Individual Account will be reduced by this amount.
ADMINISTRATIVE CHARGES. Prior to the Maturity Date, an annual
administrative fee of $30 is deducted on each Contract anniversary from the
Individual Account value. Great American Reserve will waive the annual
administrative fee if the owner's Individual Account value is $25,000 or
greater. This administrative fee has been set at a level that will recover no
more than the actual costs associated with administering the Contracts. If an
Individual Account is fully withdrawn prior to the Maturity Date, the annual
administrative fee will be deducted from proceeds paid. The administrative fee
deduction is made first from amounts accumulated in the Fixed Account; if no or
an insufficient value exists in the Fixed Account, any balance will then be
deducted from the Sub-accounts of the Variable Account.
A daily charge in an amount equal to 0.15 percent of the value of each
Sub-account of the Variable Account on an annual basis is also deducted to
reimburse Great American Reserve for administrative expenses. This asset-based
administrative charge will not be deducted from the Fixed Account. The charge
will be reflected in the Contract Value as a proportionate reduction in the
value of each Sub-account of the Variable Account.
Great American Reserve does not expect to recover from such fees any amount
in excess of its accumulated administrative expenses. Even though administrative
expenses may increase, Great American Reserve guarantees that it will not
increase the amount of the administrative fees.
MORTALITY AND EXPENSE RISK CHARGE. Great American Reserve assumes two risks
under the Contract: an annuity mortality risk and an expense risk. Great
American Reserve makes daily deductions from the variable portion of a Contract
at an effective annual rate equal to 1.25 percent of the value of the assets of
the Variable Account for the mortality and expense risks assumed by Great
American Reserve consisting of .75 percent for the mortality risk and .50
percent for the expense risk. The annuity mortality risk is Great American
Reserve's promise to continue making annuity payments, determined in accordance
with the annuity tables and other provisions contained in the Contract,
regardless of how long the Annuitant lives and regardless of how long all
Annuitants as a group live. This promise assures that neither the longevity of
an Annuitant nor an improvement in life expectancy generally will have any
adverse effect on the monthly annuity payments, and that Annuitants will not
outlive the amounts which have been accumulated to provide such payment. The
promise is based on Great American reserve's actuarial determination of expected
mortality rates among Annuitants. If, in the future, longevity of Annuitants as
a group is longer than Great American Reserve anticipated, Great American
Reserve must provide amounts from its assets which are not assets of its various
segregated asset accounts to fulfill its contract obligation. In that event, a
loss may fall on Great American Reserve. Conversely, if longevity among
Annuitants is shorter than anticipated, a gain may result to Great American
Reserve.
Great American Reserve also assumes the risk that the withdrawal charges
and the administrative fees may be insufficient to cover actual sales and
administrative expenses. If so, the shortfall will be made up from Great
American Reserve's general assets, which may include profits from other
Sub-account deductions. Conversely, if the sales deductions and administrative
fees exceed the actual sales and administrative expenses, a gain may result to
Great American Reserve. The mortality and expense risk charge is not assessed
against the Fixed Account.
REDUCTION OR ELIMINATION OF CONTRACT CHARGES. In some cases, Great American
Reserve may expect to incur lower sales and administrative expenses or perform
fewer services due to the size of the Contract, the average contribution and the
use of group enrollment procedures. Then, Great American Reserve may be able to
reduce or eliminate the contract charges for administrative expense and deferred
sales load charges.
PREMIUM TAXES. Any premium tax due may be deducted from Purchase Payments
or from other values on the Maturity Date or at such other time as determined by
Great American Reserve. The current range of premium taxes in jurisdictions in
which the Contracts are made available is from 0 percent to 3.5 percent.
OTHER CHARGES. Currently, no charge is made against the Variable Account
for Great American reserve's federal income taxes, or provisions for such taxes,
that may be attributable to the Variable Account. Great American Reserve may
charge each Sub-account of the Variable Account for its portion of any income
tax charged to the Sub-account or its assets. Under
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present laws, Great American Reserve may incur state and local taxes (in
addition to premium taxes) in several states. At present, these taxes are not
significant. If they increase, however, Great American Reserve may decide to
make charges for such taxes or provisions for such taxes against the Variable
Account. Any such charges against the Variable Account or its Sub-accounts could
have an adverse effect on the investment experience of such Sub-accounts.
DEATH BENEFIT BEFORE MATURITY DATE. If the Annuitant dies prior to the
Maturity Date, or the Owner if different than the Annuitant, Great American
Reserve will pay the minimum death benefit to the beneficiary. The minimum death
benefit will be paid either as a lump sum or in accordance with any of the
annuity options available under the Contract. Generally, the distribution of the
minimum death benefit must be made within five years after the Owner's death. If
the beneficiary is an individual, in lieu of distribution within five years of
the Owner's death, distribution may generally be made as an annuity which begins
within one year of the Owner's death and is payable over the life of the
beneficiary or over a period not in excess of the life expectancy of the
beneficiary. If the Owner's spouse is the beneficiary, that spouse may elect to
continue the Contract as the new Owner in lieu of receiving the distribution. In
such a case, the distribution rules applicable when a Contract Owner dies will
apply when that spouse, as the Owner, dies. In the case of a qualified contract,
except for IRAs and the five-percent owners of an employer, the date on which
distributions are required to begin must be no later than April 1 of the first
calendar year following the later of (a) the calendar year in which the
Annuitant attains age 70 1/2 or (b) the calendar year in which the Annuitant
retires. Distributions from IRAs and for five-percent owners must begin no later
than April 1 of the calendar year following the calendar year in which the IRA
holder or five-percent owner attains age 70 1/2. In the case of a Contract
involving more than one Contract Owner, the death of any Contract Owner shall
cause this section to apply.
The minimum death benefit during the first seven contract years will be equal
to the greater of: (a) the Contract Value on the date due proof of death is
received at Great American reserve's Administrative Office, or (b) the sum of
all Purchase Payments made, less any partial withdrawals. During any subsequent
seven-contract-year period, the minimum death benefit will be the greater of:
(a) the Contract Value on the date due proof of death is received at Great
American Reserve's Administrative Office; or (b) the Contract Value on the last
day of the previous seven-contract-year period plus any purchase payments made
and less any subsequent partial withdrawals; or (c) the sum of all premiums
paid, less any partial withdrawals. If the Annuitant or Owner dies after
attaining the age of 80, the death benefit will be the Contract Value on the
date due proof of death is received at Great American Reserve's Administrative
Office. The minimum death benefit will be reduced by any outstanding loans.
Death benefits generally will be paid within seven days of receipt of due
proof of death at Great American reserve's Administrative Office, subject to
postponement under the same circumstances that payment or withdrawals may be
postponed (see "Withdrawals").
OPTIONS UPON TERMINATION OF PARTICIPATION IN THE PLAN (FOR GROUP CONTRACTS
ONLY). Upon termination of participation in the Plan prior to the Maturity Date,
a Contract Owner will have the following options:
(a) leave the Individual Account in force under the Contract, and the
Sub-account will continue to participate in the investment results of the
selected investment option. On the Maturity Date, the Participant will
begin to receive annuity payments. During the interim, any of the options
described below may be elected by the Contract Owner. This option will
automatically apply, unless written election of another option is filed
with Great American Reserve.
(b) apply the Individual Account to provide annuity payments commencing
immediately.
(c) convert the Individual Account to an individual variable annuity contract
of the type then being issued by Great American Reserve.
(d) terminate the Individual Account and receive its Contract Value less any
applicable charges and outstanding loans.
RESTRICTIONS UNDER OPTIONAL RETIREMENT PROGRAMS. Participants in Optional
Retirement Programs can withdraw their interest in a Contract only upon (1)
termination of employment in all public institutions of higher education as
defined by applicable law, (2) retirement, or (3) death. Accordingly, a
Participant may be required to obtain a certificate of termination from his
employer before he can withdraw his interest.
RESTRICTIONS UNDER SECTION 403(B) PLANS. Section 403(b) of the Code
provides that distributions (including withdrawals) under an annuity policy
attributable to contributions made pursuant to a salary reduction agreement
shall not begin prior to the time the employee:
(a) attains age 59 1/2, separates from the service of his or her employer,
dies, or becomes disabled;
(b) suffers a financial hardship, as defined in then current Code and
regulations; or
(c) enters into a divorce settlement pursuant to a qualified domestic relations
order.
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Such Section only applies to distributions attributable to amounts accrued under
any such policy after December 31, 1988.
Such Section further provides that, in the event of a financial hardship, any
distribution made from any such policy shall consist only of contributions made
pursuant to a salary reduction agreement and shall not include any income
attributable to such contributions.
B. SETTLEMENT PROVISIONS
OPTIONAL ANNUITY PERIOD ELECTIONS. The Contract Owner selects a Maturity
Date and an Annuity option which may be on a fixed or variable basis, or a
combination of both. The Contract Owner may select a Maturity Date at any time
subject to applicable state requirements. The Maturity Date and the annuity
options are normally established by the terms of the Contract. If the Contract
Owner does not elect otherwise, (a) the manner of payment will be a lifetime
annuity with 120 monthly payments certain; and (b) the value of the Owner's
Individual Account will be applied as follows: (1) any value accumulated in the
Fixed Account will be applied to provide a fixed annuity; and (2) any value in
the Sub-account(s) of the Variable Account will be applied, separately, to
provide variable annuity payments.
By giving written notice to Great American Reserve at least 30 days prior
to the Maturity Date, the Contract Owner may elect to change (a) the annuity
option to any of the optional annuity forms described below or agreed to by
Great American Reserve, and (b) the manner in which the value of the owner's
Individual Account is to be applied to provide annuity payments (for example, an
election that a portion or all of the amounts accumulated on a variable basis be
applied to provide fixed annuity payments or vice versa). Once annuity payments
commence, no changes may be elected by the Contract Owner (except transfers: see
"Transfers After Maturity Date").
No election may be made that would result in a first monthly annuity
payment of less than $50 if payments are to be on a fully fixed or variable
basis, or less than $50 on each basis if a combination of variable and fixed
annuity payments is elected. If at any time payments are or become less than $50
per monthly payment, Great American Reserve reserves the right to change the
frequency of payment to such interval as will result in annuity payments of at
least $50 each, except that payments shall not be made less frequently than
annually.
Prior to the selected Maturity Date, an Individual Account may be
terminated by the Contract Owner and the value thereof received in a lump sum.
Once annuity payments have commenced, neither the Annuitant nor the Contract
Owner can terminate the annuity benefit and receive a lump-sum settlement in
lieu thereof.
See "Federal Tax Matters" for information on the federal tax status of
annuity payments or other settlements in lieu thereof.
ANNUITY OPTIONS
FIRST OPTION - LIFE ANNUITY. An Annuity payable monthly during the lifetime
of the Annuitant and ceasing with the last monthly payment due prior to the
death of the Annuitant. Of the first two options, this option offers the maximum
level of monthly payments since there is no minimum number of payments
guaranteed (nor a provision for a death benefit payable to a beneficiary). It
would be possible under this option to receive only one annuity payment if the
Annuitant died prior to the due date of the second annuity payment.
SECOND OPTION - LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS
GUARANTEED. An Annuity payable monthly during the lifetime of the Annuitant with
the guarantee that if, at the death of the Annuitant, payments have been made
for less than 120, 180 or 240 months, as elected, annuity payments will be
continued during the remainder of such period to the beneficiary designated by
the Contract Owner. If no beneficiary is designated, Great American Reserve
will, in accordance with the Contract provisions, pay in a lump sum to the
annuitant's estate the present value, as of the date of death, of the number of
guaranteed annuity payments remaining after that date, computed on the basis of
the assumed net investment rate used in determining the first monthly payment.
See "Determination of Amount of the First Monthly Variable Annuity Payment"
below.
Because it provides a specified minimum number of annuity payments, this
option results in somewhat lower payments per month than the First Option.
THIRD OPTION - INSTALLMENT REFUND LIFE ANNUITY. Payments are made for the
installment refund period, which is the time required for the sum of the
payments to equal the amount applied, and thereafter for the life of the payee.
FOURTH OPTION - PAYMENTS FOR A FIXED PERIOD. Payments are made for the
number of years selected, which may be from three through 20. If elected on a
variable basis, payments under this option will vary monthly in accordance with
the net investment rate of the Sub-accounts of the Variable Account, as
applicable. Should the Annuitant die before the specified number of monthly
payments is made, the remaining payments will be commuted and paid to the
designated beneficiary in a lump sum payment.
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FIFTH OPTION - PAYMENTS OF A FIXED AMOUNT. Payments of a designated dollar
amount on a monthly, quarterly, semi-annual, or annual basis are made until the
Individual Account value applied under this option, adjusted each Valuation
Period to reflect investment experience, is exhausted within a minimum of three
years and a maximum of 20 years. Should the Annuitant die before the value is
exhausted, the remaining value will be commuted and paid to the beneficiary in a
lump sum payment. In lieu of a lump sum payment, the beneficiary may elect an
annuity option for distribution of any amount on deposit at the date of the
annuitant's death which shall result in a rate of payment at least as rapid as
the rate of payment during the life of the Annuitant.
To the extent that the Fourth or Fifth Option is elected on a variable
basis, at any time during the payment period the Contract Owner may elect that
the remaining value be applied to effect a lifetime annuity under one of the
first two options described above, provided that the distribution will be made
at least as rapidly during the life of the Annuitant. Since the Contract Owner
may elect a lifetime annuity at any time, the annuity rate and expense risks
continue during the payment period. Accordingly, deductions for these risks will
continue to be made from the Individual Account values.
PROCEEDS APPLIED TO AN ANNUITY OPTION. All or part of the Contract Value
may be applied to an annuity option. The proceeds that will be applied to the
annuity option will be as follows:
(a) the Contract Value less any outstanding loans, if the annuity option
elected begins at least four years after the effective date of your
contract and is paid under any life annuity option, or any option with
payments for a minimum period of five years, with no rights of early
withdrawal; or
(b) the death benefit if proceeds are payable under death of Annuitant; or
(c) the Contract Value less any outstanding loans, withdrawal charge and any
administrative fee.
DETERMINATION OF AMOUNT OF THE FIRST MONTHLY VARIABLE ANNUITY PAYMENT. On
or after the Maturity Date when annuity payments commence, the value of the
Individual Account is determined as the total of the product(s) of (a) the value
of an Accumulation Unit for each investment option at the end of the second
Valuation Period immediately preceding the Valuation Period in which the first
annuity payment is due and (b) the number of Accumulation Units credited to the
Individual Account with respect to each investment option as of the date the
Annuity is to commence. Premium tax, if assessed at such time by the applicable
jurisdiction, will be deducted from the Individual Account value. Any portion of
the Individual Account value for which a fixed annuity election has been made is
applied to provide fixed-dollar payments under the option elected.
The amount of the first monthly variable annuity payment is then calculated
by multiplying the Individual Account Value less any outstanding loans and
applicable charges, which is to be applied to provide variable payments, by the
amount of first monthly payment in accordance with annuity tables contained in
the Contract. The annuity tables are based on the 1983 Individual Annuity
Mortality Table. The amount of the first monthly payment varies according to the
form of annuity selected (see "Annuity Options" above), the age of the Annuitant
(for certain options) and the assumed net investment rate selected by the
Contract Owner. The standard assumed net investment rate is 3 percent per annum;
however, an alternative 5 percent per annum, or such other rate as Great
American Reserve may offer, may be selected prior to the Maturity Date.
The assumed net investment rates built into the annuity tables affect both
the amount of the first monthly variable annuity payment and the amount by which
subsequent payments may increase or decrease. Selection of a 5 percent rate,
rather than the standard 3 percent rate, would produce a higher first payment,
but subsequent payments would increase more slowly in periods when Annuity Unit
values are rising and decrease more rapidly in periods when Annuity Unit values
are declining. With either assumed rate, if the actual net investment rate
during any two or more successive months was equal to the assumed rate, the
annuity payments would be level during that period.
If a greater first monthly payment would result, Great American Reserve
will compute the first monthly payment on the same mortality basis as used in
determining the first payment under immediate annuity contracts being issued for
a similar class of Annuitants at the date the first monthly payment is due under
the Contract.
VALUE OF AN ANNUITY UNIT. On the Maturity Date, a number of Annuity Units
is established for the Contract Owner for each investment option on which
variable annuity payments are to be based. For each Sub-account of the Variable
Account, the number of Annuity Units established is calculated by dividing (i)
the amount of the first monthly variable annuity payment on that basis by (ii)
the Annuity Unit value for that basis for the current Valuation Period. That
number of Annuity Units remains constant and is the basis for calculating the
amount of the second and subsequent annuity payments.
