AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 1, 2000
REGISTRATION NO. 333-xxxxx
811-8374
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 10
JPF VARIABLE ANNUITY SEPARATE ACCOUNT II
(Exact Name of Registrant)
JEFFERSON PILOT FINANCIAL INSURANCE COMPANY
(Name of Depositor)
100 N. Greene Street, Greensboro, North Carolina 27401
(Address of Depositor's Principal Executive Offices)
(336) 691-3000
(Depositor's Telephone Number, including Area Code)
NAME AND ADDRESS OF
AGENT FOR SERVICE: COPY TO:
Shari J. Lease, Esquire Joan E. Boros, Esq.
Jefferson Pilot Financial Insurance Christopher S. Petito, Esq.
Company Jorden Burt Boros Cicchetti
One Granite Place Berenson & Johnson LLP
Concord, NH 03301 1025 Thomas Jefferson Street, N.W.
Suite 400 East
Washington, D.C. 20007
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after effectiveness of the Registration Statement
TITLE OF SECURITIES BEING REGISTERED:
Variable Portion of Variable Deferred Annuity Contracts
No filing fee is due because an indefinite number of shares is deemed to have
been registered in reliance on Section 24(f) of the Investment Company Act of
1940.
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Prospectus: August 1, 2000
The Allegiance Variable Annuity
Issued by
Jefferson Pilot Financial Insurance Company
In connection with its
JPF Variable Annuity Separate Account II
One Granite Place, Concord, NH 03301 Telephone No.: 1-800-258-3648, Ext. 5394
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This Prospectus describes the Allegiance Variable Annuity (the "Contract"), an
individual flexible premium deferred variable annuity contract offered by
Jefferson Pilot Financial Insurance Company ("we", "our" or the "Company"). The
Contract is designed to help you plan for retirement or other long-term
purposes. You may purchase it on either a tax qualified or non-tax qualified
basis.
Because this is a flexible premium annuity contract, you may pay multiple
premium payments. We allocate your premium payments among the 19 Variable
Sub-accounts of the JPF Variable Annuity Separate Account II and the two
Interest Rate Guarantee Periods of the Capital Developer Account in the
proportions that you choose. You may also allocate your premium payments to the
Dollar Cost Averaging Fixed Account ("DCA Fixed Account") if you participate in
our dollar cost averaging program. Each Variable Sub-account invests exclusively
in shares of one of the following Portfolios:
JPVF International Equity Portfolio
JPVF World Growth Stock Portfolio
JPVF Emerging Growth Portfolio
JPVF Capital Growth Portfolio
JPVF Small Company Portfolio
JPVF Growth Portfolio
JPVF S&P 500 Index Portfolio
JPVF Value Portfolio
JPVF Balanced Portfolio
JPVF High Yield Bond Portfolio
JPVF Money Market Portfolio
Fidelity VIP Growth Portfolio
Fidelity VIP Equity-Income Portfolio
Fidelity VIP II Contrafund [RegTM] Portfolio
MFS Research Series
MFS Utilities Series
Oppenheimer Capital Appreciation Fund/VA
Oppenheimer Bond Fund/VA
Oppenheimer Strategic Bond Fund/VA
We may make available other allocation options in the future. Not all Variable
Sub-accounts, Interest Rate Guarantee Periods or the DCA Fixed Account may be
available in all states. You may not purchase a Non-Qualified Contract if you or
the Annuitant are over 90 years old. You may not purchase certain types of
Qualified Contracts if you are over 80 years old. (cont.)
Your Contract Value will vary up or down depending on the investment performance
of the Variable Sub-accounts to which you have allocated your premium payments.
We do not guarantee any minimum Contract Value for amounts allocated to the
Variable Sub-accounts. Amounts which you allocate to the Capital Developer
Account or the DCA Fixed Account will earn a specified interest rate. A Market
Value Adjustment ("MVA") could increase or decrease the value of amounts
withdrawn, transferred, or annuitized from the Capital Developer Account.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
This Prospectus sets forth the information you should know about the Contract.
You should read it before investing and keep it for future reference. We have
filed a Statement of Additional Information with the Securities and Exchange
Commission ("SEC"). The current Statement of Additional Information is dated
August 1, 2000. The information in the Statement of Additional Information is
incorporated by reference in this Prospectus. You can obtain a free copy by
writing us or calling us at the address or telephone number given above. The
Table of Contents of the Statement of Additional Information appears at page 44
of this Prospectus.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY CURRENT PROSPECTUSES
FOR THE PORTFOLIOS LISTED ABOVE. PLEASE READ THIS PROSPECTUS AND THE
PROSPECTUSES FOR THE PORTFOLIOS CAREFULLY AND RETAIN THEM FOR YOUR FUTURE
REFERENCE.
Contracts and shares of the Portfolios are not deposits or obligations of or
guaranteed by any bank. They are not federally insured by the FDIC or any other
government agency. Investing in the Contract involves certain investment risks,
including possible loss of the principal invested. THIS PROSPECTUS AND OTHER
INFORMATION ABOUT THE JPF VARIABLE ANNUITY SEPARATE ACCOUNT II REQUIRED TO BE
FILED WITH THE SEC CAN BE FOUND IN THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV OR
MAY BE OBTAINED FROM THE SEC'S PUBLIC REFERENCE ROOM BY CALLING 202-942-8090.
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table of contents
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Page
DEFINITIONS 4
FEE TABLES 6
Contract Owner Transaction Expenses 6
Separate Account Annual Expenses 6
Fund Annual Expenses 6
Examples 7
QUESTIONS AND ANSWERS ABOUT YOUR CONTRACT 9
CONDENSED FINANCIAL INFORMATION 9
ALLOCATION OPTIONS 13
Separate Account Investments 16
Mixed and Shared Funding: Conflicts of Interest 18
The Capital Developer Account 18
Market Value Adjustment 19
Dollar Cost Averaging Fixed Account Option 20
THE ALLEGIANCE VARIABLE ANNUITY CONTRACT 20
Contract Application and Issuance of Contracts 20
Free Look Period 20
Premium Payments 21
Initial Premium Payment 21
Additional Premium Payments 21
Allocation of Premium Payments 21
Payment Not Honored by Bank 21
Contract Value 21
Separate Account Accumulation Unit Value 22
Minimum Contract Value 22
Transfers 22
Telephone Transfers and Reallocations 23
Dollar Cost Averaging 23
Automatic Rebalancing 24
DISTRIBUTIONS UNDER THE CONTRACT 24
Surrenders and Partial Withdrawals 24
Systematic Withdrawal Plan 25
Annuity Payments 25
Maturity Date 26
Election of Annuity Payment Option 26
Taxes 26
Annuity Payment Options 26
Death Benefit 28
Death of Contract Owner Prior to Maturity Date 28
IRS Required Distribution 28
Death of Annuitant Prior to Maturity Date 28
Death of Annuitant on or After Maturity Date 29
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Death of Contract Owner on or After Maturity Date 29
Contract Owner's Spouse as Beneficiary 29
Payment of Death Benefit to Beneficiary 29
Beneficiary 29
Change of Contract Owner 29
Restrictions Under the Texas Optional Retirement Program 29
Restrictions Under Qualified Contracts 30
Restrictions Under Section 403(b) Plans 30
CHARGES AND DEDUCTIONS 30
Surrender Charge 30
Mortality and Expense Risk Charge 31
Administrative Expense Charge 31
Annual Administrative Fee 31
Transfer Charge 32
Premium Taxes 32
Federal, State and Local Taxes 32
Other Expenses Including Investment Advisory Fees 32
Reduction in Charges for Certain Groups 32
CERTAIN FEDERAL INCOME TAX CONSEQUENCES 32
Taxation of Annuities 33
In General 33
Possible Changes in Taxation 34
Surrenders and Partial Withdrawals from Qualified Contracts 34
Surrenders and Partial Withdrawals from Non-Qualified Contracts 34
Annuity Payments 34
Penalty Tax 34
Death Benefit Proceeds 35
Gifts and other Transfers or Exchanges of the Contract 35
Multiple Contracts 35
Withholding 35
Other Tax Consequences 35
Qualified Plans 35
Qualified Pension and Profit Sharing Plans 36
Individual Retirement Annuities 36
Tax-Sheltered Annuities 36
Section 457 Deferred Compensation Plans 36
JEFFERSON PILOT FINANCIAL INSURANCE COMPANY 37
The Separate Account 38
DISTRIBUTOR OF THE CONTRACTS 38
VOTING RIGHTS 39
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT 39
Addition, Deletion, or Substitution of Investments 39
Performance Data 40
Company Ratings 41
GENERAL CONTRACT PROVISIONS 42
LEGAL PROCEEDINGS 43
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AVAILABLE INFORMATION 43
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS 44
APPENDIX I--SURRENDER CHARGE CALCULATION I-1
APPENDIX II--MARKET VALUE ADJUSTMENT CALCULATION AND EXAMPLES II-1
FUND PROSPECTUSES (not part of this Prospectus)
Jefferson Pilot Variable Fund, Inc.
Fidelity's Variable Insurance Products Funds
MFS Variable Insurance Trust
Oppenheimer Variable Account Funds
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This Prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made. No dealer, salesperson or other person
is authorized to give any information or make any representations in connection
with this offering other than those contained in this Prospectus, and, if given
or made, such other information or representations must not be relied upon.
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5
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definitions
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Accumulation Period--The period during which you can make payments to us. The
Accumulation Period is the period between the Contract Date and the Maturity
Date.
Accumulation Unit--A unit of measure which we use to calculate Separate Account
Value during the Accumulation Period.
Annuitant--The natural person upon whose life the Annuity Payments are based.
You will be the Annuitant unless you name someone else to be the Annuitant in
the application. The Annuitant named in the application cannot be changed unless
the Annuitant dies before the Maturity Date.
Annuity Payments--The payments we make to the Payee beginning on the Maturity
Date. The amount of the Annuity Payments will be based on the Contract Value and
the age (and, in some states, the sex) of the Annuitant on the Maturity Date,
and the Annuity Payment option and payment frequency that you select.
Annuity Period--The period during which we make Annuity Payments to you. The
Annuity Period begins on the Maturity Date and ends with the last Annuity
Payment.
Annuity Unit--A unit of measure used to determine the amount of each variable
Annuity Payment.
Beneficiary--The person or entity you designate to receive the Death Benefit
under the Contract.
Capital Developer Account--An allocation option available under the Contract
that provides a Guaranteed Interest Rate for a specified Interest Rate Guarantee
Period. This rate will never be less than 3% per year. We guarantee the Capital
Developer Account, and it is not part of the Separate Account.
Capital Developer Account Value--The portion of your Contract Value held in the
Capital Developer Account.
Company ("our", "we", "us")--Jefferson Pilot Financial Insurance Company.
Contract--The Allegiance Variable Annuity, an individual flexible premium
deferred variable annuity contract that is described in this Prospectus.
Contract Date--The effective date of your Contract and the date from which we
measure Contract Years, quarters, months and anniversaries.
Contract Owner ("you", "your")--The person or entity entitled to the ownership
rights of the Contract. The Contract Owner is the person in whose name the
Contract is issued, unless otherwise changed. Joint Contract Owners are
permitted only if they are spouses.
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Contract Value--The value of all of the Accumulation Units held under your
Contract in the Separate Account plus the value of all amounts held under your
Contract in the Capital Developer Account and the DCA Fixed Account.
Contract Year--The first Contract Year is the annual period which begins on the
Contract Date. Subsequent Contract Years begin on each anniversary of the
Contract Date.
DCA Fixed Account--An allocation option available under the Contract that may be
used solely to hold premium payments prior to their allocation to the Variable
Sub-Accounts through our Dollar Cost Averaging Program which is described on
pages 23-24 below.
Death Benefit--The amount payable upon the death of the Contract Owner during
the Accumulation Period.
Due Proof of Death--Information we require to process a claim for a Death
Benefit, including a death certificate and a death claim form acceptable to us.
Guaranteed Interest Rate--The applicable effective annual interest rate which
the Company will credit and compound annually on the Capital Developer Account
Value during each Interest Rate Guarantee Period. The rate is guaranteed to be
at least three percent per year.
Interest Rate Guarantee Period--A specified period which begins on the date that
a premium payment is allocated to (or a portion of Contract Value is transferred
to) the Capital Developer Account to accumulate at a Guaranteed Interest Rate.
Currently we offer one and seven-year Interest Rate Guarantee Periods.
Issue Age--The age of the Contract Owner on the Contract Date.
Jefferson Pilot Variable Fund, Inc. ("JPVF")--An open-end management investment
company registered under the Investment Company Act of 1940 ("1940 Act").
Jefferson Pilot Funds--The Portfolios of JPVF which are available under the
Contract-- International Equity Portfolio, World Growth Stock Portfolio,
Emerging Growth Portfolio, Capital Growth Portfolio, Small Company Portfolio,
Growth Portfolio, S&P 500 Index Portfolio, Value Portfolio, Balanced Portfolio,
High Yield Bond Portfolio and Money Market Portfolio.
Market Value Adjustment ("MVA")--A positive or negative adjustment applied to
the Capital Developer Account Value in the event of a full surrender, partial
withdrawal, transfer or annuitization that is requested before the end of an
Interest Rate Guarantee Period. The MVA does not apply during the last 30 days
of an Interest Rate Guarantee Period.
Maturity Date--The date on which we make the first Annuity Payment under the
Contract. The latest Maturity Date you may choose is the later of the
Annuitant's 85th birthday or 10 years from the Contract Date.
MFS Funds--Series of the MFS[RegTM] Variable Insurance Trust which are available
under the Contract--MFS Research Series and MFS Utilities Series.
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MFS[RegTM] Variable Insurance Trust--An open-end management investment company
registered under the 1940 Act.
Net Premium Payment --A premium payment less any applicable Premium Tax.
Oppenheimer Funds--The Portfolios of the OVAF which are available under the
Contract--Oppenheimer Capital Appreciation Fund/VA, Oppenheimer Strategic Bond
Fund/VA and Oppenheimer Bond Fund/VA.
Oppenheimer Variable Account Funds ("OVAF")--An open-end management investment
company registered under the 1940 Act.
Payee--The person or entity you designate to receive Annuity Payments under the
Contract.
Portfolios--The Jefferson Pilot Funds, VIP Portfolios, MFS Funds and Oppenheimer
Funds.
Premium Tax--A tax imposed by certain states when a premium payment is paid,
Annuity Payments begin, a partial withdrawal is made, or the Contract is
surrendered.
Request--A request in a form satisfactory to us which is received by our
Variable Annuity Service Center.
Separate Account--The JPF Variable Annuity Separate Account II, a separate
account of Jefferson Pilot Financial Insurance Company. The Separate Account
consists of assets set aside by the Company, the investment performance of which
is kept separate from that of the general assets and all other separate account
assets of the Company. The Separate Account is registered as a unit investment
trust under the 1940 Act.
Separate Account Value--The portion of Contract Value held in the Separate
Account. There is no guaranteed or minimum Separate Account Value.
Surrender Value--Proceeds payable upon a full surrender of the Contract, equal
to:
(a) the Contract Value;
(b) plus or minus any applicable MVA;
(c) minus any applicable Surrender Charge;
(d) minus the Annual Administrative Fee; and
(e) minus any applicable Premium Tax payable by us and not previously
deducted.
Tax Code--The Internal Revenue Code of 1986, as amended.
Treasury Rate--The applicable effective annual U.S. Treasury Rate used by us for
determining the MVA applicable to a surrender, partial withdrawal, transfer, or
annuitization from the Capital Developer Account at any given time.
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Valuation Day--Any day on which the New York Stock Exchange is open for trading
except when the Securities and Exchange Commission has determined that a state
of emergency exists. In addition, the Company will be closed on the following
local or regional business holidays which shall not constitute a Valuation Day:
Good Friday, the Friday following Thanksgiving and the day before and/or
following Christmas Day.
Valuation Period--The period of time beginning at the close of business on the
New York Stock Exchange on any Valuation Day and ending at the close of business
on the next Valuation Day. A Valuation Period may be more than one day.
Variable Annuity Service Center--P.O. Box 515, Concord, NH 03302-0515. Notices,
Requests and premium payments under the Contract must be sent to the Company's
Variable Annuity Service Center.
Variable Sub-account--Separate Account assets are divided into Variable
Sub-accounts. Assets of each Variable Sub-account will be invested in shares of
the corresponding Portfolio.
VIP Funds--The Variable Insurance Products Fund ("VIP") and the Variable
Insurance Products Fund II ("VIP II"), which are open-end diversified management
investment companies registered under the 1940 Act.
VIP Portfolios--The Portfolios of the VIP Funds which are available under the
Contracts--VIP Equity-Income Portfolio, VIP Growth Portfolio and VIP II
Contrafund[RegTM] Portfolio.
fee tables
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Contract Owner Transaction Expenses
Sales Charge on Premium Payments None
Maximum Surrender Charge
(as a % of Contract Value
surrendered)(1) 6%
Annual Administrative Fee (2) The lesser of $30 per Contract or 2% of
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Contract Value
Transfer Fee No fee for first 15 transfers each
year; $10 for each additional transfer
(currently not assessed)
Separate Account Annual Expenses
(effective annual rate as a
percentage of average account value)
Mortality and Expense Risk Charge 1.25%
Administrative Expense Charge 0.15%
Total Separate Account Annual Expenses 1.40%
(1) The Surrender Charge is not applicable after the seventh Contract Year or
to the first 10% of Contract Value withdrawn or surrendered during each
Contract Year. (See "Free Surrender Amount.")
(2) This fee is waived if, on the last day of the Contract Year, your Contract
Value is at least $30,000 or if 100% of your Contract Value is allocated
to the Capital Developer Account.
Portfolio Annual Expenses
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Management Other Total Portfolio
Fees Expenses Annual Expenses
<S> <C> <C> <C>
JPVF International Equity Portfolio 1.00% 0.25% 1.25%
JPVF World Growth Stock Portfolio 0.75% 0.13% 0.88%
JPVF Emerging Growth Portfolio 0.80% 0.14% 0.94%
JPVF Capital Growth Portfolio 1.00% 0.07% 1.07%
JPVF Small Company 0.75% 0.11% 0.86%
JPVF Growth Portfolio 0.75% 0.21% 0.96%
JPVF S&P 500 Index Portfolio Portfolio
(after expense reimbursement) 0.24% 0.04% 0.28%(1)
JPVF Value Portfolio 0.75% 0.10% 0.85%
JPVF Balanced Portfolio 0.75% 0.15% 0.90%
JPVF High Yield Bond Portfolio 0.75% 0.40% 1.15%
JPVF Money Market Portfolio 0.50% 0.10% 0.60%
MFS Research Series 0.75% 0.11% 0.86%
MFS Utilities Series 0.75% 0.26% 1.01%
Oppenheimer Capital Appreciation Fund/VA 0.68% 0.02% 0.70%
Oppenheimer Bond Fund/VA 0.72% 0.01% 0.73%
Oppenheimer Strategic Bond Fund/VA 0.74% 0.04% 0.78%
VIP Equity-Income Portfolio 0.48% 0.09% 0.57%(2)
VIP Growth Portfolio 0.58% 0.08% 0.66%(2)
VIP II Contrafund [RegTM] Portfolio 0.58% 0.09% 0.67%(2)
</TABLE>
(1) JPVF S&P 500 Index Portfolio commenced operating on May 1, 2000. Total
Portfolio Annual Expenses for this Portfolio are based on estimated "Other
Expenses" for the fiscal year ending December 31, 2000. The Portfolio's
investment adviser has agreed to reimburse the Portfolio for total annual
expenses above 0.28% of average net assets. Without such reimbursement,
estimated total annual expenses are expected to be 0.35%.
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(2) FMR or the fund has entered into varying arrangements with third parties
who either pair or reduced a portion of the class' expenses. With these
arrangements, the total annual expenses presented in the table were 0.56%
for the VIP Equity Income Portfolio, 0.65% for the VIP Growth Portfolio,
and 0.65% for the VIP II Contrafund [RegTM] Portfolio.
Examples
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets (and assuming the entire Contract Value is allocated to
the applicable Variable Sub-account):
1. If you surrender the Contract or if the Contract is annuitized for less than
five years, you would pay the following expenses on a $1,000 investment assuming
a 5% annual return on assets:
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1 Year 3 Years 5 Years 10 Years
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Variable Sub-accounts:
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JPVF International Equity
Portfolio $89 $153 $203 $380
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JPVF World Growth Stock Portfolio $85 $142 $184 $334
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JPVF Emerging Growth Portfolio $86 $144 $187 $342
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JPVF Capital Growth Portfolio $87 $147 $194 $358
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JPVF Small Company Growth $85 $141 $183 $332
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JPVF Growth Portfolio $86 $144 $188 $344
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JPVF S&P 500 Index Portfolio $80 $124 $152 $256
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JPVF Value Portfolio $85 $141 $182 $330
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JPVF Balanced Portfolio $86 $142 $185 $337
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JPVF High Yield Bond Portfolio $88 $150 $198 $368
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JPVF Money Market Portfolio $83 $134 $169 $298
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MFS Research Series $85 $141 $183 $332
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MFS Utilities Series $87 $146 $191 $350
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Oppenheimer Capital Appreciation
Fund/VA $84 $137 $174 $311
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Oppenheimer Bond Fund/VA $84 $137 $176 $315
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Oppenheimer Strategic Bond Fund/VA $84 $139 $179 $321
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VIP Equity-Income Portfolio $82 $133 $167 $294
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VIP Growth Portfolio $83 $135 $172 $306
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VIP II Contrafund [RegTM]
Portfolio $83 $136 $173 $307
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2. If you annuitize for a period of five years or greater, or do not surrender
the Contract, you would pay the following expenses on a $1,000 investment
assuming a 5% annual return on assets:
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1 Year 3 Years 5 Years 10 Years
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Variable Sub-accounts:
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JPVF International Equity
Portfolio $28 $89 $159 $380
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JPVF World Growth Stock
Portfolio $24 $77 $138 $334
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JPVF Emerging Growth Portfolio $24 $79 $142 $342
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JPVF Capital Growth Portfolio $26 $83 $149 $358
--------------------------------------------------------------------------------
JPVF Small Company Portfolio $24 $76 $137 $332
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JPVF Growth Portfolio $25 $80 $143 $344
--------------------------------------------------------------------------------
JPVF S&P 500 Index Portfolio $18 $58 $105 $256
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JPVF Value Portfolio $24 $76 $137 $330
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JPVF Balanced Portfolio $24 $78 $139 $337
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JPVF High Yield Bond Portfolio $27 $86 $153 $368
--------------------------------------------------------------------------------
JPVF Money Market Portfolio $21 $68 $123 $298
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MFS Research Series $24 $76 $137 $332
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MFS Utilities Series $25 $81 $146 $350
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Oppenheimer Capital
Appreciation Fund/VA $22 $71 $128 $311
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Oppenheimer Bond Fund/VA $22 $72 $130 $315
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Oppenheimer Strategic Bond
Fund/VA $23 $74 $133 $321
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VIP Equity-Income Portfolio $21 $67 $121 $294
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VIP Growth Portfolio $22 $70 $126 $306
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VIP II Contrafund [RegTM]
Portfolio $22 $70 $127 $307
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We have included the above table and examples to assist you in understanding the
costs and expenses that you will bear directly or indirectly by investing in the
Separate Account. The table reflects expenses of the Separate Account as well as
the Portfolios. The table also assumes that the expense reimbursement
arrangements described in the notes to the Portfolio Annual Expense Table above
remain in effect for all years depicted. For additional information you should
read "Charges and Deductions" in the Prospectus and the section on expenses in
the Prospectus for each underlying Portfolio. In addition to the expenses listed
above, Premium Taxes may be applicable.
These examples reflect the Annual Administrative Fee as an annual charge of .01%
of assets, based on an anticipated average Contract Value of $30,000.
The Examples should not be considered a representation of past or future
expenses, and your actual expenses may be greater or lesser than those shown.
Similarly, the annual rate of return of 5% assumed in the example is not an
estimate or guarantee of future investment performance.
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Questions and answers about your Contract
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The following are answers to some of the questions you may have about some of
the more important features of the Contract. The Contract is more fully
described in the rest of the Prospectus. Please read the Prospectus carefully.
1. What is the Contract?
The Contract is a flexible premium deferred variable annuity contract. It is
designed for tax-deferred retirement investing. It can be purchased on a
non-qualified basis ("Non-qualified Contract") or in connection with certain
plans qualifying for favorable federal income tax treatment ("Qualified
Contract"). The Contract, like all deferred annuity contracts, has two phases:
the Accumulation Period and the Annuity Period. During the Accumulation Period,
earnings accumulate on a tax-deferred basis and are taxed as income when you
make a withdrawal. The Annuity Period begins when you begin receiving payments
under one of the Annuity Payment Options described in the answer to Question No.
2. The amount of money accumulated under your Contract during the Accumulation
Period will be used to determine the amount of your Annuity Payments during the
Annuity Period.
You may allocate your premium payments to any combination of the allocation
options under the Contract. However, over the life of your Contract, you are
currently limited to allocating your premium payments to no more than 16 of the
current or future Variable Sub-accounts. We may change this limitation in the
future. The allocation options currently available are the 19
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Variable Sub-accounts of the Separate Account, the two Interest Rate Guarantee
Periods of the Capital Developer Account and, if you have elected to participate
in our dollar cost averaging program, the DCA Fixed Account. These allocation
options may not be available in all states.
Each Variable Sub-account invests in a single Portfolio, each of which is a
separate investment portfolio of a mutual fund. Because the Separate Account
Value will increase or decrease depending on the investment experience of the
Variable Sub-accounts to which you allocate your premium payments, you bear the
entire investment risk with respect to amounts allocated to the Variable
Sub-accounts. The investment policies and risks of each Portfolio are described
in prospectuses for the Portfolios which accompany this Prospectus.
The Contract may be issued as a group contract in certain states. If you are
covered under a group contract, you will be issued a certificate as evidence of
your participation under the group contract. The description of the Contract in
this Prospectus applies equally to a certificate under a group contract unless
otherwise described.
2. What annuity options does the Contract offer?
The Contract offers four Annuity Payment Options. Under each Option (except the
first, which is only available as fixed Annuity Payments), you may choose fixed
Annuity Payments, variable Annuity Payments, or a combination of both. The
Annuity Payment Options are:
Income for a specified period.
Life Income with optional guaranteed periods.
Joint and last survivor life income payments.
Any other payment terms upon which we agree.
You may change your Annuity Payment Option at any time before the Maturity Date,
which is when Annuity Payments begin. You may select the Maturity Date of your
Contract. The latest Maturity Date you may select for a Non-qualified Contract,
however, is the later of the Annuitant's 85th birthday or 10 years from the
Contract Date. If your Contract was issued in connection with a Qualified Plan,
a different latest Maturity Date may apply.
If you select variable Annuity Payments, the amount of our payments to you will
be affected by the investment performance of the Variable Sub-accounts you have
selected. A fixed Annuity Payment Option provides for payments that will be set
on the Maturity Date and will not change. If you select an Annuity Payment
Option that is a combination of variable and fixed payments, you must specify
the allocation of the Contract Value between fixed Annuity Payments and variable
Annuity Payments. You may not change the Annuity Payment Option or the frequency
of Annuity Payments after we begin making Annuity Payments to you. After Annuity
Payment begins, you may not make a full surrender or partial withdrawal.
3. How do I buy a Contract?
You can obtain a Contract application from your Company agent. We must receive a
completed application and your initial premium payment of at least $2,000 before
we will issue a Contract to you. A lower minimum initial premium payment may
apply to certain Qualified Contracts. You may pay your initial premium payment
in a single payment or in twelve equal payments
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over the first 12 Contract months. Your subsequent premium payments must be at
least $50. We will not issue a Contract to you if either you or the Annuitant is
more than 90 years old. For certain types of Qualified Contracts, you must be
age 80 or younger to purchase a Contract.
4. What are my investment choices under the Contract?
You can allocate and reallocate your investment among the Variable Sub-accounts.
Each Variable Sub-account invests in a single Portfolio. Under the Contract, the
Separate Account currently invests in the following Portfolios:
Jefferson Pilot Variable Fund, Inc.:
International Equity Portfolio
World Growth Stock Portfolio
Emerging Growth Portfolio
Capital Growth Portfolio
Small Company Portfolio
Growth Portfolio
S&P 500 Index Portfolio
Value Portfolio (formerly Growth and Income Portfolio)
Balanced Portfolio
High Yield Bond Portfolio
Money Market Portfolio
Variable Insurance Products Fund:
VIP Growth Portfolio
VIP Equity-Income Portfolio
Variable Insurance Products Fund II:
VIP II Contrafund [RegTM] Portfolio
MFS [RegTM] Variable Insurance Trust(SM):
Research Series
Utilities Series
Oppenheimer Variable Account Funds:
Capital Appreciation Fund/VA
Bond Fund/VA
Strategic Bond Fund/VA
Each Portfolio holds its assets separately from the assets of the other
Portfolios. Each Portfolio has distinct investment objectives and policies which
are described in the accompanying prospectuses for the Portfolios.
5. What is the Capital Developer Account?
We will credit specified interest rates to the amounts you allocate to the
Capital Developer Account. You currently may select from two different Interest
Rate Guarantee Periods: a one-
15
<PAGE>
year period and a seven-year period. Not all periods are available in all
states. The amounts which you allocate to the Capital Developer Account may be
subject to an MVA if you request a surrender, partial withdrawal, transfer or
annuitization 31 days or more prior to the end of the applicable Interest Rate
Guarantee Period. Because of this adjustment and for other reasons, the amount
we pay you upon a surrender or partial withdrawal or apply to a transfer or
annuitization may be more or less than the Capital Developer Account Value at
the time of the transaction. However, the MVA will never reduce the earnings on
amounts allocated to the Capital Developer Account to less than three percent
per year before any applicable Surrender Charge.
6. What are my expenses under the Contract?
Mortality and Expense Risk Charge. We deduct a daily charge equal to a
percentage of the net assets in the Separate Account for the mortality and
expense risks that we assume. The effective annual rate of this charge is 1.25%
of the Separate Account Value. This charge does not apply to the Capital
Developer Account or the DCA Fixed Account.
Administrative Expense Charge. We deduct a daily charge equal to a percentage of
the net assets in each Variable Sub-account for administering the Separate
Account. The effective annual rate of this charge is 0.15% of the daily value of
net assets in each Variable Sub-account. We guarantee that we will not increase
this charge. This charge does not apply to the Capital Developer Account or the
DCA Fixed Account.
Annual Administrative Fee. We impose a fee each year for Contract maintenance
and related administrative expenses. This fee is the lesser of $30 per Contract
Year or 2% of Contract Value. We guarantee that we will not increase this fee.
The fee will be deducted from the Contract Value on the last day of each
Contract Year and upon full surrender of the Contract before a Contract
Anniversary. We will not deduct the fee if 100% of the Contract Value is held in
the Capital Developer Account. We will also not deduct the fee for a Contract
Year if, on the last day of that Contract Year, the Contract Value is $30,000 or
greater.
Transfer Charge. Although we currently are not charging a transfer fee, the
Contract permits us to charge you a $10 fee for each transfer in excess of 15
during any Contract Year.
Surrender Charge. We will deduct a Surrender Charge from the amount of any
partial withdrawal or full surrender during the first seven Contract Years to
help defray sales expenses. The Surrender Charge in the first three Contract
Years is 6% of the Contract Value withdrawn or surrendered and declines by one
percentage point for each of the next four Contract Years. The Surrender Charge
percentages are as follows:
16
<PAGE>
Year Percentage Charge
1 6%
2 6%
3 6%
4 5%
5 4%
6 3%
7 2%
8 0%
We also will impose the Surrender Charge on the Maturity Date if it occurs
during the first seven Contract Years and you choose an Annuity Payment option
providing for payments for fewer than five years. The Surrender Charge will not
apply to certain distributions. (See "Surrender Charge")
Each year you are entitled to a Free Withdrawal Amount, equal to 10% of the
Contract Value at the time of the surrender or partial withdrawal. We will not
charge the Surrender Charge on the Free Withdrawal Amount. We guarantee that the
aggregate Surrender Charge will never exceed 8.5% of your total premium
payments.
Premium Taxes. Some states charge a Premium Tax. We will deduct Premium Taxes if
we must pay them. Depending on state law, Premium Taxes may be assessed when you
pay a premium payment, make a partial withdrawal, surrender your Contract, when
your Contract reaches the Maturity Date, or when we pay a Death Benefit.
Fund Expenses. In addition to our charges under the Contract, each Portfolio
deducts amounts from its assets to pay its investment advisory fees and other
expenses.
7. How will my investment in the Contract be taxed?
You should consult a qualified tax adviser for personalized answers. If you are
a natural person, generally, earnings under your Contract are not taxed until
amounts are withdrawn or distributions are made (e.g., a partial withdrawal,
surrender or Annuity Payment). You may be deemed to have received a distribution
and taxes may be due if you pledge or assign your Contract. Generally, a portion
of any distribution or deemed distribution will be taxable as ordinary income.
The taxable portion of certain distributions may be subject to withholding. In
addition, a penalty tax may apply to certain distributions or deemed
distributions under the Contract.
Special rules apply if the Contract is owned by a company or other legal entity.
Generally, such a Contract Owner must include in income any increase in the
excess of the Contract Value over the "investment in the contract" during the
taxable year.
