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
- --------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
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
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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
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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
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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 as of December 31, 1996 and 1995 .................. F-10
Statement of Operations For the Year Ended December 31, 1996,
the Four and Eight Month Periods Ended December 31, 1995 and
August 31, 1995, respectively, and the Year Ended
December 31, 1994 ............................................. F-12
Statement of Shareholder's Equity For the Year Ended
December 31, 1996, the Four and Eight Month Periods Ended
December 31, 1995 and August 31, 1995, respectively, and
the Year Ended December 31, 1994............................... F-13
Statement of Cash Flows For the Year Ended
December 31, 1996, the Four and Eight Month Periods Ended
December 31, 1995 and August 31, 1995, respectively, and
the Year Ended December 31, 1994............................... F-14
Notes to 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:
F-32
<PAGE>
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.
F-33