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The Annuity Unit value is determined for each Valuation Period, for each
investment option, and is equal to the Annuity Unit value for the preceding
Valuation Period multiplied by the product of (i) the net investment factor for
the appropriate Sub-account (see Net Investment Factor for Each Valuation
Period) for the second preceding Valuation Period and (ii) a factor to
neutralize the assumed net investment rate built into the annuity tables
(discussed under the preceding caption), for it is replaced by the actual net
investment rate in step (i). The daily factor for a 3 percent assumed net
investment rate is .99991902; for a 5 percent rate, the daily factor is
.99986634.
AMOUNTS OF SUBSEQUENT MONTHLY VARIABLE ANNUITY PAYMENTS. The amounts of
subsequent monthly variable annuity payments are determined by multiplying (i)
the number of Annuity Units established for the Annuitant for the applicable
Sub-account by (ii) the Annuity Unit value for the Sub-account. If Annuity Units
are established for more than one Sub-account, the calculation is made
separately and the results combined to determine the total monthly variable
annuity payment.
1. EXAMPLE OF CALCULATION OF MONTHLY VARIABLE ANNUITY PAYMENTS. The
determination of the amount of the variable annuity payments can be
illustrated by the following hypothetical example. The example assumes that
the monthly payments are based on the investment experience of only one
investment option. If payments were based on the investment experience of
more than one investment option, the same procedure would be followed to
determine the portion of the monthly payment attributed to each investment
option.
2. FIRST MONTHLY PAYMENT. Assume that at the Maturity Date there are 40,000
Accumulation Units credited under a particular Individual Account and that
the value of an Accumulation Unit for the second Valuation Period prior to
the Maturity Date was $1.40000000; this produces a total value for the
Individual Sub-account of $56,000. Assume also that no premium tax is
payable and that the annuity tables in the Contract provide, for the option
elected, a first monthly variable annuity payment of $5.22 per $1,000 of
value applied; the first monthly payment to the Annuitant would thus be 56
multiplied by $5.22, or $292.32.
Assume that the Annuity Unit value for the Valuation Period in which the
first monthly payment was due was $1.30000000. This is divided into the
amount of the first monthly payment to establish the number of Annuity
Units for the Participant: $292.32 $1.30000000 produces 224.862 Annuity
Units. The value of this number of Annuity Units will be paid in each
subsequent month.
3. SECOND MONTHLY PAYMENT. The current Annuity Unit value is first calculated.
Assume a net investment factor of 1.01000000 for the second Valuation
Period preceding the due date of the second monthly payment. This is
multiplied by .99753980 to neutralize the assumed net investment rate of 3
percent per annum built into the number of Annuity Units determined above
(if an assumed net investment rate of 5 percent had been elected, the
neutralization factor would be .99594241), producing a result of
1.00751520. This is then multiplied by the Annuity Unit value for the
Valuation Period preceding the due date of the second monthly payment
(assume this value to be $1.30000000) to produce the current Annuity Unit
value, $1.30976976.
The second monthly payment is then calculated by multiplying the
constant number of Annuity Units by the current Annuity Unit value: 224.862
times $1.30976976 produces a payment of $294.52.
TRANSFERS AFTER MATURITY DATE. Transfers after the Maturity Date may be
made upon written notice to Great American Reserve at least 30 days before the
due date of the first annuity payment for which the change will apply. Transfers
will be made by converting the number of Annuity Units being transferred to the
number of Annuity Units of the Sub-account to which the transfer is made, so
that the next annuity payment if it were made at that time would be the same
amount that it would have been without the transfer. Thereafter, annuity
payments will reflect changes in the value of the new Annuity Units. Great
American Reserve reserves the right to limit, upon notice, the maximum number of
transfers a Contract Owner may make to one in any six- month period once annuity
payments have commenced. In addition, on or after the Maturity Date, no
transfers may be made from a fixed annuity option. Great American Reserve
reserves the right to defer the transfer privilege at any time that Great
American Reserve is unable to purchase or redeem shares of the Funds. Great
American Reserve also reserves the right to modify or terminate the transfer
privilege at any time in accordance with applicable law.
DEATH BENEFIT ON OR AFTER MATURITY DATE. If annuity payments have been
selected based on an annuity option providing for payments for a guaranteed
period, and the Annuitant dies on or after the Maturity Date, Great American
Reserve will make the remaining guaranteed payments to the beneficiary. Such
payments will be made at least as rapidly as under the method of distribution
being used as of the date of the annuitant's death. If no beneficiary is living,
Great American Reserve will commute any unpaid guaranteed payments to a single
sum (on the basis of the interest rate used in determining the payments) and pay
that single sum to the Annuitant's estate.
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C. OTHER CONTRACT PROVISIONS
TEN-DAY RIGHT TO REVIEW. Contracts allow a "10-day free look", wherein the
Contract Owner may revoke the contract by returning it to either a Great
American Reserve representative or to Great American reserve's Administrative
Office within 10 days of delivery of the Contract. Great American Reserve deems
this period as ending 15 days after a Contract is mailed from its Administrative
Office. If the Contract is returned under the terms of the 10-day free look,
Great American Reserve will refund to the Contract Owner an amount equal to all
payments received with respect to the Contract.
OWNERSHIP. The Contract Owner is the person entitled to exercise all rights
under the Contract. Prior to the Maturity Date, the Contract Owner is the person
designated in the application or as subsequently named. On and after the
Maturity Date, the Annuitant is the Contract Owner and after the death of the
Annuitant, the beneficiary is the Contract Owner.
In the case of non-qualified Contracts, ownership of the Contract may be
changed or the Contract collaterally assigned at any time during the lifetime of
the Annuitant prior to the Maturity Date, subject to the rights of any
irrevocable beneficiary. Assigning a Contract, or changing the ownership of a
Contract, may be treated as a distribution of the Contract Value for federal tax
purposes. Any change of ownership or assignment must be made in writing. Any
change must be approved by Great American Reserve. Any assignment and any
change, if approved, will be effective as of the date on which written. Great
American Reserve assumes no liability for any payments made or actions taken
before a change is approved or assignment is accepted, or responsibility for the
validity of any assignment.
In the case of qualified Contracts, ownership of the Contract generally may
not be transferred except by the trustee of an exempt employee's trust which is
part of a retirement plan qualified under Section 401 of the Code. Subject to
the foregoing, a qualified contract may not be sold, assigned, transferred,
discounted or pledged as collateral for a loan or as security for the
performance of an obligation or for any other purpose.
MODIFICATION. Great American Reserve may modify the Contract with the
approval of the Contract Owner unless provided otherwise by the Contract. After
the Contract has been in force, it may be modified by Great American Reserve
except that the mortality and expense risk charge, the withdrawal charges and
the administrative fees cannot be increased.
A Group Contract shall be suspended automatically on the effective date of
any modification initiated by Great American Reserve if the Contract Owner fails
to accept the modification. Effective with suspension, no new Participants may
enter the Plan but further Purchase Payments may be made on behalf of the
Participants then covered by the Contract.
No modification may affect Annuitants in any manner unless deemed necessary
to achieve the requirements of federal or state statutes or any rule or
regulation of the United States Treasury Department.
COMPANY APPROVAL. Each application is subject to acceptance by Great
American Reserve. Upon acceptance, a Contract is issued to the Contract Owner
and the Purchase Payment, as applicable to each investment option of the
Individual Account, is credited to the owner's Individual Account. If an
application is complete upon receipt, the Purchase Payment will be credited to
the owner's Individual Account within two business days. If it is not complete,
Great American Reserve will request additional information to complete the
processing of the application. If this is not accomplished within five business
days, Great American Reserve will return any Purchase Payment to the applicant
unless otherwise instructed. Subsequent Purchase Payments will be credited to
the owner's Individual Account at the price next computed after the Purchase
Payment is received by Great American Reserve at its Administrative Office.
FEDERAL TAX MATTERS
A. GENERAL
The operations of the Variable Account form a part of and are taxed with
the operations of Great American Reserve as a separate account under the Code.
Accordingly, the Variable Account is not separately taxed as a trust or
corporation and not treated as a "regulated investment company" under Subchapter
M of the Code. Investment income and realized capital gains on the assets of the
Variable Account are reinvested and taken into account in determining the
Accumulation and Annuity Unit values and are automatically applied to increase
reserves under the Contracts. Under existing federal income tax law, separate
account investment income and capital gains are not taxed. Therefore, the
Variable Account does not make provisions for any such taxes. If changes in the
federal tax laws or interpretations thereof were to result in Great American
Reserve being taxed on income or gains attributable to any of the Variable
Account or any Sub-account thereof or certain types of Contracts, then Great
American Reserve has reserved the right to impose a charge against the Variable
Account and its
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constituent Sub-accounts (with respect to some or all Contracts) in order to
reimburse itself for payment of such taxes.
B. STATUS OF CONTRACTS
Section 72 of the Code governs taxation of annuities in general. However,
Section 817(h) of the Code provides that variable annuity contracts such as the
Contracts will not be treated as annuities unless the underlying investments are
"adequately diversified" in accordance with regulations prescribed by the
Secretary of the Treasury. Under the final regulations adopted by the Treasury
with respect to these diversification requirements, there are limitations as to
the percentage of assets in the Sub-account which may be made up of one or more
investments. Generally, a Sub-account will be adequately diversified if (1) no
more than 55 percent of the value of the total assets of the Sub-account is
represented by any one investment; (2) no more than 70 percent of the value of
the total assets of the Sub-account is represented by any two investments; (3)
no more than 80 percent of the value of the total assets of the Sub-account is
represented by any three investments; and (4) no more than 90 percent of the
value of the total assets of the Sub-account is represented by any four
investments. For purposes of this test, all securities of the same issuer are
counted as one investment. Great American Reserve believes that the investment
policies of the Variable Account and each Sub-account are more stringent than
the diversification rules and therefore that the Variable Account and each
Sub-account do and will continue to satisfy the diversification requirement of
Section 817(h).
In addition, pursuant to Section 72(s) of the Code, a Contract will not be
treated as an annuity contract for purposes of Section 72 unless the Contract
provides that (1) if the Contract Owner dies on or after the annuity starting
date but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of such interest must be distributed at least
as rapidly as under the method of distribution in effect at the time of the
Contract Owner's death; and (2) if the Contract Owner dies prior to the annuity
starting date, the entire interest generally must be (A) distributed within five
years after the death of the Contract Owner or (B) distributed as annuity
payments over the life of a designated beneficiary (or over a period that does
not extend beyond the life expectancy of a designated beneficiary) and that such
distributions begin within one year of the Contract Owner's death. Section 72(s)
also provides, however, that if the Contract Owner's "designated beneficiary" is
the surviving spouse of the Contract Owner, the Contract may be continued with
the surviving spouse as the new Owner. Comparable rules concerning required
distributions plus additional rules also apply to qualified Plans and to IRAs.
Great American Reserve believes that the Contracts described in this Prospectus
meet these requirements.
NON-QUALIFIED CONTRACTS. Non-qualified Contracts are those Contracts which
are held by individual purchasers and which are not held as part of the assets
of a qualified pension, profit sharing, annuity purchase or other qualified Plan
as described below. Under present law, so long as the Contract meets the
requirements of the Code for treatment as an annuity, a Contract Owner is not
taxed on increases in the value of a Contract until distributions occur. For
this purpose, distributions include not only a partial withdrawal, a complete
surrender of the Contract or annuity payments under an annuity option elected,
but also the receipt of proceeds from loans and the absolute assignment or
pledge of any portion of the value of a Contract. The income portion of a
distribution is taxed as ordinary income. With respect to contributions to
annuity contracts after February 28, 1986, Section 72(u) provides that an
annuity contract owned by other than a natural person will generally be treated
as not being an annuity contract and, as a result, the income from the Contract
will be currently taxable to the owner of the Contract. The general rule,
however, is subject to several exceptions which apply to all deferred annuity
contracts that are either (1) acquired by an estate of a decedent by reason of
the death of the decedent; or (2) held under certain qualified Plans; and to all
immediate annuities. In Revenue Ruling 92-95, the Internal Revenue Service
indicated that where an annuity contract was acquired before February 28, 1986,
the exchange of that annuity contract for a new annuity contract in a
non-taxable exchange under Section 1035 did not cause the new annuity contract
to be treated as acquired after February 28, 1986.
Generally, amounts received in the case of a partial withdrawal under a
Contract are treated as taxable income to the extent of the excess of the cash
value of the Contract immediately before the withdrawal over the "investment in
the Contract". Any additional amount withdrawn at that time is not taxable. This
general rule does not apply, however, in the case of a partial withdrawal under
a Contract issued before August 14, 1982, where the partial withdrawal is
allocable first to the "investment in the Contract" made before that date. Any
amounts received are treated as taxable income only to the extent that such
amounts exceed the "investment in the Contract". In the case of a complete
surrender of any Contract (whether issued before or after August 14, 1982), the
amounts received are treated as taxable income only to the extent such amounts
exceed the "investment in the Contract". With respect to a Contract, the
"investment in the Contract" generally equals the portion of any premium paid by
or on behalf of an individual which was not excluded from the individual's gross
income, reduced by the amount of prior distributions that were not included in
the individual's gross income. For purposes of determining the amount of taxable
income that must be reported by a Contract Owner who has received a partial
distribution, all Contracts issued to the Contract Owner during a calendar year
must be treated as one Contract.
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If distributions are made from under a non-qualified Contract in the form
of annuity payments the Contract Owner's gross income generally does not include
that part of any amount received as an annuity that bears the same ratio to such
amounts as the "investment in the Contract" bears to the expected return as of
the annuity starting date. In this respect, (prior to the recovery of the
investment in the Contract), there is generally no tax on the amount of each
payment which represents this return in investment, however, the remainder of
each payment is taxable as ordinary income. After the "investment in the
Contract" is recovered, the full amount of any additional annuity payments is
taxable, unless an individual's annuity starting date is prior to January
1,1987, in which case the exclusion ratio applies for the entire term of the
annuity.
Section 72(q) imposes a penalty tax on partial withdrawals received that is
and complete surrenders equal to 10 percent of the amount treated as taxable
income. In general, the penalty tax does not apply to withdrawals or surrenders
(1) that are made on or after age 59 1/2, (2) that are made as a result of death
or disability, (3) that are received in substantially equal installments as a
life annuity, (4) that are allocable to the "investment in the Contract" before
August 14, 1982, or (5) that are received under an immediate annuity.
Revenue Ruling 92-95 indicates that eligibility for the August 14, 1982,
exception referred to in Item (4) above, will not be lost if a pre-existing
contract is exchanged for a new annuity contract on or after that date in an
exchange which is nontaxable under Section 1035 of the Code.
Annuity distributions are generally subject to withholding for the
recipient's income tax liability. The withholding rates vary according to the
type of distribution. Recipients, however, are generally provided the
opportunity to elect not to have tax withheld from distributions.
QUALIFIED CONTRACTS. Qualified Contracts are those contracts which are held
as part of the assets of qualified pension, profit sharing, annuity purchase or
other qualified Plan as described below. Generally, increases in the value of an
individual's account under a Contract purchased in connection with a qualified
Plan are not taxable until benefits are received. The rules governing the tax
treatment of contributions and distributions under such Plans, as set forth in
the Code and applicable rulings and regulations, are complex and subject to
change. These rules also vary according to the type of Plan and the terms and
conditions of the Plan itself. Therefore, no attempt is made herein to provide
more than general information about the use of Contracts with the various types
of Plans, based on Great American Reserve's understanding of the current federal
tax laws as interpreted by the Internal Revenue Service. Purchasers of Contracts
for use with such a Plan and Plan Participants and their beneficiaries should
consult legal counsel and other competent advisers as to the suitability of the
Plan and the Contract to their specific needs, and as to applicable Code
limitations and tax consequences. Owners under such Plans, as well as Annuitants
and beneficiaries, should also be aware that the rights of any person with any
benefits under such Plans may be subject to the terms and conditions of the
Plans themselves regardless of the terms and conditions of the Contract. The
Code imposes a number of rules for all qualified Plans, including among other
things, nondiscrimination rules, maximum and minimum contributions, distribution
dates, nonforfeitability of interests, and penalties for noncompliance. There
are additional restrictions for so-called "top-heavy plans". Competent advisers
should be consulted with respect to the impact of the Code on the qualification
of the Plan and the taxation of the employee participating therein.
Following are brief descriptions of the various types of Plans and of the use of
Contracts in connection therewith.