8. Do I have access to my money?
At any time during the Accumulation Period, you may elect to receive all or a
portion of your Contract's Surrender Value. The minimum partial withdrawal
amount you may withdraw is $250 from a Variable Sub-account and $1,000 from the
Capital Developer Account. After a
17
<PAGE>
partial withdrawal, the remaining Contract Value must be at least $2,000. See
"Surrenders and Partial Withdrawals" for more information.
Although you have access to your money during the Accumulation Period, certain
charges, such as the Surrender Charge, Annual Administrative Fee and Premium
Taxes, may be deducted on a surrender or a partial withdrawal. You may also
incur federal income tax liability or tax penalties. In addition, if you have
allocated some of the value of your Contract to the Capital Developer Account,
your proceeds may be increased or decreased by an MVA.
You may elect to receive the Contract Value as of the Maturity Date, less any
applicable Surrender Charge, in a lump sum payment.
9. What is the death benefit?
We will pay a death benefit while the Contract is in force and before the
Maturity Date, if the Contract Owner dies, or if the Annuitant dies and the
Contract Owner is not a natural person. To receive the death benefit payment,
the Beneficiary must return the Contract, provide us with Due Proof of Death,
and elect a Death Benefit Option. The Death Benefit will be at least equal to
the Contract Value at the time of payment. No Surrender Charge, MVA or Annual
Administrative Fee is imposed upon amounts paid as a Death Benefit.
10. May I transfer Contract Value among the allocation options?
During the Accumulation Period, you may transfer Contract Value among the
allocation options, subject to certain limitations. The minimum amount you may
transfer from any Variable Sub-account is $250. The minimum amount you may
transfer from the Capital Developer Account is $1,000. Transfers from the
Capital Developer Account may be subject to an MVA. You may not transfer
Contract Value into the DCA Fixed Account. Transfers out of the DCA Fixed
Account are only allowed pursuant to the terms of your dollar cost averaging
program.
During the Annuity Period, if you have chosen a variable Annuity Payment Option,
you may transfer Separate Account Value between the various Variable
Sub-accounts. However, if you have chosen fixed Annuity Payments, transfers are
not permitted.
11. May I cancel my Contract?
For a limited period after your receive your Contract you may return it to us
for cancellation and a refund as described in your Contract. The time period
depends on the state in which your Contract is issued. In most states it is ten
days. If your Contract replaces another contract, you have 20 days in which to
cancel your Contract. The amount of your refund also will depend on the state in
which your Contract is issued. In most states, we will pay you your Contract
Value on the date we receive your Contract back from you. The Contract Value may
be more or less than your premium payments. In some states, we are required to
refund your premium payments, less any partial withdrawals. We will not deduct
the Surrender Charge or any administrative charges from your refund. Since state
laws differ with respect to these cancellation rights, you should refer to your
Contract for specific information about your circumstances.
18
<PAGE>
12. How does the merger of Alexander Hamilton Life into the Company (the
"Merger") affect Owners of Contracts Issued before August 1, 2000?
Contracts issued before August 1, 2000 originally were issued by Alexander
Hamilton Life Insurance Company of America ("Alexander Hamilton Life").
Effective August 1, 2000, Alexander Hamilton Life merged with and into the
Company, which was an affiliated insurance company. Prior to and in connection
with the Merger, the Company redomesticated (i.e. changed its corporate
domicile) to the State of Nebraska.
As a result of the Merger, the Company has assumed the assets and liabilities of
Alexander Hamilton Life, and as of August 1, 2000 the Company is responsible for
paying benefits under the Contract. The Merger does not change the rights of
Contract Owners under Contracts issued before August 1, 2000, other than to
change the insurance company responsible for administering and paying benefits
under the Contracts. The Merger has not affected the terms of the Contracts. The
charges under the Contracts and the investment options under the Contract have
not changed as a result of the Merger. No charges were assessed to Contract
Owners in connection with the Merger. Moreover, you may still address requests
for information, contract services and benefits claims to the same Variable
Annuity Service Center that you used before the Merger. (The address and
telephone number of the Variable Annuity Service Center are shown on page 1 of
this Prospectus.)
The Company is a wholly-owned subsidiary of Jefferson-Pilot Corporation, which
through its subsidiaries engages in the communications and insurance businesses.
Alexander Hamilton Life also was a wholly-owned subsidiary of Jefferson-Pilot
Corporation. For more information about the Company, see the section headed
"Jefferson Pilot Financial Insurance Company."
13. Who can I contact for more information?
If you have a request or a question about procedures or your Contract, you can
write to us at our Variable Annuity Service Center, P.O. Box 515, Concord, New
Hampshire 03302-0515. You may also send us a fax at 603-226-5123 or call us at
1-800-258-3648, Ext. 5394. When contacting us you should include your Contract
number, your name and the Annuitant's name. Please sign the inquiry or request.
The foregoing summary is qualified in its entirety by the information in the
remainder of this Prospectus, in the Statement of Additional Information, in the
prospectus for each of the underlying Portfolios and in the Contract. You should
refer to these documents for more detailed information. This Prospectus
generally describes only the Contract and the Separate Account. Separate
prospectuses attached hereto describe each Portfolio.
19
<PAGE>
condensed financial information
--------------------------------------------------------------------------------
The following condensed financial information is derived from the financial
statements of the Separate Account. The data should be read in conjunction with
the financial statements, related notes, and other financial information
included in the Statement of Additional Information.
The following table sets forth certain information regarding the Variable
Sub-accounts for a Contract since the commencement of business operations on
February 28, 1996.
The Accumulation Unit values and the number of Accumulation Units outstanding
for each Variable Sub-account for each of the periods indicated are as follows
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
1999 1998 1997 1996
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JPVF International Equity Sub-account*
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 12.970 $ 11.371 N/A N/A
------------------------------------------------------------------------------------------
o End of period $ 16.953 $ 12.970 N/A N/A
------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 291,468 144,191 N/A N/A
------------------------------------------------------------------------------------------
JPVF World Growth Stock Sub-account**
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 11.335 $ 11.179 $ 10.985 $ 10.000
------------------------------------------------------------------------------------------
o End of period $ 13.510 $ 11.335 $ 11.179 $ 10.985
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 380,523 263,838 123,760 101,024
------------------------------------------------------------------------------------------
JPVF Emerging Growth Sub-account**
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 16.345 $ 12.469 $ 10.344 $ 10.000
------------------------------------------------------------------------------------------
o End of period $ 28.451 $ 16.345 $ 12.469 $ 10.344
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 642,670 391,328 132,456 88,358
------------------------------------------------------------------------------------------
JPVF Capital Growth Sub-account**
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 19.844 $ 14.527 $ 11.844 $ 10.000
------------------------------------------------------------------------------------------
o End of period $ 28.309 $ 19.844 $ 14.527 $ 11.844
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 1,444,462 684,717 142,456 53,999
------------------------------------------------------------------------------------------
JPVF Small Company Sub-account*
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 8.588 $ 10.000 N/A N/A
------------------------------------------------------------------------------------------
o End of period $ 9.692 $ 8.588 N/A N/A
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 201,169 155,050 N/A N/A
------------------------------------------------------------------------------------------
JPVF Growth Sub-account*
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 18.879 $ 14.655 N/A N/A
------------------------------------------------------------------------------------------
o End of period $ 33.581 $ 18.879 N/A N/A
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 152,294 37,158 N/A N/A
------------------------------------------------------------------------------------------
JPVF S&P 500 Index Sub-account***
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 12.926 $ 10.000 N/A N/A
------------------------------------------------------------------------------------------
o End of period $ 15.362 $ 12.926 N/A N/A
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 1,788,963 736,865 N/A N/A
------------------------------------------------------------------------------------------
JPVF Value Sub-account**
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 13.864 $ 12.477 $ 9.975 $ 10.000
------------------------------------------------------------------------------------------
o End of period $ 14.459 $ 13.864 $ 12.477 $ 9.975
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 660,144 466,744 105,759 40,125
------------------------------------------------------------------------------------------
JPVF Balanced Sub-account**
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 14.990 $ 12.910 $ 10.801 $ 10.000
------------------------------------------------------------------------------------------
o End of period $ 18.073 $ 14.990 $ 12.910 $ 10.801
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 581,925 382,872 104,886 27,907
------------------------------------------------------------------------------------------
JPVF High Yield Bond Sub-account*
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 11.695 $ 11.909 N/A N/A
------------------------------------------------------------------------------------------
o End of period $ 12.085 $ 11.695 N/A N/A
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 191,983 125,160 N/A N/A
------------------------------------------------------------------------------------------
JPVF Money Market Sub-account**
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 1.099 $ 1.062 $ 1.027 $ 1.000
------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------
o End of period $ 1.133 $ 1.099 $ 1.062 $ 1.027
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 9,740,414 8,842,988 1,052,017 480,732
------------------------------------------------------------------------------------------
MFS Research Series Sub-account*
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 11.896 $ 10.000 N/A N/A
------------------------------------------------------------------------------------------
o End of period $ 14.553 $ 11.896 N/A N/A
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 417,781 230,004 N/A N/A
------------------------------------------------------------------------------------------
MFS Utilities Series Sub-account*
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 11.672 $ 10.000 N/A N/A
------------------------------------------------------------------------------------------
o End of period $ 15.057 $ 11.672 N/A N/A
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 635,836 324,448 N/A N/A
------------------------------------------------------------------------------------------
Oppenheimer Capital Appreciation/VA
Sub-account****
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 10.000 N/A N/A N/A
------------------------------------------------------------------------------------------
o End of period $ 12.654 NA N/A N/A
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 159,326 N/A N/A N/A
------------------------------------------------------------------------------------------
Oppenheimer Bond/VA Sub-account**
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 11.449 $ 10.915 $ 10.223 $ 10.000
------------------------------------------------------------------------------------------
o End of period $ 11.168 $ 11.449 $ 10.915 $ 10.223
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 549,107 336,679 151,322 10,568
------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond/VA
Sub-account*
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 9.989 $ 10.000 N/A N/A
------------------------------------------------------------------------------------------
o End of period $ 10.130 $ 9.989 N/A N/A
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 206,127 134,573 N/A N/A
------------------------------------------------------------------------------------------
VIP Equity-Income Sub-account*
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 11.296 $ 10.000 N/A N/A
------------------------------------------------------------------------------------------
o End of period $ 11.845 $ 11.296 N/A N/A
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 759,940 425,663 N/A N/A
------------------------------------------------------------------------------------------
VIP II Contrafund[RegTM] Sub-account*
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 12.355 $ 10.000 N/A N/A
------------------------------------------------------------------------------------------
o End of period $ 15.140 $ 12.355 N/A N/A
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 774,323 254,379 N/A N/A
------------------------------------------------------------------------------------------
VIP Growth Sub-account*
------------------------------------------------------------------------------------------
Accumulation unit value
------------------------------------------------------------------------------------------
o Beginning of period $ 13.095 $ 10.000 N/A N/A
------------------------------------------------------------------------------------------
o End of period $ 17.748 $ 13.095 N/A N/A
------------------------------------------------------------------------------------------
Number of accumulation units
------------------------------------------------------------------------------------------
o End of period 990,213 335,670 N/A N/A
------------------------------------------------------------------------------------------
</TABLE>
* These Sub-accounts were added to the Contract as of January 1, 1998.
** On December 5, 1997, the Company substituted shares of certain Portfolios
of the JPVF and the Oppenheimer Bond Fund/VA for shares of the Alexander
Hamilton Variable Insurance Trust ("AHVIT") and the Federated Prime Money
Fund II. The above numbers reflect the performance of the AHVIT and the
Federated Prime Money Fund II for the period prior to the date of the
substitution and reflect the performance of JPVF and the Oppenheimer Bond
Fund/VA for the period after the date of the substitution.
22
<PAGE>
In the substitution, the Oppenheimer Bond Fund/VA was substituted for two
of the AHVIT Funds and the pre-substitution performance numbers for the
Oppenheimer Bond Sub-Account reflect the performance of only one of such
AHVIT Funds.
*** This Sub-account was added to the Contract as of January 1, 1998. On May
1, 2000, the Company substituted shares of the JPVF S&P 500 Index
Portfolio for shares of the VIP II Index 500 Portfolio. The above numbers
reflect the performance of the VIP II Index 500 Portfolio prior to the
date of the substitution.
**** This Sub-account was added to the Contract as of May 1, 1999.
allocation options
--------------------------------------------------------------------------------
You may allocate your premium payments to the 19 Variable Sub-accounts of the
Separate Account, to the two Interest Rate Guarantee Periods of the Capital
Developer Account, or to a combination of these options. If you participate in
our dollar cost averaging program, you may also allocate your premium payments
to the DCA Fixed Account. These allocation options may not be available in all
states. However, over the life of your Contract, you may not allocate your
premium payments to more than 16 of the Variable Sub-accounts in existence now
or in the future. We may modify this limitation in the future. There is no
guaranteed or minimum Surrender Value for any premium payments or amounts
allocated to any Variable Sub-account.
Separate Account Investments
The Separate Account currently is divided into 19 Variable Sub-accounts. We
reserve the right to add or remove Variable Sub-accounts. Each Variable
Sub-account reflects the investment performance of a specific underlying
Portfolio. Currently, eleven Variable Sub-accounts invest in shares of the
Jefferson Pilot Funds, two Variable Sub-accounts invest in shares of the
Variable Insurance Products Fund (VIP), one Variable Sub-account invests in
shares of the Variable Insurance Products Fund II (VIP II), two Variable
Sub-accounts invest in shares of the MFS Funds and three Variable Sub-accounts
invest in shares of the Oppenheimer Funds. JPVF, the VIP Funds, MFS[RegTM]
Variable Insurance Trust and Oppenheimer Variable Account Funds are open-end
management investment companies and, with the exception of the MFS Utilities
Fund and JPVF International Equity Portfolio, all of the Portfolios available
under the Contracts are diversified. Each Portfolio is managed by a registered
investment adviser.
The investment adviser for JPVF is Jefferson Pilot Investment Advisory
Corporation, an affiliate of the Company. Jefferson Pilot Investment Advisory
Corporation has contracted with eight unaffiliated companies to act as
sub-investment managers to the Jefferson Pilot Funds. These sub-investment
managers are shown in the table below.
The investment adviser for VIP and VIP II is Fidelity Management & Research
Company ("FMR"). FMR has entered into sub-advisory agreements with Fidelity
Management & Research (U.K.) Inc., Fidelity Management & Research Far East Inc.,
and Fidelity Investments Japan Limited to provide sub-advisory services to the
Contrafund[RegTM] Portfolio.
The investment adviser for the MFS[RegTM] Variable Insurance Trust is
Massachusetts Financial Services Company ("MFS").
23
<PAGE>
The investment adviser for the OVAF is OppenheimerFunds, Inc.
The investment objective and manager of each Portfolio is as follows:
<TABLE>
<CAPTION>
EQUITY PORTFOLIO CHOICES
----------------------------------------------------------------------------------------------------------------------
Portfolio Name Objective Manager
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
JPVF International Equity Long-term growth of capital through Lombard Odier International Portfolio
Portfolio investments in securities whose primary Management Limited
trading markets are outside the United States.
----------------------------------------------------------------------------------------------------------------------
JPVF World Growth Stock Long-term capital growth through a policy of Templeton Investment Counsel, Inc.
Portfolio investing primarily in stocks of companies
organized in the U.S. or in any foreign
nation. A portion of the Portfolio may also
be invested in debt obligations of companies
and governments of any nation. Any income
realized will be incidental.
----------------------------------------------------------------------------------------------------------------------
JPVF Emerging Growth Long-term growth of capital. Dividend and MFS
Portfolio interest income from portfolio securities, if
any, is incidental to the Portfolio's
investment objective of long-term growth.
----------------------------------------------------------------------------------------------------------------------
JPVF Capital Growth Seeks capital growth. Realization of income Janus Capital Corporation
Portfolio is not a significant investment consideration
and any income realized will be incidental.
----------------------------------------------------------------------------------------------------------------------
JPVF Small Company Seeks growth of capital. The Portfolio pursues Lord, Abbett & Company
Portfolio its objective by investing primarily in a
diversified portfolio of equity securities
issued by small companies.
----------------------------------------------------------------------------------------------------------------------
JPVF Growth Portfolio Capital growth by investing primarily in Strong Capital Management, Inc.
equity securities that the Sub-Manager
believes have above-average growth prospects.
----------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C>
----------------------------------------------------------------------------------------------------------------------
JPVF S&P 500 Index Seeks to approximate as closely as Barclays Global Fund
Portfolio(1) practicable, before fees and expenses, the Advisors
total rate of return of the common stocks
publicly traded in the United States, as
represented by the S&P 500.
----------------------------------------------------------------------------------------------------------------------
JPVF Value Portfolio Long-term growth of capital by investing Credit Suisse Asset Management, LLC.
primarily in a wide range of equity issues
that may offer capital appreciation and,
secondarily, to seek a reasonable level of
current income.
----------------------------------------------------------------------------------------------------------------------
MFS Research Seeks to provide long-term growth of capital MFS
and future income.
----------------------------------------------------------------------------------------------------------------------
MFS Utilities Seeks capital growth and current income MFS
(income above that available from a portfolio
invested entirely in equity securities).
----------------------------------------------------------------------------------------------------------------------
Oppenheimer Capital Seeks to achieve capital appreciation by OppenheimerFunds, Inc.
Appreciation Fund/VA investing in securities of well-known
established companies.
----------------------------------------------------------------------------------------------------------------------
VIP Equity-Income Portfolio Seeks reasonable income by investing FMR
primarily in income-producing equity
securities. In choosing these securities the
fund will also consider the potential for
capital appreciation. The fund's goal is to
achieve a yield which exceeds the composite
yield on the securities comprising the
Standards & Poor's Composite Index of 500
Stocks (S&P 500).
----------------------------------------------------------------------------------------------------------------------
VIP Growth Portfolio Seeks to achieve capital appreciation. FMR
----------------------------------------------------------------------------------------------------------------------
VIP II Contrafund [RegTM] Seeks long-term capital appreciation. FMR
Portfolio
----------------------------------------------------------------------------------------------------------------------
</TABLE>
--------
(1) "Standard & Poor's (R)", "S&P (R)", "Standard & Poor's 500", and "500"
are trademarks of the McGraw-Hill Companies, Inc. and have been licensed
for use by the Portfolio. The Portfolio is not sponsored, endorsed, sold or
promoted by Standard & Poor's and Standard & Poor's makes no representation
regarding the advisability of investing in the Portfolio.
25
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
EQUITY AND FIXED-INCOME PORTFOLIO CHOICES
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
JPVF Balanced Portfolio Reasonable current income and long-term Janus Capital Corporation
capital growth, consistent with conservation
of capital, by investing primarily in common
stocks and fixed income securities.
----------------------------------------------------------------------------------------------------------------------
<CAPTION>
FIXED INCOME PORTFOLIO CHOICES
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
JPVF High Yield Bond High level of current income by investing MFS
Portfolio primarily in corporate obligations with
emphasis on higher yielding, higher risk,
lower-rated or unrated securities.
----------------------------------------------------------------------------------------------------------------------
JPVF Money Market Portfolio Seeks to achieve as high a level of current MFS
income as is consistent with preservation of
capital and liquidity.
----------------------------------------------------------------------------------------------------------------------
Oppenheimer Bond Fund/VA Seeks a high level of current income. As a OppenheimerFunds Inc.
secondary objective, seeks capital growth
when consistent with its primary objective.
----------------------------------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Seeks a high level of current income OppenheimerFunds Inc.
Fund/VA principally derived from interest on debt
securities and to enhance such income by
writing covered call options on debt
securities.
----------------------------------------------------------------------------------------------------------------------
</TABLE>
An investment in the JPVF Money Market Portfolio is neither insured nor
guaranteed by the U.S. Government or the FDIC or any other agency.
We do not promise that the Portfolios will meet their investment objectives.
Amounts you have allocated to Variable Sub-accounts may grow in value, decline
in value, or grow less than you expect, depending on the investment performance
of the Portfolios in which those Variable Sub-accounts invest. You bear the
investment risk that those Portfolios will not meet their investment objectives.
You should carefully review their prospectuses before allocating amounts to the
Variable Sub-accounts of the Separate Account. With regard to the JPVF High
Yield Bond Portfolio and other Portfolios investing in higher yielding, higher
risk, lower-rated or unrated securities, you should consult the appropriate
section of the corresponding prospectus for a description of the risks
associated with such investments.
26
<PAGE>
Mixed and Shared Funding: Conflicts of Interest
Shares of the Portfolios are available to insurance company separate accounts
which fund variable annuity contracts and variable life insurance policies,
including the Contract described in the Prospectus. Portfolio shares are offered
to separate accounts of both affiliated and unaffiliated insurance companies. It
is conceivable that, in the future, it may not be advantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest in
these Portfolios simultaneously, since the interests of such policyowners or
contract owners may differ. Although neither the Company nor the Portfolios
currently foresee any such disadvantages either to variable life insurance
policyowners or to variable annuity contract owners, each Portfolio's Board of
Trustees/Directors has agreed to monitor events in order to identify any
material irreconcilable conflicts which may possibly arise and to determine what
action, if any, should be taken in response thereto. If such a conflict were to
occur, one of the separate accounts might withdraw its investment in a
Portfolio. This might force that Portfolio to sell portfolio securities at
disadvantageous prices.
The Capital Developer Account
Interests in the Capital Developer Account have not been registered with the SEC
in reliance upon exemptions under the Securities Act of 1933 and the Capital
Developer Account has not been registered as an investment company under the
Investment Company Act of 1940. However, disclosures regarding the Capital
Developer Account may be subject to certain generally applicable provisions of
the Federal securities laws relating to the accuracy and completeness of
statements made in prospectuses. Disclosure in this Prospectus relating to the
Capital Developer Account has not been reviewed by the SEC.
Premium payments allocated to the Capital Developer Account and transfers to the
Capital Developer Account are not part of the Separate Account. Rather, the
Capital Developer Account is secured by our general assets, which support
insurance and annuity obligations. We will invest the assets that support the
Capital Developer Account in accordance with the applicable state laws that
govern the nature and quality of investments that may be made by insurance
companies and the percentage of their assets that may be committed to any
particular type of investment.
Within the Capital Developer Account, we currently offer Interest Rate Guarantee
Periods of two durations, one lasting for one year and the other lasting for
seven years. We will start a new Interest Rate Guarantee Period for each premium
payment you allocate and each amount you transfer to the Capital Developer
Account. We will credit interest at a specified Guaranteed Interest Rate on each
Interest Rate Guarantee Period. The actual credited rates will be the interest
rate in effect on the day that a premium payment is allocated or an amount is
transferred to the Capital Developer Account. All interest rates are stated as
effective annual yields. The interest rate for new money allocated to the
Capital Developer Account will be reset periodically. Interest rates are set at
our sole discretion, but will never be less than an effective annual yield of
3.0%. There is no specific formula for the determination of the Guaranteed
Interest Rate. Some of the factors that we may consider are: general economic
trends; rates of return currently available and anticipated on our investments;
expected investment yields; regulatory and tax requirements; and competitive
factors.
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Amounts you allocate to the Capital Developer Account may be subject to an MVA
upon a surrender, partial withdrawal, transfer or annuitization requested more
than 30 days before the end of the applicable Interest Rate Guarantee Period.
The MVA will never reduce the return on amounts allocated to an Interest Rate
Guarantee Period to less than 3% per year before any applicable Surrender
Charge. Because of this adjustment and for other reasons, the amount you receive
upon partial withdrawal or surrender or the amount applied to a transfer or
annuitization may be more or less than the Account Value of the relevant
Interest Rate Guarantee Period at the time of the transaction.
You may elect to have your premium payments allocated to the Capital Developer
Account at any time. In addition, you may transfer all or part of the Separate
Account Value to one or more Interest Rate Guarantee Periods prior to the
Maturity Date.
Market Value Adjustment
The proceeds of a partial withdrawal, full surrender, or transfer made from the
Capital Developer Account 31 days or more prior to the end of the applicable
Interest Rate Guarantee Period will be increased or decreased by the application
of an MVA. If the maturity date is 31 or more days before the end of an Interest
Rate Guarantee Period, the amount applied to Annuity Payments from the Capitol
Developer Account also may be increased or decreased by an MVA. Where
applicable, the MVA only applies to the portion of the partial withdrawal
withdrawn from the Capital Developer Account Value. No MVA is applied to any
partial withdrawal, surrender or transfer from an Interest Rate Guarantee Period
made during the last 30 days of the Interest Rate Guarantee Period.
The MVA will reflect the relationship between (a) the Treasury Rate for the
period, the term to maturity of which most closely approximates the remaining
term of the Interest Rate Guarantee Period from which the partial withdrawal,
surrender, or transfer is made, and (b) the Guaranteed Interest Rate applicable
to that Interest Rate Guarantee Period.
Generally, if your Guaranteed Interest Rate does not exceed the applicable
Treasury Rate by at least 0.4%, then the application of the MVA will reduce the
proceeds of a partial withdrawal, surrender or transfer. Conversely, if your
Guaranteed Interest Rate exceeds the applicable Treasury Rate by more than 0.4%,
the application of the MVA will increase the proceeds of a partial withdrawal,
surrender, or transfer.
For example, assume that a Contract Owner selects an initial Interest Rate
Guarantee Period of seven years and the Guaranteed Interest Rate for that period
is 8% per annum, and, at the end of four years, the Contract Owner makes a
partial withdrawal. If the three-year Treasury Rate is then 6%, the MVA will be
positive and will increase the proceeds. On the other hand, if the Treasury Rate
is higher than the Guaranteed Interest Rate, for example 10%, the application of
the MVA will reduce the amount payable.
An MVA will never reduce the return on an amount allocated to an Interest Rate
Guarantee Period below three percent per year. Even on a partial withdrawal, a
negative MVA may be as much as the total interest credited to the relevant
Interest Rate Guarantee Period, as of the withdrawal date, in excess of an
effective annual rate of three percent.
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The formula for calculating the MVA is set forth in Appendix II to this
Prospectus, which contains examples of the application of the MVA.
Dollar Cost Averaging Fixed Account Option
You also may allocate premium payments to the Dollar Cost Averaging Fixed
Account ("DCA Fixed Account"). The DCA Fixed Account is part of our general
account. We will credit interest to premium payments allocated to this option
for up to one year at the current rate that we declare when you make the
allocation. The effective annual rate will never be less than 3%. You may not
transfer funds to this option from the Variable Sub-accounts or the Capital
Developer Account.
the allegiance variable annuity contract
--------------------------------------------------------------------------------
The Allegiance Variable Annuity Contract (the "Contract") is an individual
Flexible Premium Deferred Variable Annuity Contract. You may purchase a Contract
on a non-qualified basis ("Non-qualified Contract") or in connection with
retirement plans or individual retirement accounts that qualify for favorable
federal income tax treatment ("Qualified Contract"). The Contract is designed to
aid you in long-term financial planning.
Contract Application and Issuance of Contracts
Before we will issue a Contract, we must receive a completed application and an
initial premium payment of at least $2,000. A lower minimum may apply to certain
Qualified Contracts. You may pay the initial premium payment in a single payment
or in twelve equal periodic payments over the first 12 Contract Months. The
periodic payments must be made via automatic debits or automated clearing house
transfers from your checking or savings account. We reserve the right to reject
any application or premium payment. For a Non-qualified Contract, you (or the
Annuitant, if you are not the Annuitant) must be age 90 or younger. You must be
age 80 or younger for certain types of Qualified Contracts. The Contract is not
available in all states. In addition, in some states, after the Merger we will
continue to issue Contracts in the name of Alexander Hamilton Life until we
receive certain regulatory approvals, at which time we will send those Contract
Owners an endorsement reflecting that the Company assumed Alexander Hamilton
Life's obligations under the Contracts at the time of the Merger.
If you properly complete the application and it can be accepted in the form
received, your initial Net Premium Payment will be credited to the Contract
Value within 2 business days after the later of our receipt of the application
or our receipt of the initial premium payment at our Variable Annuity Service
Center. If we cannot credit the initial Net Premium Payment to the Separate
Account because the application or other issuing requirements are incomplete, we
will contact you within 5 business days and give an explanation for the delay.
We will return the initial premium payment to you at that time unless you permit
us to keep the initial payment and credit it as soon as the necessary
requirements are fulfilled. In that event, we will credit the initial Net
Premium Payment to the Contract Value within 2 business days of the
application's completion.
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Your Contract will become effective on the date we credit the initial Net
Premium Payment to the Contract Value.
Free Look Period. For a limited time you may return your Contract for
cancellation and a refund as described in your Contract. This time period
depends on the state in which your Contract is issued. In most states, you have
10 days after you receive your Contract. In most states, however, if your
Contract replaces another contract, you have 20 days in which to cancel your
Contract.
In order to cancel your Contract, you must deliver or mail a written notice to
our Variable Annuity Service Center, or to your registered representative from
whom you purchased the Contract, and return your Contract. Your cancellation
will be effective on the date it is postmarked, properly addressed and postage
paid. The Contract will then be void as if it had never been issued.
The amount of your refund will depend on the state in which your Contract was
issued. In most states we will pay you an amount equal to the Contract Value on
the date we receive the Contract from you. We will not deduct any Surrender
Charges or administrative charges that would otherwise apply. The Contract Value
at that time may be more or less than your premium payments. In some states we
are required to refund your premium payments less any partial withdrawals you
may have already made from your Contract. If your Contract is issued in one of
the states where we are required to refund your premium payments, the amount of
your refund may be more or less than your Contract Value at that time.
Premium Payments
You should make all premium payments, checks, or electronic fund transfers
payable to Jefferson Pilot Financial Insurance Company and they should be sent
to our Variable Annuity Service Center. We will provide you a receipt upon
request. We will provide you with a confirmation of each transaction. Your
premium payments may be paid directly on a flexible basis, through the
systematic investment program on a monthly or quarterly basis, or through a
group billing or payroll deduction arrangement on a periodic basis.
Initial Premium Payment. The minimum initial premium payment is currently
$2,000. A lower minimum may apply to certain Qualified Contracts. However, you
can pay the minimum initial premium payment in 12 equal monthly payments by
selecting the systematic investment program, in which additional premium
payments are automatically withdrawn monthly from your bank account, or by
participating in a periodic group billing or payroll deduction arrangement. In
the future, we may increase or decrease the minimum initial premium payment. The
initial premium payment is the only premium payment required to be paid under a
Contract. The maximum initial premium payment that we currently accept without
our prior approval is $1,000,000.
Additional Premium Payments. Prior to the Maturity Date and before a Death
Benefit has become payable, you may pay additional premium payments at any
interval. The minimum additional premium payment is $50. We reserve the right to
limit the dollar amount of any additional premium payments. You may not pay more
than $1 million in additional premium
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payments without our prior approval. We will credit additional premium payments
to the Contract Value as of the Valuation Period during which we receive them at
our Annuity Service Center.
Allocation of Premium Payments. We will allocate your premium payments among the
Variable Sub-accounts as specified by you in the application or as subsequently
changed. If you fail to specify how premium payments are to be allocated, the
application cannot be accepted. You must allocate premium payments to one or
more Variable Sub-accounts of the Separate Account, to one or more Interest Rate
Guarantee Periods, to the DCA Fixed Account or some combination thereof in whole
percentages (totaling 100%). Any allocation to a Variable Sub-account must be at
least $50 and in increments of 5% of a premium payment. Any allocation to an
Interest Rate Guarantee Period of the Capital Developer Account must be at least
$1,000. Any allocation to the DCA Fixed Account must be at least $5,000. Premium
payments allocated to an Interest Rate Guarantee Period will be credited with
interest from the day after they are received.
We will allocate your additional premium payments in the percentage specified in
your application, unless you request a change of allocation. If you allocated
some or all of your initial premium payment to the DCA Fixed Account, any
subsequent premium payments will be allocated according to the future premium
allocation instructions indicated on your Additional Features Form, if any. If
you did not provide for future premium allocation instructions on this Form,
that portion of your premium payment that would have been allocated to the DCA
Fixed Account will instead be allocated into the allocation options indicated in
the dollar cost averaging section of your completed Additional Features Form and
the remaining portion of your subsequent premium payments will be allocated
according to the instructions in your application.
You may change your allocation instructions for Net Premium Payments any time
before the Maturity Date by sending a Request to our Variable Annuity Service
Center. You must specify your new allocation choices. The allocation change will
apply to premium payments received with or after the Request.
Payment Not Honored by Bank. Any payment due under the Contract which is
derived, all or in part, from any amount paid to us by check or draft may be
postponed until such time as we determine that such instrument has been honored.
Contract Value
On the Contract Date, your Contract Value equals your initial Net Premium
Payment. Thereafter, on any day on or before your Maturity Date, your Contract
Value equals the sum of the Separate Account Value, the Capital Developer
Account Value and the DCA Fixed Account Value. Your Contract Value will increase
by (1) any additional premium payments we receive; (2) any increases in the
Contract Value due to investment results of the Variable Sub-accounts you have
selected; and (3) interest credited to the Capital Developer Account and the DCA
Fixed Account. Your Contract Value will decrease by (1) any partial withdrawals
or full surrenders, including applicable charges; (2) any decreases in your
Contract Value due to investment results of the Variable Sub-accounts you have
selected; (3) the Mortality and Expense Risk Charge, the Administrative Expense
Charge, any applicable Transfer Charge, and, on the last day of any
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Contract Year, the Annual Administrative Fee; and (4) taxes, when applicable. We
will inform you of your Contract Value upon request.
Your Contract Value is expected to change from Valuation Period to Valuation
Period. A Valuation Period is the period between successive Valuation Days. A
Valuation Day is any day that the New York Stock Exchange is open for trading.
Holidays are generally not Valuation Days.
Separate Account Accumulation Unit Value. When you allocate a Net Premium
Payment or transfer an amount to a Variable Sub-account, it is credited to the
Separate Account Value in the form of Accumulation Units. Each Variable
Sub-account has a distinct Accumulation Unit value. The number of units credited
is determined by dividing the portion of the Net Premium Payment or amount
transferred by the dollar value of one Accumulation Unit of the Variable
Sub-account as of the end of the Valuation Period during which the allocation or
transfer is made. When amounts are transferred out of, or withdrawn or
surrendered from, a Variable Sub-account, Accumulation Units are cancelled or
redeemed in a similar manner.
We will determine the Separate Account Value on every Valuation Day. For each
Variable Sub-account, the Accumulation Unit value for a given Valuation Period
is based on the net asset value of a share of the corresponding Portfolio.
Therefore, the Accumulation Units will fluctuate in value from day to day based
on the investment experience of the corresponding Portfolio and the Separate
Account Value will increase or decrease to reflect the investment performance of
the corresponding Portfolio. The Separate Account Value also reflects expenses
borne by the Portfolio and the deduction of certain charges. The determination
of Variable Sub-account Accumulation Unit values is described in detail in the
Statement of Additional Information.
Minimum Contract Value. A minimum Contract Value of $2,000 for Non-qualified
Contracts must be maintained during the Accumulation Period. If you fail to
maintain the minimum Contract Value and no premium payments have been paid in
the past two years, then we may cancel the Contract and return the Contract
Value less any applicable fees to you in one lump sum. We will send a 90-day
notice to the most current address you have given us before we cancel your
Contract. If you pay sufficient premium payments to restore the Contract Value
to at least the minimum Contract Value within 90 days of the date of notice,
your Contract will not be cancelled.
Transfers
You can transfer Contract Value to or from Interest Rate Guarantee Periods of
the Capital Developer Account and/or any Variable Sub-account of the Separate
Account, within certain limits, as described below. We do not permit transfers
into the DCA Fixed Account. We reserve the right to restrict the transfer
privilege in any way. We must receive your transfer request at our Variable
Annuity Service Center before a transfer will be effected.
We only make transfers on days when we and the New York Stock Exchange are open
for business. If we receive your request on one of those days, we will make the
transfer that day. Otherwise, we will make the transfer on the first subsequent
day on which we and the New York Stock Exchange are open.
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Transfers during the Accumulation Period are subject to the following
provisions:
o You may make an unlimited number of transfers. Currently, we waive the
transfer fee. However, we reserve the right to impose a transfer fee of
$10 on each transfer in excess of 15 during any Contract Year. We
currently have no plans to impose the $10 fee, and we will provide at
least 30 days notice before we impose such a fee.
o Transfers from an Interest Rate Guarantee Period that are made within 30
days of the end of the Interest Rate Guarantee Period are not subject to
an MVA. All other transfers from Interest Rate Guarantee Periods are
subject to an MVA.
o If, after a transfer, the remaining Separate Account Value in the Variable
Sub-account from which the transfer was made would be less than $250, we
may include that remaining Separate Account Value as part of the transfer.
o The minimum amount you may transfer among the Variable Sub-accounts is
$250 or the entire Separate Account Value remaining in the source Variable
Sub-account.
o The minimum amount that you may transfer to or from an Interest Rate
Guarantee Period of the Capital Developer Account is $1,000.
During the Annuity Period, under any Variable Annuity Option, you (whether you
are the Annuitant or not) may transfer Separate Account Value among Variable
Sub-accounts, subject to the following provisions:
o You may make an unlimited number of transfers. Currently, we waive the
transfer fee. However, we reserve the right to impose a transfer fee of
$10 on each transfer in excess of 15 during any Contract Year. We
currently have no plans to impose the $10 fee, and we will provide at
least 30 days notice before we impose such a fee.
o If, after a transfer, the remaining Separate Account Value in the Variable
Sub-account from which the transfer was made is less than $250, we may
include that remaining Separate Account Value as part of the transfer.
o The minimum amount you may transfer from a Variable Sub-account is $250 or
the entire Separate Account Value remaining in the Variable Sub-account.
Transfers between Variable Sub-accounts during the Annuity Period will be
processed based on the formula outlined in the Statement of Additional
Information (see "Annuity Period Transfer Formulas").
You may not transfer amounts applied to a fixed Annuity Payment Option.
Telephone Transfers and Reallocations. You, your authorized representative or a
member of your representative's administrative staff may request transfers by
telephone of Contract Value or reallocation of premium payments (including
allocation changes pursuant to existing Dollar Cost Averaging and Automatic
Rebalancing programs), provided we have received the appropriate authorization
form. You will be asked to provide us with personal identification
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information at the time of such request for verification purposes. Although we
have procedures that are reasonably designed to reduce the risk of unauthorized
telephone transfers or allocation changes, there still exists some risk. Neither
the Company, Jefferson Pilot Variable Corporation, nor any of their affiliates
are liable for any loss resulting from unauthorized telephone transfers or
allocation changes if the procedures have been followed, and you bear the risk
of loss in such situation.
Dollar Cost Averaging
Under the Dollar Cost Averaging program, you can instruct us to automatically
transfer a specified dollar amount from any Variable Sub-account or the DCA
Fixed Account to the Variable Sub-accounts. The program is not available in
connection with the One Year or Seven Year Interest Rate Guarantee Periods of
the Capital Developer Account. The automatic transfers can occur monthly or
quarterly, and the amount transferred each time must be at least $50. At the
time the program begins, your Contract must have a minimum value of $5,000.
Dollar Cost Averaging, an investment method which provides for regular, level
investments over time, results in the purchase of more Accumulation Units when
the Accumulation Unit value is low, and fewer Accumulation Units when the
Accumulation Unit value is high. However, there is no guarantee that the Dollar
Cost Averaging program will result in a higher Contract Value, protect against
loss, or otherwise be successful.
Moreover, while we refer to this program of periodic transfers generally as
dollar cost averaging, periodic transfers from a Sub-account with more volatile
performance experience is unlikely to produce the desired effects of dollar cost
averaging as would transfers from a less volatile Sub-account. If you are
seeking the potential benefit of Dollar Cost Averaging, you should choose either
the Fixed Account or the Money Market Sub-account as the source of transfers.
Transfers from the DCA Fixed Account will take place over a 12-month period. We
may in the future offer different periods for dollar cost averaging amounts from
the DCA Fixed Account. We will only accept new premium payments into the DCA
Fixed Account. Amounts may not be transferred into the DCA Fixed Account from
the Variable Sub-accounts or the Capital Developer Account. Once we commence the
transfers from the DCA Fixed Account into the Variable Sub-accounts you have
selected, you may not pay any additional premium payments into the DCA Fixed
Account.
If your Contract was issued in a state where we are required to return your
premium payments if you cancel your Contract during the free look period, we
reserve the right to delay commencement of dollar cost averaging transfers until
the expiration of the free look period. If the premium payments that are to be
used for your dollar cost averaging program will be sent to us at different
times, we will hold the funds in the JPVF Money Market Sub-account until we have
received all of the payments, at which time we will set your interest rate and
begin the dollar cost averaging transfers. If you discontinue the dollar cost
averaging program while amounts remain in the DCA Fixed Account, we will
transfer this remaining balance to the JPVF Money Market Sub-account unless you
indicate otherwise.
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You can elect the Dollar Cost Averaging program when purchasing the Contract or
at a later date. If you dollar cost average out of a Variable Sub-account, the
election can specify that only a certain number of transfers will be made, in
which case the program will terminate when that number of transfers has been
made. Otherwise, the program will terminate when the amount in the Variable
Sub-account equals $250 or less. At any one time, you are allowed to participate
in only one dollar cost averaging program utilizing either the DCA Fixed Account
or one of the Variable Sub-accounts. There is no charge for this program.
Transfers made as part of the Dollar Cost Averaging program do not count toward
the 15 free transfers that you are permitted annually under the Contract.
Automatic Rebalancing
You may also elect an automatic rebalancing program. This program provides a
method for re-establishing fixed proportions between selected Variable
Sub-accounts on a systematic basis. Under this program, the allocation between
Variable Sub-accounts will be automatically readjusted to the desired
allocation, subject to a minimum of 5% per Variable Sub-account, on a quarterly
or annual basis. Transfers made as a result of this program do not count toward
the 15 free transfers that you are permitted annually under the Contract. There
is currently no fee charged for participation in this program. This program does
not guarantee profits nor protect against losses.
You may not elect to have Dollar Cost Averaging and Automatic Rebalancing at the
same time. The applicable authorization form must be on file with us before
either program may begin. We reserve the right to modify the terms and
conditions of these programs upon 30 days advance notice to you.
distributions under the Contract
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Surrenders and Partial Withdrawals
Prior to the Maturity Date, you may surrender your Contract for the Surrender
Value or withdraw a portion of the Surrender Value by sending a Request, signed
by you, to our Variable Annuity Service Center. The Surrender Value is the
Contract Value plus or minus any MVA, minus any applicable Surrender Charge,
Annual Administrative Fee, and Premium Taxes.
The proceeds payable upon a partial withdrawal will be the partial withdrawal
amount requested, increased or decreased by any applicable MVA and then
decreased by any applicable Surrender Charge and Premium Taxes payable by us and
not previously deducted. For partial withdrawals, you must specify the
allocation option from which the withdrawal should be taken. If we do not
receive allocation instructions from you, we will allocate the partial
withdrawal proportionately among the Variable Sub-accounts and the Capital
Developer Account in the same proportions as you have instructed us to allocate
your premium payments.
No MVA is imposed on surrenders or partial withdrawals made from an Interest
Rate Guarantee Period during the last 30 days of the Interest Rate Guarantee
Period.
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The minimum amount that you can withdraw is $250 ($1,000 if the withdrawal is
from any Interest Rate Guarantee Period of the Capital Developer Account) unless
we agree otherwise or unless a smaller amount is required to comply with the Tax
Code. Qualified Contracts may be subject to required minimum distribution
requirements. (See "Certain Federal Income Tax Consequences.") In addition,
following any partial withdrawal, your remaining Contract Value must be at least
$2,000. If the processing of your partial withdrawal request would result in a
remaining Contract Value of less than $2,000, we may treat your partial
withdrawal request as a request for a full surrender of your Contract, and you
will receive the Surrender Value. Following payment of the Surrender Value, your
Contract will be cancelled. If the amount requested to be withdrawn from an
allocation option is greater than the portion of the Contract Value attributable
to that allocation option, we will pay you the entire portion of the Contract
Value attributable to that allocation option, plus or minus any MVA, minus any
Surrender Charge and minus any charge for applicable Premium Taxes payable by us
and not previously deducted.
The Separate Account Value remaining in any Variable Sub-account immediately
following a partial withdrawal must be at least $250. The Capital Developer
Account Value remaining in an Interest Rate Guarantee Period immediately
following a partial withdrawal must be at least $1,000. If the processing of
your withdrawal request would result in Separate Account Value remaining in a
Variable Sub-account of less than $250 or Capital Developer Account Value
remaining in an Interest Rate Guarantee Period of less than $1,000, we may treat
your withdrawal request as a request for withdrawal of the entire Separate
Account Value remaining in the relevant Variable Sub-account or the entire
Capital Developer Account Value remaining in the relevant Interest Rate
Guarantee Period.
You may surrender the Contract at any time prior to the Maturity Date by sending
a Request to our Variable Annuity Service Center. We will pay you the Surrender
Value. All of your rights and those of the Annuitant will terminate following a
full surrender or at any time partial withdrawals reduce your Contract Value to
zero. After the Maturity Date, no surrenders or partial withdrawals are
permitted. (See "Annuity Payment Options.")
Withdrawals and surrenders will be processed using the Separate Account Value
for the Valuation Period during which your Request for withdrawal or surrender
is received at our Variable Annuity Service Center. We will pay all partial
withdrawals and full surrender requests in a lump sum to you or to any other
Payee that you designate within 5 business days (unless you choose a later date)
following receipt of your request and all requirements necessary to process the
Request at our Variable Annuity Service Center, except as follows:
o Capital Developer Account--We reserve the right, when permitted by law, to
defer payment of any partial withdrawal or full surrender from the
Interest Rate Guarantee Periods for up to 6 months. We will pay Interest
on any amount deferred for 30 days or more at a rate of at least 3.0% per
year.
o Separate Account--We reserve the right to defer the payment of any partial
withdrawal or full surrender from the Separate Account as permitted by the
Investment Company Act of 1940. Such delay may occur because (i) the New
York Stock Exchange is closed for trading (other
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than usual weekend or holiday closing); (ii) the SEC determines that a
state of emergency exists; or (iii) an order or pronouncement of the SEC
permits a delay for your protection.
In addition, a premium payment amount is not available to satisfy a partial
withdrawal or full surrender until the check or other instrument by which such
premium payment was paid has been honored.
Partial withdrawals (including systematic withdrawals described below) and
surrenders may be taxable and a penalty tax may apply prior to age 591/2. (See
"Certain Federal Income Tax Consequences.")
Systematic Withdrawal Plan
Under the Systematic Withdrawal Plan, you can instruct us to make automatic
withdrawal payments to you monthly, quarterly, semi-annually or annually from a
specified Variable Sub-account. The minimum monthly payment is $250, the minimum
quarterly payment is $750, the minimum semi-annual payment is $1,500, and the
minimum annual payment is $3,000, or the amounts can be the minimum required
amounts to comply with qualified plan requirements. The request for systematic
withdrawal must specify a date for the first payment, which must be at least 30
but not more than 90 days after the form is submitted. The Surrender Charge will
not apply to the first 10% of Contract Value (determined at the time of the
withdrawal) that is withdrawn during a Contract Year. Amounts withdrawn in
excess of 10% will be subject to any applicable Surrender Charge. After the
seventh Contract Year, amounts withdrawn will no longer be subject to a
Surrender Charge. Systematic Withdrawals may not be taken from the Interest Rate
Guarantee Periods. Systematic Withdrawals may result in certain tax
consequences. (See "Certain Federal Income Tax Consequences.")
Annuity Payments
We will make Annuity Payments beginning on the Maturity Date, provided that your
Contract is in force on that date. The Annuity Payment Option and frequency of
Annuity Payments may not be changed after Annuity Payments begin. Unless you
specify otherwise, the Payee of the Annuity Payments is the Annuitant. The
amount applied to Annuity Payments will equal the Contract Value on the Maturity
Date, plus or minus any applicable MVA, minus any applicable Surrender Charge.
The application of the MVA to annuitizations is explained in "Market Value
Adjustment" on page 19. If the Maturity Date is in the first seven Contract
Years and if an Annuity Payment Option of less than five years is elected, then
the Surrender Charge will be deducted. The Surrender Charge also applies to any
annuitization during the first Contract Year. The dollar amount of the payments
will depend on numerous factors including the amount applied to Annuity
Payments, the type of Annuity and Annuity Payment Option you elected, the
frequency of payments you elected, and possibly the age and sex of the Annuitant
on the Maturity Date.
Maturity Date. Initially, you select the Maturity Date at the time the
application is completed. You may change the Maturity Date from time-to-time, by
submitting a Request to us, provided that notice of each change is received by
our Variable Annuity Service Center at least 30 days prior to the then-current
Maturity Date along with the written consent of any irrevocable
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Beneficiaries. The latest Maturity Date which may be elected for a Non-qualified
Contract, unless we otherwise consent, is the Annuitant's 85th birthday or the
tenth Contract anniversary (whichever is later). For a Qualified Contract, the
Maturity Date will be the date the Annuitant attains age 701/2, unless you
demonstrate that the minimum required distribution under the Tax Code is being
made. If you do not select a Maturity Date, the Maturity Date will be the
Annuitant's 85th birthday (for a Non-qualified Contract) or the date the
Annuitant attains age 701/2 (for a Qualified Contract).
Election of Annuity Payment Option. During your lifetime and that of the
Annuitant and prior to the Maturity Date, you may choose an Annuity Payment
Option. You may change the option, but a Request specifying a change of option
and the written consent of any irrevocable Beneficiary must be received by our
Variable Annuity Service Center at least 30 days prior to the Maturity Date. If
no election is made at least 30 days prior to the Maturity Date, Annuity
Payments will be made as an annuity for the Annuitant's life with Annuity
Payments guaranteed for 10 years. (See "Annuity Payment Options," below.) You
may not change the Annuity Payment Option after the Maturity Date.
Taxes. All or part of each Annuity Payment will be taxable. (See "Certain
Federal Income Tax Consequences.") We may be required by state law to pay a
Premium Tax on the amount applied to an Annuity Payment Option and we will
deduct a charge for the amount of any such Premium Taxes.
Annuity Payment Options
The Contract provides four Annuity Payment Options which are described below.
Three of these are offered as either a fixed annuity or a variable annuity
(Option I is only available as a fixed annuity). You may elect a fixed annuity,
a variable annuity, or a combination of both. If you elect a combination, you
must specify what part of the Contract Value is to be applied to fixed and
variable payments. Unless you specify otherwise, the Capital Developer Account
Value will be used to provide a fixed annuity and the Separate Account Value
will be used to provide a variable annuity. Any remaining balance in the DCA
Fixed Account will be transferred to the JPVF Money Market Sub-account where it
will be used to provide a variable annuity unless you specify otherwise.
Variable Annuity Payments will be based on the Variable Sub-account(s) that you
select, or on the allocation of the Separate Account Value among the Variable
Sub-accounts.
If the amount of the Annuity Payments will depend on the age of the Annuitant,
we reserve the right to ask for satisfactory proof of the Annuitant's age. If
Annuity Payments are contingent upon the survival of the Annuitant, we may
require evidence satisfactory to us that such Annuitant is living. We may delay
making Annuity Payments until satisfactory proof is received.
On the Maturity Date, the sum of (i) the Capital Developer Account Value, (ii)
the Separate Account Value, and (iii) any remaining balance in the DCA Fixed
Account, plus or minus (iv) any MVA to the Capital Developer Account Value,
minus (v) any applicable Surrender Charge, minus (vi) any Premium Tax payable by
us and not previously deducted, will be applied to provide for Annuity Payments
under the selected Annuity Payment Option.
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A fixed annuity provides for Annuity Payments which will remain constant
pursuant to the terms of the Annuity Payment Option elected. The effect of
choosing a fixed annuity is that the amount of each payment will be set on the
Maturity Date and will not change. If a fixed annuity is selected, the Separate
Account Value used to provide the fixed annuity will be transferred to the
general assets of the Company, and may become subject to the claims of the
Company's third party creditors. The Annuity Payments will be fixed in amount by
the fixed annuity provisions selected and, for some options, the age of the
Annuitant. The fixed Annuity Payment amounts are determined by applying the
annuity purchase rate specified in the Contract to the portion of the Contract
Value allocated to the Annuity Option that you select. However, if the Company's
annuity purchase rates in effect on the Maturity Date would result in higher
Annuity Payments, then those more favorable rates will be used.
A variable annuity provides for payments that fluctuate or vary in dollar
amount, based on the investment performance of your selected allocations to one
or more Variable Sub-accounts. The variable annuity purchase rate tables in the
Contract reflect an assumed interest rate of 3.0%, so if the actual net
investment performance of the Variable Sub-account is less than this rate, then
the dollar amount of the actual variable Annuity Payments will decrease. If the
actual net investment performance of the Variable Sub-account is higher than
this rate, then the dollar amount of the actual variable Annuity Payments will
increase. If the net investment performance exactly equals the 3.0% rate, then
the dollar amount of the actual variable Annuity Payments will remain constant.
Accordingly, if you wish to seek to avoid risking a decrease in your Annuity
Payments, during the Annuity Period you should consider selecting Sub-accounts
that have lower investment risk. You should consult the Statement of Additional
Information for more detailed information as to how we determine variable
Annuity Payments.
You may choose to receive Annuity Payments under any one of the Annuity Payment
Options described below. Additionally, you may also elect to receive the
Contract Value less any applicable Surrender Charge as of the Maturity Date in a
lump sum payment.
Note Carefully: Under Annuity Payment Options II and III it would be possible
for only one Annuity Payment to be made if the Annuitant(s) were to die before
the due date of the second Annuity Payment; only two Annuity Payments if the
Annuitant(s) were to die before the due date of the third Annuity Payment; and
so forth.
The following Annuity Payment Options are available:
Annuity Payment Option I--Income for Specified Period (Available as a Fixed
Annuity Only)--We make periodic payments for the period you have chosen. The
specified period must be at least 5 years and cannot be more than 30 years.
Annuity Payment Option II--Life Income--We make payments for as long as the
Annuitant lives with optional guaranteed periods (Life Income with Period
Certain). If the Annuitant dies before we have made all of the guaranteed
payments, we will pay the remaining guaranteed payments as provided below.
Annuity Payment Option III--(1) Joint and Last Survivor Life Income Payments--We
make payments during the joint lifetime of two Annuitants, continuing in the
same amount during the
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lifetime of the surviving Annuitant; or (2) Joint and 50% or 75% Survivor
Annuity--Payments will be made during the joint lifetime of two Annuitants,
continuing during the lifetime of the surviving Annuitant and will be computed
on the basis of one-half or three- fourths of the Annuity Payment (or units) in
effect during the joint lifetime.
Annuity Payment Option IV--Special Income Settlement Agreement--We will pay the
proceeds in accordance with terms agreed upon in writing by you and us.
During the Annuity Period, you may (whether or not you are the Annuitant), upon
Request, transfer a portion of any Variable Sub-account to another Variable
Sub-account within the Separate Account.(See "Transfers.") However, during the
Annuity Period, no partial withdrawals or surrenders are permitted.
A portion or the entire amount of the Annuity Payments may be taxable as
ordinary income. If, at the time the Annuity Payments begin, we have not
received a proper written election not to have federal income taxes withheld, we
must by law withhold such taxes from the taxable portion of such Annuity
Payments and remit that amount to the federal government. (See "Certain Federal
Income Tax Consequences.")
Except as otherwise agreed to by you and the Company, Annuity Payments will be
payable monthly. If your Contract Value is less than $2,000 (or an amount that
would provide monthly Annuity Payments of less than $20 under any Annuity
Payment Option) on the Maturity Date, we will pay you a lump sum. We may require
proof from the Payee of the Annuitant's survival as a condition of future
payments.
In some states, the Contracts offered by this Prospectus contain annuity tables
that provide for different benefit payments to men and women of the same age. We
will use these sex-distinct tables, where permitted, for Non-qualified Contracts
and IRAs. We will use unisex tables for Qualified Contracts (other than IRAs).
You may request a copy of these tables from us.
Death Benefit
Death of Contract Owner Prior to Maturity Date. If you die before the Maturity
Date, we will pay the Beneficiary a Death Benefit. The Death Benefit is payable
upon our receipt of Due Proof of Death, as well as proof that the death occurred
during the Accumulation Period. Upon our receipt of this proof and an election
of a Death Benefit Option and return of the Contract, the Death Benefit
generally will be payable after we have sufficient information to make the Death
Benefit payment. If we do not receive an election by the Beneficiary to receive
Annuity Payments as described below under "Payment of Death Benefit to
Beneficiary" within 90 days following the date we receive Due Proof of Death,
the Beneficiary will be deemed to have elected to receive the Death Benefit in
the form of a single cash payment on such 90th day.
The determination of the Death Benefit depends upon your Issue Age. If you die
and your Issue Age is less than or equal to age 75, the amount of the Death
Benefit is equal to the greatest of:
(A) the sum of all premium payments less any "Adjusted Partial
Withdrawals," with interest compounded at 4% per year through the
earlier of (1) the date of your death or (2) the date you reach age
75;
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(B) the Contract Value as of the most recent fifth Contract Anniversary
occurring while you were living and before your age 75, plus any
premium payments and minus any "Adjusted Partial Withdrawals", as
defined below, made since that Contract Anniversary; and
(C) the Contract Value as of the date we have sufficient information to
make the Death Benefit payment.
For purposes of (A), above, the Death Benefit will be calculated as of the date
of the Contract Owner's death but will never be greater than 200% of all premium
payments, less any partial withdrawal.
The "Adjusted Partial Withdrawal" amount for each partial withdrawal equals (a)
times (b) where:
(a) is the ratio of the amount of the partial withdrawal to the Contract
Value on the date of (but immediately prior to) the partial
withdrawal; and
(b) is the Death Benefit on the date of (but immediately prior to) the
partial withdrawal.
If you die and your Issue Age is greater than age 75, the amount of the Death
Benefit is equal to the Contract Value on the date we receive Due Proof of
Death, election of a payment option, and return of the Contract.
If you are deemed a non-natural person (i.e., a trust or corporation) under
Section 72 of the Tax Code, the Death Benefit is payable upon the death of the
primary Annuitant. The "primary Annuitant" is that individual whose life affects
the timing or amount of Annuity Payments under the Contract. The Death Benefit
in such situation is equal to the Contract Value on the date we have received
Due Proof of Death of the primary Annuitant, election of a payment option, and
return of the Contract.
Payment of the Death Benefit will be in full settlement of our liability under
the Contract, and the Contract will be cancelled on the date the Death Benefit
is determined and paid.
Death Benefit payments will be made in a lump sum or in accordance with your or
the Beneficiary's election, as described below. The Beneficiary may elect to use
the lump sum payment to establish an account through our retained asset program
("Performance Plus Account"). The Performance Plus Account allows the
Beneficiary to write one or more checks up to the amount of Death Benefit
proceeds credited to the account plus any applicable interest. The amount in the
Performance Plus Account will earn interest at the floating 13 week U.S.
Treasury Bill rate, determined quarterly, from the date the claim is processed
until the date the checks are cleared. We guarantee that the interest rate will
never be less than an annual rate of 2%, compounded monthly. The Contract Value
will be calculated as of the date we receive Due Proof of Death and all
requirements necessary to make the payment at our Variable Annuity Service
Center. The Contract will end on such date.
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IRS Required Distribution. Federal tax law requires that if you die before the
Maturity Date, then the entire value of the Contract must generally be
distributed within five years of the date of your death. Special rules may apply
to your spouse. Other rules apply to Qualified Contracts. (See "Certain Federal
Income Tax Consequences.")
Death of Annuitant Prior to Maturity Date. If you are not the Annuitant and the
Annuitant dies prior to the Maturity Date, you may name a new Annuitant. If no
new Annuitant is named, you become the new Annuitant.
If you are a non-natural person (i.e., a trust or corporation) for purposes of
Tax Code Section 72, then the primary Annuitant's death will be treated as the
death of the Contract Owner and will result in payment of the Contract Value.
(No enhanced Death Benefit will apply.)
Death of Annuitant on or After Maturity Date. If the Annuitant dies while there
are remaining guaranteed Annuity Payments to be made, we will continue to make
the remaining guaranteed Annuity Payments to only one of the following, in this
order: (1) the named Payee, if any and if living, (2) the Contract Owner, if
living, (3) the Beneficiary, if any and if living, and (4) the Contract Owner's
estate. Annuity Payments will be paid at least as rapidly as under the Annuity
Payment Option in effect at the time of death. However, the recipient of the
remaining Annuity Payments can elect to accelerate payment of the remaining
Annuity Payments. No amount will be payable to a Beneficiary under any Annuity
Payment Option if the Annuitant dies after all guaranteed Annuity Payments have
been made.
Death of Contract Owner on or After Maturity Date. If you die after the Maturity
Date and before the Annuitant, we will pay any remaining guaranteed Annuity
Payments to only one of the following, in this order: (1) any named Payee, if
living, (2) any joint Contract Owner, if living, (3) any Beneficiary, if living,
(4) the deceased Contract Owner's estate. Annuity Payments will be paid at least
as rapidly as under the Annuity Payment Option in effect at the time of death.
Contract Owner's Spouse as Beneficiary. If you die and the Beneficiary is your
surviving spouse, your spouse may choose not to receive the Death Benefit and
may continue the Contract and become the Contract Owner. The excess, if any, of
the Death Benefit over the Contract Value will be added to the Contract Value.
In this situation, if you were also the Annuitant, your spouse will be the new
Annuitant. If your spouse chooses to continue the Contract, no Death Benefit
will be paid because of your death.
Payment of Death Benefit to Beneficiary. Instead of accepting the Death Benefit,
the Beneficiary (after your death) can choose by Request to receive Annuity
Payments based on his or her life expectancy. Payment under any payment option
must be for the life of the Beneficiary or for a number of years that is not
more than the life expectancy of the Beneficiary, at the time of your death (as
determined for federal tax purposes), and must begin within one year of your
death.
Beneficiary
You may name more than one Beneficiary in the application. You may change a
Beneficiary by sending a Request, signed by you, to our Variable Annuity Service
Center. When the Variable Annuity Service Center records the change, it will
take effect as of the date we received your
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Request at our Variable Annuity Service Center. You may designate the amount or
percentage of the Death Benefit that each Beneficiary receives, either in the
application or by a Request, signed by you. If you do not make such a
designation, the Death Benefit will be paid in equal shares to each Beneficiary.
We will comply with all state and federal laws requiring notification of the
change in Beneficiary.
If you die and you have not named a Beneficiary, or your named Beneficiary
predeceased you and you did not name a new Beneficiary, your estate will be the
Beneficiary. If your Contract is owned by joint Contract Owners and one of the
joint Contract Owners dies, the surviving joint Contract Owner will be the
deemed Beneficiary. Joint Contract Owners are permitted only if they are
spouses.
Change of Contract Owner
You may change the Contract Owner while the Annuitant is alive by sending a
Request to our Variable Annuity Service Center. The change will be effective on
the date we record the Request, but will be subject to any payment made or
action taken by us before recording the change. When the change takes effect,
all rights of ownership in the Contract will pass to the new Contract Owner.
Changing the Contract Owner does not change the Annuitant or the Beneficiary.
Changing the Contract Owner may have tax implications (See "Certain Federal
Income Tax Consequences"). We will comply with all state and federal laws
requiring notification of the change in Contract Owner. The Annuitant named in
the application cannot be changed unless that Annuitant dies prior to the
Maturity Date.
Restrictions Under the Texas Optional Retirement Program
Section 36.105 of the Texas Educational Code permits participants in the Texas
Optional Retirement Program ("ORP") to withdraw their interest in a variable
annuity contract issued under the ORP only upon: (1) termination of employment
in the Texas public institutions of higher education; (2) retirement; or (3)
death. Accordingly, if you are a participant in the ORP, you (or your estate if
you have died) will be required to obtain a certificate of termination from the
employer or a certificate of death before the Contract can be surrendered.
Restrictions Under Qualified Contracts
Other restrictions with respect to the election, commencement, or distribution
of benefits may apply under Qualified Contracts or under the terms of the plan
in respect of which Qualified Contracts are issued.
Restrictions Under Section 403(b) Plans
Section 403(b) of the Tax Code provides for tax-deferred retirement savings
plans for employees of certain non-profit and educational organizations. In
accordance with the requirements of Section 403(b), any Contract used for a
403(b) plan will prohibit distributions of elective contributions and earnings
on elective contributions except upon death of the employee, attainment of age
59 1/2, separation from service, disability, or financial hardship. In addition,
income attributable to elective contributions may not be distributed in the case
of hardship.
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charges and deductions
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We will make certain charges and deductions under the Contract in order to
compensate us for incurring expenses in distributing the Contract, bearing
mortality and expense risks under the Contract, and administering the Separate
Account and the Contracts. We may also deduct charges for transfers, Premium
Taxes, and other federal, state or local taxes. In addition, certain deductions
are made from the assets of the Portfolios for management fees and expenses.
Surrender Charge
We incur expenses relating to the sale of Contracts, including commissions to
registered representatives and other promotional expenses. The Surrender Charge,
which is a contingent deferred sales charge, is intended to allow us to recoup
these distribution expenses. In connection with a partial withdrawal, full
surrender, annuitization within the first Contract Year, or selection of an
Annuity Payment Option of less than five years during the first seven Contract
Years, we will impose the Surrender Charge on the amount withdrawn or
surrendered, net of any MVA and before any deductions for the Annual
Administrative Fee or Premium Taxes. The Surrender Charge is calculated as a
percentage of the Contract Value withdrawn, surrendered, or annuitized.
The Surrender Charge schedule is as follows:
Contract Year 1 2 3 4 5 6 7 8+
Surrender Charge 6% 6% 6% 5% 4% 3% 2% 0%
The Surrender Charge will not be applied under the following circumstances:
1. If you cancel the Contract during the free look period.
2. If you choose to annuitize the Contract after the first Contract
Year and you choose an Annuity Payment Option of longer than five
years.
3. Payment of the Death Benefit.
4. On any Free Surrender Amount. (See below.)
5. To comply with the minimum distribution requirements of the Tax
Code.
6. If, after the Contract Date, you become confined to a hospital or a
state-licensed inpatient nursing care facility ("nursing care
facility") and meet all of the following conditions:
(a) You were not confined to a nursing care facility at any time
on or before the Contract Date;
(b) You have been confined to a nursing care facility for at least
30 consecutive days;
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(c) It is medically necessary for you to be confined to the
nursing care facility; and
(d) You send us a Request for a surrender or partial withdrawal
along with the Request for waiver of Surrender Charges while
you are confined or within 90 days after your discharge from
such facility.