1. GOVERNMENT AND TAX-EXEMPT ORGANIZATIONS' DEFERRED COMPENSATION Plans. Under
Code provisions, employees and independent contractors performing services
for state and local governments and other tax-exempt organizations may
participate in Deferred Compensation Plans. While participants in such
Plans may be permitted to specify the form of investment in which their
Plan accounts will participate, all such investments are owned by the
sponsoring employer and are subject to the claims of its creditors until
December 31, 1998, or such earlier date as may be established by Plan
amendment. However, amounts deferred under a Plan created on or after
August 20, 1996 and amounts deferred under any 457 Plan after December 31,
1998 must be held in trust, custodial account or annuity contract for the
exclusive benefit of Plan participants and their beneficiaries. The amounts
deferred under a Plan which meets the requirements of Section 457 of the
Code are not taxable as income to the participant until paid or otherwise
made available to the participant or beneficiary. As a general rule, the
maximum amount which can be deferred in any one year is the lesser of
$7,500 or 33 1/3 percent of the participant's includable compensation.
However, in limited circumstances, up to $15,000 may be deferred in each of
the last three years before normal retirement age.
2. PUBLIC SCHOOL SYSTEMS AND CERTAIN TAX-EXEMPT ORGANIZATIONS. Payments made
to purchase annuity contracts by public school systems or certain
tax-exempt organizations for their employees are excludable from the gross
income of the employee to the extent that aggregate payments for the
employee do not exceed the "exclusion allowance" provided by Section 403(b)
of the Code, the limits on salary deferrals under Section 402 (g), or the
overall limits for excludable contributions of Section 415 of the Code.
Furthermore, the investment results credited to the Sub-account are not
taxable until benefits are received either in the form of annuity payments
or in a single sum.
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If an employee's Individual Account is surrendered, usually the full amount
received would be includable in income for that year and taxed at ordinary
rates.
3. QUALIFIED EMPLOYEES' PENSION AND PROFIT-SHARING TRUST AND QUALIFIED ANNUITY
PLANS. Contributions made to purchase Contracts by an employer and the
earnings on such contributions for Plans that are qualified under Sections
401(a) or 403(a) of the Code are not taxable as income to the employee
until distributed to him or her. However, the employee may be required to
include these amounts in gross income prior to distribution if the
qualified Plan loses its qualification. Plans qualified under Section
401(a) or 403(a) of the Code are subject to extensive rules, including
limitations on maximum contributions or benefits.
Distributions of amounts not attributable to nondeductible employee
contributions are generally taxable as ordinary income unless the
distribution qualifies for "lump-sum" treatment.
Under the Code special considerations apply to Plans covering
self-employed individuals. Such Plans are subject to extensive rules,
including limitations on maximum contributions or benefits involving "key
employees" or 5-percent owners, as well as to special rules pertaining to
"top heavy" Plans. Purchasers of the Contracts for use with these Plans
should seek competent advice as to the suitability of certain types of
Plans and the funding contracts to be purchased.
4. INDIVIDUAL RETIREMENT ANNUITIES. Under Section 408 of the Code, an
individual who receives compensation for personal services and who either
(A) does not participate in an employer-sponsored pension plan and, if
married, whose spouse does not participate in an employer-sponsored pension
plan or (B) does participate in such a plan, or whose spouse does, but does
not have adjusted gross income in excess of $40,000 for married individuals
or $25,000 for a single taxpayer, may make deductible contributions in a
retirement program known as an Individual Retirement Annuity or an
Individual Retirement Account (each of which is an "IRA"). The individual
is entitled to an income tax deduction for a contribution to an IRA of up
to the lesser of $2,000 (or $4,000 effective for tax years after December
31, 1996 if the IRA is maintained for both the individual and his or her
non-working spouse) or 100 percent of compensation. In addition,
distributions from IRA Plans, qualified Plans or Section 403(b) annuities
may, in whole or in part, qualify to be treated as a "rollover" on a
tax-deferred basis into an IRA rollover. Distributions from IRAs are
subject to certain restrictions. All distributions will be taxed to the
individual as ordinary income at the time of distribution. Any distribution
to the individual before the individual attains age 59 1/2 (except in the
event of death or disability) or the failure to satisfy certain other Code
requirements may result in adverse tax consequences to the individual.
Individuals who do participate in an employer- sponsored pension plan
or whose spouse participates in an employer-sponsored pension plan and who
have adjusted gross income in excess of the above-mentioned amounts may
generally participate in an IRA program; however, such contributions may
not be eligible for an income tax deduction.
5. SIMPLIFIED EMPLOYEE PENSION PLANS. An employer may make contributions on
behalf of employees to a simplified employee pension Plan as provided by
Section 408(k) of the Code. The amount of contributions and distribution
dates are limited by the Code provisions. All distributions from the Plan
will be taxed as ordinary income. Any distribution before the employee
attains age 59 1/2 (except in the event of death or disability) or the
failure to satisfy certain other Code requirements may result in adverse
tax consequences.
6. SIMPLE IRAs. Subject to certain limitations, an employer may adopt the
Savings Incentive Match Plan for Employees (SIMPLE Plan). The simplest
version of a SIMPLE Plan is the SIMPLE IRA. Generally, contributions to a
SIMPLE IRA are excludable from the employee's income and distributions made
from a SIMPLE IRA are taxed as ordinary income. The SIMPLE IRA requires
either a specified employer matching contribution or a qualified
non-elective employer contribution. Special rules apply to SIMPLE IRAs,
including early withdrawal penalty taxes, that may not apply to IRAs. A
competent tax advisor should be consulted for additional information before
an investment is made in a SIMPLE IRA
C. TAXATION OF DISTRIBUTIONS
The following rules generally apply to distributions from Contracts
purchased in connection with the qualified Contracts discussed above, other than
IRA or governmental and tax-exempt organizations' deferred compensation plans.
The portion, if any, of any contribution under a Contract made by or on
behalf of an individual which is not excluded from the employees gross income
(generally, the employees own non-deductible contributions) constitutes his or
her investment in the Contract. If a distribution is made under certain
qualified contracts in the form of annuity payments the portion of each payment
that is excluded from gross income will generally be equal to the total amount
of any investment in the Contract as of the annuity starting date, divided by
the number of anticipated payments, which are determined by reference to the age
of the Annuitant; however, the remainder of each payment is taxable as ordinary
income. Generally, after the "investment in the Contract" is recovered, the full
amount of any additional annuity payments is taxable. In certain circumstances,
tax may be deferred by rolling over the proceeds to an IRA or another qualified
Plan. If a surrender or withdrawal from the Contract is effected and a
distribution is made in a single payment, the proceeds may qualify for special
"lump sum distribution" treatment under certain qualified Plans as discussed
below.
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Great American
Reserve
1997 Account E
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If an employee or beneficiary receives in a single tax year the total
amounts payable with respect to that employee from a Plan and all similar plans
and the benefits are paid as a result of the employee's death, disability or
separation from service or after the employee attains age 59 1/2, the
distribution may be eligible for the special "five-year averaging" for tax years
beginning before December 31, 1999. A "10-year averaging" procedure may also be
available to individuals who attained 50 before January 1, 1986. For further
information regarding these rules, a competent tax advisor should be consulted.
The taxation of benefits payable upon an employee's death to his
beneficiary generally follows these same principles, subject to a variety of
special rules.
IRA 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. Generally, amounts are withheld
from periodic payments at the same rate as wages and at the rate of 10% from
non-periodic payments. Recipients, however, generally are provided the
opportunity to elect not to have tax withheld from distributions.
As of January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or 403(b) of the Code, that are not directly rolled
over to another eligible retirement plan or an IRA, are subject to a mandatory
20% withholding for federal income tax.
Distributions to a Participant from a Section 457 plan retain their
character as wages and federal income taxes must be withheld under the wage
withholding rules. Federal income tax on payment to beneficiaries will be
withheld from annuity (periodic) payments at the rates applicable to wage
withholding, and from other distributions at a flat 10% rate, unless the
beneficiary elects not to have federal income tax withheld. For complete
information on withholding, a qualified tax advisor should be consulted.
There also may be imposed a penalty tax on partial withdrawals and complete
surrenders equal to 10 percent of the amount treated as taxable income. In
general, there is no penalty tax on the following withdrawals or surrenders: (1)
a distribution that is part of a scheduled series of substantially equal
periodic payments for the life (or life expectancy) of the participant, or the
joint lives (or joint life expectancies) of the participant and beneficiary (2)
made on or after age 59 1/2; (3) a distribution to a terminated employee, age 55
or older, with the exception of distributions from an IRA; (4) a hardship
distribution used to pay certain medical expenses (5) a distribution made to, or
on behalf of, an alternate payee pursuant to a qualified domestic relations
order; with the exception of distributions from an IRA; and (6) a distribution
after death or disability of the employee.
D. OTHER CONSIDERATIONS
The previous discussion is general in nature and is not intended as tax
advice. It should be understood that the foregoing comments about the federal
tax consequences under these Contracts are not exhaustive and that special rules
exist with respect to other tax situations not discussed herein. Further, the
federal income tax consequences discussed herein reflect current law which is
subject to change at any time. The foregoing discussion also does not address
any applicable state, local or foreign tax laws. Before an investment is made, a
competent tax adviser should be consulted.
GENERAL MATTERS
PERFORMANCE INFORMATION. Performance information for the Variable Account
investment options may appear from time to time in advertisements or sales
literature. Performance information reflects only the performance of a
hypothetical investment in the Variable Account investment options during the
particular time period on which the calculations are based. Performance
information may consist of yield, effective yield, and average annual total
return quotations reflecting the deduction of all applicable charges for recent
one-year and, when applicable, five- and 10-year periods and, where less than 10
years, for the period subsequent to the date each Sub-account first became
available for investment. Additional total return quotations may be made that do
not reflect a surrender charge deduction (assuming no surrender at the end of
the illustrated period). Performance information may be shown by means of
schedules, charts or graphs. See the Statement of Additional Information for a
description of the methods used to determine yield and total return information
for the Sub-accounts.
DISTRIBUTION OF CONTRACTS. Conseco Equity Sales, Inc. ("Conseco Equity
Sales"), 11815 N. Pennsylvania Street, Carmel, IN 46032, an affiliate of Great
American Reserve, is the principal underwriter of the Contracts. Conseco Equity
Sales is a broker-dealer registered under the Securities and Exchange Act of
1934 and a member of the National Association of Securities Dealers, Inc. Sales
of the Contracts will be made by registered representatives of Conseco Equity
Sales and broker-dealers authorized to sell the Contracts. Such registered
representatives will also be licensed insurance representatives of Great
American Reserve. See the Statement of Additional Information for more
information.
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CONTRACT OWNER INQUIRIES. All Contract Owner inquiries should be directed
to Great American reserve's Administrative Office address or telephone number
appearing on page 1 of this Prospectus.
LEGAL PROCEEDINGS. There are no legal proceedings to which the Variable
Account is a party or to which the assets of the Variable Account are subject.
Neither Great American Reserve nor Conseco Equity Sales is involved in any
litigation that is of material importance in relation to their total assets or
that relates to the Variable Account.
OTHER INFORMATION. This Prospectus contains information concerning the
Variable Account, Great American Reserve, and the Contracts, but does not
contain all of the information set forth in the Registration Statement and all
exhibits and schedules relating thereto, which Great American Reserve has filed
with the Securities and Exchange Commission, Washington, D.C.
Additional information may be obtained from Great American Reserve by
requesting from Great American reserve's Administrative Office, 11815 N.
Pennsylvania Street, Carmel, Indiana 46032, a Statement of Additional
Information. For convenience, the Table of Contents of the Statement of
Additional Information is provided below:
TABLE OF CONTENTS OF THE STATEMENT
OF ADDITIONAL INFORMATION
PAGE
General Information and History ......... B-2
Independent Accountants.................. B-2
Distribution................. ........... B-2
Calculation of Yield Quotations ......... B-2
Calculation of Total Return Quotations .. B-3
Other Performance Data................... B-5
Financial Statements .................... F-1
35
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Great American
Reserve
1997 Account E
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If you would like a free copy of the Statement of Additional Information
for this Prospectus, please complete this form, detach, and mail to:
Great American Reserve Insurance Company
Administrative Office
11815 N. Pennsylvania Street
Carmel, Indiana 46032
Gentlemen:
Please send me a free copy of the Statement of Additional Information for
Great American Reserve Variable Annuity Account E at the following address:
Name:
---------------------------------------------------------------------------
Mailing Address:
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
Sincerely,
----------------------------------------
(Signature)
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Great American
Reserve
1997 Account E
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APPENDIX A
CONSECO SERIES TRUST
Conseco Series Trust is an open-end management investment company organized
as a business trust under the laws of the Commonwealth of Massachusetts on
November 15, 1982. Trust shares are offered only to separate accounts of various
insurance companies to fund benefits of variable life and variable annuity
contracts. Conseco Capital Management serves as the investment adviser.
THE ALGER AMERICAN FUND
The Alger American Fund is an open-end management investment company
organized as a business trust under the laws of the Commonwealth of
Massachusetts on April 6, 1988. Trust shares are offered only to separate
accounts of various insurance companies to fund benefits of variable life and
variable annuity contracts. Fred Alger Management, Inc. serves as the investment
adviser.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
American Century Variable Portfolios, Inc. is an open-end management
investment company organized as a Maryland corporation on June 4, 1987, and is a
part of American Century Investments, a family of funds that includes nearly 70
no-load mutual funds covering a variety of investment opportunities. The fund
offers its shares only to insurance companies to fund the benefits of variable
annuity or variable life insurance contracts.
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger Institutional Products Trust is an open-end management investment
company organized as a business trust under the laws of the State of Delaware on
October 17, 1995. Trust shares are offered only to separate accounts of various
insurance companies in connection with investment in and payments under variable
annuity contracts and variable life insurance contracts, as well as to certain
qualified retirement plans. The investment adviser is Berger Associates, Inc.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
The Dreyfus Socially Responsible Growth Fund, Inc. is an open-end
diversified, management investment company. It was incorporated under Maryland
law on July 20, 1992, and commenced operations on October 7, 1993. The Dreyfus
Corporation serves as the Fund's investment adviser. NCM Capital Management
Group, Inc. serves as the Fund's sub-investment adviser and provides day-to-day
management of the Fund's portfolio.
DREYFUS STOCK INDEX FUND
Dreyfus Stock Index Fund is an open-end, non-diversified, management
investment company. It was incorporated in the name Dreyfus Life and Annuity
Index Fund, Inc. under Maryland law on January 24, 1989, and commenced
operations on September 29, 1989. On May 1, 1994, the Fund began operating under
the name Dreyfus Stock Index Fund. The Dreyfus Corporation serves as the Fund's
manager and Mellon Equity Associates serves as the Fund's index manager.
FEDERATED INSURANCE SERIES
Federated Insurance Series is an open-end management investment company
organized as a business trust under the laws of the Commonwealth of
Massachusetts on September 15, 1993. Trust shares are offered only to separate
accounts of various insurance companies to serve as the investment medium of
variable life insurance policies and variable annuity contracts issued by the
insurance companies. Federated Advisers serves as the investment adviser.
JANUS ASPEN SERIES
Janus Aspen Series is an open-end management investment company organized
as a business trust under the laws of the State of Delaware on May 20, 1993.
Trust shares are offered only to separate accounts of various insurance
companies to fund the benefits of variable life and variable annuity contracts,
and to qualified retirement plans. The investment adviser and manager is Janus
Capital Corporation.
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NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Neuberger & Berman Advisers Management Trust is a Delaware business trust
organized pursuant to a Trust Instrument dated May 23, 1994. The Trust is
registered under the Investment Company Act of 1940 as a diversified, open-end
management investment company and consists of seven separate portfolios. Each
portfolio of the Trust invests all of its net investable assets in a
corresponding series of Neuberger & Berman Advisers Managers Trust, whose
investment adviser is Neuberger & Berman Management Incorporated. Shares of the
Trust are offered to life insurance companies for allocation to certain of their
separate accounts established for the purpose of funding variable annuity
contracts and variable life insurance policies.
STRONG SPECIAL FUND II
Strong Special Fund II is a diversified open-end management investment
company established as a corporation under Wisconsin law on December 28, 1990.
Shares of the Fund are only offered and sold to the separate accounts of certain
insurance companies for the purpose of funding variable annuity and variable
life insurance contracts. Strong Capital Management, Inc. is the investment
adviser for the Fund.
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Variable Insurance Funds, Inc., is an open-end management investment
company and was organized as a corporation under Wisconsin law on December 28,
1990. Shares of the Fund are only offered and sold to the separate accounts of
certain insurance companies for the purpose of funding variable annuity and
variable life insurance contracts. Strong Capital Management, Inc. is the
investment adviser for the Fund.
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust is an open-end management investment
company organized as a business trust under the laws of the Commonwealth of
Massachusetts on January 7, 1987. Trust shares are offered only to separate
accounts of various insurance companies to fund the benefits of variable life
and variable annuity contracts. The investment adviser and manager is Van Eck
Associates Corporation.