7. If you are diagnosed as suffering from an illness that reduces your
life expectancy to 12 months or less from the date of diagnosis. We
reserve the right to require, at our expense, a second opinion from
a physician acceptable to both of us.
We will tell you the amount of Surrender Charge that would be assessed upon a
withdrawal or surrender upon request. More information about how the Surrender
Charge is calculated for partial withdrawals and full surrenders is in Appendix
I. We may waive or reduce the Surrender Charge for Contracts sold to certain
groups. (See "Reduction in Charges for Certain Groups.")
We anticipate that the Surrender Charge will not generate sufficient funds to
pay the cost of distributing the Contracts. To the extent the Surrender Charge
does not cover all sales commissions and other promotional or distribution
expenses, we may use any of our corporate assets, including potential profit
which may arise from the mortality and expense risk charge or any other charge
or fee described above, to make up any difference.
We guarantee that the aggregate Surrender Charge will never exceed 8.5% of the
total premium payments you pay under the Contract.
Free Surrender Amount. You are entitled to withdraw up to 10% of the Contract
Value each year without a Surrender Charge. This Free Surrender Amount is equal
to 10% of the Contract Value as of the date of the withdrawal, less the sum of
Free Surrender Amounts previously taken during the Contract Year, and will not
be less than zero. Because the Contract Value may change from day to day, the
Free Surrender Amount or any remaining portion thereof may increase or decrease
on any day. Any cumulative amount surrendered or withdrawn in excess of the
annual Free Surrender Amount during one of the first seven Contract Years is
subject to the Surrender Charge, as applicable. Unused Free Surrender Amounts
cannot be accumulated and carried from one Contract Year to the next. The Free
Surrender Amount does not apply to amounts applied to an Annuity Payment Option.
Mortality and Expense Risk Charge
We impose a daily charge as compensation for bearing certain mortality and
expense risks in connection with the Contracts. This charge is 1.25% annually of
the daily value of net assets in each Variable Sub-Account. The Mortality and
Expense Risk Charge is reflected in the Accumulation Unit value or Annuity Unit
value for each Variable Sub-account. The Mortality and Expense Risk Charge will
not be deducted with respect to amounts held in the Capital Developer Account.
Contract Values and Annuity Payments are not affected by changes in actual
mortality experience nor by actual expenses incurred by the Company.
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The mortality risks we assume arise from our contractual obligations to make
Annuity Payments. Thus, you are assured that neither the Annuitant's own
longevity nor an unanticipated improvement in general life expectancy will
adversely affect the Annuity Payments that you will receive under the Contract.
We also bear substantial risk in connection with the Death Benefit. During the
Accumulation Period, if your age is less than 75, we will pay a Death Benefit
that could be greater than the Contract Value. Otherwise, the Death Benefit is
based on the Contract Value. The Death Benefit is paid without imposition of a
Surrender Charge or application of the MVA.
The expense risk we assume is the risk that our actual expenses in administering
the Contract and the Separate Account will exceed the amount we receive through
the Annual Administrative Fee and the Administrative Expense Charge.
Administrative Expense Charge
We deduct a daily charge equal to a percentage of the net assets in each
Variable Sub-account for administering the Separate Account. The effective
annual rate of this charge is 0.15% of the daily value of net assets in each
Variable Sub-account. We guarantee that the amount of this charge will not
increase. The Administrative Expense Charge does not apply to any amounts held
in the Capital Developer Account.
Annual Administrative Fee
In order to cover the cost of administering your Contract, we deduct an Annual
Administrative Fee from the Contract Value of your Contract on the last day of
each Contract Year and upon full surrender of the Contract. This Annual
Administrative Fee is the lesser of $30 or 2% of Contract Value on the last day
of the applicable Contract Year. We guarantee that this fee will not increase.
We do not anticipate realizing any profit from this charge. The Annual
Administrative Fee will be deducted pro rata from your allocation options in the
same proportion that the amount of your Contract Value in each allocation option
bears to your total Contract Value. We will waive the Annual Administrative Fee
if, on the last day of that Contract Year, your Contract Value is $30,000 or
greater or if 100% of your Contract Value is allocated to the Capital Developer
Account. No Annual Administrative Fee is deducted after the Maturity Date.
We may waive or reduce the Annual Administrative Fee for Contracts sold to
certain groups. (See "Reduction in Charges for Certain Groups.")
Transfer Charge
We may impose a fee equal to $10 for each transfer in excess of 15 during any
Contract Year. Although we reserve the right to impose a $10 fee, we currently
have no plans to do so.
Premium Taxes
We may be required to pay Premium Taxes in certain states. Depending upon
applicable state law, we will deduct the Premium Taxes if we are required to pay
them. This may occur, for example, at the time you pay a premium payment,
surrender your Contract or make a partial
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withdrawal or when the Contract reaches the Maturity Date or a Death Benefit is
paid. We may elect to defer the deduction of Premium Taxes that would otherwise
be deducted from premium payments until a later time. Premium Taxes may range
from 0% to 3.5% of premium payments or Contract Value. However, a state may
change its premium tax rate in the future.
Federal, State and Local Taxes
No charges are currently imposed for federal, state, or local taxes other than
state premium taxes. However, we reserve the right to deduct charges in the
future for such taxes or other economic burden resulting from the application of
any tax laws that we determine to be attributable to the Contracts.
Other Expenses Including Investment Advisory Fees
You indirectly bear the charges and expenses of the Portfolios whose shares are
held by the Variable Sub-accounts to which you allocate your Contract Value. The
net assets of each Portfolio will reflect deductions in connection with the
investment advisory fees and other expenses.
For more information concerning the investment advisory fees and other charges
against the Portfolios, see the prospectuses for the Portfolios, current copies
of which accompany this Prospectus.
Reduction in Charges for Certain Groups
The Company may reduce or eliminate the Annual Administrative Fee or Surrender
Charge on Contracts that have been sold to (1) employees and sales
representatives of the Company or its affiliates; (2) customers of the Company
or distributors of the Contracts who are transferring existing contract values
to a Contract; (3) individuals or groups of individuals when sales of the
Contract result in savings of sales or administrative expenses; or (4)
individuals or groups of individuals where premium payments are to be made
through an approved group payment method and where the size and type of the
group results in savings of administrative expenses.
In no event will reduction or elimination of the Annual Administrative Fee or
Surrender Charge be permitted where such reduction or elimination will be
unfairly discriminatory to any person.
certain federal income tax consequences
--------------------------------------------------------------------------------
The following is a general description of Federal tax considerations relating to
individual Contract Owners and individual beneficiaries of the Contract, and is
based upon our understanding of the present Federal income tax laws as the
Internal Revenue Service currently interprets them. No representation is made as
to the likelihood of the continuation of the present Federal income tax laws or
the current interpretations by the Internal Revenue Service (the "IRS"). This
general discussion does not attempt to describe the tax treatment of the
Contract under state or local tax laws.
This general discussion also does not attempt to describe the tax treatment that
will apply to:
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o foreign owners or beneficiaries
o corporate owners or beneficiaries, or
o trusts that are owners or beneficiaries.
This discussion is not intended to be tax advice. Any person concerned about the
tax implications of owning a Contract, or receiving distributions from the
Contract, should consult a competent tax advisor before initiating any
transaction.
The Contract is issued by the separate account of the Company, which is taxed as
a life insurance company under the Tax Code. Under existing Federal income tax
laws, all investment income and realized and unrealized capital gains (and
losses) automatically increase (or decrease) the Accumulation Unit Values of the
Contract. If changes in the Federal tax laws, or changes in the IRS's
interpretation of the tax laws, result in the Company being taxed on income or
gains produced in the Separate Account, then we reserve the right to start
imposing charges against any affected Contracts in order to provide for payment
of those taxes.
You may purchase a Non-qualified Contract or a Qualified Contract. A Contract is
a Qualified Contract if purchased by individuals whose premium payments are
comprised solely of proceeds from and/or contributions under retirement plans
which are intended to qualify as plans entitled to special income tax treatment
under Sections 401, 403(b) (Tax-Sheltered Annuity), 408 (Traditional IRA), 408A
(Roth IRA), or 457 of the Tax Code. Information regarding the tax treatment of a
Traditional IRA or a Roth IRA is contained in a separate IRA Disclosure
Statement available from the Company. The ultimate effect of Federal income
taxes on amounts contributed to, held in, or received from a Qualified Contract
depends on the type of retirement plan, the tax and employment status of the
individual and/or his or her employer, the source of the contributions, and the
reason for the distribution. Purchasers of Qualified Contracts should seek
competent legal and tax advice regarding the suitability of the Contract for
their situation, the applicable requirements, and the tax treatment of the
rights and benefits of the Contract. The following discussion assumes that a
Qualified Contract is purchased with proceeds from and/or contributions under
retirement plans that qualify for the intended special Federal income tax
treatment.
If you purchase this Contract as a Non-qualified Contract, it is intended that
the Contract will be owned and administered to satisfy the requirements of
Sections 72 and 817(h) of the Tax Code. If you purchase this Contract as a
Qualified Contract, it is intended that the Contract will be owned and
administered to satisfy the requirements of the provisions of the Tax Code that
apply to that type of Qualified Contract. The following discussion is based on
the assumption that the Contract satisfies whichever Federal income tax rules
apply to the Contract.
At the time you pay the initial premium payment, you must specify whether a
Non-qualified Contract or a Qualified Contract is being purchased. If your
initial premium payment is derived from an exchange or surrender of another
annuity contract, we may require that you provide us with information as to the
Federal income tax status of the previous contract. We will require you to
purchase separate Contracts if you desire to invest monies qualifying for
different annuity tax treatment under the Tax Code. We will require the minimum
initial premium payment on
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each Contract. Additional premium payments under your Contract must qualify for
the same Federal income tax treatment as your initial premium payment under the
Contract. We will not accept an additional premium payment under your Contract
if the Federal income tax treatment of such premium payment would be different
from that of your initial premium payment.
The investments held for Non-qualified Contracts must be "adequately
diversified" in accordance with the requirements of Section 817(h) and Treas.
Regs. Section 1.817-5. The Company intends to, and will be responsible for,
complying with these diversification rules. The IRS has stated in several
published rulings (the "Investor Control Rulings") that if the owner of the
Contract has such control or power over the investments held for the Contract,
the owner of the Contract, and not the Separate Account, will be treated as the
owner of the underlying assets. The Company believes that it is complying with
the Investor Control Rulings so that the Company, and not the owner of the
Contract, will be treated as the owner of the underlying assets. We reserve the
right to amend or modify the Contract if necessary to comply with any IRS rules
or regulations related to diversification or control over investments.
Taxation of Annuities
In General. Section 72 of the Tax Code governs taxation of annuities in general.
We believe that if you are an individual (a "natural" person under the tax
rules), you will not be taxed on increases in the value of a Non-qualified
Contract until a distribution occurs (e.g., partial withdrawals, surrenders,
loan or assignment, pledge, gift, or the receipt of Annuity Payments under a
payment option). Any change in ownership, assignment, pledge, or agreement to
assign or pledge any portion of a Qualified Contract's value generally will be
treated as a distribution. The taxable portion of a distribution (in the form of
a single lump sum payment or as an annuity) is taxable as ordinary income.
Unlike direct investments in mutual funds, no amounts invested in a variable
annuity will produce any capital gains or losses.
If the owner of any Non-qualified Contract is not an individual or other
"natural" person (e.g., a corporation or a certain type of trust), the owner
generally must include in income any increase in the excess of the Contract's
value over the "investment in the contract" (discussed below) during the taxable
year. There are exceptions to this rule if the non-natural person holds the
Contract as agent for a natural person. We reserve the right to not issue a
Non-qualified Contract if it will not be owned by a natural person, or by a
non-natural person as agent for a natural person.
Possible Changes in Taxation. In past years, legislation has been proposed that
would have adversely modified the Federal taxation of certain annuities.
Although as of the date of this Prospectus Congress has not passed any
legislation regarding the taxation of annuities, there is always the possibility
that the tax treatment of annuities could change by legislation or other means
(such as IRS regulations, revenue rulings, judicial decisions, etc.). Moreover,
it is also possible that any change could apply to your Contract even though it
was purchased prior to the change in the tax laws or rules.
Surrenders and Partial Withdrawals from Qualified Contracts. In the case of a
full surrender or partial withdrawal under a Qualified Contract, under Section
72(e) of the Tax Code a ratable portion of the amount received is taxable,
generally based on the ratio of the "investment in the
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contract" to the individual's total account balance under the retirement plan.
The "investment in the contract" generally equals the amount of any premium
payments paid by or on behalf of any individual with after tax contributions.
For certain Qualified Contracts the "investment in the contract" may be zero. As
explained in the separate Disclosure Statement for Roth IRAs, special tax rules
apply to distributions from Roth IRAs and Roth Conversion IRAs.
Surrenders and Partial Withdrawals from Non-qualified Contracts. Full surrenders
from Non-qualified Contracts are treated as taxable income to the extent that
the amount received exceeds the "investment in the contract." Partial
withdrawals from Non-qualified Contracts (including systematic withdrawals) are
generally treated as taxable income to the extent that the Accumulation Value
(before any Surrender Charges, and including any positive MVA) immediately
before the partial withdrawal exceeds the "investment in the contract" at that
time.
Annuity Payments. If you elect to receive payments over a period of years, over
your life expectancy, or over the life expectancies of yourself and another
individual, part of each payment you receive will be a return of your
"investment in the contract" and part of each payment will be taxable income. In
general, the amount of each payment that is a return of your "investment in the
contract" is calculated by dividing your total "investment in the contract" by
the total number of expected payments. For example, if your "investment in the
contract" is $6,000, and you elect to receive 60 monthly Annuity Payments, $100
of each payment will be a return of your "investment in the contract" and will
not be subject to Federal income taxes ($6,000/60 = $100). If payments are being
made over your life expectancy, or the joint life expectancy of you and your
spouse, there are IRS tables which are used to determine how many Annuity
Payments are expected to be made. After you have received the expected number of
payments, you will have received tax-free your entire "investment in the
contract." Any additional payments will be fully taxable. If you die before you
have received your entire "investment in the contract" and there are no
additional payments after you die, there is a special tax rule that allows a tax
deduction for the unrecovered "investment in the contract" on your last income
tax return. If some payments continue to your Beneficiary after your death, your
Beneficiary can recover any remaining "investment in the contract" over the
additional payments being made.
Penalty Tax. For Non-qualified Contracts and for most Qualified Contracts (there
are special rules for Roth IRAs) there may be a 10% Federal penalty tax on any
premature distributions. The 10% penalty applies only to the portion of the
distribution that is treated as taxable income. In general, however, there is no
penalty tax on distributions from a Qualified or a Non-qualified Contract:
o made on or after the date on which you attain age 59-1/2;
o made as a result of your death or disability;
o received in substantially equal periodic payments as a life annuity or a
joint and survivor annuity for the lives or life expectancies of you and a
"designated beneficiary";
o resulting from the direct rollover of the Contract into another qualified
contract or individual retirement annuity;
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o allocable to investment in a Non-qualified Contract before August 14,
1982;
o under a qualified funding asset (as defined in Tax Code Section 130(d));
o under an immediate annuity (as defined in Tax Code Section 72(u)(4)); or
o which are purchased by an employer on termination of certain types of
qualified plans and which are held by the employer until the employee
separates from service.
For distributions from Qualified Contracts, in addition to all of the above
exceptions to the 10% penalty tax, the following additional exceptions to the
penalty may apply on distributions made to:
o an employee after separation from service after age 55 from a retirement
plan other than an IRA;
o pay certain uninsured medical expenses;
o certain unemployed individuals to pay health insurance premiums;
o pay for certain higher education expenses; or
o a first-time home buyer ($10,000 lifetime limit).
Death Benefit Proceeds. The Tax Code requires that both Qualified and
Non-qualified Contracts make certain distributions if the Contract Owner of the
Contract dies. If you die before periodic Annuity Payments have started, the
entire value of the annuity must either (i) be paid out, in full, within five
years of your death, or (ii) Annuity Payments must start within one year of your
death. If your surviving spouse is the Beneficiary of the Contract, your spouse
has the option of continuing the Contract as if he or she had been the original
Contract Owner. If you die after periodic Annuity Payments have started,
payments must continue to be made under a method that will distribute the
balance in the Contract at least as rapidly as the method being used prior to
your death. A non-spousal beneficiary may not elect, or continue to use, a
settlement option unless that settlement option will result in distributions
that comply with the Tax Code. Amounts distributed because of the death of a
Contract Owner are generally included in income under the same rules that apply
to distributions to the Contract Owner. Annuities, unlike capital assets owned
directly by an individual (e.g., real estate, stocks, bonds), do not receive a
step-up in tax basis at the death of the Contract Owner. Therefore, the
investment in the Contract is not affected by the Contract Owner's death.
Gifts and Other Transfers or Exchanges of the Contract. The gift or other
transfer of ownership of a Contract may result in certain tax consequences to
you, including the immediate taxation of the entire gain in the Contract. You
should contact a competent tax advisor to discuss the potential tax effects of
any gift, transfer or exchange of a Contract.
Multiple Contracts. All non-qualified deferred annuity contracts that we or our
affiliates issue to you during any calendar year are treated as one annuity
contract for purposes of determining the
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amount of income produced by a distribution from one or more of the annuity
contracts. The Treasury Department may issue regulations to prevent the
avoidance of Section 72(e) through the serial purchase of annuity contracts or
otherwise, or to treat the combination purchase of separate immediate and
deferred annuity contracts as a single annuity contract. You should consult with
a competent tax advisor before purchasing more than one annuity contract in a
calendar year.
Withholding. Pension and annuity distributions generally are subject to
withholding for the recipient's Federal income tax liability at rates that vary
according to the type of distribution and the recipient's tax status. If you
have provided the Company with your taxpayer identification number (i.e., your
Social Security number), you may elect not to have tax withheld from most
distributions. Withholding is mandatory for certain distributions from certain
types of Qualified Contracts.
Other Tax Consequences. As noted above, this discussion of the Federal income
tax consequences under the Contract is not intended to cover every possible
situation. The Federal income tax consequences discussed in this Prospectus
reflect our understanding of current law, and the law may change. Federal estate
and state and local estate, inheritance, and other tax consequences of ownership
or receipt of distributions under the Contract depend on your individual
circumstances or those of the recipient of the distribution. You should consult
a competent tax advisor for further information.
Qualified Plans
The Contract may be used with several types of qualified plans. Under the Tax
Code, qualified plans generally enjoy tax-deferred accumulation of amounts
invested in the plan. Therefore, in considering whether or not to purchase a
Contract in a qualified plan, you should only consider the Contract's other
features, including the availability of lifetime Annuity Payments and death
benefit protection.
No attempt is made to provide detailed information about the use of the Contract
with the various types of qualified plans. Contract Owners, Annuitants and
Beneficiaries are cautioned that the rights of any person to any benefits under
Qualified Contracts may be subject to the terms and conditions of the plans
themselves, regardless of the terms and conditions of the Contract. Some
retirement plans are subject to distribution and other requirements that are not
incorporated into our Contract administration procedures. Contract Owners,
Participants and Beneficiaries are responsible for determining that
contributions, distributions and other transactions with respect to the
Contracts comply with applicable law. The following are brief descriptions of
the various types of qualified plans in connection with which we may issue the
Contract. Contracts for all types of qualified plans may not be available in all
states. When issued in connection with a qualified plan, the Contract will be
amended as necessary to conform to the requirements of the Tax Code.
Qualified Pension and Profit Sharing Plans. Sections 401(a) of the Tax Code
permits corporate employers to establish various types of retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10," permits self-employed individuals to
establish qualified plans for themselves and their
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employees. These retirement plans may permit the purchase of the Contracts to
accumulate retirement savings under the plans. Adverse tax or other legal
consequences to the plan, to the participant or to both may result if the
Contract is assigned or transferred to any individual as a means to provide
benefit payments, unless the plan complies with all legal requirements
applicable to such benefits prior to transfer of the Contract. If you are
considering the purchase of a Contract for use with such a plan, you should seek
competent advice regarding the suitability of the proposed plan documents and
the Contract to your specific needs.
Individual Retirement Annuities. Section 408 of the Tax Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity (hereinafter referred to as "Traditional IRA").
Traditional IRAs are subject to limitations on the amount which may be
contributed and deducted and the time when distributions may commence. Also,
distributions from certain other types of qualified plans may be "rolled over"
on a tax-deferred basis into a Traditional IRA. The sale of a Contract for use
with a Traditional IRA is subject to special disclosure requirements of the IRS.
Purchasers of a Contract for use with Traditional IRAs will be provided with
supplemental information required by the Internal Revenue Service or other
appropriate agency. Such purchasers will have the right to revoke their purchase
within seven days of the earlier of the establishment of the Traditional IRA or
their purchase. You should seek competent advice as to the suitability of the
Contract for use with Traditional IRAs. The Internal Revenue Service has not
addressed in a ruling of general applicability whether a death benefit provision
such as the provision in the Contract comports with Traditional IRA
qualification requirements.
Section 408A of the Tax Code permits eligible individuals to contribute to a
Roth IRA. Purchasers of a Contract for use with Roth IRAs will be provided with
supplemental information required by the IRS or other appropriate agency. Such
purchasers will have the right to revoke their purchase within seven days of the
earlier of the establishment of the Roth IRA or their purchase. You should seek
competent advice as to the suitability of the Contract for use with Roth IRAs.
The Internal Revenue Service has not addressed in a ruling of general
applicability whether a death benefit provision such as the provision in the
Contract comports with Roth IRA qualification requirements.
Tax-Sheltered Annuities. Section 403(b) of the Tax Code permits public school
employees and employees of certain types of religious, charitable, educational,
and scientific organizations specified in Section 501(c)(3) of the Tax Code to
purchase annuity contracts and, subject to certain limitations, exclude the
amount of premiums from gross income for tax purposes. However, these payments
may be subject to FICA (Social Security) taxes. These annuity contracts are
commonly referred to as "Tax-Sheltered Annuities."
Subject to certain exceptions, withdrawals under Tax-Sheltered Annuities which
are attributable to contributions made pursuant to salary reduction agreements
are prohibited unless made:
o after you attain age 59-1/2,
o after your separation from service,
o because of your death or disability, or
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o for an amount not greater than the total of such contributions in the case
of hardship.
Section 457 Deferred Compensation Plans ("Section 457 Plans"). Under Section 457
of the Tax Code, employees of (and independent contractors who perform services
for) certain state and local governmental units or certain tax-exempt employers
may participate in a Section 457 Plan of their employer allowing them to defer
part of their salary or other compensation. The amount deferred and any income
on such amount will not be taxable until paid or otherwise made available to the
employee. The maximum amount that can be deferred under a Section 457 Plan in
any tax year is ordinarily one-third of the employee's includable compensation,
up to $7,500. Includable compensation means earnings for services rendered to
the employer which is includable in the employee's gross income, but excluding
any contributions under the Section 457 Plan or a Tax-Sheltered Annuity. During
the last three years before an individual attains normal retirement age,
additional "catch-up" deferrals are permitted.
The deferred amounts will be used by the employer to purchase the Contract. The
Contract will be issued to a trust set up by a governmental employer, or by
other tax-exempt employer. All Accumulation Values will be subject to the claims
of the employer's creditors. The employee has no rights or vested interest in
the Contract and is only entitled to payment in accordance with the Section 457
Plan provisions. The plans may permit participants to specify the form of
investment for their deferred compensation account. Depending on the terms of
the particular plan, the employer may be entitled to draw on deferred amounts
for purposes unrelated to its Section 457 Plan obligations. Present Federal
income tax law does not allow tax-free transfers or rollovers for amounts
accumulated in a Section 457 Plan, except for transfers to other Section 457
Plans in certain limited cases. If you are considering the purchase of a
Contract for use with such a plan, you should seek competent advice regarding
the suitability of the proposed plan documents and the Contract to your specific
needs.
Jefferson Pilot Financial Insurance Company
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Jefferson Pilot Financial Insurance Company is a stock life insurance company
chartered in 1903 in Tennessee, redomesticated to New Hampshire in 1991, and
redomesticated to Nebraska effective June 12, 2000. Prior to May 1, 1998, we
were known as Chubb Life Insurance Company of America. Effective April 30, 1997,
Chubb Life, formerly a wholly-owned subsidiary of The Chubb Corporation, became
a wholly-owned subsidiary of Jefferson-Pilot Corporation, a North Carolina
corporation. The principal offices of Jefferson-Pilot Corporation are located at
100 North Greene Street, Greensboro, North Carolina 27401; its telephone number
is 336-691-3000. Our service center is located at One Granite Place, Concord,
New Hampshire 03301 and our telephone number is 800-258-3648, ext. 5394.
We are licensed to do life insurance business in forty-nine states of the United
States, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam,
and the Commonwealth of the Northern Mariana Islands.
At December 31, 1999, the Company, its subsidiaries and predecessors, had total
assets of $16.6 billion and had $149 billion of insurance in force,
while total assets of Jefferson-Pilot Corporation and its subsidiaries
(including the Company) were approximately $26.4 billion.
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The Company writes individual life insurance and annuities. We are subject to
Nebraska laws governing insurance.
Effective August 1, 2000, Alexander Hamilton Life and Guarantee Life Insurance
Company ("GLIC") merged with and into the Company, with the Company as the
surviving entity. Both Alexander Hamilton Life and GLIC were affiliates of the
Company. Alexander Hamilton Life was a stock life company initially organized
under the laws of the State of North Carolina in 1981, and reincorporated in the
State of Michigan in September 1995. GLIC was a stock life insurance company
incorporated under the laws of the state of Nebraska. GLIC originally was
organized in 1901 as a mutual assessment association and, after a period as a
mutual life insurance company, became a stock life insurance company on December
26, 1995.
Upon the merger, the existence of Alexander Hamilton Life and GLIC ceased, and
the Company became the surviving company. As a result of the merger, the
Separate Account became a separate account of the Company. GLIC did not have any
separate accounts or insurance contracts registered with the SEC. All of the
Contracts issued by Alexander Hamilton Life before the merger were, at the time
of the merger, assumed by the Company. The merger did not affect any provisions
of, or rights or obligations under, those Contracts.
In approving the merger on July 14, 2000, the boards of directors of the
Company, Alexander Hamilton Life, and GLIC determined that the merger of three
financially strong stock life insurance companies would result in an overall
enhanced capital position and reduced expenses, which, together, would be in the
long-term interests of their respective contract owners. On July 14, 2000, the
respective 100% stockholders of the Company, Alexander Hamilton Life, and GLIC
voted to approve the merger. In addition, the Nebraska and Michigan Departments
of Insurance have approved the merger.
The Separate Account
The JPF Variable Annuity Separate Account II of Jefferson Pilot Financial
Insurance Company (the "Separate Account") was established by Alexander Hamilton
Life, a former affiliate of the Company, as a separate investment account under
the laws of the State of Michigan on January 24, 1994. On August 1, 2000,
Alexander Hamilton Life, together with the Separate Account, was merged into the
Company. The Separate Account survived the merger intact.
The Company owns the assets of the Separate Account. The Separate Account will
not be charged with liabilities arising out of our other separate accounts or
out of any of our other business unless the liabilities have a specific and
determinable relation to or dependence upon the Separate Account. We reserve the
right to transfer assets of the Separate Account in excess of the reserves and
other Contract liabilities with respect to the Separate Account to our general
account. The income, if any, and gains or losses realized or unrealized on each
Variable Sub-account are credited to or charged against that Variable
Sub-account without regard to our other income, gains or losses. Therefore, the
investment performance of any Variable Sub-account should be entirely
independent of the investment performance of our general account assets or any
of our other separate accounts.
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distributor of the Contracts
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Jefferson Pilot Variable Corporation (formerly Jefferson-Pilot Investor
Services, Inc.) is the principal underwriter of the Contracts. Jefferson Pilot
Variable Corporation will enter into one or more contracts with various
broker-dealers for the distribution of the Contracts. Commissions paid on
Contract sales may vary, but we estimate that total commissions paid on all
Contract sales will not exceed 6.75% of all premium payments. In certain
circumstances, commissions may be paid in installments over time. Jefferson
Pilot Variable Corporation, a wholly owned subsidiary of Jefferson-Pilot
Corporation, is a member of the NASD. Its mailing address is One Granite Place,
Concord, NH 03301. There may be other underwriters in the future.
In addition to the payment of commissions, we may from time to time pay or allow
additional promotional incentives, in the form of cash or other compensation, to
broker-dealers that sell variable annuity contracts. In some instances, such
other cash incentives may be offered only to certain broker-dealers that sell or
are expected to sell during specified time periods certain minimum amounts of
variable annuity contracts. Our payment of promotional incentives is subject to
applicable state insurance law and regulation.
voting rights
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There are no voting rights associated with the Capital Developer Account Value.
With respect to the Separate Account Value, we are the "shareholder" of the
Portfolios and as such, we have certain voting rights. As a general matter, you
do not have a direct right to vote the shares of the Portfolios held by the
Variable Sub-accounts to which you have allocated your Contract Value. Under
current law, however, and prior to the Maturity Date, you are entitled to give
us instructions on how to vote those shares on certain matters. We will notify
when your instructions are needed. We will also provide proxy materials or other
information to assist you in understanding the matters being voted on. We will
determine the number of shares for which you may give voting instructions as of
the record date set by the relevant Portfolio holding the shareholder meeting.
The number of votes that you have the right to instruct will be calculated
separately for each Variable Sub-account. The number of votes that you have the
right to instruct for a particular Variable Sub-account will be determined by
dividing your Contract Value in the Variable Sub-account by the net asset value
per share of the corresponding Portfolio in which the Variable Sub-account
invests. Fractional shares will be counted.
After the Maturity Date, the person receiving Annuity Payments has the voting
interest, and the number of votes decreases as Annuity Payments are made and as
the reserves for the Contract decrease. The person's number of votes will be
determined by dividing the reserve for the Contract allocated to the applicable
Variable Sub-account by the net asset value per share of the corresponding
Portfolio. Fractional shares will be counted.
If you send us written voting instructions, we will follow your instructions in
voting the Portfolio shares attributable to your Contract. If you do not send us
written instructions, we will vote the shares attributable to your Contract in
the same proportions as we vote the shares for which we have received
instructions from other Contract Owners. We or our affiliates may vote shares in
which you or other persons entitled to vote have no beneficial interest in our
sole discretion.
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We reserve the right to restrict or eliminate any of your voting rights when we
are permitted by law to do so.
The above description reflects our view of currently applicable law. If the law
changes or our interpretation of the law changes, we may decide that we are
permitted to vote Portfolio shares without obtaining voting instructions from
our Contract Owners and we may elect to do so.
additional information about the separate account
--------------------------------------------------------------------------------
Addition, Deletion, or Substitution of Investments
We reserve the right to transfer assets of the Separate Account, which we
determine to be associated with the class of policies to which the Contract
belongs, to another separate account. If this type of transfer is made, the term
"Separate Account," as used herein, shall then mean the separate account to
which the assets were transferred.
We further reserve the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the Separate
Account or that the Separate Account may purchase. If the shares of a Portfolio
are no longer available for investment or if in our judgment further investment
in any Portfolio should become inappropriate in view of the purposes of the
Separate Account, we may redeem the shares, if any, of that Portfolio and
substitute shares of another Portfolio or of another registered open-end
management investment company. We will not substitute any shares attributable to
a Contract's interest in a Variable Sub-account of the Separate Account without
notice and prior approval of the SEC and state insurance authorities, if
required by law.
We also reserve the right to establish additional Variable Sub-accounts of the
Separate Account, each of which would invest in shares corresponding to a new
investment portfolio of the existing Funds or in shares of another investment
company. Subject to applicable law and any required SEC approval, we may, in our
sole discretion, establish new Variable Sub-accounts, eliminate one or more
Variable Sub-accounts, or combine Variable Sub-accounts if marketing needs, tax
considerations or investment conditions warrant. Any new Variable Sub-accounts
may be made available to existing Contract Owners on a basis to be determined by
the Company.
If any of these substitutions or changes is made, we may by appropriate
endorsement change the Contract to reflect the substitution or change. If we
deem it to be in the best interest of Contract Owners and Annuitants, and
subject to any approvals that may be required under applicable law, the Separate
Account may be operated as a management investment company under the 1940 Act;
it may be deregistered under the 1940 Act if registration is no longer required;
or it may be combined with other separate accounts of the Company. Further, we
reserve the right, when permitted by law, to manage the Separate Account under
the direction of a committee at any time. We will notify you of our intent to
exercise any such reserved rights with respect to the Separate Account. You will
have thirty-one (31) days after you receive any such notification to accept or
reject the change(s) described therein. If you choose not to accept such
change(s), you may request to cancel your Contract and receive the Surrender
Value.
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Performance Data
From time-to-time we may use the yield of the JPVF Money Market Variable
Sub-account and total returns of other Variable Sub-accounts in advertisements
and sales literature. Performance data is not intended to and does not indicate
future performance.
JPVF Money Market Variable Sub-account Yield. The yield of the JPVF Money Market
Variable Sub-account refers to the annualized income generated by an investment
in that Variable Sub-account over a specified seven-day period. The yield is
"annualized" by assuming that the income generated for that seven-day period is
generated each seven-day period over a 52-week period and is shown as a
percentage of that investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in that Variable Sub-account
is assumed to be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed reinvestment.