A full description of the Conseco Series Trust, the Alger American Fund,
the American Century Variable Portfolios, Inc., the Berger Institutional
Products Trust, the Dreyfus Socially Responsible Growth Fund, Inc., the Dreyfus
Stock Index Fund, the Federated Insurance Series, the Janus Aspen Series, the
Neuberger and Berman Advisers Management Trust, the Strong Variable Insurance
Funds, Inc. Growth Fund II, the Strong Special Fund II, and the Van Eck
Worldwide Insurance Trust, including the investment objectives, policies and
restrictions of each of the eligible Funds, is contained in the prospectuses of
the Funds which accompany this Prospectus and should be read carefully by a
prospective purchaser before investing.
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PART B
<PAGE>
Great American Reserve
Insurance Company
VARIABLE ANNUITY ACCOUNT E
INDIVIDUAL & GROUP VARIABLE DEFERRED ANNUITY CONTRACTS
STATEMENT OF ADDITIONAL INFORMATION
Dated May 1, 1997
Offered by Great American Reserve Insurance Company
11815 N. Pennsylvania St., Carmel, IN 46032
(317) 817-3700
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus for Great American Reserve Variable
Annuity Account E ("Variable Account") -- Individual Variable Deferred Annuity
Contracts or Group Variable Deferred Annuity Contracts, dated May 1, 1997. You
can obtain a copy of the Prospectus by contacting Great American Reserve
Insurance Company ("Great American Reserve") at the address or telephone number
given above.
TABLE OF CONTENTS Page
General Information and History.........................................B-2
Independent Accountants.................................................B-2
Distribution............................................................B-2
Calculation of Yield Quotations.........................................B-2
Calculation of Total Return Quotations..................................B-3
Other Performance Data..................................................B-5
Financial Statements....................................................F-1
<PAGE>
Great American
Reserve
1997 Account E
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GENERAL INFORMATION AND HISTORY
Great American Reserve is an indirect wholly owned subsidiary of Conseco,
Inc. ("Conseco"). The operations of Great American Reserve are handled by
Conseco. Conseco is a publicly owned financial services holding company, the
principal operations of which are in the development, marketing and
administration of specialized annuity and life insurance products. Conseco has
its principal offices at 11815 N. Pennsylvania Street, Carmel, Indiana 46032.
The Variable Account was established by Great American Reserve.
INDEPENDENT ACCOUNTANTS
The financial statements of Great American Reserve Variable Annuity Account
E and Great American Reserve included in the Prospectus and the Statement of
Additional Information have been examined by Coopers & Lybrand L.L.P.,
Indianapolis, Indiana, independent accountants, for the periods indicated in
their reports as stated in their opinion and have been so included in reliance
upon such opinion given upon the authority of that firm as experts in accounting
and auditing.
DISTRIBUTION
Great American Reserve continuously offers the Contracts through associated
persons of the principal underwriter for Variable Account, Conseco Equity Sales,
Inc. ("Conseco Equity Sales"), a registered broker-dealer and member of the
National Association of Securities Dealers, Inc. Conseco Equity Sales is located
at 11815 N. Pennsylvania Street, Carmel, Indiana 46032, and is an affiliate of
Great American Reserve. For the years ended December 31, 1996 and December 31,
1995, and from commencement of operations on July 25, 1994, until December 31,
1994, Great American Reserve paid Conseco Equity Sales total underwriting
commissions of $2,195,600, $684,533 and $20,522. In addition, certain Contracts
may be sold by life insurance/registered representatives of other registered
broker-dealers.
Conseco Equity Sales performs the sales functions relating to the Contracts
and Great American Reserve provides all administrative services. To cover the
sales expenses and administrative expenses (including such items as salaries,
rent, postage, telephone, travel, legal, actuarial, audit, office equipment and
printing), Great American Reserve makes sales and administrative deductions,
varying by type of Contract. See "Contract Charges" in the Prospectus.
CALCULATION OF YIELD QUOTATIONS
The Money Market Sub-account's standard yield quotations may appear in
sales material and advertising as calculated by the standard method prescribed
by rules of the Securities and Exchange Commission. Under this method, the yield
quotation is based on a seven-day period and computed as follows: The Money
Market Sub-account's daily net investment factor, minus one (1.00) is multiplied
by 365 to produce an annualized yield. The annualized yields of the seven-day
period are then averaged and carried to the nearest one-hundredth of one
percent. This yield reflects investment results less deductions for investment
advisory fees, mortality and expense risk fees and the administrative charge,
but does not include a deduction of any applicable annual administrative fees.
Because of these deductions, the yield for the Money Market Sub-account will be
lower than the yield for the corresponding Fund of the Conseco Series Trust.
The Money Market Sub-account's effective yield may appear in sales material
and advertising for the same seven-day period, determined on a compound basis.
The effective yield is calculated by compounding the unannualized base period
return by adding one to the base period return, raising the sum to a power equal
to 365 divided by 7, and subtracting one from the result.
The yield on the Money Market Sub-account will generally fluctuate on a
daily basis. Therefore, the yield for any given past period is not an indication
or repre-sentation of future yields or rates of return. The actual yield is
affected by changes in interest rates on money market securities, average
Sub-account maturity, the types and quality of Portfolio securities held by the
corresponding Fund of the Conseco Series Trust and its operating expenses.
B-2
<PAGE>
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The Conseco Series Trust Asset Allocation, Common Stock, Corporate Bond,
and Government Securities Portfolios; The Alger American Fund Growth, Leveraged
AllCap, MidCap Growth, and Small Capitalization Portfolios; the American Century
Variable Portfolios, Inc. International and Value Funds; the Berger IPT - 100,
Berger IPT - Growth and Income, Berger IPT - Small Company Growth, and
Berger/BIAM IPT - International Funds; The Dreyfus Socially Responsible Growth
Fund, Inc.; the Dreyfus Stock Index Fund; the Federated Insurance Series High
Income Bond, International Equity, and Utility Funds; the Janus Aspen Series
Aggressive Growth, Growth, and Worldwide Growth Portfolios; the Neuberger &
Berman Advisers Management Trust Limited Maturity Bond and Partners Portfolios;
the Strong Special Fund II; the Strong Variable Insurance Funds, Inc. Growth
Fund II; and the Van Eck Worldwide Insurance Trust Worldwide Hard Assets
(formerly, Gold and Natural Resources), Worldwide Bond, and Worldwide Emerging
Markets Funds may advertise investment performance figures, including yield.
Each Sub-account's yield will be based upon a stated 30-day period and will be
computed by dividing the net investment income per accumulation unit earned
during the period by the maximum offering price per accumulation unit on the
last day of the period, according to the following formula:
YIELD = 2 ((A - B/CD) + 1)6 - 1
Where:
A = the dividends and interest earned during the period.
B = the expenses accrued for the period (net of reimbursements, if any).
C = the average daily number of accumulation units outstanding during
the period that were entitled to receive dividends.
D = the maximum offering price per accumulation unit on the last day of the
period.
CALCULATION OF TOTAL RETURN QUOTATIONS
Great American Reserve may include certain total return quotations for one
or more of the Conseco Series Trust Asset Allocation, Common Stock, Corporate
Bond, and Government Securities Portfolios; The Alger American Fund Growth,
Leveraged AllCap, MidCap Growth, and Small Capitalization Portfolios; the
American Century Variable Portfolios, Inc. International and Value Funds; the
Berger IPT - 100, Berger IPT - Growth and Income, Berger IPT - Small Company
Growth, and Berger/BIAM IPT - International Funds; The Dreyfus Socially
Responsible Growth Fund, Inc.; the Dreyfus Stock Index Fund; the Federated
Insurance Series High Income Bond, International Equity, and Utility Funds; the
Janus Aspen Series Aggressive Growth, Growth, and Worldwide Growth Portfolios;
the Neuberger & Berman Advisers Management Trust Limited Maturity Bond and
Partners Portfolios; the Strong Special Fund II; the Strong Variable Insurance
Funds, Inc. Growth Fund II; and the Van Eck Worldwide Insurance Trust Worldwide
Hard Assets (formerly,Gold and Natural Resources), Worldwide Bond, and Worldwide
Emerging Markets Funds in advertising, sales literature or reports to Contract
Owners or prospective purchasers. Such total return quotations will be expressed
as the average annual rate of total return over one-, five- and 10-year periods
ended as of the end of the immediately preceding calendar quarter, and as the
dollar amount of annual total return on a year-to-year, rolling 12-month basis
ended as of the end of the immediately preceding calendar quarter.
Average annual total return quotations are computed according to the
following formula:
P (1+T)n = ERV
Where:
P = beginning purchase payment of $1,000
T = average annual total return
n = number of years in period
ERV = ending redeemable value of a hypothetical $1,000 purchase payment made at
the beginning of the one-, five- or 10-year period at the end of the one-,
five- or 10-year period (or fractional portion thereof).
B-3
<PAGE>
Great American
Reserve
1997 Account E
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP FLEXIBLE PREMIUM PAYMENT VARIABLE ANNUITY
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year Since
VARIABLE ACCOUNT SUB-ACCOUNTS (1) 1/1/96 - 12/31/96 Inception
======================================================================================================
<S> <C> <C>
CONSECO SERIES TRUST
Asset Allocation Portfolio ........................................... 13.78% 19.86%(2)
Common Stock Portfolio ............................................... 28.64% 30.05%(2)
Corporate Bond Portfolio ............................................. (6.98)% 4.15%(2)
Government Securities Portfolio ...................................... (8.96)% 2.82%(2)
THE ALGER AMERICAN FUND
Alger American Leveraged AllCap Portfolio ............................ (0.75)% 24.48%(3)
Alger American Growth Portfolio ...................................... N/A (7.42)%(4)
Alger American MidCap Growth Portfolio ............................... N/A (14.83)%(4)
Alger American Small Capitalization Portfolio ........................ (7.69)% 8.58%(3)
BERGER IPT
Berger IPT - 100 Fund ................................................ N/A (9.29)%(4)
Berger IPT - Growth and Income Fund .................................. N/A 0.64%(4)
Berger IPT - Small Company Growth Fund ............................... N/A (15.09)%(4)
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC........................ 7.47% 16.72%(3)
DREYFUS STOCK INDEX FUND ................................................ 8.17% 16.11%(3)
FEDERATED INSURANCE SERIES
Federated High Income Bond Fund II ................................... 1.34% 5.83%(3)
Federated International Equity Fund II ............................... (3.97)% (0.23)%(3)
Federated Utility Fund II ............................................ (1.14)% 7.60%(3)
JANUS ASPEN SERIES
Aggressive Growth Portfolio .......................................... (4.39)% 13.75%(3)
Growth Portfolio ..................................................... 5.00% 14.57%(3)
Worldwide Growth Portfolio ........................................... 14.42% 23.76%(3)
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Hard Assets Fund (formerly, Gold and Natural Resources Fund) 4.69% 8.68%(3)
Worldwide Bond Fund .................................................. (9.14)% (4.05)%(3)
Worldwide Emerging Markets Fund ...................................... N/A 5.07%(4)
======================================================================================================
</TABLE>
(1) No information is provided with respect to the Sub-accounts investing in
the American Century Variable Portfolios, Inc. International and Value
Funds, the Berger/BIAM IPT - International Fund, the Neuberger & Berman
Advisers Management Trust Limited Maturity Bond and Partners Portfolios,
the Strong Special Fund II, or the Strong Variable Insurance Funds, Inc.
Growth Fund II, because these Funds were not available as of December 31,
1996.
(2) Since inception (July 25, 1994).
(3) Since inception (June 1, 1995).
(4) Since inception (May 1, 1996).
B-4
<PAGE>
Great American
Reserve
1997 Account E
- --------------------------------------------------------------------------------
OTHER PERFORMANCE DATA
Great American Reserve may from time to time also illustrate average annual
total returns in a non-standard format, as appears in the following "Gross
Average Annual Total Returns" table, in conjunction with the standard format
described above. The non-standard format will be identical to the standard
format except that the withdrawal charge percentage will be assumed to be zero.
All non-standard performance data will only be advertised if the standard
performance data for the same period, as well as for the required periods, is
also illustrated.
Performance data for the Variable Account investment options may be
compared in advertisements, sales literature and reports to contract owners,
with the investment returns on various mutual funds, stocks, bonds, certificates
of deposit, tax free bonds, or common stock and bond indices, and other groups
of variable annuity separate accounts or other investment products tracked by
Morningstar, Inc., a widely used independent research firm which ranks mutual
funds and other investment companies by overall performance, investment
objectives, and assets, or tracked by other services, companies, publications,
or persons who rank such investment companies on overall performance or other
criteria.
Reports and promotional literature may also contain other information,
including the effect of tax-deferred compounding on an investment option's
performance returns, or returns in general, which may be illustrated by graphs,
charts or otherwise, and which may include a comparison, at various points in
time, of the return from an investment in a Contract (or returns in general) on
a tax-deferred basis (assuming one or more tax rates) with the return on a
taxable basis.
Reports and promotional literature may also contain the ratings Great
American Reserve has received from independent rating agencies. However, Great
American Reserve does not guarantee the investment performance of the Variable
Account investment options.
B-5
<PAGE>
Great American
Reserve
1997 Account E
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP FLEXIBLE PREMIUM PAYMENT VARIABLE ANNUITY
<TABLE>
<CAPTION>
GROSS AVERAGE ANNUAL TOTAL RETURNS
1 Year Since
VARIABLE ACCOUNT SUB-ACCOUNTS (1) 1/1/96 - 12/31/96 Inception
======================================================================================================
<S> <C> <C>
CONSECO SERIES TRUST
Asset Allocation Portfolio ........................................... 26.50% 24.28%(2)
Common Stock Portfolio ............................................... 42.96% 34.84%(2)
Corporate Bond Portfolio ............................................. 3.50% 8.01%(2)
Government Securities Portfolio ...................................... 1.31% 6.63%(2)
THE ALGER AMERICAN FUND
Alger American Leveraged AllCap Portfolio ............................ 10.47% 32.11%(3)
Alger American Growth Portfolio ...................................... N/A 6.55%(4)
Alger American MidCap Growth Portfolio ............................... N/A (1.98)%(4)
Alger American Small Capitalization Portfolio ........................ 2.72% 15.23%(3)
BERGER IPT
Berger IPT - 100 Fund ................................................ N/A 4.39%(4)
Berger IPT - Growth and Income Fund .................................. N/A 15.82%(4)
Berger IPT - Small Company Growth Fund ............................... N/A (2.27)%(4)
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC ....................... 19.53% 23.88%(3)
DREYFUS STOCK INDEX FUND ................................................ 20.31% 23.23%(3)
FEDERATED INSURANCE SERIES
Federated High Income Bond Fund II ................................... 12.71% 12.31%(3)
Federated International Equity Fund II ............................... 6.80% 5.88%(3)
Federated Utility Fund II ............................................ 10.00% 14.19%(3)
JANUS ASPEN SERIES
Aggressive Growth Portfolio .......................................... 6.44% 20.71%(3)
Growth Portfolio ..................................................... 16.79% 21.59%(3)
Worldwide Growth Portfolio ........................................... 27.23% 31.35%(3)
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Hard Assets Fund (formerly, Gold and Natural Resources Fund) 16.41% 15.34%(3)
Worldwide Bond Fund .................................................. 1.09% 1.83%(3)
Worldwide Emerging Markets Fund ...................................... N/A 20.92%(4)
======================================================================================================
</TABLE>
(1) No information is provided with respect to the Sub-accounts investing in
the American Century Variable Portfolios, Inc. International and Value
Funds, the Berger/BIAM IPT - International Fund, the Neuberger & Berman
Advisers Management Trust Limited Maturity Bond and Partners Portfolios,
the Strong Special Fund II, or the Strong Variable Insurance Funds, Inc.
Growth Fund II because these Funds were not available as of December 31,
1996.
(2) Since inception (July 25, 1994).
(3) Since inception (June 1, 1995).
(4) Since inception (May 1, 1996).
B-6
<PAGE>
FINANCIAL STATEMENTS
Audited Financial Statements of Great American Reserve Annuity Account E
and Great American Reserve Insurance Company as of December 31, 1996 are
included herein.