Other Variable Sub-account Yield. We may from time-to-time advertise or disclose
the current annualized yield of one or more of the Variable Sub-accounts of the
Separate Account (except the JPVF Money Market Variable Sub-account) for 30-day
periods. The annualized yield of a Variable Sub-account refers to income
generated by the Variable Sub-account over a specific 30-day period. Because the
yield is annualized, the yield generated by a Variable Sub-account during the
30-day period is assumed to be generated each 30-day period over a 12-month
period.
The yield is computed by: (i) dividing the net investment income of the Variable
Sub-account less Variable Sub-account expenses for the period, by (ii) the
maximum offering price per unit on the last day of the period times the daily
average number of units outstanding for the period, (iii) compounding that yield
for a 6-month period, and (iv) multiplying that result by 2. Expenses
attributable to the Variable Sub-account include (i) the Annual Administrative
Fee, (ii) the Mortality and Expense Risk Charge and (iii) the Administrative
Expense Charge.
Because of the charges and deductions imposed by the Separate Account, the yield
for a Variable Sub-account of the Separate Account will be lower than the yield
for its corresponding Portfolio. The yield calculations do not reflect the
effect of any Surrender Charge or Premium Taxes that may be applicable to a
particular Contract. The yield on amounts held in the Variable Sub-accounts of
the Separate Account normally will fluctuate over time. Therefore, the disclosed
yield for any given past period is not an indication or representation of future
yields or rates of return. A Variable Sub-account's actual yield is affected by
the types and quality of its investments and its operating expenses.
Total Return. Total returns for the Sub-accounts may be calculated pursuant to a
standardized formula or in non-standardized manners. The standardized total
return of the Variable Sub-accounts refers to return quotations assuming an
investment has been held in the Variable Sub-account for various periods of time
including, but not limited to, one year, five years, and ten years (if the
Variable Sub-account has been in operation for those periods), and a period
measured from the date the Variable Sub-account commenced operations. The total
return quotations will represent the average annual compounded rates of return
that would equate an initial investment of $1,000 to the redemption value of
that investment as of the last day of each of the periods for which total return
quotations are provided. Accordingly, the total return
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quotations will reflect not only income but also changes in principal value
(that is, changes in the Accumulation Unit values), whereas the yield figures
will only reflect income. In addition, the standardized total return quotations
will reflect the Surrender Charge imposed on partial withdrawals and full
surrenders, but the standardized yield figures will not.
In addition, we may from time-to-time also disclose total return in non-standard
formats and cumulative total return for the Variable Sub-accounts. The
non-standard average annual total return and cumulative total return would not
reflect the Surrender Charge, which if reflected would lower the performance
figures for periods of less than seven years.
We may from time-to-time also disclose standard total returns and non-standard
total returns for the Variable Sub-accounts based on or covering periods of time
other than those indicated above. All non-standard performance data will only be
disclosed if the standard total return is also disclosed. For additional
information regarding the calculation of performance data, please refer to the
Statement of Additional Information.
Performance Comparisons. From time-to-time, in advertisements, sales literature,
or in reports to you, we may compare the performance of the Variable
Sub-accounts to that of other variable accounts or investment vehicles with
similar investment objectives or to relevant indices published by recognized
mutual fund or variable annuity statistical rating services or publications of
general variable annuity statistical rating services or publications of general
interest such as Forbes or Money magazines. For example, a Variable
Sub-account's performance might be compared to that of other accounts or
investments with a similar investment objective as compiled by Lipper Analytical
Services, Inc., VARDs, Morningstar, Inc., or by others. In addition, a Variable
Sub-account's performance might be compared to that of recognized stock market
indicators including, but not limited to, the Standard & Poor's 500 Stock Index
(which is a group of unmanaged securities widely regarded by investors as
representative of the stock market in general) and the Dow Jones Industrial
Average (which is a price-weighted average of 30 large, well-known industrial
stocks that are generally the leaders in their industry). Performance
comparisons should not be considered representative of the future performance of
a Variable Sub-account.
General. Performance data may also be calculated for shorter or longer base
periods. The Separate Account may use various base periods as may be deemed
necessary or appropriate to provide investors with the most informative
performance data information, depending on the then-current market conditions.
Performance will vary from time-to-time, and historical results will not be
representative of future performance. Performance information may not provide a
basis for comparison with other investments or other investment companies using
a different method of calculating performance. A Portfolio's total returns
should not be expected to be the same as the returns of other portfolios,
whether or not both funds have the same portfolio managers and/or similar names.
Current yield is not fixed and varies with changes in investment income and
Accumulation Unit values. The JPVF Money Market Variable Sub-account yield will
be affected if it experiences a net inflow of new money which it invests at
interest rates different from those being earned on its then-current
investments. An investor's principal in a Variable Sub-account and a Variable
Sub-account's return are not guaranteed and will fluctuate according to market
conditions. Also, as
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noted above, advertised performance data figures will be historical figures for
a Contract during the Accumulation Period.
Company Ratings
We may from time-to-time publish (in advertisements, sales literature and
reports to you) the ratings and other information assigned to us by one or more
independent rating organizations such as A.M. Best Company, Standard & Poor's,
Duff & Phelps, and Fitch Investors Services. The purpose of the ratings is to
reflect our financial strength and/or claims-paying ability and should not be
considered as bearing on the investment performance of assets held in the
Separate Account. Each year the A.M. Best Company reviews the financial status
of thousands of insurers, culminating in the assignment of Best's Ratings. These
ratings reflect A.M. Best Company's current opinion of the relative financial
strength and operating performance of an insurance company in comparison to the
norms of the life/health insurance industry. In addition, our claims-paying
ability as measured by Standard and Poor's Insurance Ratings Services, Duff &
Phelps, or Fitch Investors Services may be referred to in such advertisements,
sales literature, or reports. These ratings are opinions regarding our financial
capacity to meet the obligations of our insurance and annuity policies in
accordance with their terms. Such ratings do not reflect the investment
performance of the Separate Account or the degree of risk associated with an
investment in the Separate Account.
general contract provisions
--------------------------------------------------------------------------------
Entire Contract
The entire contract consists of the Contract, any attached riders and
endorsements, and the attached copy of the application. Only our President, or
one of our Executive Vice Presidents may change the Contract. The change must be
in writing. No change will be made in the Contract unless you agree to it in
writing. No agent is authorized to change the Contract or to change or waive any
provision of the Contract.
Reliance on Information Provided in Application
In issuing the Contract, we will rely on the statements made in the application.
We deem all such statements to be representations and not warranties. We assume
that these statements are true and complete to the best of the knowledge and
belief of those who made them. We will not use any statement made in connection
with the application to void the Contract unless that statement is a material
misrepresentation and is part of the application.
Variations in Contract Provisions
Certain provisions of your Contract may vary from the descriptions in this
Prospectus in order to comply with different state laws. Any such variations
will be included in your Contract or in riders or endorsements to your Contract.
The Company's Ability to Contest the Contract
We will not contest the Contract from the Contract Date.
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Measurement of Dates
Contract Years, Quarters, Months, and Anniversaries are measured from the
Contract Date, except where otherwise specified.
Calculation of Age
References in the Contract to a person's age on any date refer to his or her age
on that person's last birthday.
Misstatement of Age
If the age of the Annuitant has been misstated, any amount payable under the
Contract will be what would have been purchased at the correct age. If payments
were made based on incorrect age, we will increase or reduce a later payment or
payments to adjust for the error. Any adjustment will include interest, at 6.0%
per year, from the date of the wrong payment to the date the adjustment is made.
Assignment of the Contract
While the Annuitant is living, and except for Qualified Contracts, you may
assign the Contract or any interest you have in it. Any irrevocable Beneficiary
must agree to the assignment. If there is a joint Contract Owner, the joint
Contract Owner must agree to any assignment. Your interest, and anyone else's,
will then be subject to that assignment. As Contract Owner, you still have the
rights of ownership that you have not assigned.
An assignee cannot change the Contract Owner, Annuitant or Beneficiary, and may
not elect an alternative payment option. Any amount payable to the assignee will
be made in one lump sum.
To assign the Contract, you must provide us with a copy of the assignment. We
are not responsible for the validity of any assignment. An assignment will be
subject to any payment previously made by us or any other action we may take
before recording the assignment.
State law such as those governing marital property may affect your ability to
encumber the Contract.
Nonparticipating
The Contract is nonparticipating and will not share in any surplus earnings of
the Company. No dividends are payable on the Contract.
Non-Business Days
If the due date for any activity required by the Contract falls on a
non-business day for the Company, performance will be rendered on the first
business day following the due date.
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Regulatory Requirements
All interest guarantees, surrender benefits, and amounts payable at death will
not be less than the minimum benefits approved under the laws and regulations of
the state in which the Contract is delivered.
We will administer the Contract in accordance with the U.S. tax laws and
regulations in order to retain its status as an annuity contract.
The Contract is deemed to include all state and federal laws that apply.
legal proceedings
--------------------------------------------------------------------------------
We are not involved in any litigation that is of material importance in relation
to our general account assets. In addition, there are no legal proceedings to
which the Separate Account is a party.
available information
--------------------------------------------------------------------------------
We have filed a registration statement (the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933
relating to the Contracts offered by this Prospectus. This Prospectus has been
filed as part of the Registration Statement and does not contain all of the
information set forth in the Registration Statement. Reference is hereby made to
such Registration Statement for further information relating to the Company and
the Contracts. The Registration Statement may be inspected and copied at the
public reference facilities of the SEC at Room 1024, 450 Fifth Street, N.W,
Washington, D.C. 20549. Copies of such materials also can be obtained from the
Public Reference Section of the SEC at 450 Fifth Street, N.W, Washington, D.C.
20549, (telephone no. 202-942-8090), at prescribed rates or may be found at the
SEC's Web Site at http://www.sec.gov.
statement of additional information
--------------------------------------------------------------------------------
A Statement of Additional Information is available (at no cost) which contains
more details concerning the subjects discussed in this Prospectus. The following
is the Table of Contents for that Statement:
TABLE OF CONTENTS
Page
More Information About the Contract 3
Determination of Variable Sub-account Accumulation Unit Values 3
Calculation of Annuity Unit Value 4
Annuity Period Transfer Formulas 5
Administration 6
Records and Reports 6
Custody of Assets 6
Principal Underwriter 6
Performance Data and Calculations 7
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Money Market Variable Sub-account Yields 7
Other Variable Sub-account Yield 7
Variable Sub-account Total Return Calculations: Standardized 9
Other Performance Data: Non-Standardized 10
Other Information 13
Legal Matters 13
Other Information 13
Experts 14
Financial Statements 14
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appendix I
SURRENDER CHARGE CALCULATION
A Surrender Charge, which will not exceed 8.5% of total premium payments paid,
is deducted from the Contract Value upon partial withdrawal or full surrender of
the Contract, unless certain conditions apply. (See "Surrender Charge," p. 30.)
The Surrender Charge is calculated as follows:
(S - FREE) x X% = SC, but not less than zero.
Where:
(S) is the gross surrender or partial withdrawal amount.
(FREE) is the 10% Free Surrender Amount (net of any other applicable
withdrawals that may have been taken and applied toward the
current Contract Year).
(SC) is the Surrender Charge amount.
(X) is the following Surrender Charge percentage:
CONTRACT YEAR PERCENTAGE
1 6%
2 6%
3 6%
4 5%
5 4%
6 3%
7 2%
8 0%
EXAMPLE.
Assume a Contract Value of $50,000 at the end of the third Contract Year. Also
assume that no MVA has been taken and no previous partial withdrawals were made.
1) If there is a full surrender at the end of the third Contract Year:
Surrender Charge = ($50,000 - $5,000) x .06 = $2,700.00
Thus, the surrender proceeds would be $50,000 - $2,700.00 = $47,300.00.
Premium Taxes may also be applicable.
NOTE: The Annual Administrative Fee ($30) applies to full surrenders only
when Contract Value is less than $30,000.
2) If there is a partial surrender of $10,000 at the end of the third
Contract Year:
Surrender Charge = ($10,000 - $5000) x .06 = $300.00
Thus, the Contract Value would be reduced by $10,000 and you would receive
$9,700. Premium Taxes may also be applicable.
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appendix II
--------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENT
The formula which will be used to determine the MVA is:
[[(1+I)/(1+J+.004)]^(N/12)-1] x A
NOTE: The MVA will be limited so that it does not reduce the return on each
Interest Rate Guarantee Period of the Capital Developer Account below 3.0% per
year.
I = The Guaranteed Interest Rate in effect for the current Interest Rate
Guarantee Period (expressed as a decimal, (e.g., 1% = .01).)
J = The Current U.S. Treasury Bill, Note or Bond rate (as quoted by the Wall
Street Journal and expressed as a decimal (e.g., 1% = .01)) in effect for
the period most closely approximating the time remaining in the current
Interest Rate Guarantee Period (Fractional years will be rounded to the
nearest month and the interest rate will be calculated using
interpolation). If the period is less than 1 year then the Company will
use the 1 year Treasury Bill rate.
N = The number of complete months from the surrender or partial withdrawal
to the end of the current Interest Rate Guarantee Period.
A = The amount surrendered, withdrawn or transferred.
The ".004" in the formula is a factor designed to cover anticipated costs of
liquidating investments. Thus, the Guaranteed Interest Rate ("I") must be at
least 0.4% higher than the Treasury Rate ("J") for there to be a positive MVA.
If I is lower than J or higher but less than 0.4% higher, the MVA is negative.
EXAMPLES OF MARKET VALUE ADJUSTMENT
Assume an Account Value of $50,000 in a seven year Interest Rate Guarantee
Period with a Guaranteed Interest Rate of 6%, and an original payment of $43,000
at the beginning of the current Interest Rate Guarantee Period.
1) If there is a full surrender at the beginning of the fourth Contract Year
with four years remaining in the Interest Rate Guarantee Period:
(a) if the current rate for a four-year Treasury Note is 5%:
MVA = $50,000 x [(1.06/1.054)^(48/12) - 1] = $1,148.28
Free Surrender Amount = ($51,148.28 x .10) = $5,114.83
Surrender Charge = ($51,148.28 - $5,114.83) x .05 = $2,301.67
Thus, the surrender proceeds = $51,148.28 - $2,301.67
= $48,846.61 - any applicable Premium Taxes;
(b) if the current rate for a four-year Treasury Note is 7%:
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MVA = $50,000 x [(1.06/1.074)^(48/12) - 1] = -$2,556.54
Minimum MVA with 3% guaranteed return = $43,000 x (1.03)^3^ - $50,000 =
-$3,012.74
Since -$2,556.54 is greater than -$3,012.74, the actual MVA is -$2,556.54
Free Surrender Amount = ($47,443.46 x .10) = $4,744.35
Surrender Charge = ($47,443.46 - $4,744.35) x .05 = $2,134.96
Thus, the surrender proceeds = $47,443.46 - $2,134.96
= $45,308.50 - any applicable Premium Taxes
2) If there is a full surrender at the beginning of the tenth Policy Year
(thus, no Surrender Charge applies) with three years remaining in the
Interest Rate Guarantee Period:
(a) if the current rate for a three-year Treasury Note is 5%:
MVA = $50,000 x [(1.06/1.054)^(36/12) - 1] =$858.76
Surrender Charge = 0
Thus, the surrender proceeds = $50,000 + $858.76 = $50,858.76 - any
applicable Premium Taxes;
(b) if the current rate for a three-year Treasury Note is 7%:
MVA = $50,000 x [(1.06/1.07)^(36/12) - 1] = -$1,929.93
Minimum MVA with 3% guaranteed return = $43,000 x (1.03)^4^ -
$50,000 = -$1,603.12
Since -$1,603.12 is greater than -$1,929.93, the actual MVA is
-$1,603.12
Surrender Charge = 0
Thus, the surrender proceeds = $50,000 - $1,603.12 = $48,396.88 -
any applicable Premium Taxes
3) If there is a partial withdrawal of $10,000 at the beginning of the fourth
Contract Year with four years remaining in the Interest Rate Guarantee
Period:
(a) if the current rate for a four-year Treasury Note is 5%:
MVA = $10,000 x [(1.06/1.054)^(48/12) - 1] =$229.66
Free Surrender Amount = $50,229.66 x .10 = $5,022.97
Surrender Charge = $10,000 - $5,022.97 x .05 = $248.85
Thus, the surrender proceeds = $10,000 + $229.66 - $248.85
= $9,980.81 - any applicable Premium Taxes;
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(b) if the current rate for a four-year Treasury Note is 7%:
MVA = $10,000 x [(1.06/1.074)^(48/12) - 1] =-$511.31
Minimum MVA with 3% guaranteed return =
$43,000 x (1.03)^3^ - $50,000 = -$3,012.74
Since -$511.31 is greater than -$3,012.74, the actual MVA is
-$511.31
Free Surrender Amount = $49,488.69 x .10 = $4,948.87
Surrender Charge = ($10,000 - $4,948.87) x .05 = $252.56
Thus, the surrender proceeds = $10,000 - $511.31 - $252.56
= $9,236.13 - any applicable Premium Taxes.
4) If there is a partial surrender of $10,000 at the beginning of the tenth
Contract Year (thus no Surrender Charge applies) with three years
remaining in the Interest Rate Guarantee Period:
(a) if the current rate for a three-year Treasury Note is 5%:
MVA = $10,000 x [(1.06/1.054)^(36/12) - 1] = $171.75
Surrender Charge = 0
Thus, the withdrawal proceeds = $10,000 + $171.75 = $10,171.75 - any
applicable Premium Taxes;
(b) if the current rate for a three-year Treasury Note is 7%:
MVA = $10,000 x [(1.06/1.074)^(36/12) - 1] =-$385.99
Minimum MVA with 3% guaranteed return =
$43,000 x (1.03)^4^ - $50,000 = -$1,603.12
Since -$385.99 is greater than -$1,603.12, the actual MVA is
-$385.99
Surrender Charge = 0
Thus, the withdrawal proceeds = $10,000 - $385.99
= $9,614.01 - any applicable Premium Taxes.
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JPF VARIABLE ANNUITY SEPARATE ACCOUNT II
Offered by
JEFFERSON PILOT FINANCIAL INSURANCE COMPANY
Service Center:
One Granite Place
P.O. Box 515
Concord, New Hampshire 03306-0515
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information expands upon certain subjects discussed
in the current Prospectus for the Allegiance Variable Annuity Contract (the
"Contract") offered by Jefferson Pilot Financial Insurance Company. You may
obtain a copy of the Prospectus dated August 1, 2000 by calling
1-800-258-3648, Ext. 5394, or by writing to the Company at its Variable Annuity
Service Center, One Granite Place, P.O. Box 515, Concord, New Hampshire
03302-0515. Terms used in the current Prospectus for the Contract are
incorporated in this Statement.
This Statement of Additional Information is not a prospectus and should be read
only in conjunction with the prospectuses for the Contract, the Jefferson Pilot
Variable Fund, Inc.; the Variable Insurance Products Fund; the Variable
Insurance Products Fund II; the MFS Variable Insurance Trust; and the
Oppenheimer Variable Account Funds.
Dated: August 1, 2000
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TABLE OF CONTENTS
Page
More Information About the Contract
Determination of Variable Sub-account Accumulation Unit Values
Calculation of Annuity Unit Value
Annuity Period Transfer Formulas
Administration
Records and Reports
Custody of Assets
Principal Underwriter
Performance Data and Calculations
Money Market Variable Sub-account Yield
Other Variable Sub-account Yields
Variable Sub-account Total Return Calculations: Standardized
Other Performance Data: Non-Standardized
Other Information
Legal Matters
Other Information
Experts
Financial Statements
In order to supplement the description in the Prospectus, the following provides
additional information about the Company and the Contract which may be of
interest to you.
MORE INFORMATION ABOUT THE CONTRACT
Determination Of Variable Sub-Account Accumulation Unit Values
Accumulation Units. Accumulation Units are used to account for all amounts
allocated to or withdrawn from the Separate Account. We will determine the
number of Accumulation Units of a Variable Sub-account by dividing the Net
Premium Payment allocated to (or the amount withdrawn from) the Variable
Sub-account by the dollar value of one Accumulation Unit on the date of the
transaction. The Separate Account Value will consist of the sum of the value of
all Accumulation Units in all Variable Sub-accounts credited to the Contract on
the applicable Valuation Day.
Accumulation Unit Value. The value of an Accumulation Unit in a Variable
Sub-account on any Valuation Day is the product of (a) the value on the
preceding Valuation Day and (b) the Net Investment Factor for the Variable
Sub-account for the Valuation Period just ended. The initial value of an
Accumulation Unit was established at $10 for each of the nineteen Variable
Sub-accounts except the Money Market Variable Sub-account, for which the value
was established at $1, the JPVF Growth Sub-account, for which the value was
established at $14.655, the JPVF High Yield Bond Sub-account, for which the
value was established at $11.909, and the JPVF International Equity Sub-account,
for which the value was established at $11.371.
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<PAGE>
A Valuation Day is any day on which the New York Stock Exchange is open for
trading except for normal federal holiday closing or when the Securities and
Exchange Commission ("SEC") has determined that a state of emergency exists. In
addition, the Company will be closed on the following local or regional business
holidays which shall not constitute a Valuation Day: Good Friday, the Friday
following Thanksgiving and the day before and/or following Christmas Day.
A Valuation Period is the period of time beginning at the close of trading of
the New York Stock Exchange on any Valuation Day and ending at the close of
business on the next Valuation Day. A Valuation Period may be one day or more
than one day.
Net Investment Factor. We calculate the Net Investment Factor for a Valuation
Period for each Variable Sub-account by dividing (a) by (b) and subtracting (c)
from the result, where:
(a) is the sum of:
(1) the net asset value of a Portfolio share held in the Separate
Account for that Variable Sub-account determined at the end of
the current Valuation Period, plus
(2) the per share amount of any dividend or capital gain
distributions made for shares held in the Separate Account for
that Variable Sub-account if the ex-dividend date occurs
during the Valuation Period.
(b) is the net asset value of a Portfolio share held in the Separate
Account for that Variable Sub-account determined as of the end of
the preceding Valuation Period.
(c) is a factor representing the Mortality and Expense Risk Charge and
the Administrative Expense Charge. This factor is equal, on an
annual basis, to 1.40% (1.25% + 0.15%) of the daily net asset value
of Portfolio shares held in the Separate Account for that Variable
Sub-account.
The Net Investment Factor may be greater or less than one; therefore, the
Accumulation Unit value may increase or decrease.
Calculation Of Annuity Unit Value
o Annuity Units and Payments. The dollar amount of each variable Annuity
Payment depends on the number of Annuity Units credited to that Annuity
Payment Option and the value of those units. The number of Annuity Units
is determined as follows:
1. The dollar amount of the first payment with respect to each Variable
Sub-account is determined by multiplying the portion of the Contract
Value to be applied to the Variable Sub-account by the variable
annuity purchase rate specified in the Settlement Option table in
the Contract.
2. The number of Annuity Units credited in each Variable Sub-account is
then determined by dividing the dollar amount of the first payment
by the value of one Annuity Unit in that Variable Sub-account on the
Maturity Date.
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3. The amount of each subsequent Annuity Payment equals the product of
the Annuitant's number of Annuity Units and the Annuity Unit values
on the payment date. The amount of each payment may vary.
o Annuity Unit Value. The value of the Annuity Units will increase or
decrease on a daily basis to reflect the investment performance of the
applicable Portfolio. The value of an Annuity Unit in a Variable
Sub-account on any Valuation Day is determined as follows:
1. The value of the Annuity Unit for the Variable Sub-account on the
preceding Valuation Day is multiplied by the Net Investment Factor
for the Valuation Period.
2. The result in (1) is then multiplied by a factor (slightly less than
one) to compensate for the interest assumption built into the
variable annuity purchase rates.
The Net Investment Factor reflects the investment experience of the applicable
Portfolio and certain charges (See above for a detailed description of the Net
Investment Factor).
Annuity Period Transfer Formulas
During the Annuity Period, you may transfer Separate Account Value from one
Variable Sub-account to another, subject to certain limitations. Interest Rate
Guarantee Periods are not available during the Annuity Period, thus none will be
available for transfers. (See "Transfers," in the Prospectus.)
Transfers during the Annuity Period are implemented according to the following
formula:
1. Determine the number of units to be transferred from the Variable
Sub-account as follows: = D/AUV1
2. Determine the number of Annuity Units remaining in such Variable
Sub-account (after the transfer): = UNIT1 - D/AUV1
3. Determine the number of Annuity Units in the transferee Variable
Sub-account (after the transfer): = UNIT2 + D/AUV2
4. Subsequent Annuity Payments will reflect the changes in Annuity
Units in each Variable Sub-account as of the next Annuity Payment's
due date.
Where:
(AUV1) is the Annuity Unit value of the Variable Sub-account that the
transfer is being made from.
(AUV2) is the Annuity Unit value of the Variable Sub-account that the
transfer is being made to.
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(UNIT1) is the number of units in the Variable Sub-account that the
transfer is being made from, before the transfer.
(UNIT2) is the number of units in the Variable Sub-account that the
transfer is being made to, before the transfer.
(D) is the dollar amount being transferred.
Administration
We or our affiliates will provide administrative services. These services
include issuance and redemption of the Contract, maintenance of records
concerning the Contract and certain Contract Owner services.
If we or our affiliates do not continue to provide these services, we will
attempt to secure similar services from such sources as may then be available.
Services will be purchased on a basis which, in our sole discretion, affords the
best service at the lowest cost. We, however, reserve the right to select a
provider of services which we, in our sole discretion, consider best able to
perform such services in a satisfactory manner even though the costs for the
service may be higher than would prevail elsewhere.
Records And Reports
We will maintain all records and accounts relating to the Separate Account. As
presently required by the Investment Company Act of 1940 and regulations
promulgated thereunder, we will mail to you at your last known address of
record, at least annually, reports containing such information as may be
required under that Act or by any other applicable law or regulation. You will
also receive confirmation of each financial transaction and any other reports
required by law or regulation.
Custody Of Assets
The assets of each of the Variable Sub-accounts of the Separate Account are held
in the custody of Citibank, N.A. The assets of each of the Variable Sub-accounts
of the Separate Account are segregated and held separate and apart from the
assets of the other Variable Sub-accounts and from the Company's general account
assets. Jefferson Pilot Investment Advisory Corporation, an affiliate of the
Company, maintains records of all purchases and redemptions of Portfolio shares
by each of the Variable Sub-accounts.
Principal Underwriter
During the year ended December 31, 1997, Jefferson Pilot Variable Corporation
("JPVC") received $341,003 in brokerage commissions, of which it retained
$66,407. During the year ended December 31, 1998, JPVC received $4,442,409 in
brokerage commissions, and did not retain any of these commissions. During the
year ended December 31, 1999, JPVC received $6,229,400 in brokerage commissions
and did not retain any of these commissions.
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The Company, on its own behalf and on behalf of the Separate Account, entered
into an Agreement with JPVC to serve as principal underwriter for the continuous
offering of the Contracts. JPVC has served as principal underwriter since
November 1, 1996. JPVC is a wholly-owned subsidiary of Jefferson-Pilot
Corporation and is an affiliate of the Company.
Performance Data And Calculations
Money Market Variable Sub-account Yield
The Yield of the Money Market Variable Sub-account for a seven-day period is
calculated by a standardized method prescribed by rules of the SEC. Under this
method, the yield quotation is computed by determining the net change, exclusive
of capital changes, in the value of a hypothetical pre-existing account having a
balance of one Accumulation Unit of the Money Market Variable Sub-account at the
beginning of such seven-day period, subtracting a hypothetical charge reflecting
deductions from Contract owner accounts, and dividing the difference by the
value of the account at the beginning of the base period to obtain the base
period return, and multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of one percent.
The Separate Account may also compute the Money Market Variable Sub-account's
yield on an annualized basis. This current annualized yield is computed by
determining the net change (exclusive of realized gains and losses on the sale
of securities and unrealized appreciation and depreciation) in the value of a
hypothetical account having a balance of one Accumulation Unit of the Money
Market Variable Sub-account at the beginning of such seven-day period, dividing
such net change in account value by the value of the account at the beginning of
the seven-day base period to determine the base period return, and annualizing
this quotient on a 365-day basis.
The SEC also permits the Separate Account to disclose the effective yield of the
Money Market Variable Sub-account for the same seven-day period, determined on a
compounded 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 amounts held in the Money Market Variable Sub-account normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The Money Market Variable Sub-account's actual yield is affected by
changes in interest rates on money market securities, average portfolio maturity
of the JPVF Money Market Portfolio, the types and quality of portfolio
securities held by the JPVF Money Market Portfolio, and its operating expenses.
The yield figures do not reflect Surrender Charges or Premium Taxes.
Other Variable Sub-account Yields
The yield of Variable Sub-accounts other than the Money Market Variable
Sub-account based on a thirty-day period is calculated by a standardized method
prescribed by rules of the Securities and Exchange Commission. The yield is
computed by dividing the net investment income per Accumulation Unit earned
during the period by the maximum offering price per unit on the last day of the
period, according to the following formula:
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Yield = 2[((a-b)+1)^6 -1]
----
cd
Where:
a = net investment income earned during the period by the Portfolio
attributable to shares owned by the Sub-account.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Accumulation Units outstanding during
the period.
d = the maximum offering price per Accumulation Unit on the last day
of the period.
We may from time to time advertise or disclose the current annualized yield of
one or more of the Variable Sub-accounts of the Separate Account (except the
Money Market Variable Sub-account) for 30-day periods. The annualized yield of a
Variable Sub-account refers to income generated by the Variable Sub-account over
a specific 30-day period. Because the yield is annualized, the yield generated
by a Variable Sub-account during the 30-day period is assumed to be generated
each 30-day period over a 12-month period. The 30-day yield is calculated
according to the following formula:
Yield = 2 (a-b)^6+1 -1
----
cd
Where:
a = net investment income of the Variable Sub-account for the 30-day
period attributable to the Variable Sub-account's unit.
b = expenses of the Variable Sub-account for the 30-day period.
c = the average number of units outstanding.
d = the unit value at the close (highest) of the last day in the
30-day period.
Because of the charges and deductions imposed by the Separate Account, the yield
for a Variable Sub-account of the Separate Account will be lower than the yield
for its corresponding Portfolio. The yield calculations do not reflect the
effect of any Premium Taxes or Surrender Charge that may be applicable to a
particular Contract. Surrender Charges range from 6% to 2% of the amount
withdrawn based on the Contract Year of surrender. The yield on amounts held in
the Variable Sub-accounts of the Separate Account normally will fluctuate over
time. Therefore, the disclosed yield for any given past period is not an
indication or representation of future yields or rates of return. A Variable
Sub-account's actual yield is affected by the types and quality of the
Portfolios' investments and its operating expenses.
Variable Sub-account Total Return Calculations: Standardized
We may from time to time also disclose average annual total returns for one or
more of the Variable Sub-accounts for various periods of time. Average annual
total return quotations are computed by finding the average annual compounded
rates of return over one, five and ten year periods and for the life of the
Variable Sub-account that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
7
<PAGE>
P (1 + T)^n = ERV
Where:
P = hypothetical initial premium payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the one, five or ten-year
period (or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the one, five, or ten-year period.
The Surrender Charge on Contracts and all recurring fees that are charged to all
shareholder accounts (the Annual Administrative Fee) are recognized in the
ending redeemable value for standard total return figures. These figures will
not reflect any Premium Taxes.
The following table shows the Standardized Average Annual Total Return for the
Allegiance Variable Annuity Sub-accounts for the period ended December 31, 1999.
1999 Since Inception
JPVF Money Market Sub-account* -5.89% -1.14%
JPVF Balanced Sub-account* 10.52% 12.43%
JPVF Value Sub-account* -4.78% 5.86%
JPVF Capital Growth Sub-account* 31.28% 26.99%
JPVF Small Company Sub-account** 3.06% -8.28%
JPVF Emerging Growth Sub-account* 60.82% 26.78%
JPVF World Growth Stock
Sub-account* 9.22% 3.74%
JPVF Growth Sub-account** 64.39% 46.70%
JPVF S&P 500 Index
Sub-account** *** 8.90% 18.02%
JPVF High Yield Bond
Sub-account** -5.68% -5.60%
JPVF International Equity
Sub-account** 20.04% 16.42%
MFS Research Series Sub-account** 12.18% 14.93%
MFS Utilities Series
Sub-account** 18.45% 16.93%
Oppenheimer Capital Appreciation
Sub-Account**** N/A 16.13%
Oppenheimer Bond Sub-account* -11.53% -1.47%
8
<PAGE>
Oppenheimer Strategic Bond
Sub-account** -7.50% -5.69%
VIP Equity-Income Sub-account** -4.25% 2.80%
VIP Growth Sub-account** 24.59% 28.52%
VIP II Contrafund Sub-account** 12.37% 17.82%
* Performance information reflects the substitution of the Portfolios in
which these Variable Sub-accounts invest, which occurred on December 5, 1997.
The above numbers reflect the performance of the Alexander Hamilton Variable
Insurance Trust ("AHVIT") and the Federated Prime Money Fund II for the period
prior to the date of the substitution and reflect the performance of the
Jefferson Pilot Variable Fund, Inc. and the Oppenheimer Bond Fund for the period
after the date of the substitution. In the substitution, the Oppenheimer Bond
Fund was substituted for two of the AHVIT Funds and the pre-substitution
performance numbers for the Oppenheimer Bond Sub-account reflect the performance
of only one of such AHVIT Funds. The inception date for these Variable
Sub-accounts was February 27, 1996.
** These Sub-accounts were added to the Contract as of January 1, 1998.
*** Prior to May 1, 2000, this Sub-account invested in the VIP II Index 500
Portfolio and the performance numbers in the above table reflect the performance
of such Fund.
**** The Oppenheimer Capital Appreciation Sub-account was added to the Contract
as of May 1, 1999.
Other Performance Data: Non-Standardized
We may from time to time also disclose average annual total returns in
non-standardized formats in conjunction with the standard format described
above. The non-standard format calculation varies from the standard format
calculation described above in that it will NOT take either Surrender Charges or
the Annual Administrative Fee into account and will be based on an average
Contract size of $30,000.
The standardized performance calculation described above is based on the
inception date of each Variable Sub-account. However, for the non-standardized
performance calculation, if a Portfolio was in existence prior to the inception
date of the corresponding Variable Sub-account, the performance for the Variable
Sub-account will be calculated on a hypothetical basis by applying the Mortality
and Expense Risk Charge and the Administrative Expense Charge to the historical
performance of the corresponding Portfolio as if the Contract has been in
existence back to the inception date of the Portfolio.
The following table shows the non-standardized average annual total return for
the Allegiance Variable Annuity Sub-accounts for the periods ended December 31,
1999.
9
<PAGE>
Sub-Accounts 1 Year 3 Years 5 Years 10 Years Inception*
JPVF Money Market 3.12% 3.31% 3.34% 3.02% 3.50% (8/1/85)
JPVF Balanced 20.57% 17.11% 16.12% N/A 11.96% (5/1/92)
JPVF Value 4.29% 13.79% 18.64% N/A 13.81% (5/1/92
JPVF Capital Growth 42.66% 35.48% 32.50% N/A 26.43% (5/1/92)
JPVF Small Company 12.64% 6.11% 11.90% 10.85% 10.97% (4/18/86)
JPVF Emerging Growth 74.07% 39.43% N/A N/A 35.71% (5/1/95)
JPVF World Growth Stock 19.19% 11.19% 13.13% 10.06% 10.86% (8/1/85)
JPVF Growth 77.87% N/A N/A N/A 51.76% (1/1/98)
JPVF S&P 500 Index** 18.84% 25.32% 26.37% N/A 19.43% (8/27/92)
JPVF High Yield Bond 3.34% N/A N/A N/A 1.41% (1/1/98)
JPVF International
Equity 30.71% N/A N/A N/A 25.28% (1/1/98)
MFS Research Series 22.34% 20.86% N/A N/A 21.13% (7/26/95)
MFS Utilities Series 29.00% 24.98% N/A N/A 24.69% (1/3/95)
Oppenheimer Capital
Appreciation 39.68% 28.74% 28.82% 16.80% 15.97% (4/3/85)
Oppenheimer Bond -2.88% 3.31% 5.60% 6.25% 7.33% (4/3/85)
Oppenheimer Strategic
Bond 1.40% 3.33% 6.73% N/A 4.70% (5/3/93)
VIP Equity-Income 4.86% 13.38% 16.91% 12.89% 12.19% (10/9/86)
VIP Growth 35.54% 31.42% 27.87% 18.24% 17.09% (10/9/86)
VIP II Contrafund 22.54% 24.35% N/A N/A 25.96% (1/3/95)
* The date listed next to each performance figure in this column is the
inception date of the Portfolio underlying each corresponding Variable
Sub-account.
** Prior to May 1, 2000, this Sub-account invested in the VIP II Index 500
Portfolio and the performance numbers in the above table reflect the performance
of such Portfolio.
We may from time to time also disclose cumulative total returns in conjunction
with the standard format described above. Cumulative total return figures
represent the cumulative change in value of an investment in a Sub-account over
the indicated periods. The cumulative returns will be calculated using the
following formula, assuming no Surrender Charge or Annual Administrative Fee.
CTR = ERV - P
-------
P
Where:
CTR = the cumulative total return net of a Variable Sub-account's
recurring charges for the period;
ERV = ending redeemable value at the end of the one, five or ten-year
(or other) period (or fractional portion thereof) of a hypothetical
$30,000 premium payment made at the beginning of the one, five, or
ten-year (or other) period.
P = a hypothetical initial premium payment of $30,000.
The following table shows the Non-Standardized Cumulative Total Return for the
Allegiance Variable Annuity Sub-accounts for the period ended December 31, 1999.
Sub-Accounts 1 Year Since Inception*
JPVF Money Market 3.12% 64.33% (8/1/85)
JPVF Balanced 20.57% 137.97% (5/1/92)
10
<PAGE>
JPVF Value 4.29% 169.75% (5/1/92)
JPVF Capital Growth 42.66% 504.51% (5/1/92)
JPVF Small Company 12.64% 316.85% (4/18/86)
JPVF Emerging Growth 74.07% 316.36% (5/1/95)
JPVF World Growth Stock 19.19% 342.68% (8/1/85)
JPVF Growth 77.87% 130.06% (1/1/98)
JPVF S&P 500 Index ** 18.84% 268.68% (8/27/92)
JPVF High Yield Bond 3.34% 2.83% (1/1/98)
JPVF International Equity 30.71% 56.84% (1/1/98)
MFS Research Series 22.34% 134.06% (7/26/95)
MFS Utilities Series 29.00% 201.10% (1/3/95)
Oppenheimer Capital
Appreciation 39.68% 789.44% (4/3/85)
Oppenheimer Bond -2.88% 184.08% (4/3/85)
Oppenheimer Strategic Bond 1.40% 35.82% (5/3/93)
VIP Equity-Income 4.86% 358.56% (10/9/86)
VIP Growth 35.54% 707.44% (10/9/86)
VIP II Contrafund 22.54% 216.66% (1/3/95)
* The date listed next to each performance figure in this column is the
inception date of the Portfolio underlying each corresponding Variable
Sub-account.
** Prior to May 1, 2000, this Variable Sub-account invested in the VIP II Index
500 Portfolio and the performance numbers in the above table reflect the
performance of such Portfolio.
All non-standard performance data will only be advertised if the standard total
return performance data is also included in the advertisement.
Other Information
The following is a partial list of those publications which may be cited in
advertising or sales literature describing investment results or other data
relative to one or more of the Variable Sub-accounts. Other publications may
also be cited.
Broker World Financial World
Across the Board Advertising Age
American Banker Barron's
Best's Review Business Insurance
Business Month Business Week
Changing Times Consumer Reports
Economist Financial Planning
Forbes Fortune
Inc. Institutional Investor
Insurance Forum Insurance Sales
Insurance Week Journal of Accountancy
Journal of the American Society of CLU & ChFC Journal of Commerce
Life Insurance Selling Life Association News
MarketFacts Manager's Magazine
National Underwriter Money
Morningstar, Inc. Nation's Business
New Choices (formerly 50 Plus) New York Times
Pension World Pensions & Investments
Rough Notes Round the Table
U.S. Banker VARDs
11
<PAGE>
Wall Street Journal Working Woman
Legal Matters
Legal advice relating to certain matters under the federal securities laws
applicable to the issue and sale of the Contracts has been provided to the
Company by Jorden Burt Boros Cicchetti Berenson & Johnson, LLP of Washington
D.C.
Other Information
A Registration Statement has been filed with the SEC, under the Securities Act
of 1933, as amended, with respect to the Contracts discussed in this Statement
of Additional Information. Not all of the information set forth in the
Registration Statement, amendments and exhibits thereto has been included in the
Prospectus for the Contracts or this Statement of Additional Information.
Statements contained in the Prospectus and this Statement of Additional
Information concerning the content of the Contracts and other legal instruments
are intended to be summaries. For a complete statement of the terms of these
documents, reference should be made to the instruments filed with the Securities
and Exchange Commission.
Experts
The financial statements of JPF Variable Annuity Separate Account II of
Jefferson Pilot Financial Insurance Company as of December 31, 1999, and for the
year then ended, appearing in this Statement of Additional Information and this
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The audited consolidated financial statements of Jefferson Pilot Financial
Insurance Company as of December 31, 1999, and for each of the two years ended
December 31, 1999, and the eight months ended December 31, 1997, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The audited financial statements of The Guarantee Life Companies Inc. (a
wholly-owned subsidiary of Jefferson Pilot Corporation and the former holding
company parent of GLIC) and subsidiaries as of December 31, 1999, and December
31, 1998, and for each of the years in the three-year period ended December 31,
1999, have been audited by KPMG LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
FINANCIAL STATEMENTS
The supplemental financial statements of the Company included in this Statement
of Additional Information should be considered only as bearing on the ability of
the Company to meet its obligations under the Contracts. They should not be
considered as bearing on the investment performance of the assets held in the
Separate Account, nor do they necessarily bear on the Guaranteed Interest Rates
declared from time to time for the Capital Developer Account Interest Rate
Guarantee Periods.
12
<PAGE>
Audited Financial Statements
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable Annuity
Separate Account of Alexander Hamilton Life Insurance Company of America)
Year ended December 31, 1999
with Report of Independent Auditors
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Audited Financial Statements
Year ended December 31, 1999
Contents
<TABLE>
<S> <C>
Report of Independent Auditors..............................................3
Audited Financial Statements
Statement of Assets and Liabilities.........................................4
Statement of Operations.....................................................8
Statements of Changes in Net Assets.........................................9
Notes to Financial Statements..............................................10
</TABLE>
<PAGE>
Report of Independent Auditors
Contractholders of the JPF Variable Annuity
Separate Account II of Jefferson Pilot Financial Insurance Company
Board of Directors, Jefferson Pilot Financial Insurance Company
We have audited the accompanying statement of assets and liabilities of the JPF
Variable Annuity Separate Account II of Jefferson Pilot Financial Insurance
Company (formerly The Alexander Hamilton Variable Annuity Separate Account of
Alexander Hamilton Life Insurance Company of America) as of December 31, 1999,
and the related statement of operations for the year then ended, and the related
statement of changes in net assets for each of the three years in the period
ended December 31, 1999. 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 audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 securities owned as of December 31, 1999, by
correspondence with the fund managers. 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 the JPF Variable Annuity
Separate Account II of Jefferson Pilot Financial Insurance Company at December
31, 1999, and the results of its operations and the changes in its net assets
for the year then ended, and the changes in its net assets for the year ended
December 31, 1998 and 1997 in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 23, 2000
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
JPVF JPVF JPVF JPVF JPVF
International World Emerging Capital Small
Equity Growth Stock Growth Growth Company
Sub-account Sub-account Sub-account Sub-account Sub-account
------------------ ------------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments at cost $ 3,814,522 $4,745,913 $ 9,733,933 $28,991,607 $1,808,285
================== ================== =================== ================= =================
Investments at market value $ 4,935,008 $ 5,137,997 $18,167,863 $40,834,419 $1,948,889
Net premiums receivable (payable) 5,736 2,396 114,746 52,597 550
------------------ ------------------ ------------------- ----------------- -----------------
Total Net Assets $ 4,940,744 5,140,393 $18,282,609 $40,887,016 $1,949,438
================== ================== =================== ================= =================
SHARES OUTSTANDING 307,106.206 197,038.037 446,665.206 1,039,969.898 107,944.722
NET ASSET VALUE PER SHARE $ 16.07 $ 26.08 $ 40.674 $ 39.27 $ 18.05
</TABLE>
4
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
JPVF JPVF
JPVF JPVF JPVF High Yield Money
Growth Growth and Income Balanced Bond Market
Sub-account Sub-account Sub-account Sub-account Sub-account
----------------- ------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments at cost $ 3,133.031 $ 8,999,714 $ 8,893,118 $ 2,326,945 $10,781,263
================= =================== ================== ================= ==================
Investments at market value $ 5,012,350 $ 9,540,371 $10,550,740 $ 2,141,708 $10,999,604
Net premiums receivable (payable) 101,265 3,292 (34,690) 2,444 34,441
Accrued investment income 0 0 0 175,757 0
----------------- ------------------- ------------------ ----------------- ------------------
Total Net Assets $ 5,113,615 $ 9,543,663 $10,516,050 $ 2,319,909 $11,034,045
================= =================== ================== ================= ==================
SHARES OUTSTANDING 214,408.133 475,517.062 690,914.183 233,097.384 1,014,121.864
NET ASSET VALUE PER SHARE $ 23.38 $ 20.06 $ 15.27 $ 9.19 $ 10.85
</TABLE>
5
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
Fidelity Fidelity Fidelity Fidelity
VIP II VIP VIP VIP MFS
Contrafund Equity-Income Growth Index 500 Research
Sub-account Sub-account Sub-account Sub-account Sub-account
------------------- ------------------ ------------------ -------------------- -------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments at cost $ 9,311,612 $ 8,722,447 $ 13,829,863 $ 23,546,824 $ 4,765,677
=================== ================== ================== ==================== ===================
Investments at market value $ 11,257,801 $ 8,994,345 $ 17,484,074 $ 27,469,132 $ 6,078,222
Net premiums receivable 9,818 5,866 88,272 9,354 1,079
------------------- ------------------ ------------------ -------------------- -------------------
Total Net Assets $ 11,267,619 $ 9,000,211 $ 17,572,346 $ 27,478,486 $ 6,079,301
=================== ================== ================== ==================== ===================
SHARES OUTSTANDING 386,202.449 349,838.375 318,297.369 164,082.982 260,420.800
NET ASSET VALUE PER SHARE $ 29.15 $ 25.71 $ 54.93 $ 167.41 $ 23.34
</TABLE>
6
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
Oppenheimer Oppenheimer
MFS Capital Oppenheimer Strategic
Utilities Appreciation Bond Bond
Sub-account Sub-account Sub-account Sub-account
-------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
ASSETS
Investments at cost $ 7,719,095 $ 1,687,224 $ 6,306,556 $ 2,103,657
==================== ==================== ==================== ===================
Investments at market value $ 9,570,731 $ 2,015,789 $ 6,119,092 $ 2,087,452
Net premiums receivable 1,834 27 12,626 278
-------------------- -------------------- -------------------- -------------------
Total Net Assets $ 9,572,565 $ 2,015,816 $ 6,131,718 $ 2,087,730
==================== ==================== ==================== ===================
SHARES OUTSTANDING 396,139.527 40,445.205 531,171.222 420,010.325
NET ASSET VALUE PER SHARE $ 24.16 $ 49.84 $ 11.52 $ 4.97
</TABLE>
7
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Statement of Operations
Year ended December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Investment income:
Dividend income $ 767,275
Capital gain distribution from investment companies 1,999,754
--------------------
2,767,029
--------------------
Expenses:
Mortality and expense fee (Note 3) (1,900,547)
--------------------
Net investment income 866,482
--------------------
Realized and unrealized gains on investments:
Net realized gain on investments 1,362,662
Unrealized appreciation of investments 33,543,176
--------------------
Net gain on investments 34,905,838
--------------------
Net increase in net assets from operations $35,772,320
====================
</TABLE>
See accompanying notes.
8
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Increase in net assets from operations
Net investment income $ 866,482 $ 1,507,070 $ 849,663
Net realized gain on investments 1,362,662 (82,026) 142,844
Net unrealized appreciation
(depreciation) on investments 33,543,176 5,522,576 66,507
----------------------------------------------------------
Net increase in net assets resulting from
operations 35,772,320 6,947,620 1,059,014
Changes from principal transactions:
Net contract purchase payment 77,321,210 66,176,879 5,307,789
Benefits paid (5,609,514) (1,230,447) (177,442)
Net transfer of reserves from (to) sponsor
9,584,230 1,424,413 229,614
----------------------------------------------------------
Increase in net assets derived from
principal transactions 81,295,926 66,370,845 5,359,961
----------------------------------------------------------
Total increase 117,068,242 73,318,465 6,418,975
Net asset at beginning of year 83,865,032 10,546,567 4,127,592
----------------------------------------------------------
Net assets at end of year $200,933,274 $ 83,865,032 $ 10,546,567
==========================================================
</TABLE>
See accompanying notes.
9
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Notes to Financial Statements
December 31, 1999
1. History
The JPF Variable Annuity Separate Account II (formerly Alexander Hamilton
Variable Annuity Separate Account) ("Account") was established by resolution of
the Board of Directors of Alexander Hamilton Life Insurance Company of America
("Sponsor") on January 24, 1994. The Account has been registered as a unit
investment trust under the Investment Company Act of 1940 to receive and invest
payments made by purchasers of variable annuity contracts. The fund began
conducting business on February 8, 1996.
Each sub-account reflects the investment performance of a specific underlying
mutual fund. Subject to certain limitations and restrictions, a variable annuity
contractholder may elect to have net purchase payments credited to any of the
sub-accounts. Prior to the commencement of annuity payments, a contractholder
may elect to transfer accumulation units among sub-accounts, subject to certain
minimum transfer amounts. Contractholders may also transfer accumulation units
after payments begin under a variable annuity payment option. No transfers are
permitted under a fixed annuity payment option. Contractholders may also
allocate purchase payments or transfer amounts into or out of the "Fixed
Account", which is maintained in the general account of the sponsor. The sponsor
guarantees that the fixed account accumulation value will accrue interest at an
annual effective rate of not less than 3%, although the sponsor may, at its sole
discretion, credit interest in excess of the guaranteed rate. The fixed account
accumulation values are not charged a mortality and expense fee or an
administrative fee.
In accordance with the terms of the contracts, the payments are invested in
shares of Jefferson-Pilot Variable Fund (JPVF) International Equity, World
Growth Stock, Emerging Growth, Capital Growth, Growth, Small Company, Growth and
Income, Balanced, High Yield Bond, and Money Market Portfolios, the Fidelity VIP
II Contrafund, VIP Growth Fund, VIP Equity-Income Fund and VIP II Index 500
Fund, the MFS Research Series and MFS Utilities Series, and the Oppenheimer
Strategic Bond, Bond, and Capital Appreciation Funds, at the net asset value of
such shares on the date payments are received. The accumulation of net asset
values at the date shares are acquired represents cost. The investments in the
nineteen sub-accounts are carried in the Statement of Assets and Liabilities at
net asset value, which is market value at December 31, 1999.
10
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Notes to Financial Statements (continued)
December 31, 1999
2. Significant Accounting Policies
Investment Valuation
The investments in the sub-accounts are carried in the Statement of Assets and
Liabilities at net asset value, which is market value at December 31, 1999.
Investment transactions are accounted for on the date the order to buy or sell
is executed (trade date).
Investment Income
Investment income consists of dividend income (both ordinary and capital gains)
and is recognized on the ex-dividend date. All distributions received are
reinvested in the respective sub-accounts. The aggregate costs of purchases and
proceeds from sales of investments (other than short-term securities) for the
year ended December 31, 1999, were $177,662,926 and $96,367,000 respectively.
Realized investment gains and losses on investments are determined using average
cost.
3. Fees
In accordance with the provisions of the variable annuity contracts, specified
amounts are set aside for the Sponsor to cover the assumption of mortality and
expense risks, sales and administrative expenses, and state premium taxes. The
mortality and expense fee is 1.25%, and the administrative expense charge is
.15% annually. There is also an annual administration fee which is the lesser of
$30 or 2% of the contract value on the last day of the year.
4. Federal Income Taxes
Operations of the Account are taxed with those of the Sponsor. Under existing
federal income tax law, no taxes are payable on the transactions of the Account.
11
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Notes to Financial Statements (continued)
December 31, 1999
5. Use of Estimates
The accompanying financial statements of the Account have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates that affect amounts
reported in the financial statements and accompanying notes. Such estimates
could change in the future as more information becomes known, which could impact
the amounts reported and disclosed herein.
6. Remuneration
The Account pays no remuneration to directors, advisory boards, officers, or
such other persons who may from time to time perform services for the Account.
7. Accumulation Units
Changes in the number of accumulation units are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------
<S> <C> <C> <C>
JPVF International Equity Sub-account
Units outstanding at beginning of period 144,190.832 0.000 0.000
Units purchased 203,342.245 168,565.745 0.000
Redemptions and charges (56,064.995) (24,374.913) 0.000
--------------------------------------------------------------------
Units outstanding at end of period 291,468.082 144,190.832 0.000
====================================================================
JPVF World Growth Stock Sub-account
Units outstanding at beginning of period 263,838.091 123,760.115 101,024.252
Units purchased 217,937.418 214,946.488 166,600.224
Redemptions and charges (101,252.635) (74,868.512) (143,864.361)
--------------------------------------------------------------------
Units outstanding at end of period 380,522.874 263,838.091 123,760.115
====================================================================
JPVF Emerging Growth Sub-account
Units outstanding at beginning of period 391,327.966 132,236.490 88,358.431
Units purchased 352,281.843 346,591.035 119,576.383
Redemptions and charges (100,939.940) (87,499.559) (75,698.324)
--------------------------------------------------------------------
Units outstanding at end of period 642,669.869 391,327.966 132,236.490
====================================================================
</TABLE>
12
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Notes to Financial Statements (continued)
December 31, 1999
7. Accumulation Units (continued)
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C>
JPVF Capital Growth Sub-account
Units outstanding at beginning of period 684,717.278 142,455.821 53,999.122
Units purchased 962,880.710 792,868.720 103,157.417
Redemptions and charges (203,135.772) (250,607.263) (14,700.718)
-------------------------------------------------------------------
Units outstanding at end of period 1,444,462.216 684,717.278 142,455.821
===================================================================
JPVF Small Company Sub-account
Units outstanding at beginning of period 155,050.255 0.000 0.000
Units purchased 140,466.781 173,898.811 0.000
Redemptions and charges (94,348.260) (18,848.556) 0.000
-------------------------------------------------------------------
Units outstanding at end of period 201,168.776 155,050.255 0.000
===================================================================
JPVF Growth Sub-account
Units outstanding at beginning of period 37,157.550 0.000 0.000
Units purchased 144,173.228 47,847.606 0.000
Redemptions and charges (29,036.296) (10,690.056) 0.000
-------------------------------------------------------------------
Units outstanding at end of period 152,294.482 37,157.550 0.000
===================================================================
JPVF Growth and Income Sub-account
Units outstanding at beginning of period 466,743.706 105,758.481 40,124.651
Units purchased 308,076.725 578,830.887 98,594.509
Redemptions and charges (114,676.267) (217,845.662) (32,960.679)
-------------------------------------------------------------------
Units outstanding at end of period 660,144.164 466,743.706 105,758.481
===================================================================
JPVF Balanced Sub-account
Units outstanding at beginning of period 382,871.839 104,890.468 27,907.033
Units purchased 371,555.607 348,256.709 111,975.225
Redemptions and charges (172,502.627) (70,275.338) (34,991.790)
-------------------------------------------------------------------
Units outstanding at end of period 581,924.819 382,871.839 104,890.468
===================================================================
JPVF High Yield Bond Sub-account
Units outstanding at beginning of period 125,160.026 0.000 0.000
Units purchased 114,345.574 200,015.542 0.000
Redemptions and charges (47,522.465) (74,855.516) 0.000
-------------------------------------------------------------------
Units outstanding at end of period 191,983.135 125,160.026 0.000
===================================================================
</TABLE>
13
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Notes to Financial Statements (continued)
December 31, 1999
7. Accumulation Units (continued)
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C>
JPVF Money Market Sub-account
Units outstanding at beginning of period 8,842,988.430 1,052,016.838 480,731.823
Units purchased 52,963,572.551 48,629,131.723 7,287,822.529
Redemptions and charges (52,066,146.866) (40,838,160.131) (6,716,537.514)
-------------------------------------------------------------------
Units outstanding at end of period 9,740,414.115 8,842,988.430 1,052,016.838
===================================================================
Fidelity VIP II Contrafund Sub-account
Units outstanding at beginning of period 254,379.294 0.000 0.000
Units purchased 604,487.721 289,728.643 0.000
Redemptions and charges (114,544.199) (35,349.349) 0.000
-------------------------------------------------------------------
Units outstanding at end of period 744,322.816 254,379.294 0.000
===================================================================
Fidelity VIP Equity Income Sub-account
Units outstanding at beginning of period 425,662.765 0.000 0.000
Units purchased 507,509.170 561,199.896 0.000
Redemptions and charges (173,232.130) (135,537.131) 0.000
-------------------------------------------------------------------
Units outstanding at end of period 759,939.805 425,662.765 0.000
===================================================================
Fidelity VIP Growth Sub-account
Units outstanding at beginning of period 335,670.270 0.000 0.000
Units purchased 894,052.861 428,001.694 0.000
Redemptions and charges (239,510.532) (92,331.424) 0.000
-------------------------------------------------------------------
Units outstanding at end of period 990,212.599 335,670.270 0.000
===================================================================
Fidelity VIP II Index 500 Sub-account
Units outstanding at beginning of period 736,865.063 0.000 0.000
Units purchased 1,790,941.873 1,080,961.110 0.000
Redemptions and charges (738,843.539) (344,096.047) 0.000
-------------------------------------------------------------------
Units outstanding at end of period 1,788,963.397 736,865.063 0.000
===================================================================
MFS Research Sub-account
Units outstanding at beginning of period 230,004.347 0.000 0.000
Units purchased 278,301.107 334,137.582 0.000
Redemptions and charges (90,524.915) (104,133.235) 0.000
-------------------------------------------------------------------
Units outstanding at end of period 417,780.539 230,004.347 0.000
===================================================================
</TABLE>
14
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Notes to Financial Statements (continued)
December 31, 1999
7. Accumulation Units (continued)
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C>
MFS Utilities Sub-account
Units outstanding at beginning of period 324,447.841 0.000 0.000
Units purchased 495,903.262 541,941.392 0.000
Redemptions and charges (184,515.468) (217,493.551) 0.000
-------------------------------------------------------------------
Units outstanding at end of period 635,835.635 324,447.841 0.000
===================================================================
Oppenheimer Capital Appreciation Sub-account
Units outstanding at beginning of period 0.000 0.000 0.000
Units purchased 165,394.297 0.000 0.000
Redemptions and charges (6,068.766) 0.000 0.000
-------------------------------------------------------------------
Units outstanding at end of period 159,325.531 0.000 0.000
===================================================================
Oppenheimer Bond Sub-account
Units outstanding at beginning of period 336,679.032 151,322.641 0.000
Units purchased 405,223.312 344,262.107 155,740.418
Redemptions and charges (192,794.919) (158,905.716) (4,417.777)
-------------------------------------------------------------------
Units outstanding at end of period 549,107.425 336,679.032 151,322.641
===================================================================
Oppenheimer Strategic Bond Sub-account
Units outstanding at beginning of period 134,572.798 0.000 0.000
Units purchased 150,942.894 169,211.618 0.000
Redemptions and charges (79,388.304) (34,638.820) 0.000
-------------------------------------------------------------------
Units outstanding at end of period 206,127.388 134,572.798 0.000
===================================================================
</TABLE>
15
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Notes to Financial Statements (continued)
December 31, 1999
8. Variable Annuity Contracts
Net asset values for variable annuity contracts are based on the following
accumulation units, unit values and annuity funds:
<TABLE>
<CAPTION>
Accumulation Unit Total
Units Value Value
------------------------------------------------------------------
<S> <C> <C> <C>
JPVF International Equity Sub-account
December 31, 1999
Qualified/non-qualified units 291,468.082 16.951235 $ 4,940,744
--------------------
$ 4,940,744
====================
JPVF World Growth Stock Sub-account
December 31, 1999
Qualified/non-qualified units 380,522.874 13.508763 $ 5,140,393
--------------------
$ 5,140,393
====================
JPVF Emerging Growth Sub-account
December 31, 1999
Qualified/non-qualified units 642,669.869 28.447902 $ 18,282,609
--------------------
$ 18,282,609
====================
JPVF Capital Growth Sub-account
December 31, 1999
Qualified/non-qualified units 1,444,462.216 28.306047 $ 40,887,016
--------------------
$ 40,887,016
====================
JPVF Small Company Sub-account
December 31, 1999
Qualified/non-qualified units 201,168.776 9.690562 $ 1,949,438
--------------------
$ 1,949,438
====================
JPVF Growth Sub-account
December 31, 1999
Qualified/non-qualified units 152,294.482 33.577153 $ 5,113,615
--------------------
$ 5,113,615
====================
JPVF Growth & Income Sub-account
December 31, 1999
Qualified/non-qualified units 660,144.164 14.456938 $ 9,543,663
--------------------
$ 9,543,663
====================
</TABLE>
16
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Notes to Financial Statements (continued)
December 31, 1999
8. Variable Annuity Contracts (continued)
<TABLE>
<CAPTION>
Accumulation Unit Total
Units Value Value
------------------------------------------------------------------
<S> <C> <C> <C>
JPVF Balanced Sub-account
December 31, 1999
Qualified/non-qualified units 581,924.819 18.071148 $ 10,516,050
--------------------
$ 10,516,050
====================
JPVF High Yield Bond Sub-account
December 31, 1999
Qualified/non-qualified units 191,983.135 12.083920 $ 2,319,909
--------------------
$ 2,319,909
====================
JPVF Money Market Sub-account
December 31, 1999
Qualified/non-qualified units 9,740,414.115 1.132811 $ 11,034,045
--------------------
$ 11,034,045
====================
Fidelity VIP II Contrafund Sub-account
December 31, 1999
Qualified/non-qualified units 744,322.816 15.138082 $ 11,267,619
--------------------
$ 11,267,619
====================
Fidelity VIP Equity Income Sub-account
December 31, 1999
Qualified/non-qualified units 759,939.805 11.843320 $ 9,000,211
--------------------
$ 9,000,211
====================
Fidelity VIP Growth Sub-account
December 31, 1999
Qualified/non-qualified units 990,212.599 17.746034 $ 17,572,346
--------------------
$ 17,572,346
====================
Fidelity VIP II Index 500 Sub-account
December 31, 1999
Qualified/non-qualified units 1,788,963.397 15.360004 $ 27,478,486
--------------------
$ 27,478,486
====================
</TABLE>
17
<PAGE>
The JPF Variable Annuity Separate Account II
of Jefferson Pilot Financial Insurance Company
(formerly The Alexander Hamilton Variable
Annuity Separate Account of Alexander Hamilton
Life Insurance Company of America)
Notes to Financial Statements (continued)
December 31, 1999
8. Variable Annuity Contracts (continued)
<TABLE>
<CAPTION>
Accumulation Unit Total
Units Value Value
----------------------------------------------------------------
<S> <C> <C> <C>
MFS Reseach Fund Sub-account
December 31, 1999
Qualified/non-qualified units 417,780.539 14.551421 $ 6,079,301
------------------
$ 6,079,301
==================
MFS Utilities Series Sub-account
December 31, 1999
Qualified/non-qualified units 635,835.635 15.055094 $ 9,572,565
------------------
$ 9,572,565
==================
Oppenheimer Capital Appreciation Sub-account
December 31, 1999
Qualified/non-qualified units 159,325.531 12.652187 $ 2,015,816
------------------
$ 2,015,816
==================
Oppenheimer Bond Sub-account
December 31, 1999
Qualified/non-qualified units 549,107.425 11.166701 $ 6,131,718
------------------
$ 6,131,718
==================
Oppenheimer Strategic Bond Sub-account
December 31, 1999
Qualified/non-qualified units 206,127.388 10.128347 $ 2,087,730
------------------
$ 2,087,730
==================
</TABLE>
18
<PAGE>
Audited Consolidated Financial Statements
Jefferson Pilot Financial Insurance Company and Subsidiaries
As of December 31, 1999 and 1998 and for the two years ended December 31, 1999
and the eight months ended December 31, 1997
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Audited Consolidated Financial Statements
As of December 31, 1999 and 1998 and for the two years ended December
31, 1999 and the eight months ended December 31, 1997
Contents
Report of Independent Auditors.................................................1
Consolidated Balance Sheets....................................................2
Consolidated Statements of Income..............................................4
Consolidated Statements of Stockholder's Equity................................5
Consolidated Statements of Cash Flows..........................................6
Notes to Consolidated Financial Statements.....................................8
<PAGE>
Report of Independent Auditors
The Board of Directors
Jefferson Pilot Financial Insurance Company and Subsidiaries
We have audited the accompanying consolidated balance sheets of Jefferson Pilot
Financial Insurance Company (a wholly-owned subsidiary of Jefferson-Pilot
Corporation) and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholder's equity, and cash flows for each
of the two years in the period ended December 31, 1999 and for the eight month
period ended December 31, 1997. 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 auditing standards generally accepted
in the United States. 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 consolidated financial position of Jefferson Pilot
Financial Insurance Company and subsidiaries at December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1999 and for the eight month
period ended December 31, 1997, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Greensboro, North Carolina
August 1, 2000
1
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Consolidated Balance Sheets
(In Thousands, except for Share Amounts)
<TABLE>
<CAPTION>
Assets December 31,
Invested assets: 1999 1998
-----------------------------------
<S> <C> <C>
Debt securities available-for-sale, at fair value (amortized cost $8,102,384
and $7,029,122) $ 7,827,493 $ 7,305,747
Debt securities held-to-maturity, at amortized cost (fair value $1,762,890 and
$1,862,069) 1,798,897 1,797,798
Equity securities available-for-sale, at fair value (cost $58,615 and $11,475) 55,023 23,631
Policy loans 654,431 1,194,703
Mortgage loans on real estate 1,120,310 772,304
Real estate 41,724 35,897
Other investments 18,749 8,004
-----------------------------------
Total investments 11,516,627 11,138,084
Cash and cash equivalents 156,672 14,663
Accrued investment income 169,244 143,231
Due from reinsurers 1,473,925 1,342,925
Deferred policy acquisition costs 329,513 223,337
Value of business acquired 949,095 568,208
Cost in excess of net assets acquired, net of accumulated amortization
(1999-$12,132; 1998-$9,406) 266,680 192,016
Property and equipment, net of accumulated depreciation (1999-
$53,368; 1998-$56,041) 34,951 16,066
Deferred federal income taxes 123,917 40,528
Assets held in separate accounts 1,483,931 919,493
Other assets 91,581 69,359
-----------------------------------
$16,596,136 $14,667,910
===================================
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Liabilities
Policy liabilities:
Policyholder contract deposits $10,781,694 $10,667,782
Future policy benefits 1,212,866 743,694
Policy and contract claims 173,612 80,832
Premiums paid in advance 2,148 2,851
Other policyholders' funds 243,502 109,102
-----------------------------------------
Total policy liabilities 12,413,822 11,604,261
Payable to affiliates 88,946 124,496
Liabilities related to separate accounts 1,483,931 919,493
Securities sold under repurchase agreements 302,358 150,372
Accrued expenses and other liabilities 255,990 138,194
-----------------------------------------
14,545,047 12,936,816
Commitments and contingencies
Redeemable preferred stock - 3,000
Stockholder's equity
Common stock, par value $5 per share, 600,000 shares authorized, issued
and outstanding 3,000 3,000
Paid in capital 1,714,338 1,288,454
Retained earnings 434,964 330,483
Accumulated other comprehensive income - net unrealized (losses) gains
on securities (101,213) 106,157
-----------------------------------------
2,051,089 1,728,094
-----------------------------------------
$16,596,136 $14,667,910
=========================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Consolidated Statements of Income
(In Thousands)
<TABLE>
<CAPTION>
Eight months
Year ended ended
December 31, December 31,
1999 1998 1997
-------------------- ------------------- ---------------------
<S> <C> <C> <C>
Revenues
Premiums and policy charges $444,545 $447,388 $328,513
Net investment income 726,928 714,504 515,347
Realized investment (losses) gains (4,333) (355) 5,631
Other income 2,372 3,929 6,413
-------------------- ------------------- ---------------------
Total revenues 1,169,512 1,165,466 855,904
Benefits and expenses
Policy benefits and claims 649,388 675,770 514,470
Commissions and operating
expenses, net of deferrals 54,170 73,581 64,928
Amortization of intangibles 118,368 107,174 63,651
Taxes, licenses and fees 28,335 27,194 18,948
-------------------- ------------------- ---------------------
Total benefits and expenses 850,261 883,719 661,997
-------------------- ------------------- ---------------------
Income before federal income tax and
preferred stock dividends 319,251 281,747 193,907
Federal income tax expense:
Current 69,694 72,868 40,127
Deferred 45,076 28,048 28,623
-------------------- ------------------- ---------------------
114,770 100,916 68,750
-------------------- ------------------- ---------------------
Net income before preferred stock
dividends 204,481 180,831 125,157
Preferred stock dividends - 1,128 2,811
-------------------- ------------------- ---------------------
Net income $204,481 $179,703 $122,346
==================== =================== =====================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Consolidated Statements of Stockholder's Equity
(In Thousands)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income - Total
Common Paid in Retained Net Unrealized (Losses) Stockholder's
Stock Capital Earnings Gains on Securities Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, April 30, 1997 $ - $ - $ - $ - $ -
Purchase of JPFIC by JPCorp 3,000 782,500 - - 785,500
AHL balances at time of affiliation with
JPFIC - 532,388 98,434 (39,249) 591,573
Net income, eight months - - 122,346 - 122,346
Other comprehensive income - - - 128,801 128,801
----------------------------------------------------------
Comprehensive income 251,147
----------------------------------------------------------------------------------------
Balance, December 31, 1997 3,000 1,314,888 220,780 89,552 1,628,220
Net income - - 179,703 - 179,703
Other comprehensive income - - - 16,605 16,605
----------------------------------------------------------
Comprehensive income 196,308
Less dividends paid - - (70,000) - (70,000)
Purchase price adjustment - (26,434) - - (26,434)
----------------------------------------------------------------------------------------
Balance, December 31, 1998 3,000 1,288,454 330,483 106,157 1,728,094
Net income - - 204,481 - 204,481
Other comprehensive income - - - (207,370) (207,370)
----------------------------------------------------------
Comprehensive income (2,889)
Less dividends paid - - (100,000) - (100,000)
Acquisition of GLIC - 425,884 - - 425,884
----------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 3,000 $ 1,714,338 $ 434,964 $ (101,213) $2,051,089
========================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Eight months
Year ended ended
December 31, December 31,
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $204,481 $179,703 $122,346
Adjustments to reconcile net income to
net cash provided by operating activities:
Change in future policy benefits, policy and
contract claims and premiums paid in advance, net 6,635 (103,826) 15,614
Credits to policyholder accounts, net 52,210 79,661 192,962
Policy acquisition costs deferred,
net of amortization (106,175) (91,387) (47,202)
Net amortization of value of
business acquired 59,607 47,704 (3,159)
Change in accrued investment income (6,250) (2,902) 704
Realized investment losses (gains) 4,333 355 (5,631)
Amortization of investment
premium 14,498 20,905 24,552
Provision for depreciation 6,417 10,737 1,210
Provision for deferred income tax 45,076 28,048 28,623
Change in receivables and asset accruals 5,800 (27,420) 75,840
Change in payables and expense accruals 59,476 73,872 (32,857)
Other operating activities, net (6,629) (16,878) 22,223
-----------------------------------------------------
Net cash provided by operating activities 339,479 198,572 395,225
-----------------------------------------------------
Investing activities
Proceeds from sales of debt securities 693,010 356,442 526,259
Proceeds from maturities of debt securities 978,645 994,576 551,720
Proceeds from sales of equity securities 2,616 11,294 10,386
Purchases of debt securities (1,567,094) (1,347,301) (1,042,253)
Purchases of equity securities (11,354) (13,805) (322)
Mortgage loans originated (279,375) (260,915) (323,058)
Repayments of mortgage loans 40,859 79,556 40,001
Policy loans issued, net of repayments (22,168) (12,004) 15,683
Other investing activities, net 5,896 6,996 1,405
-----------------------------------------------------
Net cash used in investing activities (158,965) (185,161) (220,179)
-----------------------------------------------------
</TABLE>
6
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
Eight months
Year ended ended
December 31, December 31,
1999 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Financing activities
Deposits credited to policyholders' funds 834,017 902,909 763,509
Withdrawals from policyholders' funds (965,290) (966,006) (855,580)
Dividends paid (100,000) (70,000) -
Proceeds from securities sold under
repurchase agreements 151,986 150,593 (44,958)
Other financing activities (4,184) (53,068) (43,301)
-----------------------------------------------------------
Net cash used in financing activities (83,471) (35,572) (180,330)
-----------------------------------------------------------
Change in cash and cash equivalents 97,043 (22,161) (5,284)
Cash of GLIC at date of acquisition 44,966 - -
Cash and cash equivalents, beginning
of period 14,663 36,824 42,108
-----------------------------------------------------------
Cash and cash equivalents, end of period $ 156,672 $ 14,663 $ 36,824
===========================================================
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation
Principles of Consolidation
The consolidated financial statements presented herein represent the merger of
three insurance companies that previously were affiliated through a common
parent. The merger (reorganization of affiliates) under the common parent has
been accounted for on a basis similar to a pooling-of-interests utilizing the
parent's historical basis. The historical accounting basis includes the "pushed
down" effect of purchase accounting utilized by the common parent to the three
individual companies. The merger was effective August 1, 2000, and included no
additional consideration. The parties to the merger include Jefferson Pilot
Financial Insurance Company (the Company or JPFIC), the survivor in the
reorganization, acquired by the common parent Jefferson-Pilot Corporation
(JPCorp) effective April 30, 1997, Alexander Hamilton Life Insurance Company of
America (AHL), acquired by JPCorp in 1995 and Guarantee Life Insurance Company
(GLIC), a wholly-owned subsidiary of The Guarantee Life Companies, Inc., (TGLCI)
which was acquired by JPCorp effective December 30, 1999. The financial
statements presented include the periods for which each of three companies were
affiliated through common ownership by JPCorp. JPFIC is the survivor company,
and therefore, the related statements of income, stockholder's equity and cash
flows are presented only for the period in which JPCorp owned the Company.