INDEX TO FINANCIAL STATEMENTS
PAGE
GREAT AMERICAN RESERVE VARIABLE ANNUITY
ACCOUNT E
Report of Independent Accountants ............................... F-2
Statement of Assets and Liabilities as of
December 31, 1996 ............................................. F-3
Statements of Operations for the Years Ended
December 31, 1996 and 1995 .................................... F-5
Statements of Changes in Net Assets for the
Years Ended December 31, 1996 and 1995 ........................ F-5
Notes to Financial Statements ................................... F-6
GREAT AMERICAN RESERVE INSURANCE COMPANY
Report of Independent Accountants ............................... F-9
Balance Sheet -- Statutory Basis as of
December 31, 1996 and 1995 .................................... F-10
Statement of Operations -- Statutory Basis
For the Years Ended December 31, 1996
and 1995 ...................................................... F-12
Statement of Shareholder's Equity --
Statutory Basis For the Years Ended
December 31, 1996 and 1995 .................................... F-13
Statement of Cash Flows -- Statutory Basis
For the Years Ended December 31, 1996,
and 1995 ...................................................... F-14
Notes to Statutory Basis Financial Statements ................... F-15
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF GREAT AMERICAN RESERVE INSURANCE COMPANY AND
CONTRACT OWNERS OF GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT E
We have audited the accompanying statement of assets and liabilities of
Great American Reserve Variable Annuity Account E (the "Account") as of December
31, 1996, and the related statements of operations and changes in net assets for
each of the two years in the period then ended. These financial statements are
the responsibility of the Account's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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. Our procedures included
confirmation of portfolio shares owned at December 31, 1996 by correspondence
with 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Great American Reserve
Variable Annuity Account E as of December 31, 1996, and the results of its
operations and changes in its net assets for each of the two years in the period
then ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
February 21, 1997
F-2
<PAGE>
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT E
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<CAPTION>
====================================================================================================================================
Reported
Shares COST Value
===========================================
<S> <C> <C> <C>
Assets:
Investments in portfolio shares, at net asset value (Note 2):
The Alger American Fund:
Alger American Growth Portfolio ................................... 2,228.2 $ 75,938 $ 76,493
Alger American Leveraged AllCap Portfolio ......................... 66,983.2 1,253,918 1,296,794
MidCap Portfolio .................................................. 1,977.2 42,182 42,213
Alger American Small Capitalization Portfolio ..................... 59,660.5 2,426,458 2,440,712
Berger Institutional Products Trust:
100 Fund .......................................................... 6,895.0 69,671 71,639
Growth and Income Fund ............................................ 5,945.2 64,659 66,230
Small Company Growth Fund ......................................... 4,263.0 44,658 42,374
Conseco Series Trust:
Asset Allocation Portfolio ........................................ 312,532.4 4,145,115 4,209,385
Common Stock Portfolio ............................................ 320,252.1 6,708,965 6,996,839
Corporate Bond Portfolio .......................................... 186,680.3 1,856,056 1,861,142
Government Securities Portfolio ................................... 13,300.8 159,975 158,849
Money Market Portfolio ............................................ 1,254,757.8 1,254,758 1,254,758
Dreyfus Stock Index Fund ............................................. 128,076.3 2,438,791 2,597,387
The Dreyfus Socially Responsible Growth Fund, Inc. ................... 15,466.6 307,519 310,724
Federated Insurance Series:
Federated High Income Bond Fund II ................................ 59,732.4 589,035 611,660
Federated International Equity Fund II ............................ 9,154.6 98,715 102,166
Federated Utility Fund II ......................................... 30,856.6 339,890 364,416
The Janus Aspen Series:
Aggressive Growth Portfolio ....................................... 77,020.9 1,411,595 1,404,861
Growth Portfolio .................................................. 129,029.6 1,924,726 2,001,249
Worldwide Growth Portfolio ........................................ 172,509.0 3,145,653 3,353,574
The Van Eck Worldwide Insurance Trust:
Gold and Natural Resources Fund ................................... 48,926.6 781,504 818,053
Worldwide Bond Fund ............................................... 166,197.3 1,809,105 1,844,790
Worldwide Emerging Markets Fund ................................... 12,104.2 147,150 151,182
Worldwide Hard Assets Fund ........................................ 130,278.7 1,540,251 1,929,428
====================================================================================================================================
Total assets ...................................................... 34,006,918
Liabilities:
Amounts due to Great American Reserve Insurance Company .............. 39,723
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets (Note 6)................................................ $ 33,967,195
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT E
STATEMENT OF ASSETS AND LIABILITIES - CONTINUED
December 31, 1996
<TABLE>
<CAPTION>
====================================================================================================================================
Unit Reported
Units Value Value
===============================================
<S> <C> <C> <C>
Net assets attributable to:
Contract owners' deferred annuity reserves:
Alger American Growth Portfolio....................................... 73,226.5 $1.043521 $ 76,414
Alger American Leveraged AllCap Portfolio.......................... 832,794.1 1.555302 1,295,246
MidCap Portfolio................................................... 42,736.2 0.986695 42,168
Alger American Small Capitalization Portfolio...................... 1,946,992.8 1.252107 2,437,844
Berger Institutional Products Trust:
100 Fund........................................................... 69,521.1 1.029280 71,557
Growth and Income Fund............................................. 59,956.1 1.103582 66,166
Small Company Growth Fund.......................................... 42,981.8 0.984692 42,324
Conseco Series Trust:
Asset Allocation Portfolio......................................... 2,475,992.2 1.698128 4,204,552
Common Stock Portfolio............................................. 3,374,109.6 2.071274 6,988,704
Corporate Bond Portfolio........................................... 1,540,494.1 1.206516 1,858,631
Government Securities Portfolio.................................... 135,679.6 1.169361 158,658
Money Market Portfolio............................................. 1,144,950.6 1.094516 1,253,167
Dreyfus Stock Index Fund.............................................. 1,862,979.9 1.392679 2,594,533
The Dreyfus Socially Responsible Growth Fund, Inc..................... 221,018.2 1.404343 310,386
Federated Insurance Series:
Federated High Income Bond Fund II................................. 508,205.1 1.202161 610,945
Federated International Equity Fund II............................. 93,215.1 1.094819 102,054
Federated Utility Fund II.......................................... 294,881.5 1.234309 363,975
The Janus Aspen Series:
Aggressive Growth Portfolio........................................ 1,041,049.6 1.347927 1,403,258
Growth Portfolio................................................... 1,466,042.4 1.363534 1,998,998
Worldwide Growth Portfolio......................................... 2,173,780.7 1.541029 3,349,859
The Van Eck Worldwide Insurance Trust:
Gold and Natural Resources Fund ................................... 651,603.1 1.253925 817,061
Worldwide Bond Fund................................................ 1,790,258.5 1.029224 1,842,577
Worldwide Emerging Markets Fund.................................... 132,952.7 1.135940 151,026
Worldwide Hard Assets Fund......................................... 1,257,325.2 1.532692 1,927,092
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets......................................................... 33,967,195
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT E
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996 and 1995
=====================================================================================================================
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income:
Dividends from investments in portfolio shares....................... $ 1,880,859 $ 268,996
Expenses:
Mortality and expense risk fees...................................... 211,735 17,815
Administrative fees.................................................. 24,908 2,137
- ---------------------------------------------------------------------------------------------------------------------
Total expenses....................................................... 236,643 19,952
- ---------------------------------------------------------------------------------------------------------------------
Net investment income................................................ 1,644,216 249,044
- ---------------------------------------------------------------------------------------------------------------------
Net realized gains (losses) and unrealized appreciation
(depreciation) of investments in portfolio shares:
Net realized gains on sales of investments in portfolio shares....... 90,408 72,012
Net change in unrealized appreciation (depreciation) of portfolio shares 1,416,628 (46,944)
- ---------------------------------------------------------------------------------------------------------------------
Net gain on investments in portfolio shares ..................... 1,507,036 25,068
- ---------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations .................. $ 3,151,252 $ 274,112
- ---------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1996 and 1995
=====================================================================================================================
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Changes from operations:
Net investment income .................................................. $ 1,644,216 $ 249,044
Net realized gains on sales of investments in portfolio shares ........ 90,408 72,012
Net change in unrealized appreciation (depreciation) of investments
in portfolio shares .................................................. 1,416,628 (46,944)
- ---------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations ........................ 3,151,252 274,112
- ---------------------------------------------------------------------------------------------------------------------
Changes from principal transactions:
Net contract purchase payments.......................................... 26,259,253 4,933,143
Contract redemptions.................................................... (523,287) (9,667)
Net transfers (to) from fixed account................................... (239,681) 42,904
- ---------------------------------------------------------------------------------------------------------------------
Net increase in net assets from principal transactions ............. 25,496,285 4,966,380
- ---------------------------------------------------------------------------------------------------------------------
Net increase in net assets......................................... 28,647,537 5,240,492
Net assets, beginning of year ................................................ 5,319,658 79,166
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of year (Note 6)................................... $33,967,195 $5,319,658
=====================================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE>
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT E
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(1) GENERAL
Great American Reserve Variable Annuity Account E ("Account E") is
registered under the Investment Company Act of 1940, as amended, as a unit
investment trust. Account E was established on November 12, 1993 and commenced
operations on July 25, 1994 as a segregated investment account for individual
and group variable annuity contracts issued by Great American Reserve Insurance
Company (the "Company") which are registered under the Securities Act of 1933.
The operations of Account E are included in the operations of the Company
pursuant to the provisions of the Texas Insurance Code. The Company is an
indirect wholly owned subsidiary of Conseco, Inc., a publicly-held specialized
financial services holding company listed on the New York Stock Exchange.
Prior to June 1, 1995, Account E invested solely in shares of the
portfolios of the Conseco Series Trust. Effective June 1, 1995 (or June 1, 1996)
the following investment options were available:
THE ALGER AMERICAN FUND
Alger American Growth Portfolio (June 1, 1996)
Alger American Leveraged AllCap Portfolio
Alger American MidCap Portfolio (June 1, 1996)
Alger American Small Capitalization Portfolio
BERGER INSTITUTIONAL PRODUCTS TRUST
100 Fund (June 1, 1996)
Growth and Income Fund (June 1, 1996)
Small Company Growth Fund (June 1, 1996)
THE CONSECO SERIES TRUST
Asset Allocation Portfolio
Common Stock Portfolio
Corporate Bond Portfolio
Government Securities Portfolio
Money Market Portfolio
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
DREYFUS STOCK INDEX FUND
FEDERATED INSURANCE SERIES
Federated High Income Bond Fund II
Federated International Equity Fund II
Federated Utility Fund II
THE JANUS ASPEN SERIES
Aggressive Growth Portfolio
Growth Portfolio
Worldwide Growth Portfolio
F-6
<PAGE>
GREAT AMERICAN RESERVE VARIABLE ANNUITY ACCOUNT E
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
THE VAN ECK WORLDWIDE INSURANCE TRUST
Gold and Natural Resources Fund
Worldwide Bond Fund
Worldwide Emerging Markets Fund (June 1, 1996)
Worldwide Hard Assets Fund
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION, TRANSACTIONS AND INCOME
Investments in portfolio shares are valued using the net asset value of the
respective portfolios at the end of each New York Stock Exchange business day,
with the exception of regional business holidays. Investment share transactions
are accounted for on a trade date basis (the date the order to purchase or
redeem shares is executed) and dividend income is recorded on the ex-dividend
date. The cost of investments in portfolio shares sold is determined on a
first-in first-out basis. Account E does not hold any investments which are
restricted as to resale.
Net investment income and net realized gains (losses) and unrealized
appreciation (depreciation) on investments are allocated to the contracts on
each valuation date based on each contract's pro rata share of the assets of
Account E as of the beginning of the valuation date.
FEDERAL INCOME TAXES
No provision for federal income taxes has been made in the accompanying
financial statements because the operations of Account E are included in the
operations of the Company, which is treated as a life insurance company for
federal income tax purposes under the Internal Revenue Code. Net investment
income and realized gains (losses) are retained in Account E and are not taxable
until received by the contract owner or beneficiary in the form of annuity
payments or other distributions.
ANNUITY RESERVES
Deferred annuity contract reserves are comprised of net contract purchase
payments less redemptions and benefits. These reserves are adjusted daily for
the net investment income and net realized gains (losses) and unrealized
appreciation (depreciation) on investments.
(3) PURCHASES AND SALES OF INVESTMENTS IN PORTFOLIO SHARES
The aggregate costs of purchases of investments in portfolio shares for the
years ended December 31, 1996 and 1995 were $29,565,192 and $6,575,469,
respectively. The aggregate proceeds from sales of investments in portfolio
shares for the years ended December 31, 1996 and 1995 were $2,741,697 and
$1,353,396, respectively.
F-7
<PAGE>
(4) DEDUCTIONS AND EXPENSES
Although periodic retirement payments to contract owners vary according to
the investment performance of the portfolios, such payments are not affected by
mortality or expense experience because the Company assumes the mortality and
expense risks under the contracts.
The mortality risk assumed by the Company results from the life annuity
payment option in the contracts in which the Company agrees to make annuity
payments regardless of how long a particular annuitant or other payee lives. The
annuity payments are determined in accordance with annuity purchase rate
provisions established at the time the contracts are issued. Based on the
actuarial determination of expected mortality, the Company is required to fund
any deficiency in the annuity payment reserves from its general account assets.
The expense risk assumed by the Company is the risk that the deductions for
sales and administrative expenses may prove insufficient to cover the actual
sales and administrative expenses.
The Company deducts daily from Account E a fee, which is equal on an annual
basis to 1.25 percent of the daily value of the total investments of Account E,
for assuming the mortality and expense risks. These fees were $211,735 and
$17,815 for the years ended December 31, 1996 and 1995, respectively.
Pursuant to an agreement between Account E and the Company (which may be
terminated by the Company), the Company provides sales and administrative
services to Account E. The Company may deduct a percentage of amounts
surrendered to cover sales expenses. The percentage varies up to 9.00 percent
based upon the number of years the contract has been held. In addition, the
Company deducts units from individual contracts annually and upon full surrender
to cover an administrative fee of $30. These sales and administrative charges
were $21,774 for the year ended December 31, 1996. The Company also deducts
daily from Account E a fee, which is equal on an annual basis to 0.15 percent of
the daily value of the total investments of Account E, for administrative
expenses. These expenses were $24,908 and $2,137 for the years ended December
31, 1996 and 1995, respectively.
(5) OTHER TRANSACTIONS WITH AFFILIATES
Conseco Equity Sales, Inc., an affiliate of the Company, is the principal
underwriter and performs all variable annuity sales functions on behalf of the
Company.
(6) NET ASSETS
Net assets consisted of the following at December 31, 1996:
Proceeds from the sales of units since organization,
less cost of units redeemed............... $ 30,540,559
Undistributed net investment income........... 1,893,584
Undistributed net realized gains on sales of investments 162,421
Net unrealized appreciation of investments.... 1,370,631
-------------
Total net assets....................... $ 33,967,195
=============
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Great American Reserve Insurance Company
We have audited the accompanying balance sheet of Great American Reserve
Insurance Company (the "Company") as of December 31, 1996 and 1995, and the
related statements of operations, shareholder's equity and cash flows for the
year ended December 31, 1996 and the four months ended December 31, 1995. We
have also audited the accompanying statements of operations, shareholder's
equity and cash flows of the Company for the eight months ended August 31, 1995,
and the year ended December 31, 1994, based on the basis of accounting
applicable to periods prior to the adoption of push down accounting upon
Conseco, Inc.'s purchase of all common shares of the Company it did not
previously own (see note 1 of the notes to financial statements regarding the
adoption of push down accounting). 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 financial statements referred to above present fairly,
in all material respects, the financial position of Great American Reserve
Insurance Company as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the year ended December 31, 1996, the four
months ended December 31, 1995, the eight months ended August 31, 1995 and the
year ended December 31, 1994, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 14, 1997
F-9
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET
December 31, 1996 and 1995
(Dollars in millions)
ASSETS
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1996 - $1,810.8; 1995 - $1,980.1) ............................................. $ 1,795.1 $ 2,030.9
Mortgage loans .................................................................. 77.3 95.5
Credit-tenant loans ............................................................. 93.4 79.4
Policy loans .................................................................... 80.8 84.7
Other invested assets ........................................................... 89.0 37.8
Short-term investments .......................................................... 14.8 19.0
Assets held in separate accounts ................................................ 232.4 137.5
-------- --------
Total investments ............................................................ 2,382.8 2,484.8
Accrued investment income ............................................................ 32.9 34.0
Cost of policies purchased ........................................................... 143.0 120.0
Cost of policies produced ............................................................ 38.2 24.0
Reinsurance receivables .............................................................. 25.7 27.0
Goodwill (net of accumulated amortization: 1996 - $11.7; 1995 - $10.2) ............... 49.7 53.0
Other assets ......................................................................... 8.2 14.0
-------- --------
Total assets ................................................................. $ 2,680.5 $ 2,756.8
========= ==========
</TABLE>
(continued on next page)
The accompanying notes are an integral part
of the financial statements.