Significant intercompany transactions have been eliminated in consolidation.
Nature of Business
After the merger, the Company is wholly-owned by JPCorp. The merged Company and
subsidiaries are principally engaged in the sale of individual life insurance
products, individual annuity products, individual investment products, and
worksite and group non-medical products (primarily term life and disability).
These products are marketed primarily through personal producing general agents
throughout the Unites States.
Acquisitions
JPCorp acquired the Company on May 13, 1997, with an effective date of April 30,
1997. The acquisition was accounted for as a purchase, utilizing "push down"
accounting, and the assets and liabilities were recorded at fair value as of
April 30, 1997. The original cost of the acquisition as of April 30, 1997 was
$785 million, including all acquisition costs. Subsequent adjustments to the
original purchase price in 1998 resulted in a downward adjustment of the
purchase price to $759 million. The amount allocated to value of business
acquired and cost in excess of net assets acquired was $460 million and $100
million, respectively.
8
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Basis of Presentation (continued)
Acquisitions (continued)
AHL was acquired by JPCorp on October 1, 1995, and included substantially all of
the life insurance and single premium deferred annuity contracts in force as of
the acquisition date. Certain blocks of business including structured
settlements, lottery business and Corporate Owned Life Insurance (COLI) written
prior to the acquisition as well as certain business written in conjunction with
the seller's lending business were 100% reinsured with affiliates of the seller
on a coinsurance basis. The aggregate purchase was $575 million including all
acquisition costs. The value of business acquired resulting from this
acquisition amounted to $325 million while cost in excess of net assets acquired
came to $50 million.
GLIC was acquired by JPCorp through the acquisition of its parent on December
30, 1999 for an aggregate purchase price of $426 million. The preliminary amount
allocated to value of business acquired and cost in excess of net assets
acquired was $206 million and $81 million, respectively.
The following proforma results of operations for the year ended December 31,
1999, assume that the GLIC acquisition occurred as of January 1, 1999. The
proforma results have been prepared for comparative purposes only and do not
purport to indicate the results of operations which would have actually been
reported had the acquisition occurred on January 1, 1999, or which may occur in
the future (in thousands):
Net revenues $1,665,614
Net income $ 207,136
9
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements requires management to make estimates
and assumptions affecting the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities as of the date of the financial
statements, and the reported amounts of revenues and expenses for the reporting
period. Those estimates are inherently subject to change and actual results
could differ from those estimates. Included among the material (or potentially
material) reported amounts and disclosures that require extensive use of
estimates are asset valuation allowances, policy liabilities, deferred policy
acquisition costs, value of business acquired and the potential effects of
resolving litigated matters.
Cash and Cash Equivalents
The Company includes with cash and cash equivalents its holdings of short-term
investments which are highly liquid investments that mature within three months
of the date of acquisition.
Invested Assets
Debt securities are classified as either securities held-to-maturity, stated at
amortized cost, or as securities available-for-sale, stated at fair value with
net unrealized gains and losses included in accumulated other comprehensive
income, net of deferred income taxes and adjustments to deferred policy
acquisition costs and value of business acquired.
Equity securities are classified as securities available-for-sale, stated at
fair value with net unrealized gains and losses included in accumulated other
comprehensive income, net of deferred income taxes and adjustments to deferred
policy acquisition costs and value of business acquired.
Policy loans are carried at the unpaid balances.
10
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Invested Assets (continued)
Mortgage loans on real estate are stated at the unpaid balances, net of
allowances for unrecoverable amounts. The Company's mortgage loan portfolio is
comprised primarily of conventional real estate mortgages collateralized by
retail (28%) and (33%), apartment (20%) and (18%), industrial (24%) and (17%),
hotel (11%) and (14%), and office (17%) and (16%) properties at December 31,
1999 and 1998, respectively.
Mortgage loan underwriting standards emphasize the credit status of a
prospective borrower, quality of the underlying collateral and conservative
loan-to-value relationships. Of stated mortgage loan balances as of December 31,
1999 and 1998, 29% and 28% are due from borrowers in South Atlantic states, 24%
and 28% are due from borrowers in West South Central states, 10% and 10% are due
from borrowers in West North Central states, 11% and 7% are due from borrowers
in East North Central states, 10% and 7% are due from borrowers in Pacific
states, and 10% and 12% are due from borrowers in Mountain states. No other
geographic region represents as much as 10% of December 31, 1999 and 1998
mortgage loans.
Amortization of premiums and accrual of discounts on investments in debt
securities are reflected in earnings over the contractual terms of the
investments in a manner that produces a constant effective yield. Realized gains
and losses on dispositions of securities are determined by the specific
identification method.
Recognition of Revenues, Benefits, Claims and Expenses
Universal Life Products
Universal life products include universal life insurance, variable universal
life insurance and other interest-sensitive life insurance policies. Revenues
for universal life products consist of policy charges for the cost of insurance,
policy administration and surrenders that have been assessed against policy
account balances during the period.
Policy fund liabilities for universal life and other interest-sensitive life
insurance policies are computed in accordance with the retrospective deposit
method and represent policy account balances before surrender charges. Policy
fund assets and liabilities for variable universal life insurance are segregated
and recorded as separate account assets and liabilities. Separate account assets
are carried at market values as of the balance sheet date and are invested by
the Company
11
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Recognition of Revenues, Benefits, Claims and Expenses (continued)
at the direction of the policyholder. Investments are made in different
portfolios in a series fund. Each of the portfolios has specific investment
objectives and the investment income and investment gains and losses accrue
directly to, and investment risk is borne by, the policyholders. Accordingly,
operating results of the separate accounts are not included in the consolidated
statements of income.
Policy claims that are charged to expense include claims incurred in the period
in excess of related policy account balances. Other policy benefits include
interest credited to universal life and other interest-sensitive life insurance
policies.
Investment Products
Investment products include variable annuities, fixed premium annuities,
flexible premium annuities, structured settlement annuities and other
supplementary contracts without life contingencies. Revenues for investment
products consist of policy charges for the cost of insurance, policy
administration and surrenders that have been assessed against policy account
balances during the period. Deposits for these products are recorded as policy
fund liabilities, which are increased by interest credited to the liabilities
and decreased by withdrawals and policy charges assessed against the contract
holders.
Traditional Life Insurance Products
Traditional life insurance products include those products with fixed and
guaranteed premiums and benefits. Premium revenues for traditional life
insurance are recognized as revenues when due. The liabilities for future policy
benefits are computed by the net level premium method based on estimated future
investment yield, mortality and withdrawal experience. Mortality is calculated
principally on an experience multiple applied to select and ultimate tables in
common usage in the industry. Estimated withdrawals are determined principally
based on industry tables. Policy benefits and claims are charged to expense as
incurred.
Interest Rate Assumptions
The liability for future policy benefits associated with ordinary life insurance
policies has been determined using initial interest rate assumptions ranging
from 2% to 9.9% and, when applicable, uniform grading over 20 to 30 years to
ultimate rates ranging from 2% to 6%.
12
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Recognition of Revenues, Benefits, Claims and Expenses (continued)
Credited interest rates for universal life-type products ranged from 4.1% to
6.6% in 1999, 3.8% to 6.85% in 1998, and 4% to 7.5% in 1997. The average
credited interest rates for universal life-type products were 5.28%, 5.96% and
6.25% for 1999, 1998 and 1997. For annuity products, credited interest rates
generally ranged from 4% to 6% in 1999, 1998, and 1997.
Accident and health and disability insurance premiums are earned on a monthly
pro rata basis over the terms of the policies. Benefits include paid claims plus
an estimate for known claims and claims incurred but not reported as of the
balance sheet date.
Policy and Contract Claims
The liability for policy and contract claims consists of the estimated amount
payable for claims reported but not yet settled, and an estimate of claims
incurred but not reported, which is based on historical experience, adjusted for
trends and circumstances. Management believes that the recorded liability is
sufficient to provide for the associated claims adjustment expenses.
Reinsurance
Reinsurance receivables include amounts recoverable from reinsurers related to
paid benefits and estimated amounts related to unpaid policy and contract
claims, future policy benefits and policyholder contract deposits. The cost of
reinsurance is accounted for over the terms of the underlying reinsured policies
using assumptions consistent with those used to account for the policies.
Deferred Policy Acquisition Costs and Value of Business Acquired
Costs related to obtaining new business, including commissions, certain costs of
underwriting and issuing policies and certain agency office expenses, all of
which vary with and are primarily related to the production of new business,
have been deferred.
Deferred policy acquisition costs for traditional life insurance polices are
amortized over the premium paying periods of the related contracts using the
same assumptions for anticipated premium revenue that are used to compute
liabilities for future policy benefits. For universal life and investment
products, these costs are amortized at a constant rate based on the present
value of the estimated future gross profits to be realized over the terms of the
contracts, not to exceed 25 years.
13
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Deferred Policy Acquisition Costs and Value of Business Acquired (continued)
Value of business acquired represents the actuarially determined present value
of anticipated profits to be realized from life insurance and annuity business
purchased, using the same assumptions used to value the related liabilities.
Amortization of the value of business acquired occurs over the related contract
periods, using current crediting rates to accrete interest and a constant
amortization rate based on the present value of expected future profits.
The carrying amounts of deferred policy acquisition costs and value of business
acquired related to universal life and investment contracts is adjusted to
reflect the effects that the unrealized gains or losses on investments
classified as available-for-sale would have had on the present value of
estimated gross profits had such gains or losses actually been realized. This
adjustment is excluded from income and charged or credited directly to
accumulated other comprehensive income, net of applicable deferred income tax.
The carrying amounts of deferred policy acquisition costs and value of business
acquired are also adjusted for the effect of realized gains and losses.
The carrying amounts of deferred policy acquisition costs and value of business
acquired are reviewed periodically to determine that the unamortized portion
does not exceed expected recoverable amounts. No impairment adjustments have
been reflected in earnings for any period presented.
Cost in Excess of Net Assets Acquired
The excess of JPCorp's purchase price over the fair value of assets acquired,
which has been "pushed down" to the Company level for financial reporting
purposes, is being amortized on a straight-line basis over 25 to 35 years.
Carrying amounts are regularly reviewed for indications of value impairment,
with consideration given to financial performance and other relevant factors.
Property and Equipment
Property and equipment used in operations are carried at cost, less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated remaining useful lives of the assets.
14
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Federal Income Taxes
For each of the periods presented, each of the insurance companies, JPFIC, AHL
and TGLCI, have filed separate consolidated tax returns with their wholly-owned
subsidiaries.
Deferred income tax assets and liabilities are recorded on the differences
between the tax bases of assets and liabilities and the amounts at which they
are reported in the financial statements. Recorded amounts are adjusted to
reflect changes in income tax rates and other tax law provisions as they become
enacted.
New Accounting Pronouncement
Effective January 1, 2001, the Company will adopt SFAS 133, "Accounting for
Derivative Instruments and for Hedging Activities". SFAS 133 requires companies
to recognize all derivatives on the balance sheet at fair value and establishes
special accounting rules for hedging activities. The effect of the hedge
accounting rules is to permit a company to offset changes in fair value or cash
flows of both the hedged item and hedging instrument in earnings in the same
period. Changes in the fair value of derivatives that do not qualify for hedge
accounting are reported in earnings in the period of the change. Based on the
limited nature of the Company's use of derivatives and hedging activities,
adoption of this pronouncement is not expected to have a material impact on the
Company's financial position or results of operations.
15
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Invested Assets
Aggregate amortized cost, aggregate fair value and gross unrealized gains and
losses of debt securities were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale carried
at fair value
U.S. Treasury obligations and direct
obligations of U.S. government
agencies $ 156,185 $ 439 $ (275) $ 156,349
Corporate bonds 5,116,508 8,135 (211,387) 4,913,256
Obligations of states and political
subdivisions 7,582 - (883) 6,699
Mortgage-backed securities 2,809,367 9,564 (80,794) 2,738,137
Redeemable preferred stocks 12,742 381 (71) 13,052
------------------------------------------------------------------------
Total debt securities $8,102,384 $18,519 $(293,410) $7,827,493
========================================================================
Held-to-maturity carried
at amortized cost
U.S. Treasury obligations and
direct obligations of U.S.
government agencies $ 6,616 $ - $ - $ 6,616
Corporate bonds 1,735,122 1,999 (37,650) 1,699,471
Obligations of states and
political subdivisions 11,091 - - 11,091
Mortgage-backed securities 2,985 - - 2,985
Affiliate bonds 43,083 3 (359) 42,727
------------------------------------------------------------------------
Total debt securities $1,798,897 $2,002 $(38,009) $1,762,890
========================================================================
</TABLE>
16
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Invested Assets (continued)
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Available for sale carries
at fair value
U.S. Treasury obligations
and direct obligations of
U.S. government agencies $ 127,215 $ 6,425 $ - $ 133,640
Corporate bonds 4,194,389 202,304 (31,262) 4,365,431
Obligations of states and
political subdivisions 12,225 97 (165) 12,157
Mortgage-backed securities 2,681,474 104,692 (6,599) 2,779,567
Redeemable preferred stocks 13,819 1,154 (21) 14,952
----------------- ---------------- ---------------- -----------------
Total debt securities $7,029,122 $ 314,672 $ (38,047) $7,305,747
================= ================ ================ =================
Held to maturity carried
at amortized cost
Corporate bonds $1,752,631 $63,498 $ (2,235) $1,813,894
Affiliate bonds 45,167 3,008 - 48,175
----------------- ---------------- ---------------- -----------------
Total debt securities $1,797,798 $ 66,506 $ (2,235) $1,862,069
================= ================ ================ =================
</TABLE>
Affiliate bonds consist of securities issued by Jefferson-Pilot Communications
Company, an affiliate. Interest earned on these bonds totaled $3.1 million, $3.3
million and $2.9 million in 1999, 1998 and 1997, respectively.
17
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Invested Assets (continued)
Aggregate amortized cost and aggregate fair value of debt securities at December
31, 1999 by contractual maturity were as follows (in thousands):
<TABLE>
Available-for-Sale Held-to-Maturity
----------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 178,084 $ 178,114 $ 222,498 $ 222,543
Due after one year through five years 1,197,090 1,181,542 726,094 716,731
Due after five years through ten years 1,761,089 1,681,859 189,634 183,210
Due after ten years 963,539 922,923 123,780 121,722
Amounts not due at a single maturity date 4,002,582 3,863,055 536,891 518,684
----------------------------------------------------------------
$8,102,384 $7,827,493 $1,798,897 $1,762,890
================================================================
</TABLE>
Actual future maturities will differ from the contractual maturities shown
because the issuers of certain debt securities have the right to call or prepay
the amounts due to the Company, with or without penalty.
The sources of net investment income were as follows (in thousands):
<TABLE>
<CAPTION>
Eight months
ended
Year ended December 31, December 31,
1999 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $648,201 $647,093 $470,786
Equity securities 2,817 2,710 3,477
Policy loans 27,098 24,598 16,086
Mortgage loans 71,170 53,549 28,851
Other 7,086 11,316 9,439
----------------------------------------------------------------
Gross investment income 756,372 739,266 528,639
Investment expenses 29,444 24,762 13,292
----------------------------------------------------------------
Net investment income $726,928 $714,504 $515,347
================================================================
</TABLE>
18
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Invested Assets (continued)
Realized investment gains and (losses) were as follows (in thousands):
<TABLE>
<CAPTION>
Eight months
ended
Year ended December 31, December 31,
1999 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Debt securities $(4,932) $ 7,679 $ 4,826
Equity securities (95) 2,899 1,534
Real estate 157 1,640 532
Increase in mortgage loan valuation allowance (411) (9,800) -
Amortization of value of business acquired
and deferred policy acquisition costs 1,643 (2,365) (444)
Other (695) (408) (817)
------------------------------------------------------------
$(4,333) $ (355) $ 5,631
============================================================
</TABLE>
Information about gross realized gains and losses on available-for-sale
securities transactions is as follows (in thousands):
<TABLE>
<CAPTION>
Eight months
ended
Year ended December 31, December 31,
1999 1998 1997
----------------- ------------------- -------------------
<S> <C> <C> <C>
Gross realized:
Gains $ 6,786 $17,299 $15,388
Losses (12,354) (7,247) (8,699)
----------------- ------------------- -------------------
Net realized (losses) gains on available-for-
sale securities $ (5,568) $10,052 $ 6,689
================= =================== ===================
</TABLE>
19
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Invested Assets (continued)
The changes in unrealized gains and (losses) on securities classified as
available-for-sale for the Company were as follows (in thousands):
<TABLE>
<CAPTION>
Eight months
ended
Year ended December 31, December 31,
1999 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C>
Change in equity securities $ (1,902) $ (1,697) $ 3,842
Change in debt securities (551,516) 44,398 315,835
Change in value of business acquired
adjustment 234,387 (17,156) (121,522)
--------------------------------------------------------------
(319,031) 25,545 198,155
Deferred income taxes 111,661 (8,940) (69,354)
--------------------------------------------------------------
Change in net unrealized gains $(207,370) $ 16,605 $ 128,801
==============================================================
</TABLE>
The Company participates in a securities lending program. The Company generally
receives cash collateral in an amount that is in excess of the market value of
the securities loaned. Market values of securities loaned and collateral are
monitored daily, and additional collateral is obtained as necessary. At December
31, 1999, the market value of securities loaned and collateral received amounted
to $59.7 million and $63.1 million, respectively. At December 31, 1998, the
market value of securities loaned and collateral received amounted to $99.7
million and $104.3 million, respectively.
The allowance for credit losses on mortgage loans increased from $0 at April 30,
1997 to $9.8 million at December 31, 1998 to $10.2 million at December 31, 1999.
20
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Derivatives
Use of Derivatives
The Company's investment policy permits the use of derivative financial
instruments such as interest rate swaps in certain circumstances. The following
summarizes open interest rate swaps at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------ --- ------------------
<S> <C> <C>
Received-fixed swaps held as hedges of direct
investments
Notional amount $137,440 $137,440
Average rate received 7.28% 7.28%
Average rate paid 5.62% 5.55%
Received-fixed swaps held to modify annuity
crediting rates
Notional amount $17,500 $17,500
Average rate received 6.78% 6.78%
Average rate paid 5.33% 5.31%
</TABLE>
Hedging Direct Investments
Interest rate swaps are used to reduce the impact of interest rate fluctuations
on specific floating-rate direct investments. Interest is exchanged periodically
on the notional value, with the Company receiving a fixed rate and paying a
short-term LIBOR rate on a net exchange basis. The net amount received or paid
under swaps is reflected as an adjustment to investment income. All of the
hedges are of investments classified as available-for-sale, and net unrealized
gains and losses, net of the effects of income taxes and the impact on deferred
policy acquisition costs and the value of business acquired, are not significant
and are included in accumulated other comprehensive income in stockholder's
equity as of December 31, 1999 and 1998.
21
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Derivatives (continued)
Modifying Annuity Crediting Rates
Interest rate swaps are used to modify the interest characteristics of certain
blocks of annuity contract deposits. Interest is exchanged periodically on the
notional value, with the Company receiving a fixed rate and paying various
short-term LIBOR rates on a net exchange basis. The net amount received or paid
under these swaps is reflected as an adjustment to annuity benefits.
Hedging Equity Indexed Annuity Crediting Rates
GLIC marketed an equity indexed annuity product which has an equity market
component, where interest credited to the contracts is linked to the performance
of the S&P 500 index. GLIC historically managed this risk by purchasing call
options that mirrored the interest credited to the contracts. As of December 31,
1999, the fair value of these options totaled $5 million. The fair value equaled
the carrying value due to the mark-to-market adjustment made to GLIC's assets as
of the acquisition date.
Credit and Market Risk
The Company is exposed to credit risk in the event of non-performance by
counterparties to swap agreements. The Company limits this exposure by entering
into swap agreements with counterparties having high credit ratings and by
regularly monitoring the ratings.
The Company's credit exposure on swaps is limited to the fair value of swap
agreements that are favorable to the Company. The Company does not expect any
counterparty to fail to meet its obligation; however, non-performance would not
have a material adverse effect on the Company's financial position or results of
operations.
The Company's exposure to market risk is mitigated by the offsetting effects of
changes in the value of swap agreements and the related direct investments. The
Company routinely monitors correlation between hedged items and hedging
instruments. In the event a hedge relationship is terminated or loses
correlation, any related hedging instrument that remained would be
marked-to-market through income. If the hedging instrument is terminated, any
gain or loss is deferred and amortized over the remaining life of the hedged
asset.
22
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Deferred Policy Acquisition Costs and Value of Business Acquired
Policy acquisition costs deferred and the related amortization charged to income
were as follows (in thousands):
<TABLE>
<CAPTION>
Eight months
ended
Year ended December 31, December 31,
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 223,337 $ 132,215 $ -
AHL balance at time of affiliation with JPFIC - - 64,658
Deferral:
Commissions 104,033 78,759 49,865
Other 30,801 29,960 23,218
------------------------------------------------------
134,834 108,719 73,083
Amortization (29,273) (17,332) (5,526)
Adjustment related to realized losses (gains) on debt
securities 615 (265) -
------------------------------------------------------
Ending balance $ 329,513 $ 223,337 $132,215
======================================================
</TABLE>
Changes in the value of business acquired were as follows (in thousands):
<TABLE>
<CAPTION>
Eight months
ended
Year ended December 31, December 31,
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Beginning balance $568,208 $622,438 $ -
Purchase of JPFIC by JPCorp. - - 481,600
AHL balance at time of affiliation with JPFIC - - 279,556
Deferral of commissions and accretion
of interest 22,142 37,281 36,809
Amortization (82,778) (83,518) (53,561)
Adjustment related to purchase accounting
adjustments 206,108 11,263 -
Adjustment related to realized losses (gains) on
debt securities 1,028 (2,100) (444)
Adjustment related to unrealized losses (gains) on
securities available-for-sale 234,387 (17,156) (121,522)
-----------------------------------------------------
Ending balance $949,095 $568,208 $ 622,438
=====================================================
</TABLE>
23
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Deferred Policy Acquisition Costs and Value of Business Acquired (continued)
Expected approximate amortization percentages of the value of business acquired
as of December 31, 1999 over the next five years were as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
2000 9.8%
2001 8.7%
2002 7.8%
2003 7.1%
2004 6.4%
</TABLE>
6. Federal Income Taxes
The tax effects of temporary differences that gave rise to deferred income tax
assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
-----------------------------------
<S> <C> <C>
Deferred income tax assets:
Difference in policy liabilities $ 253,904 $ 266,372
Net unrealized losses on securities 54,699 -
Obligation for postretirement benefits 650 -
Depreciation differences - 2,263
Deferred compensation 20,577 19,445
Differences in investment basis 7,754 -
Other deferred tax assets 80,677 38,186
-----------------------------------
Gross deferred tax assets 418,261 326,266
Deferred income tax liabilities:
Net unrealized gains on securities - (57,162)
Deferral of policy acquisition costs and value of business acquired (251,052) (184,861)
Deferred gain recognition for income tax purposes - (11,115)
Obligation for postretirement benefits - (40)
Depreciation differences (3,678) -
Other deferred tax liabilities (39,614) (32,560)
-----------------------------------
Gross deferred tax liabilities (294,344) (285,738)
-----------------------------------
Net deferred income tax assets $ 123,917 $ 40,528
===================================
</TABLE>
24
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Federal Income Taxes (continued)
Under prior federal income tax law, one-half of the excess of a life insurance
company's income from operations over its taxable investment income was not
taxed, but was set aside in a special tax account designated as "Policyholders'
Surplus". The Company has approximately $15.8 million of untaxed "Policyholders'
Surplus" on which no payment of federal income taxes will be required unless it
is distributed as a dividend, or under other specified conditions. The Clinton
administration is proposing to tax, as part of its 2001 budget initiative, the
"Policyholders' Surplus" over a five-year period. No related deferred tax
liability has been recognized for the potential tax which would approximate $5.5
million under current proposed rates.
Federal income taxes paid in 1999 and 1998 were $52 million and $70 million,
respectively. Federal income taxes paid in the eight month period ended December
31, 1997 were $47 million.
7. Retirement Benefit Plans
Pensions
The Company's employees participate in JPCorp's defined benefit pension plans
covering substantially all employees. The plans are noncontributory and are
funded through group annuity contracts issued by Jefferson-Pilot Life Insurance
Company, an affiliate. The assets of the plan are those of the related
contracts, and are primarily held in the separate accounts of Jefferson-Pilot
Life Insurance Company. The plans provide benefits based on annual compensation
and years of service. The funding policy is to contribute annually no more than
the maximum amount deductible for federal income tax purposes. The plans are
administered by JPCorp. Pension expense for all years presented was not
significant.
Other Postretirement Benefits
The Company provides certain other postretirement benefits, principally health
care and life insurance, to retired employees and their beneficiaries and
covered dependents. The Company contributes to a welfare benefit trust from
which future benefits will be paid. The Company accrues the cost of providing
postretirement benefits other than pensions during the employees' active service
period. Plan expense for all years presented was not significant.
Defined Contribution Plans
Defined contribution retirement plans cover most employees and full time agents.