F-10
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET (Continued)
December 31, 1996 and 1995
(Dollars in millions, except per share amount)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Liabilities:
Insurance liabilities........................................................... $1,957.5 $ 2,039.1
Income tax liabilities ......................................................... 29.8 39.0
Investment borrowings .......................................................... 48.4 84.2
Other liabilities .............................................................. 15.5 14.4
Liabilities related to separate accounts ....................................... 232.4 137.5
Total liabilities ......................................................... 2,283.6 2,314.2
------- -------
Shareholder's equity:
Common stock and additional paid-in capital (par value $4.80 per share, 1,065,000
shares authorized, 1,043,565 shares issued and outstanding) .................... 380.8 380.8
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities (net of applicable deferred income taxes:
1996 - $(2.4); 1995 - $6.8)................................................... (4.4) 11.8
Other investments (net of applicable deferred income taxes:
1996 - $(.1); 1995 - $.4)..................................................... (.2) .6
Retained earnings................................................................ 20.7 49.4
Total shareholder's equity.................................................. 396.9 442.6
===== =====
Total liabilities and shareholder's equity.................................. $2,680.5 $2,756.8
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-11
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(Dollars in millions)
<TABLE>
<CAPTION>
Prior Basis
----------------------------
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income.............................. $ 81.4 $ 31.8 $ 60.5 $ 98.6
Net investment income................................ 218.4 74.2 136.4 187.9
Net investment gains................................. 2.7 12.5 7.3 .2
------- ------ ------ ------
Total revenues................................. 302.5 118.5 204.2 286.7
------- ------ ------ ------
Benefits and expenses:
Insurance policy benefits ........................... 54.9 18.9 45.9 66.2
Change in future policy benefits .................... (3.7) .2 (4.3) (1.3)
Interest expense on annuities and financial products 129.4 44.2 74.6 101.4
Interest expense on investment borrowings ........... 6.2 1.0 3.6 2.9
Amortization related to operations .................. 17.8 5.3 11.7 16.0
Amortization related to investment gains ........... 2.5 10.0 4.3 2.7
Other operating costs and expenses .................. 54.3 13.1 23.7 37.3
Total benefits and expenses .................... 261.4 92.7 159.5 225.2
Income before income taxes ..................... 41.1 25.8 44.7 61.5
Income tax expense ....................................... 15.4 9.7 16.5 22.7
------- ------ ------ ------
Net income ..................................... $ 25.7 $ 16.1 $ 28.2 $ 38.8
======= ===== ====== ======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-12
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
<TABLE>
<CAPTION>
Prior Basis
------------------------
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stock and additional paid-in capital:
Balance, beginning of period........................... $380.8 $380.8 $339.7 $339.7
Adjustment of balance due to new accounting basis..... - - 41.1 -
------ ------ ------ ------
Balance, end of period................................. $380.8 $380.8 $339.7 $339.7
====== ====== ====== ======
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of period.......................... $ 11.8 $ 1.3 $(53.0) $ 33.3
Change in unrealized appreciation (depreciation).... (16.2) 10.5 55.7 (86.3)
Adjustment of balance due to new
accounting basis................................... - - (1.4) -
------ ------ ------ ------
Balance, end of period................................ $ (4.4) $11.8 $ 1.3 $(53.0)
====== ====== ====== ======
Other investments:
Balance, beginning of period.......................... $ .6 $ .6 $ (2.1) $ (.1)
Change in unrealized appreciation (depreciation).... (.8) - 3.3 (2.0)
Adjustment of balance due to new
accounting basis................................... - - (.6) -
------ ------ ------ ------
Balance, end of period................................ $ (.2) $ .6 $ .6 $ (2.1)
====== ====== ====== ======
Retained earnings:
Balance, beginning of year.............................. $ 49.4 $33.3 $ 80.3 $ 75.6
Net income ........................................... 25.7 16.1 28.2 38.8
Dividends on common stock............................. (54.4) - (41.2) (34.1)
Adjustment of balance due to new
accounting basis.................................... - - (34.0) -
------ ------ ------ ------
Balance, end of year.................................... $ 20.7 $ 49.4 $ 33.3 $ 80.3
====== ====== ====== ======
Total shareholder's equity.......................... $396.9 $442.6 $416.0 $364.9
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-13
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(Dollars in millions)
<TABLE>
<CAPTION>
Prior Basis
------------------------
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 25.7 $ 16.1 $ 28.2 $ 38.8
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization .......................................... 20.4 15.3 16.0 18.7
Income taxes .......................................... (3.9) 2.3 2.9 1.3
Insurance liabilities.................................. (40.5) (25.8) (14.0) (10.5)
Interest credited to insurance liabilities ............ 129.4 44.2 74.6 101.4
Fees charged to insurance liabilities ................. (32.8) (10.3) (22.2)
Accrual and amortization of investment income ......... 3.1 3.2 (1.8) (1.2)
Deferral of cost of policies produced ................. (13.2) (3.0) (6.6) (9.4)
Investment gains ...................................... (2.7) (12.5) (7.3) (.2)
Other ................................................. (8.9) (8.9) (3.2) 5.0
------ ---- ---- -----
Net cash provided by operating activities......... 76.6 20.6 66.6 107.4
------ ---- ---- -----
Cash flows from investing activities:
Sales of investments........................................ 988.9 513.2 406.5 586.0
Maturities and redemptions.................................. 101.7 60.4 57.5 118.4
Purchases of investments ................................... (954.2) (532.2) (476.2) (786.9)
------- ------- ------- -------
Net cash provided (used) by investing
activities.................................... 136.4 41.4 (12.2) (82.5)
------- ------- ------- -------
Cash flows from financing activities:
Deposits to insurance liabilities...................... 169.8 50.8 104.4 146.0
Cash paid in reinsurance recapture..................... - (71.1) - -
Investment borrowings.................................. (35.8) (36.8) 121.0 (58.3)
Withdrawals from insurance liabilities................. (306.7) (71.9) (166.3) (171.4)
Dividends paid on common stock......................... (44.5) - (41.2) (34.1)
------- ------- ------- -------
Net cash provided (used) by
financing activities.......................... (217.2) (129.0) 17.9 (117.8)
------- ------- ------- -------
Net increase (decrease) in short-term
investments................................... (4.2) (67.0) 72.3 (92.9)
Short-term investments, beginning of period................. 19.0 86.0 13.7 106.6
------- ------- ------- -------
Short-term investments, end of period....................... $ 14.8 $ 19.0 $ 86.0 $ 13.7
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
F-14
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Great American Reserve Insurance Company (the "Company") markets
tax-qualified annuities and certain employee benefit-related insurance products
through professional independent agents. Since August 1995, the Company has been
a wholly owned subsidiary of Conseco, Inc. ("Conseco"), a financial services
holding company engaged in the development, marketing and administration of
annuity, individual health insurance and individual life insurance products.
During 1994, Conseco effectively owned 36 percent of the Company, through its
ownership interest in CCP Insurance, Inc. ("CCP"), a holding company organized
for companies previously acquired by Conseco Capital Partners, L.P. (the
"Partnership"), a limited partnership organized by Conseco. The Company was
acquired by the Partnership in 1990 (the "Partnership Acquisition"). During
1995, Conseco's ownership in CCP (and in the Company) increased to 49 percent as
a result of purchases of CCP common stock by CCP and Conseco. In August 1995,
Conseco completed the purchase of the remaining shares of CCP common stock it
did not already own in a transaction pursuant to which CCP was merged with
Conseco, with Conseco being the surviving corporation (the "Conseco
Acquisition").
The accompanying financial statements give effect to "push down" purchase
accounting to reflect the Partnership Acquisition and the Conseco Acquisition.
As a result of applying "push down" purchase accounting: (i) the Company's
financial position and results of operations for periods subsequent to the
Partnership Acquisition and before the Conseco Acquisition (the "prior basis")
reflect the Partnership's cost to acquire the Company's asset and liability
accounts based upon their estimated fair values at the purchase date; and (ii)
the Company's financial position and results of operations for periods
subsequent to the Conseco Acquisition reflect Conseco's cost to acquire the
Company's asset and liability accounts based upon their estimated fair values at
the purchase date.
The effect of the adoption of the new basis of accounting on the Company's
balance sheet accounts on August 31, 1995, was as follows (dollars in millions):
Debit
(Credit)
--------
Cost of policies purchased................................ $ 59.0
Cost of policies produced ................................ (27.0)
Goodwill.................................................. (15.1)
Insurance liabilities..................................... (1.2)
Income tax liabilities.................................... (11.9)
Other..................................................... 1.3
Common stock and additional paid-in capital............... (41.1)
Net unrealized appreciation of fixed maturity securities.. 1.4
Net unrealized appreciation of other investments.......... .6
Retained earnings......................................... 34.0
The accompanying financial statements also include the effect of the
December 31, 1994, merger of Jefferson National Life Insurance Company
("Jefferson National", which was acquired by the Partnership in 1990) into the
Company. This merger has been accounted for as a pooling of interests;
therefore, the assets and liabilities of each company have been combined at
their book values and the statements of operations, shareholder's equity and
cash flows have been reported as if the merger had occurred on January 1, 1994.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"), which differ in some respects
from statutory accounting practices followed in the preparation of financial
statements submitted to state insurance departments. The financial statements
prepared in conformity with GAAP include amounts based on informed estimates and
judgment of management, with consideration given to materiality. Significant
estimates and assumptions are utilized in the calculation of cost of policies
produced, cost of policies purchased, insurance liabilities, guaranty fund
assessment accruals and deferred income taxes. Actual experience may differ from
those estimates. Certain amounts from the 1995 and 1994 financial statements and
notes have been reclassified to conform with the 1996 presentation.
F-15
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
INVESTMENTS
Fixed maturity investments are securities that mature more than one year
after issuance. They include bonds, notes receivable and preferred stocks with
mandatory redemption features and are classified as follows:
ACTIVELY MANAGED - fixed maturity securities that may be sold prior to
maturity due to changes that might occur in market interest rates, issuer
credit quality or the Company's liquidity requirements. Actively managed
fixed maturity securities are carried at estimated fair value and the
unrealized gain or loss is recorded net of tax and related adjustments
described below as a component of shareholder's equity.
TRADING ACCOUNT - fixed maturity securities are bought and held principally
for the purpose of selling them in the near term. Trading account
securities are carried at estimated fair value. Unrealized gains or losses
are included in net investment gains (losses). The Company did not hold any
trading account securities during 1996, 1995 or 1994.
HELD TO MATURITY - (all other fixed maturity securities) are those
securities which the Company has the ability and positive intent to hold to
maturity, and are carried at amortized cost. The Company may dispose of
these securities if the credit quality of the issuer deteriorates, if
regulatory requirements change or under other unforeseen circumstances. The
Company has not held any securities in this classification during 1996,
1995 or 1994.
Anticipated returns, including investment gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of the cost of policies purchased and the cost of policies
produced. When actively managed fixed maturity securities are stated at
estimated fair value, an adjustment to the cost of policies purchased and the
cost of policies produced may be necessary if a change in amortization would
have been recorded if such securities had been sold at their fair value and the
proceeds reinvested at current yields. Furthermore, if future yields expected to
be earned on such securities decline, it may be necessary to increase certain
insurance liabilities. Adjustments to such liabilities are required when their
balances, in addition to future net cash flows (including investment income),
are insufficient to cover future benefits and expenses.
Unrealized gains and losses and the related adjustments described in the
preceding paragraph have no effect on earnings, but are recorded, net of tax, as
a component of shareholder's equity. The following table summarizes the effect
of these adjustments as of December 31, 1996:
<TABLE>
<CAPTION>
Effect of fair
Balance value adjustment on
before actively managed Reported
adjustment fixed maturities amount
---------- ---------------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturity securities....... $1,810.8 $(15.7) $1,795.1
Cost of policies purchased....................... 135.2 7.8 143.0
Cost of policies produced........................ 37.1 1.1 38.2
Income tax liabilities........................... 32.2 2.4 29.8
Net unrealized depreciation of fixed maturities.. - (4.4) (4.4)
</TABLE>
When changes in conditions cause a fixed maturity investment to be
transferred to a different category (e.g. actively managed, held to maturity or
trading), the security is transferred to the new category at its fair value at
the date of the transfer. There were no such transfers in 1996, 1995 or 1994. At
the transfer date, the security's unrealized gain or loss is recorded as
follows:
o For transfers to the trading category, the unrealized gain or loss is
recognized in earnings;
o For transfers from the trading category, the unrealized gain or
loss already recognized in earnings is not reversed;
F-16
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
o For transfers to actively managed from held to maturity, the
unrealized gain or loss is recognized in shareholder's equity; and
o For transfers to held to maturity from actively managed, the unrealized
gain or loss at the date of transfer continues to be recognized in
shareholder's equity, but is amortized as a yield adjustment until
ultimately sold.
Credit-tenant loans are loans for commercial properties which require: (i)
the lease of the principal tenant to be assigned to the Company; (ii) the lease
to produce adequate cash flow to fund substantially all the cash requirements of
the loan; and (iii) the principal tenant, or the guarantor of such tenant's
obligations, to have an investment-grade credit rating when the loan is made.
These loans also must be collateralized by the value of the related property.
Underwriting guidelines take into account such factors as: (i) the lease term of
the property; (ii) the borrower's management ability, including business
experience, property management capabilities and financial soundness; and (iii)
such economic, demographic or other factors that may affect the income generated
by the property or its value. The underwriting guidelines generally require a
loan-to-value ratio of 75 percent or less. Credit-tenant loans and traditional
mortgage loans are carried at amortized cost.
Policy loans are stated at their current unpaid principal balance.
Short-term investments include commercial paper, invested cash and other
investments purchased with maturities of less than three months and are carried
at amortized cost, which approximates fair value. The Company considers all
short-term investments to be cash equivalents.
Fees received and costs incurred in connection with origination of
investments, principally mortgage loans, are deferred. Fees, costs, discounts
and premiums are amortized as yield adjustments over the contractual life of the
investments. Anticipated prepayments on mortgage-backed securities are taken
into consideration in determining estimated future yields on such securities.
The specific identification method is used to account for the disposition
of investments. The differences between sale proceeds and carrying values are
reported as investment gains and losses, or as adjustments to investment income
if the proceeds are prepayments by issuers prior to maturity.
The Company regularly evaluates investment securities, credit-tenant loans
and mortgage loans based on current economic conditions, past credit loss
experience and other circumstances of the investee. A decline in a security's
net realizable value that is other than temporary is treated as an investment
loss and the cost basis of the security is reduced to its estimated fair value.
Impaired loans are revalued at the present value of expected cash flows
discounted at the loan's effective interest rate when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the agreement. The Company accrues interest on the net carrying amount
of impaired loans.
As part of the Company's investment strategy, the Company may enter into
reverse repurchase agreements and dollar-roll transactions to increase its
investment return or to improve liquidity. These transactions are accounted for
as collateral borrowings, where the amount borrowed is equal to the sales price
of the underlying securities.
SEPARATE ACCOUNTS
Separate accounts are funds on which investment income and gains or losses
accrue directly to certain policyholders. The assets of these accounts are
legally segregated. They are not subject to the claims which may arise out of
any other business of the Company. The Company reports separate account assets
at market value; the underlying investment risks are assumed by the contract
holders. The Company records the related liabilities at amounts equal to the
underlying assets; the fair value of these liabilities equals their carrying
amount.
COST OF POLICIES PURCHASED
The cost of policies purchased represents the portion of the acquisition
cost that was allocated to the value of the right to receive future cash flows
from insurance contracts existing at the date such insurance contracts were
acquired. The value of cost of policies purchased
F-17
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
is the actuarially determined present value of the projected future cash flows
from the insurance contracts existing at the acquisition date. The method used
to value the cost of policies purchased is consistent with the valuation methods
used most commonly to value blocks of insurance business, which is also
consistent with the basic methodology generally used to value assets.
The method used is summarized as follows:
o Identify the expected future cash flows from the blocks of business.
o Identify the risks inherent in realizing those cash flows (i.e., what
is the probability that the cash flows will be realized).
o Identify the rate of return necessary considering the risks inherent
in realizing the cash flows.
o Determine the value of the policies by discounting the expected future
cash flows by the discount rate required.
The expected future cash flows used in determining such value are based on
actuarially determined projections of future premium collections, mortality,
surrenders, operating expenses, changes in insurance liabilities, investment
yields on the assets held to back the policy liabilities and other factors.
These projections take into account all factors known or expected at the
valuation date, based on the collective judgment of the Company's management.
Actual experience on purchased business may vary from projections due to
differences in renewal premiums collected, investment spread, investment gains
or losses, mortality and morbidity costs and other factors.
The discount rate used to determine the value of the cost of policies
purchased is the rate of return required in order to invest in the business
being acquired. In determining this required rate of return, the following
factors are considered:
o The magnitude of the risks associated with each of the actuarial
assumptions used in determining expected future cash flows.
o The cost of capital required to fund the acquisition.
o The likelihood of changes in projected future cash flows that might
occur if there are changes in insurance regulations and tax laws.
o The acquired business compatibility with other activities of the
Company that may favorably affect future cash flows.
o The complexity of the acquired business.
o Recent prices (i.e., discount rates used in determining valuations)
paid by others to acquire similar blocks of business.
After the cost of policies purchased is determined, it is amortized based
on the incidence of the expected cash flows. This asset is amortized using the
interest rate credited to the underlying policies.
If renewal premiums collected, investment spread, investment gains or
losses, mortality and morbidity costs or other factors differ from expectations,
amortization of the cost of policies purchased is adjusted. For example, the
sale of a fixed maturity investment may result in a gain (or loss). If the sale
proceeds are reinvested at a lower (or higher) earnings rate, there may also be
a reduction (or increase) in future investment spread. Amortization must be
increased (decreased) to reflect the change in the incidence of expected cash
flows consistent with the methods used with the cost of policies produced
(described below).
Each year, the recoverability of the cost of policies purchased is
evaluated by line of business within each block of purchased insurance business.
If current estimates indicate that the existing insurance liabilities, together
with the present value of future net cash flows from the blocks of business
purchased, will be insufficient to recover the cost of policies purchased, the
difference is charged to expense. Amortization is adjusted consistent with the
methods used with the cost of policies produced (as described below).
The cost of policies purchased related to the original acquisition of the
Company by the Partnership in 1990 is amortized under a slightly different
method than that described above. However, the effect of the different method on
1996 net income was insignificant.
F-18
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
COST OF POLICIES PRODUCED
Costs which vary with and are primarily related to the acquisition of new
business are deferred to the extent that such costs are deemed recoverable.
These costs include commissions, certain costs of policy issuance and
underwriting and certain agency expenses. For traditional life and health
contracts, deferred costs are amortized with interest in relation to future
anticipated premium revenue using the same assumptions that are used in
calculating the insurance liabilities. For immediate annuities with mortality
risks, deferred costs are amortized in relation to the present value of benefits
to be paid. For universal life-type, interest-sensitive and investment-type
contracts, deferred costs are amortized in relation to the present value of
expected gross profits from these contracts, discounted using the interest rate
credited to the policy (currently, 5 percent to 8 percent).
Recoverability of the unamortized balance of cost of policies produced is
evaluated regularly and considers anticipated investment income. For universal
life-type contracts and investment-type contracts, the accumulated amortization
is adjusted (whether an increase or a decrease) whenever there is a change in
the estimated gross profits expected over the life of a block of business in
order to maintain a constant relationship between amortization and the present
value (discounted at the rate of interest that accrues to the policies) of
expected gross profits. For traditional and most other contracts, the
unamortized asset balance is reduced by a charge to income only when the sum of
the present value of discounted future cash flows and the policy liabilities is
not sufficient to cover such asset balance.
GOODWILL
The excess of the cost of acquiring the Company's net assets over its
estimated fair values is recorded as goodwill and is being amortized on the
straight-line basis over a 40-year period. The Company periodically assesses the
recoverability of goodwill through projections of future earnings of the
acquired business. Such assessment is made based on whether goodwill is fully
recoverable from projected undiscounted net cash flows from earnings of the
acquired business over the remaining amortization period. If future evaluations
of goodwill indicate a material change in the factors supporting recoverability
over the remaining amortization period, all or a portion of goodwill may need to
be written off or the amortization period shortened (no such changes have
occurred).
INSURANCE LIABILITIES, RECOGNITION OF INSURANCE POLICY INCOME AND RELATED
BENEFITS AND EXPENSES
Reserves for traditional and limited-payment life insurance contracts are
generally calculated using the net level premium method based on assumptions as
to investment yields, mortality, morbidity, withdrawals and dividends. The
assumptions are based on projections using past and expected experience and
include provisions for possible adverse deviation. These assumptions are made at
the time the contract is issued or, in the case of contracts acquired by
purchase, at the purchase date.
Reserves for universal life-type and investment-type contracts are based on
the contract account balance, if future benefit payments in excess of the
account balance are not guaranteed, or on the present value of future benefit
payments when such payments are guaranteed. Additional increases to insurance
liabilities are made if future cash flows including investment income are
insufficient to cover future benefits and expenses.
For investment-type contracts without mortality risk (such as deferred
annuities and immediate annuities with benefits paid for a period certain) and
for contracts that permit the Company or the insured to make changes in the
contract terms (such as single-premium whole life and universal life), premium
deposits and benefit payments are recorded as increases or decreases in a
liability account rather than as revenue and expense. Amounts charged against
the liability account for the cost of insurance, policy administration and
surrender penalties are recorded as revenues. Interest credited to the liability
account and benefit payments made in excess of the contract liability account
balance are charged to expense.
For traditional life insurance contracts, premiums are recognized as income
when due. Benefits and expenses are associated with earned premiums resulting in
their level recognition over the premium paying period of the contracts. Such
recognition is accomplished through the provision for future policy benefits and
the amortization of deferred policy acquisition costs.
F-19
<PAGE>
- --------------------------------------------------------------------------------
For contracts with mortality risk, but with premiums paid for only a
limited period (such as single-premium immediate annuities with benefits paid
for the life of the annuitant), the accounting treatment is similar to
traditional contracts. However, the excess of the gross premium over the net
premium is deferred and recognized in relation to the present value of expected
future benefit payments.
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Liabilities for incurred claims are determined using historical experience
and represent an estimate of the present value of the ultimate net cost of all
reported and unreported claims. Management believes these estimates are
adequate. Such estimates are periodically reviewed and any adjustments are
reflected in current operations.
For participating policies, the amount of dividends to be paid (which are
not significant) is determined annually by the Company. The portion of the
earnings allocated to participating policyholders is recorded as an insurance
liability.
REINSURANCE
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid over
such limit by ceding reinsurance to other insurance enterprises or reinsurers
under excess coverage and coinsurance contracts. The Company has set its
retention limit for acceptance of risk on life insurance policies at various
levels up to $.5 million.
Assets and liabilities related to insurance contracts are reported before
the effects of reinsurance. Reinsurance receivables and prepaid reinsurance
premiums (including amounts related to insurance liabilities) are reported as
assets. Estimated reinsurance receivables are recognized in a manner consistent
with the liabilities relating to the underlying reinsured insurance contracts.
INCOME TAXES
Income tax expense includes deferred taxes arising from temporary
differences between the tax and financial reporting basis of assets and
liabilities. The effects of a tax rate change on current and accumulated
deferred income taxes are reflected in the period in which the change was
enacted.
In assessing the realization of deferred tax assets, the Company considers
whether it is more likely than not that the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences become deductible. If future income does not occur as expected,
deferred income taxes may need to be written off.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
determining estimated fair values of financial instruments:
INVESTMENT SECURITIES: The estimated fair values of fixed maturity
securities (including redeemable preferred stocks) are based on quotes from
independent pricing services, where available. For investment securities
for which such quotes are not available, the estimated fair values are
determined using values obtained from broker-dealer market makers or by
discounting expected future cash flows using current market interest rates
applicable to the yield, credit quality of the investments and maturity of
the investments.
MORTGAGE LOANS, CREDIT-TENANT LOANS AND POLICY LOANS: The estimated fair
values of mortgage loans, credit-tenant loans and policy loans are
determined by discounting future expected cash flows using interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. Loans with similar characteristics are aggregated for purposes of
the calculations.
OTHER INVESTED ASSETS: The estimated fair values of these assets have been
assumed to be equal to their carrying value. Such value is believed to be a
reasonable approximation of the fair value of these investments.
SHORT-TERM INVESTMENTS: The estimated fair values of short-term investments
are based on quoted market prices, where available. The carrying amount
reported in the balance sheet for these assets approximates their estimated
fair value.
F-20
<PAGE>
- --------------------------------------------------------------------------------
INSURANCE LIABILITIES FOR INVESTMENT CONTRACTS: The estimated fair values
of liabilities under investment-type insurance contracts are determined
using discounted cash flow calculations based on interest rates currently
being offered for similar contracts with maturities consistent with those
remaining for the contracts being valued.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
INVESTMENT BORROWINGS: Due to the short-term nature of these borrowings
(terms generally less than 30 days), estimated fair values are assumed to
approximate the carrying amount reported in the balance sheet.
The estimated fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------- ------------------
Carrying Fair Carrying Fair
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Financial assets issued for purposes
other than trading: Actively managed
fixed maturity securities.................. $1,795.1 1,795.1 $ 2,030.9 $2,030.9
Mortgage loans ....................... 77.3 77.0 95.5 108.9
Credit-tenant loans .................. 93.4 92.5 79.4 79.7
Policy loans ......................... 80.8 80.8 84.7 84.7
Other invested assets ................ 89.0 89.0 37.8 37.8
Short-term investments ............... 14.8 14.8 19.0 19.0
Financial liabilities issued for
purposes other than trading:
Insurance liabilities for investment
contracts (1) ............................. $1,282.1 $1,282.1 $1,346.5 $1,346.5
Investment borrowings ................ 48.4 48.4 84.2 84.2
</TABLE>
- ----------
(1) The estimated fair value of the liabilities for investment contracts was
approximately equal to its carrying value at December 31, 1996 and 1995,
because interest rates credited on the vast majority of account balances
approximate current rates paid on similar investments and because these
rates are not generally guaranteed beyond one year. The Company is not
required to disclose fair values for insurance liabilities, other than
those for investment contracts. However, the Company takes into
consideration the estimated fair values of all insurance liabilities in its
overall management of interest rate risk. The Company attempts to minimize
exposure to changing interest rates by matching investment maturities with
amounts due under insurance contracts.
2. JEFFERSON NATIONAL MERGER
On December 31, 1994, Jefferson National was merged with the Company, with
the Company being the surviving corporation. The merger has been accounted for
as a pooling of interests and, accordingly, the financial statements for 1994
have been restated to include the accounts of Jefferson National. Certain 1994
balances for the separate companies are as follows:
AMOUNT PRIOR TO JEFFERSON
EFFECT OF MERGER NATIONAL COMBINED
---------------- -------- --------
(DOLLARS IN MILLIONS)
Insurance policy income....................... $ 53.2 $ 45.4 $ 98.6
Net investment income......................... 101.9 86.0 187.9
Total revenues................................ 154.1 132.6 286.7
Income before income taxes.................... 25.9 35.6 61.5
Net income.................................... 16.7 22.1 38.8
F-21
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
3. INVESTMENTS
At December 31, 1996, the amortized cost and estimated fair value of actively
managed fixed maturity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
COST GAINS LOSSES VALUE
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations
of United States government corporations and
agencies........................ $ 29.9 $ .3 $ .3 $ 29.9
Obligations of state and political subdivisions 6.1 .1 .1 6.1
Debt securities issued by foreign governments 11.6 - .5 11.1
Public utility securities......... 234.8 2.4 7.0 230.2
Other corporate securities........ 950.1 10.9 17.6 943.4
Mortgage-backed securities........ 578.3 2.3 6.2 574.4
-------- ----- ----- --------
Total........................... $1,810.8 $16.0 $31.7 $1,795.1
======== ===== ===== ========
</TABLE>
At December 31, 1995, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations
of United States government corporations and
agencies........................ $ 59.2 $ 2.1 $ - $ 61.3
Obligations of state and political subdivisions 9.3 .2 .1 9.4
Debt securities issued by foreign governments 8.3 .3 - 8.6
Public utility securities......... 351.6 11.4 2.0 361.0
Other corporate securities........ 888.0 34.0 6.4 915.6
Mortgage-backed securities........ 663.7 12.2 .9 675.0
----- ---- -- -----
Total....................... $1,980.1 $60.2 $9.4 $2,030.9
======== ===== ==== ========
</TABLE>
Actively managed fixed maturity securities, summarized by the source of their
estimated fair value, were as follows at December 31, 1996:
Estimated
Amortized fair
COST VALUE
---- -----
(Dollars in millions)
Nationally recognized pricing services............ $1,516.7 $1,500.4
Broker-dealer market makers....................... 242.9 243.6
Internally developed methods (calculated based
on a weighted-average current market yield
of 10.2 percent).............................. 51.2 51.1
-------- --------
Total .................................... $1,810.8 $1,795.1
======== ========
F-22
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The following table sets forth actively managed fixed maturity securities
at December 31, 1996, classified by rating categories. The category assigned is
the highest rating by a nationally recognized statistical rating organization
or, as to $23.5 million fair value of fixed maturity securities not rated by
such firms, the rating assigned by the National Association of Insurance
Commissioners ("NAIC"). For the purposes of this table, NAIC Class 1 is included
in the "A" rating; Class 2, "BBB-"; Class 3, "BB-"; and Classes 4-6, "B+ and
below":
PERCENT OF PERCENT OF
INVESTMENT FIXED TOTAL
RATING MATURITIES INVESTMENTS
------ ---------- -----------
AAA .............................................. 37% 28%
AA ............................................... 6 5
A ............................................... 21 15
BBB+ ............................................... 9 6
BBB ............................................... 13 10
BBB- ............................................... 7 5
---- ----
Investment-grade............................... 93 69
---- ----
BB+ ............................................... 1 1
BB ............................................... 1 1
BB- ............................................... 2 2
B+ and below ........................................ 3 2
---- ----
Below investment-grade......................... 7 6
---- ----
Total actively managed fixed maturities...... 100% 75%
==== ====
Below investment-grade actively managed fixed maturity securities,
summarized by the amount their amortized cost exceeds fair value, were as
follows at December 31, 1996:
ESTIMATED
AMORTIZED FAIR
COST VALUE
---- -----
(Dollars in millions)
Amortized cost exceeds fair value by more than 15%..$ 3.1 $ 1.7
Amortized cost exceeds fair value by more than
5% but not more than 15% 18.4 16.8
All others.......................................... 111.1 113.3
Total.......................................$ 132.6 $ 131.8
======== ========
The Company had no fixed maturity investments in technical or substantive
default as of December 31, 1996. The Company recorded writedowns of fixed
maturity investments and other invested assets totaling $.8 million in 1996,
$1.6 million in 1995 and $1.0 million in 1994, as a result of changes in
conditions which caused it to conclude the decline in the fair value of the
investment was other than temporary. As of December 31, 1996, there were no
fixed maturity investments about which the Company had serious doubts as to the
ability of the issuer to comply with the contractual terms of their obligations
on a timely basis. Investment income foregone due to defaulted securities was
$.2 million in 1996, $.1 million in the four months ended December 31, 1995 and
$1.3 million in 1994. There was no investment income foregone due to defaulted
securities during the eight months ended August 31, 1995.
Actively managed fixed maturity securities at December 31, 1996,
summarized by contractual maturity date, are shown below. Actual maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties and because
most mortgage-backed securities provide for periodic payments throughout their
lives.
F-23
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
---- -----
(DOLLARS IN MILLIONS)
Due in one year or less..........................$ 10.7 $ 10.6
Due after one year through five years............ 102.3 103.1
Due after five years through ten years........... 314.7 313.5
Due after ten years.............................. 804.8 793.5
--------- -------
Subtotal.................................. 1,232.5 1,220.7
Mortgage-backed securities....................... 578.3 574.4
--------- -------
Total .................................... $1,810.8 $1,795.1
========= ========
Net investment income consisted of the following:
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
Actively managed fixed maturity
securities $146.4 $53.9 $110.2 $157.9
Mortgage loans................. 11.8 4.8 8.0 13.0
Credit-tenant loans ........... 7.2 1.7 4.1 3.8
Policy loans................... 5.0 1.9 3.5 5.2
Short-term investments......... 2.3 .8 1.9 3.8
Other invested assets.......... 11.4 .3 1.6 3.2
Separate accounts.............. 35.6 11.3 7.9 2.3
------ ----- ------ ------
Gross investment income.... 219.7 74.7 137.2 189.2
Investment expenses............ 1.3 .5 .8 1.3
------ ----- ------ ------
Net investment income...... $218.4 $74.2 $136.4 $187.9
====== ===== ====== ======
The Company did not have any fixed maturity investments and mortgage loans
not accruing investment income in 1996, 1995 and 1994.
F-24
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The proceeds from sales of actively managed fixed maturity securities were
$938.3 million in 1996, $512.5 million in the four months ended December 31,
1995, $406.0 million in the eight months ended August 31, 1995 and $578.3
million in 1994. Net investment gains consisted of the following:
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
Fixed maturities:
Gross gains................. $16.6 $16.5 $14.4 $17.6
Gross losses................ (9.2) (2.2) (2.3) (9.3)
Other than temporary decline in
fair value (.2) (.4) (1.2) (1.0)
----- ----- ----- -----
Net investment gains from
fixed maturities
before expenses.......... 7.2 13.9 10.9 7.3
Mortgage loans................. - - (.2) -
Other ........................ - - (1.0) (3.1)
Other than temporary
decline in fair value.... (.6) - - -
----- ----- ----- -----
Net investment gains
before expenses........... 6.6 13.9 9.7 4.2
Investment gain expenses....... 3.9 1.4 2.4 4.0
----- ----- ----- -----
Net investment gains....... $ 2.7 $12.5 $ 7.3 $ .2
===== ===== ===== =====
The change in net unrealized appreciation (depreciation) on investments
consisted of the following:
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
Actively managed fixed
maturities .................. $(66.5) $45.5 $164.1 $(254.9)
Other invested assets.......... (1.3) .1 5.1 (3.2)
======= ====== ===== ====
Subtotal................ (67.8) 45.6 169.2 (258.1)
Less effect on other
balance sheet accounts:
Cost of policies purchased.. 36.6 (26.3) (64.1) 93.1
Cost of policies produced... 4.5 (2.7) (12.0) 27.6
Income taxes................ 9.7 (6.1) (34.1) 49.1
======= ====== ===== ====
Change in net unrealized appreciation
(depreciation) of securities $(17.0) $10.5 $ 59.0 $(88.3)
======= ====== ===== ====
F-25
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Investments in mortgage-backed securities at December 31, 1996, included
collateralized mortgage obligations ("CMOs") of $221.6 million and
mortgage-backed pass-through securities of $352.8 million. CMOs are securities
backed by pools of pass-through securities and/or mortgages that are segregated
into sections or "tranches." These securities provide for sequential retirement
of principal, rather than the pro rata share of principal return which occurs
through regular monthly principal payments on pass-through securities.
The following table sets forth the par value, amortized cost and estimated
fair value of investments in mortgage-backed securities including CMOs at
December 31, 1996, summarized by interest rates on the underlying collateral:
Par Amortized Estimated
VALUE COST FAIR VALUE
----- ---- ----------
(Dollars in millions)
Below 7 percent ........................... $209.6 $205.1 $201.5
7 percent - 8 percent...................... 247.4 241.5 240.6
8 percent - 9 percent...................... 70.9 69.7 69.3
9 percent and above........................ 60.1 62.0 63.0
------ ------ ------
Total mortgage-backed securities........ $588.0 $578.3 $574.4
====== ====== ======
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at December 31, 1996, summarized by type of security were as
follows:
ESTIMATED FAIR VALUE
PERCENT
AMORTIZED OF FIXED
COST AMOUNT MATURITIES
---- ------ ----------
TYPE (Dollars in millions)
- ----
Pass-throughs and sequential and
targeted amortization classes............ $458.7 $454.9 25%
Accrual (Z tranche) bonds.................... 9.6 9.7 1
Planned amortization classes and accretion
directed bonds 77.2 76.7 4
Subordinated classes ........................ 32.8 33.1 2
---- ---- ---
Total mortgage-backed securities..... $578.3 $574.4 32%
====== ====== ===
The following table sets forth the amortized cost and estimated fair value
of mortgage-backed securities as of December 31, 1996, based upon the pricing
source used to determine estimated fair value:
ESTIMATED
AMORTIZED FAIR
COST VALUE
---- -----
(DOLLARS IN MILLIONS)
Nationally recognized pricing services ............. $515.1 $511.3
Broker-dealer market makers......................... 52.7 52.5
Internally developed methods (calculated based on a
weighted-average current market yield of
7.4 percent) ............................. 10.5 10.6
------ ------
Total mortgage-backed securities............ $578.3 $574.4
====== ======
F-26
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
At December 31, 1996, no mortgage loans or credit-tenant loans had
defaulted as to principal or interest for more than 60 days, were in
foreclosure, had been converted to foreclosed real estate or had been
restructured while the Company owned them. At December 31, 1996, the Company had
a loan loss reserve of $.9 million. Approximately 30 percent, 18 percent, 16
percent and 6 percent of the mortgage loan balance were on properties located in
California, Indiana, Texas and Florida, respectively. No other state comprised
greater than 5 percent of the mortgage loan balance.
As part of its investment strategy, the Company enters into reverse
repurchase agreements and dollar-roll transactions to increase its return on
investments and improve its liquidity. These transactions are accounted for as
short-term borrowings collateralized by pledged securities with book values
approximately equal to the loan value. Such borrowings averaged approximately
$115.3 million during 1996 compared to $84.4 million during 1995. The weighted
average interest rate on short-term collateralized borrowings was 5.3 percent
and 5.4 percent during 1996 and 1995, respectively. The primary risk associated
with short-term collateralized borrowings is that the counterparty will be
unable to perform under the terms of the contract. The Company's exposure is
limited to the excess of the net replacement cost of the securities over the
value of the short-term investments (which was not material at December 31,
1996). The Company believes that the counterparties to its reverse repurchase
and dollar-roll agreements are financially responsible and that the counterparty
risk is minimal.
Investments on deposit for regulatory authorities as required by law were
$17.1 million at December 31, 1996.
No investments of a single issuer were in excess of 10 percent of
shareholder's equity at December 31, 1996, other than investments issued or
guaranteed by the United States government.
4. INSURANCE LIABILITIES
Insurance liabilities consisted of the following:
INTEREST
WITHDRAWAL MORTALITY RATE DECEMBER 31,
---------------
ASSUMPTION ASSUMPTION ASSUMPTION 1996 1995
---------- ---------- ---------- ---- ----
(DOLLARS IN MILLIONS)
Future policy benefits:
Investment contracts. N/A N/A (b) $1,282.1 $1,346.5
Limited-payment contracts None (a) 8% 105.3 96.7
Traditional life
insurance Company
contracts.......... experience (a) 8% 146.2 153.5
Universal life-type
contracts N/A N/A N/A 354.4 367.6
Claims payable and other
policyholders' funds. N/A N/A N/A 69.5 74.8
-------- --------
Total............. $1,957.5 $2,039.1
======== ========
- --------------------
(a) Principally modifications of the 1975-80 Basic Table, Select and Ultimate
Table.
(b) At December 31, 1996 and 1995, approximately 98 percent of this liability
represented account balances where future benefits were not guaranteed. The
weighted average interest rate on the remainder of the liabilities,
representing the present value of guaranteed future benefits, was
approximately 7 percent at December 31, 1996.
F-27
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Participating policies represented approximately 3.5 percent, 3.7 percent
and 3.6 percent of total life insurance in force at December 31, 1996, 1995 and
1994, respectively, and approximately 2.7 percent, 2.4 percent and 7.5 percent
of premium income for 1996, 1995 and 1994, respectively. Dividends on
participating policies amounted to $1.9 million, $1.8 million and $1.7 million
in 1996, 1995 and 1994, respectively.
5. REINSURANCE
Cost of reinsurance ceded where the reinsured policy contains mortality risks
totaled $24.6 million in 1996, $29.1 million in 1995 and $35.3 million in 1994.
This cost was deducted from insurance premium revenue. The Company is
contingently liable for claims reinsured if the assuming company is unable to
pay. Reinsurance recoveries netted against insurance policy benefits totaled
$19.4 million in 1996, $19.5 million in 1995 and $27.5 million in 1994.
Effective October 1, 1995, Western National Life Insurance Company, a former
subsidiary of Conseco, recaptured certain annuity businesses ceded to the
Company through a reinsurance agreement. Reserves related to these policies
totaled $72.8 million. Recapture fees of $.7 million were recognized as income
during the four months ended December 31, 1995.
The Company's reinsurance receivable balance at December 31, 1996, relates to
many reinsurers. No balance from a single reinsurer exceeds $7.0 million.
6. INCOME TAXES
Income tax liabilities consisted of the following:
DECEMBER 31,
---------------------
1996 1995
---- ----
(Dollars in millions)
Deferred income tax liabilities (assets):
Cost of policies purchased and cost of policies
produced $60.3 $44.7
Investments.................................. (3.3) 8.6
Insurance liabilities........................ (19.7) (21.7)
Unrealized appreciation (depreciation)....... (2.5) 7.2
Other........................................ (5.0) (7.7)
Deferred income tax liabilities........... 29.8 31.1
Current income tax liabilities.................. - 7.9
---- ----
Income tax liabilities.................... $29.8 $39.0
===== =====
Income tax expense was as follows:
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
Current tax provision............ $10.5 $11.9 $19.9 $20.0
Deferred tax provision (benefit). 4.9 (2.2) (3.4) 2.7
----- ------ ----- -----
Income tax expense......... $15.4 $ 9.7 $16.5 $22.7
===== ====== ===== =====
F-28
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Income tax expense differed from that computed at the applicable statutory
rate of 35 percent for the following reasons:
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
Federal tax on income before income taxes at
statutory rate................. $14.4 $9.0 $15.6 $21.5
State taxes and other............. .6 .5 .4 .5
Nondeductible items............... .4 .2 .5 .7
----- ---- ----- -----
Income tax expense............ $15.4 $9.7 $16.5 $22.7
===== ==== ===== =====
The Company is currently being examined by the Internal Revenue Service
for the 1994 tax year. The Company believes that the outcome of this examination
will not have a material impact on its financial position or results of
operations.
7. RELATED PARTY TRANSACTIONS
The Company operates without direct employees through management and
service agreements with subsidiaries of Conseco. Fees for such services
(including data processing, executive management and investment management
services) were based on negotiated rates for periods prior to January 1, 1996.
Pursuant to new service agreements effective January 1, 1996, such fees are
based on Conseco's direct and directly allocable costs plus a 10 percent margin.
Total fees incurred by the Company under such agreements were $44.1 million in
1996, $26.6 million in 1995 and $25.1 million in 1994.
During 1996, the Company purchased $31.5 million par value of senior
subordinated notes issued by subsidiaries of Conseco. Such notes had a
carrying value of $34.7 million at December 31, 1996, and are classified as
"other invested assets" in the accompanying balance sheet. In addition,
during 1996, the Company forgave receivables from Conseco totaling $9.9
million. This transaction is reflected as a dividend to Conseco in the
accompanying statement of shareholder's equity.
F-29
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
8. OTHER OPERATING INFORMATION
Insurance policy income consisted of the following:
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
Direct premiums collected.........$241.3 $ 82.8 $158.6 $ 240.3
Reinsurance assumed............... 1.7 .7 2.0 3.1
Reinsurance ceded................. (24.6) (11.2) (17.9) (35.3)
------ ----- ------ ------
Premiums collected, net
of reinsurance .............. 218.4 72.3 142.7 208.1
Less premiums on universal life
and products without
mortality risk which are
recorded as additions to
insurance liabilities..........(169.8) (50.8) (104.4) (146.0)
------ ----- ------ ------
Premiums on products with
mortality and morbidity
risk, recorded as insurance
policy income ............... 48.6 21.5 38.3 62.1
Fees and surrender charges........ 32.8 10.3 22.2 36.5
------ ----- ------ ------
Insurance policy income.....$ 81.4 $ 31.8 $ 60.5 $ 98.6
======== ====== ======= ========
The four states with the largest shares of the Company's premiums
collected in 1996 were Texas (29 percent), Florida (19 percent), California (9
percent) and Michigan (7 percent). No other state's share of premiums collected
exceeded 5 percent.
Other operating costs and expenses were as follows:
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
Policy maintenance expense........ $37.8 $ 6.5 $14.0 $19.0
State premium taxes and guaranty
assessments ..................... 4.4 1.6 1.1 3.0
Commission expense................ 12.1 5.0 8.6 15.3
------ ------- ------ ------
Other operating costs
and expenses .............. $54.3 $13.1 $23.7 $37.3
====== ======= ====== ======
Anticipated returns from the investment of policyholder balances are
considered in determining the amortization of the cost of policies purchased and
cost of policies produced. Sales of fixed maturity investments during 1996, 1995
and 1994, changed the incidence of profits on such policies because investment
gains and losses were recognized currently and the expected future yields on the
investment of policyholder balances were affected. Accordingly, amortization of
the cost of policies purchased and cost of policies produced was increased by
$2.5 million in 1996, $10.0 million in the four months ended December 31, 1995,
$4.3 million for the eight months ended August 31, 1995, and $2.7 million in
1994.
F-30
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The changes in the cost of policies purchased were as follows:
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
Balance, beginning of period...... $120.0 $159.0 $173.9 $ 93.0
Amortization related to operations:
Cash flow realized............ (26.2) (9.4) (19.1) (30.4)
Interest added................ 13.1 5.0 12.7 20.8
Amortization related to sales
of fixed maturity
investments................... (2.2) (8.3) (3.4) (2.6)
Amounts related to fair value
adjustment of actively
managed fixed maturity
securities.................... 36.6 (26.3) (64.1) 93.1
Adjustment of balance due to
new accounting
basis and other............... 1.7 - 59.0 -
----- ----- ------ ------
Balance, end of period............ $143.0 $120.0 $159.0 $173.9
====== ====== ====== ======
Based on current conditions and assumptions as to future events on all
policies in force, approximately 9.2 percent, 9.2 percent, 8.3 percent, 7.3
percent and 6.7 percent of the cost of policies purchased as of December 31,
1996, are expected to be amortized in each of the next five years, respectively.
The discount rates used to determine the amortization of the cost of policies
purchased ranged from 5 percent to 8 percent and averaged 5.5 percent.
The changes in the cost of policies produced were as follows:
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
Balance, beginning of period...... $24.0 $25.9 $ 63.2 $30.8
Additions...................... 13.2 3.0 6.6 9.4
Amortization related to
operations .................. (3.2) (.5) (4.0) (4.5)
Amortization related to sales
of fixed maturity investments (.3) (1.7) (.9) (.1)
Amounts related to fair value
adjustment of actively
managed fixed maturity
securities .................. 4.5 (2.7) (12.0) 27.6
Adjustment of balance due
to new accounting basis - - (27.0) -
----- ----- ------- -----
Balance, end of period............ $38.2 $24.0 $ 25.9 $63.2
===== ===== ======= =====
F-31
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
9. STATEMENT OF CASH FLOWS
Income taxes paid during 1996, 1995, and 1994, were $18.1 million, $19.3
million and $20.3 million, respectively.
Short-term investments having original maturities of three months or less
are considered to be cash equivalents. All cash is invested in short-term
investments.
10. STATUTORY INFORMATION
Statutory accounting practices prescribed or permitted for insurance
companies by regulatory authorities differ from generally accepted accounting
principles. The Company reported the following amounts to regulatory agencies:
DECEMBER 31,
1996 1995
---- ----
(Dollars in millions)
Statutory capital and surplus..................$140.3 $156.2
Asset valuation reserve ("AVR")................ 28.7 26.2
Interest maintenance reserve ("IMR")........... 63.1 64.7
------ ------
Total.......................................$232.1 $247.1
====== ======
Statutory accounting practices classify certain segregated portions of
surplus, called AVR and IMR, as liabilities. The purpose of these accounts is to
stabilize statutory net income and surplus against fluctuations in the market
value and creditworthiness of investments. The IMR captures all realized
investment gains and losses resulting from changes in interest rates and
provides for subsequent amortization of such amounts into statutory net income
on a basis reflecting the remaining life of the assets sold. The AVR captures
investment gains and losses related to changes in creditworthiness and is also
adjusted each year based on a formula related to the quality and loss experience
of the investment portfolio.
The following table compares the pre-tax income determined on a statutory
accounting basis with such income reported herein in accordance with GAAP:
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Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
Pre-tax income as reported on a
statutory accounting
basis before transfers to
and from and
amortization of the IMR........ $40.2 $ 33.6 $ 50.2 $ 58.6
GAAP adjustments:
Investments valuation.......... 4.9 (3.3) .8 7.5
Amortization related to
operations ................. (17.8) (5.3) (11.7) (16.0)
Amortization related to
investment gains ............ (2.5) (10.0) (4.3) (2.7)
Deferral of cost of policies
produced .................... 13.2 3.06 .6 9.4
Insurance liabilities.......... 3.2 5.1 2.5 2.5
Other.......................... (.1) 2.7 .6 2.2
----- ---- ----- -------
Net effect of GAAP adjustments .9 (7.8) (5.5) 2.9
GAAP pre-tax income......... $41.1 $ 25.8 $ 44.7 $ 61.5
===== ====== ====== ======
State insurance laws generally restrict the ability of insurance companies to
pay dividends or make other distributions. Approximately $32.7 million of the
Company's net assets at December 31, 1996, are available for distribution in
1997 without permission of state regulatory authorities.
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