The Company matches a portion of participant contributions and makes profit
sharing contributions to a fund that acquires and holds shares of JPCorp's
common stock. Most plan assets are invested under a group variable annuity
contract issued by Jefferson-Pilot Life Insurance Company. Plan expense for all
years presented was not significant.
25
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingent Liabilities
The Company leases electronic data processing equipment and field office space
under noncancelable operating lease agreements. The lease terms generally range
from three to five years. Neither annual rent nor future rental commitments are
significant.
The Company routinely enters into commitments to extend credit in the form of
mortgage loans and to purchase certain debt securities for its investment
portfolio in private placement transactions. The fair value of outstanding
commitments to fund mortgage loans and to acquire debt securities in private
placement transactions, which are not reflected in the consolidated balance
sheet, approximates $4.5 million as of December 31, 1999.
The Company is a defendant in a proposed class action suit. The suit alleges
deceptive practices, fraudulent and negligent misrepresentation and breach of
contract in the sale of certain life insurance policies using policy
illustrations which plaintiffs claim were misleading. Unspecified compensatory
and punitive damages, costs and equitable relief are sought in the case. While
management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome in the case, management
believes that it has made appropriate disclosures to policyholders as a matter
of practice, and intends to vigorously defend its position.
In the normal course of business, the Company and its subsidiaries are parties
to various lawsuits. Because of the considerable uncertainties that exist, the
Company cannot predict the outcome of pending or future litigation. However,
management believes that the resolution of pending legal proceedings will not
have a material adverse effect on the Company's financial position or liquidity,
although it could have a material adverse effect on the results of operations
for a specific period.
9. Reinsurance
The Company attempts to reduce its exposure to significant individual claims by
reinsuring portions of certain life insurance contracts written. The maximum
amount of individual life insurance retained on any one life, including
accidental death benefits, is $1.5 million.
26
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Reinsurance (continued)
The effect of reinsurance in the consolidated statements of income for the year
ended December 31, 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
Eight months ended
Year ended December 31, December 31,
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Direct premiums and other considerations $561,978 $557,495 $370,897
Less premiums and other
considerations ceded 118,336 140,998 43,588
Plus premiums and other
considerations assumed 903 30,891 1,204
-------------------------------------------------------
Net premiums and other
considerations $444,545 $447,388 $328,513
=======================================================
Policy benefits and claims ceded $232,886 $263,789 $ 89,643
=======================================================
</TABLE>
Reinsurance contracts do not relieve the Company from its primary obligation to
policyholders. Therefore, the failure of a reinsurer to discharge its
reinsurance obligations could result in a loss to the Company. The Company
regularly evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk related to reinsurance activities. No significant
credit losses resulted from the Company's reinsurance activities during any
period presented.
The Company reinsured 100% of the Periodic Payment Annuities (PPA), COLI and
Affiliated credit insurance business written prior to the AHL acquisition by
JPCorp in 1995 with affiliates of Household International, Inc. on a coinsurance
basis. Balances are settled monthly, and the Company is compensated by the
reinsurers for administrative services related to the reinsured business. The
amounts due from reinsurers in the consolidated balance sheets include $1,080
million and $1,057 million due from the Household affiliates at December 31,
1999 and 1998.
27
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Reinsurance (continued)
Assets related to the reinsured PPA and COLI business have been placed in
irrevocable trusts formed to hold the assets for the benefit of the Company and
are subject to investment guidelines which identify (1) the types and standards
of securities in which new investments are permitted, (2) prohibited new
investments, (3) individual credit exposure limits and (4) portfolio
characteristics. Household has unconditionally and irrevocably guaranteed, as
primary obligor, full payment and performance by its affiliated reinsurers. The
Company has the right to terminate the PPA and COLI reinsurance agreements by
recapture of the related assets and liabilities if Household does not take a
required action under the guarantee agreements within 90 days of a triggering
event. The Company has the option to terminate the PPA and COLI reinsurance
agreements on the seventh anniversary of the acquisition, by recapturing the
related assets and liabilities at an agreed-upon price or their then current
fair values as independently determined.
As of December 31, 1999 and 1998, the Company had a reinsurance recoverable of
$87 million and $95 million, respectively, from a another reinsurer, pursuant to
a 50% coinsurance agreement. The Company and the reinsurer are joint and equal
owners in $191 million of securities and short-term investments as of December
31, 1999 and 1998, respectively, 50% of which is included in investments in the
accompanying consolidated balance sheets.
10. Statutory Financial Information
The Company prepares financial statements on the basis of statutory accounting
practices (SAP) prescribed or permitted by the Nebraska Department of Insurance.
Prescribed SAP include a variety of publications of the National Association of
Insurance Commissioners (NAIC) as well as state laws, regulations and
administrative rules. Permitted SAP encompass all accounting practices not so
prescribed. The impact of permitted accounting practices on statutory capital
and surplus is not significant for the Company.
28
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Statutory Financial Information (continued)
The principal differences between SAP and generally accepted accounting
principles (GAAP) as they relate to the financial statements of the Company are
(1) policy acquisition costs are expensed as incurred under SAP, whereas they
are deferred and amortized under GAAP, (2) amounts collected from holders of
universal life-type and investment products are recognized as premiums when
collected under SAP, but are initially recorded as contract deposits under GAAP,
with cost of insurance recognized as revenue when assessed and other contract
charges recognized over the periods for which services are provided, (3) the
classification and carrying amounts of investments in certain securities are
different under SAP than under GAAP, (4) the criteria for providing asset
valuation allowances, and the methodologies used to determine the amounts
thereof, are different under SAP than under GAAP, (5) the timing of establishing
certain reserves, and the methodologies used to determine the amounts thereof,
are different under SAP than under GAAP, (6) no provision is made for deferred
income taxes under SAP, and (7) certain assets are not admitted for purposes of
determining surplus under SAP.
Reported capital and surplus on a statutory basis (including GLIC at December
31, 1999 only) at December 31, 1999 and 1998 was $874 million and $651 million.
Reported statutory net income (excluding GLIC) for the years ended December 31,
1999 and 1998 was $198 million and $191 million, respectively, and for the eight
months ended December 31, 1997 was $95 million.
Prior to the acquisition of GLIC by JPCorp, GLIC converted from a mutual form to
a stock life company. In connection with that conversion, GLIC agreed to
segregate certain assets to provide for dividends on participating policies
using dividend scales in effect at the time of the conversion, providing that
the experience underlying such scales continued. The assets, including the
revenue therefrom, allocated to the participating policies will accrue solely to
the benefit of those policies. At December 31, 1999, the assets and liabilities
relating to these participating policies amounted to $332 million and $371
million. The excess of liabilities over the assets represents the total
estimated future earnings expected to emerge from these participating policies.
29
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Statutory Financial Information (continued)
The amount of GAAP equity in excess of statutory surplus is unavailable for
distribution. In addition, various state insurance laws restrict the Company and
its insurance subsidiaries as to the amount of dividends from statutory surplus
they may pay without the prior approval of regulatory authorities. The
restrictions generally are based on net gains from operations and on certain
levels of surplus as determined in accordance with statutory accounting
practices. Dividends in excess of such thresholds are considered "extraordinary"
and require prior regulatory approval.
Risk-Based Capital ("RBC") requirements promulgated by the NAIC require life
insurers to maintain minimum capitalization levels that are determined based on
formulas incorporating credit risk, insurance risk, interest rate risk and
general business risk. As of December 31, 1999, JPFIC, AHL, and GLIC each had
adjusted capital and surplus that exceeded authorized control level RBC.
The NAIC Codification of Statutory Accounting Principles (Codification) has been
completed. The purpose of Codification is to create uniformity in statutory
financial reporting across states. Codification must be adopted by individual
states before it will have any bearing on the statutory reporting requirements
of their domiciliary companies. The NAIC is encouraging the states to adopt
Codification as soon as possible, with an implementation date of January 1,
2001. The Company does not expect implementation to have a material impact on
its statutory surplus; however, implementation is expected to result in a net
reduction of statutory surplus and RBC throughout the insurance industry.
11. Transactions with Affiliated Companies
The Company has entered into service agreements with JPCorp and other
subsidiaries of JPCorp for personnel and facilities usage, general management
services and investment management services. The Company expensed $75.7 million,
$83.3 million, and $73.8 million in 1999, 1998, and the eight months ended
December 31, 1997 for general management and investment services provided by
Jefferson-Pilot Life Insurance Company, another wholly-owned subsidiary of
JPCorp of which $55.9 million and $60.7 million remained payable as of December
31, 1999 and 1998, respectively. The remainder of the payable to affiliates at
year end was due to other affiliates.
30
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Fair Values of Financial Instruments
Fair values of financial instruments are based on quoted market prices where
available. Fair values of financial instruments for which quoted market prices
are not available are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rates and the estimates of future cash flows. Certain
financial instruments, particularly insurance contracts, are excluded from fair
value disclosure requirements.
The methods and assumptions used to estimate the fair value of financial
instruments are as follows:
o Fair values of debt securities with active markets are based on quoted
market prices. For debt securities that trade in less active markets,
fair values are obtained from independent pricing services. Fair
values of debt securities are principally a function of current
interest rates.
o Fair values of equity securities are based on quoted market prices.
o The carrying value of cash and cash equivalents approximates fair
value due to the short maturities of these assets.
o Fair values of policy loans and mortgage loans are estimated using
discounted cash flow analyses.
o Fair values of separate account assets and liabilities are reflected
in the consolidated balance sheets.
o Annuity contracts do not generally have defined maturities. Therefore,
fair values of the liabilities under annuity contracts, the carrying
amounts of which are included with policyholder contract deposits in
the consolidated balance sheets, are estimated to equal the cash
surrender values of the contracts.
o Fair value of the Company's redeemable preferred stock approximates
its stated amount because its dividend rate is adjustable.
o Fair values of securities sold under repurchase agreements approximate
carrying values, which include accrued interest.
31
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Fair Values of Financial Instruments (continued)
The carrying value and fair value of financial instruments were as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998
-----------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Debt securities available-for-sale $7,827,862 $7,827,862 $7,295,526 $7,295,526
Interest rate swaps available-for-sale (369) (369) 10,221 10,221
Debt securities held-to-maturity 1,798,897 1,763,127 1,797,798 1,860,736
Interest rate swaps held-to-maturity - (237) - 1,333
Equity securities available-for-sale 55,023 55,023 23,631 23,631
Cash and cash equivalents 156,672 156,672 14,663 14,663
Policy loans 654,431 714,121 1,194,703 1,238,437
Mortgage loans on real estate 1,120,310 1,064,177 772,304 814,707
Financial Liabilities
Annuity contracts in accumulation phase 2,969,170 2,904,528 3,275,463 3,184,119
Redeemable preferred stock - - 3,000 3,000
Securities sold under repurchase agreements 302,358 302,358 150,372 150,372
</TABLE>
Securities sold under repurchase agreements with a single counterparty, Credit
Suisse First Boston Corporation, totaled $149 million at December 31, 1999, and
had maturity dates ranging from January to March, 2000.
32
<PAGE>
Jefferson Pilot Financial Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Other Comprehensive Income
Comprehensive income and its components are displayed in the accompanying
statements of stockholder's equity. Currently, the only element of other
comprehensive income applicable to the Company is changes in unrealized gains
and losses on securities classified as available-for-sale, which are displayed
in the following table, along with related tax effects. See Note 3 for further
detail of changes in unrealized gains on securities available-for-sale (in
thousands):
<TABLE>
<CAPTION>
Eight months
ended
December 31,
Year ended December 31, 1997
------------------------------------------------------
1999 1998
------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding (losses) gains arising during
period, before taxes $(322,415) $ 33,758 $204,071
Income taxes 112,845 (11,815) (71,425)
------------------------------------------------------
Unrealized holding (losses) gains arising during
period, net of taxes (209,570) 21,943 132,646
Less reclassification adjustment:
(Losses) gains realized in net income, before taxes (3,384) 8,213 5,916
Income taxes 1,184 (2,875) (2,071)
------------------------------------------------------
Reclassification adjustment for (losses) gains
realized in net income (2,200) 5,338 3,845
------------------------------------------------------
Other comprehensive income - net unrealized (losses) gains $(207,370) $ 16,605 $128,801
======================================================
</TABLE>
14. Impact of Year 2000 (Unaudited)
The Company's administrative and financial reporting systems are shared among
numerous insurance affiliates within the consolidated Jefferson-Pilot
Corporation group. In prior years, JPCorp discussed the nature and progress of
its plans to become Year 2000 ready. In late 1999, JPCorp completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, JPCorp experienced no significant disruptions in
critical information technology systems and believes those systems successfully
responded to the Year 2000 date change. JPCorp expensed approximately $20.6
million to date in connection with remediating its systems. JPCorp is not aware
of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
JPCorp will continue to monitor its critical computer applications and those of
its vendors throughout the Year 2000 to ensure that any latent Year 2000 matters
that arise are addressed promptly.
33
<PAGE>
Jefferson Pilot Financial Insurance Company
Unaudited Pro Forma Condensed Consolidated Statements of Income
Introduction
On December 30, 1999, Jefferson-Pilot Corporation, the parent company of
Jefferson Pilot Financial Insurance Company (JPFIC) acquired Guarantee Life
Insurance Company (GLIC) through the acquisition of GLIC's parent. The
acquisition was accounted for using the purchase method. Accordingly, no results
of operations for GLIC for 1999 or before are included in the audited JPFIC
financial statements included in this document. The following pro forma
condensed consolidated statements of income have been prepared assuming the
acquisition of GLIC had taken place on January 1, 1999.
The total purchase price paid for GLIC was $426 million, including debt assumed
of GLIC's parent. Preliminary estimates of the allocation of the purchase price
to GLIC's tangible and intangible assets and liabilities resulted in $81 million
of cost in excess of net assets acquired and $206 million of value of business
acquired.
The pro forma adjustments include adjustments for financing costs of GLIC,
investment differences and the changes resulting from the intangibles relating
from purchase accounting adjustments. The parent company does not allocate
interest costs to the operating subsidiaries, and therefore, no adjustments for
the interest cost associated with the acquisition are reflected in these
statements. There are also no adjustments relating to expected savings in
expenses from either personnel or efficiencies of operations shown in these pro
forma statements.
<PAGE>
Jefferson Pilot Financial Insurance Company
Unaudited Pro Forma Condensed Consolidated Statements of Income
Year Ended December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
REVENUE: JPFIC GLIC Adjustments Pro Forma
------------- -------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Premium and other considerations $ 444,545 $393,439 $ (12,092) (5) $ 825,892
Net investment income 726,928 85,258 776 (1) 812,962
Realized investment gains (losses) (4,333) (381) (4,714)
Other income 2,372 29,102 31,474
------------- -------------- -------------- ----------------
1,169,512 507,418 (11,316) 1,665,614
BENEFITS AND EXPENSES:
Policy benefits 649,388 316,713 (10,020) (5) 956,081
Commissions and operating expenses,
net of deferrals 82,505 108,649 (7,518) (1)
298 (4) 183,934
Amortization of intangibles 118,368 79,677 (79,677) (2)
68,381 (3)
11,954 (3)
2,314 (3) 201,017
------------- -------------- -------------- ----------------
850,261 505,039 (14,268) 1,341,032
Income before income taxes 319,251 2,379 2,952 324,582
Provision for income taxes 114,770 833 1,843 (6) 117,446
------------- -------------- -------------- ----------------
Net income $ 204,481 $ 1,546 $ 1,109 $ 207,136
============= ============== ============== ================
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Statements of Income
<PAGE>
Jefferson Pilot Financial Insurance Company
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income
Year Ended December 31, 1999
(Dollars in thousands)
Background Information:
No pro forma balance sheet information is provided as the December 31, 1999
balance sheet is presented with the purchase accounting adjustments already
made.
<TABLE>
<S> <C>
Note 1 - Adjustment to increase investment income and reduce GLIC interest
expense
Increase in investment income from amortization of market value
adjustment of invested assets 776
Decrease in interest expense of GLIC due to pay off of debt (reflected as operating expense) 7,518
-------------
8,294
Note 2 - Adjustment to reduce historical amortization of intangible assets
Decrease in amortization of deferred acquisition costs 79,677
Note 3 - Adjustments to record amortization of purchase accounting adjustments
to intangible assets
Amortization of deferred acquisition costs associated with costs deferred
subsequent to January 1, 1999 (68,381)
Amortization of the value of business acquired over the related
contract periods (11,954)
Amortization of the cost in excess of net assets acquired
over a 35 year period (2,314)
-----------------
(82,649)
Note 4 - Adjustment to record additional depreciation expense on purchase
accounting adjustments
Depreciation expense on properties (298)
Note 5 - Adjustment to remove the impact of AGL Life Assurance Company (AGL)
from 1999 operating results, as GLIC sold AGL prior to Jefferson-Pilot
Corporation's acquisition of GLIC
Decrease in revenue ( reflected as premiums and other considerations) (12,092)
Decrease in expenses ( reflected as policy benefits) 10,020
-----------------
(2,072)
Note 6 - Pro forma income tax effect of the foregoing adjustments based on the
statutory tax rate of 35%, except that the amortization of cost in
excess of net assets acquired is not tax effected
Federal income tax expense 1,843
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of The Guarantee Life Companies Inc.:
We have audited the accompanying consolidated balance sheets of The
Guarantee Life Companies Inc. and subsidiaries (Guarantee Life) as of December
31, 1999 and 1998, and the related consolidated statements of income,
comprehensive income, shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of Guarantee Life's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Guarantee Life Companies Inc. and subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Omaha, Nebraska
June 16, 2000
1
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Assets
------
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $870,415 and $865,597) $ 830,823 $ 888,363
Held-to-maturity, at amortized cost (fair value: $123,219 and $158,341) 129,011 147,180
----------- -----------
959,834 1,035,543
Equity securities, at fair value (cost: $25,154 and $20,643) 24,885 23,835
Mortgage loans, net 113,010 103,736
Policy loans 32,527 31,767
Investment real estate, net 3,162 3,211
Other invested assets, net 14,236 54,970
Closed Block invested assets 289,795 314,108
----------- -----------
Total invested assets 1,437,449 1,567,170
Cash and cash equivalents 48,190 23,794
Accrued investment income 16,571 13,900
Ceded reinsurance recoverables 89,321 95,511
Accounts receivable, net 28,019 19,641
Deferred policy acquisition costs, net 155,610 144,844
Property, plant and equipment, net 18,723 19,929
Other assets 12,160 12,607
Closed Block other assets 8,395 16,224
Separate account assets -- 78,629
----------- -----------
Total assets $ 1,814,438 $ 1,992,249
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Future policy benefits:
Life $ 97,835 $ 97,433
Accident and health 96,154 80,700
Policyholder account balances:
Universal life contracts 461,984 445,986
Annuity contracts 324,255 349,834
Policy and contract claims 74,805 68,701
Other policyholder funds 51,475 43,751
Unearned premium revenue 12,847 13,149
Notes payable -- 112,500
Intercompany borrowing 91,250 --
Other liabilities 17,898 63,516
Closed Block liabilities 381,373 386,933
Discontinued operations 21,620 21,075
Separate account liabilities -- 78,629
----------- -----------
Total liabilities 1,631,496 1,762,207
Shareholders' equity:
Common stock $0.01 par value; 30,000,000 shares authorized, 10,315,785
shares issued at December 31, 1999 and 1998 103 103
Additional paid-in capital 200,440 201,255
Retained earnings 33,238 33,962
Treasury stock, at cost (978,274 and 1,087,124 shares at December 31, 1999
and 1998, respectively) (22,695) (25,054)
Accumulated other comprehensive income, net (28,144) 19,776
----------- -----------
Total shareholders' equity 182,942 230,042
Commitments and contingencies -- --
----------- -----------
Total liabilities and shareholders' equity $ 1,814,438 $ 1,992,249
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Insurance premiums and policyholder assessments:
Life $ 123,118 $ 116,811 $ 76,260
Accident and health 296,206 246,056 179,700
Policyholder assessments 46,329 37,020 30,476
Reinsurance premiums (72,214) (77,881) (55,508)
--------- --------- ---------
393,439 322,006 230,928
Investment income, net 85,258 74,651 58,449
Realized investment gains (381) 1,978 1,270
Ceding commissions and other income 25,970 22,124 15,558
Contribution from Closed Block 3,132 4,723 4,071
--------- --------- ---------
Total revenues 507,418 425,482 310,276
Policyholder benefits:
Benefits:
Life 56,925 96,046 62,749
Accident and health 278,397 184,691 113,335
Reinsurance recoveries (60,717) (67,082) (35,752)
--------- --------- ---------
274,605 213,655 140,332
Interest credited to policyholder account balances:
Annuity contracts 14,473 16,059 10,624
Universal contracts 27,635 20,353 15,028
--------- --------- ---------
Total policyholder benefits 316,713 250,067 165,984
Expenses:
Policy acquisition costs 79,677 77,964 57,364
Other insurance operating expenses 108,649 83,055 61,191
--------- --------- ---------
Total expenses 188,326 161,019 118,555
Income from continuing operations before income taxes 2,379 14,396 25,737
Income tax expense 833 5,039 9,098
--------- --------- ---------
Net income from continuing operations 1,546 9,357 16,639
Net income (loss) from discontinued operations 374 (328) (195)
--------- --------- ---------
Net income $ 1,920 $ 9,029 $ 16,444
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
--------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income $ 1,920 $ 9,029 $ 16,444
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) of invested assets (48,640) 4,773 7,843
Less reclassification adjustment for gains included in net income 720 1,978 1,270
-------- -------- --------
(47,920) 6,751 9,113
-------- -------- --------
Comprehensive income (loss) $(46,000) $ 15,780 $ 25,557
======== ======== ========
</TABLE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Common stock, beginning of year $ 103 $ 99 $ 99
Issuance of common stock, 371,402 shares -- 4 --
--------- --------- ---------
Common stock, end of year 103 103 99
--------- --------- ---------
Additional paid in capital, beginning of year 201,255 191,123 191,226
Issuance of common stock (815) 9,996 --
Options exercised and stock awards granted -- 136 (103)
--------- --------- ---------
Additional paid in-capital, end of year 200,440 201,255 191,123
--------- --------- ---------
Retained earnings, beginning of year 33,962 27,463 13,435
Net income 1,920 9,029 16,444
Shareholder dividends declared ($0.28/share in 1999
and 1998, $0.26/share in 1997) (2,644) (2,530) (2,416)
--------- --------- ---------
Retained earnings, end of year 33,238 33,962 27,463
--------- --------- ---------
Treasury stock, beginning of year (25,054) (22,512) --
Purchases of treasury stock (None in 1999, 119,722 shares
in 1998, 1,069,011 shares in 1997) -- (3,150) (23,603)
Options exercised (106,862 shares in 1999; 42,730 shares in 1998,
1,496 shares in 1997) and stock awards granted, (2,017 shares in 1999,
7,392 shares in 1998, 49,991 shares in 1997) 2,359 608 1,091
--------- --------- ---------
Treasury stock, end of year (22,695) (25,054) (22,512)
--------- --------- ---------
Accumulated other comprehensive income:
Beginning of year 19,776 13,025 3,912
Unrealized appreciation (depreciation) of invested assets (47,920) 6,751 9,113
--------- --------- ---------
End of year (28,144) 19,776 13,025
--------- --------- ---------
Total shareholders' equity $ 182,942 $ 230,042 $ 209,198
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 1,546 $ 9,357 $ 16,639
Adjustments to reconcile net income from continuing
operations to net cash provided by continuing operating
activities:
Policyholder assessments (46,329) (37,020) (30,476)
Interest credited to policyholder account balances 42,108 36,412 25,652
Realized investment (gains) losses 381 (1,978) (1,270)
Change in: (net of amounts acquired)
Ceded reinsurance recoverables 3,720 (12,358) (2,918)
Deferred policy acquisition costs (10,766) 1,907 4,799
Liabilities for future policy benefits 15,856 13,695 13,745
Policy and contract claims 6,104 13,863 (6,586)
Other liabilities (7,337) 4,908 6,492
Deferred income taxes (29,245) 3,077 (2,996)
Closed Block assets and liabilities, net 2,269 (2,475) (2,377)
Other, net (5,614) 10,902 10,200
--------- --------- ---------
Net cash provided by continuing operating activities (27,307) 40,290 30,904
Net cash provided (used) by discontinued operations 919 (251) (11,560)
--------- --------- ---------
Net cash provided (used) by operating activities (26,388) 40,039 19,344
--------- --------- ---------
Cash flows from investing activities:
Purchase of fixed maturities (224,406) (329,247) (226,294)
Proceeds from sale of fixed maturities:
Available-for-sale 204,272 358,102 144,607
Maturities, calls and principal reductions of fixed maturities 51,758 29,392 82,751
Purchases of equity securities and short-term investments (3,514) (32,924) (3,121)
Purchase of mortgage loans (18,415) (25,900) (27,670)
Proceeds from repayment of mortgage loans 9,138 7,806 11,431
Acquisitions, net of cash acquired -- (90,863) (30,913)
Dispositions, net of cash surrendered 3,900 -- --
Change in Closed Block invested assets, net 24,313 (4,331) (4,206)
Other, net 30,633 (3,848) 1,127
--------- --------- ---------
Net cash used by investing activities 77,679 (91,813) (52,288)
--------- --------- ---------
Cash flows from financing activities:
Deposits to policyholder account balances 77,967 76,715 77,153
Withdrawals from policyholder account balances (83,327) (77,183) (52,752)
Purchase of treasury stock -- (3,150) (23,603)
Options exercised 2,359 608 1,091
Proceeds from issuance of long term debt -- 90,000 40,000
Principal payments on debt obligations (21,250) (17,500) --
Shareholder dividends (2,644) (2,530) (2,416)
--------- --------- ---------
Net cash provided (used) by financing activities (26,895) 66,960 39,473
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 24,396 15,186 6,529
Cash and cash equivalents at beginning of year $ 23,794 $ 8,608 $ 2,079
--------- --------- ---------
Cash and cash equivalents at end of year $ 48,190 $ 23,794 $ 8,608
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
--------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
(a) Organization and Principles of Consolidation
At December 31, 1999 the consolidated financial statements include The
Guarantee Life Companies Inc. (Holding Company) and its direct and indirect
wholly owned subsidiaries, all of which are collectively referred to hereinafter
as "Guarantee Life". Guarantee Life Insurance Company (Guarantee Life Insurance)
is an insurance subsidiary domiciled in Nebraska.
On December 30, 1999, Jefferson Pilot Corporation (A North
Carolina-domiciled insurance holding company) acquired 100% of the outstanding
common stock of the Holding Company.
These financial statements have been prepared on an historical GAAP basis
of accounting which reflects the cost of the assets acquired and owned by
Guarantee Life. These financial statements do not reflect the adjustments
necessary to record the purchase of Guarantee Life by Jefferson Pilot
Corporation on the December 31, 1999 consolidated balance sheet.
Until October 31, 1999, PFG, Inc.'s wholly owned subsidiaries included AGL
Life Assurance Company (AGL) and "Philadelphia Financial Group" which consists
of Philadelphia Financial Group, Inc., PFG Distribution Company, Philadelphia
Financial Group Agency of Ohio, Inc., PFG Insurance Agency of Texas, Inc., and
Philadelphia Financial Insurance Agency of Massachusetts, Inc., which were owned
by Guarantee Life.
On October 31, 1999, the common stock of AGL and the other minor
subsidiaries of PFG, Inc. was sold to a group of unrelated investors. Concurrent
with the spin-off transaction, Guarantee Life Insurance assumed, through a
coinsurance agreement and an assumption reinsurance agreement, 100% of the
policies of AGL, excluding the variable life and annuities. As part of this
transaction the company sold the separate accounts business with assets and
liabilities for $109.4 million recording proceeds of $3.9 million. No gain or
loss resulted on the sale.
The unaudited pro forma consolidated results of operations, which assume
that AGL had been sold as of January 1, 1999 is as follows:
For the Year Ended
December 31, 1999
------------------
(in millions)
Total Revenue $ 495.7
Net Income from Continuing Operations $ 0.2
Net Income $ 0.5
Effective May 31, 1998, Guarantee Life acquired the Westfield Life
Insurance Company from Ohio Farmers Insurance Company for $100.0 million,
consisting of $90.0 million in cash and 371,402 restricted shares of Guarantee
Life common stock valued at $10.0 million. In addition, approximately $2.0
million of expenses were capitalized as part of this transaction. Guarantee Life
acquired $396.9 million in assets and assumed $294.5 million in liabilities in
this transaction. The acquisition has been accounted for as a purchase and,
accordingly, the acquired assets and liabilities have been recorded at their
estimated fair value at the date of acquisition. No goodwill was recorded in
this transaction. The results of operations, since the date of acquisition, have
been included in the accompanying consolidated financial statements.
6
<PAGE>
The unaudited pro forma consolidated results of operations, which assume
that PFG and Westfield had been acquired as of January 1, 1997 are as follows:
For the Years Ended
December 31,
-----------------------
(in millions)
1998 1997
------- -------
Total Revenue $ 450.0 $ 389.2
Net Income from Continuing Operations $ 12.1 $ 14.2
Net Income $ 11.7 $ 14.0
Pro forma presented herein related to acquisition and disposal data does
not purport to be indicative of the results that would have been obtained had
this acquisition occurred at the beginning of the periods presented and is not
intended to be indicative of future results.
All significant intercompany transactions have been eliminated in
consolidation.
(b) Investments in Fixed Maturities and Equity Securities
Categorization of fixed maturities and equity securities
Fixed maturity and equity securities are carried at fair value unless
Guarantee Life demonstrates that it has the positive intent and ability to hold
these investments to maturity. Fixed maturity and equity securities must be
classified into one of three categories: 1) held-to-maturity, 2)
available-for-sale, or 3) trading securities.
Management determines the appropriate classification of fixed maturities
and equity securities at the time of purchase and reevaluates such designation
at each balance sheet date. When changes in condition cause a fixed maturity
investment to be transferred to a different category, the security is
transferred to the new category at its fair value at the date of transfer. In
1999 and 1998 there were no such transfers. In 1997, Guarantee Life transferred
one security with an amortized cost of $0.5 million from the held-to-maturity
category due to deterioration in the issuers' credit quality. The credit was
sold during 1997 realizing a loss of $80,000.
Available-for-sale fixed maturities and equity securities
Available-for-sale fixed maturities and equity securities (common and
nonredeemable preferred stocks) are carried at fair value. After adjusting
related balance sheet accounts as if the unrealized gains had been realized, the
net adjustment is recorded within other accumulated comprehensive income on
securities within shareholders' equity. If the fair value of a security
classified as available-for-sale declines below its cost and this decline is
considered to be other than temporary, the security is reduced to its net
realizable value, and the reduction is recorded as a realized loss.
Held-to-maturity fixed maturities
Fixed maturities for which Guarantee Life has both the ability and the
intent to hold to maturity are stated at amortized cost adjusted for other than
temporary fair value decline. Amortized cost reflects actual cost adjusted for
amortization of premium and accretion of discount.
Mortgage Loans
Mortgage loans on real estate are stated at unpaid principal balance, net
of unamortized discounts and valuation allowances. The valuation allowances on
mortgage loans are based on losses expected by management to be realized on
transfers of mortgage loans to real estate, on the disposition or settlement of
mortgage loans and on mortgage loans which management believes may not be
collectible in full.
Policy loans, investment real estate and other invested assets
Policy loans are carried at unpaid balances. Investment real estate is
generally stated at depreciated cost, including development costs, less
allowances for other than temporary decline in value. Investment real estate
acquired in satisfaction of debt is valued at the lower of cost or estimated
fair value at date of acquisition and is periodically revalued. Other invested
assets are recorded at amortized cost less allowances.
7
<PAGE>
Investment income
Bond premium and discounts are amortized into income using the scientific
yield method over the term of the security. Premiums and discounts on
mortgage-backed securities are amortized using the interest method over the
expected life of each security. In addition, a pro rata portion of premiums and
discounts is recognized when unscheduled principal payments are received and is
included in net investment income. Realized gains and losses on sales of
investments are recognized in net income on the specific identification basis.
Changes in fair values of available-for-sale fixed maturities and equity
securities are reflected as a component of accumulated comprehensive income
directly in shareholders' equity and, accordingly, have no effect on net income.
Interest is recognized as earned on the accrual basis of accounting. Dividends
are recognized on the ex-dividend date.
Invested asset impairment and valuation allowances
Invested assets are considered impaired when Guarantee Life determines
that collection of all amounts due under the contractual terms is doubtful.
Guarantee Life adjusts invested assets to their estimated net realizable value
at the point at which it determines an impairment is other than temporary.
Guarantee Life has also established valuation allowances for mortgage loans and
other invested assets. Valuation allowances for other than temporary impairments
in value are netted against the asset categories to which they apply, and
additions to valuation allowances are included in total investment results.
(c) Deferred Policy Acquisition Costs
For limited payment and other traditional life insurance policies, certain
commissions, expenses of the policy issue and underwriting departments and other
variable expenses have been deferred. These deferred policy acquisition costs
are being amortized in proportion to the ratio of the expected annual premium
revenue to the expected total premium revenue. Expected premium revenue was
estimated with the same assumptions used for computing liabilities for future
policy benefits for these policies.
For universal life and annuity type contracts, the deferred policy
acquisitions costs are amortized over a period of not more than twenty years in
relation to the present value of estimated gross profits arising from estimates
of mortality, interest, expense and surrender experience. The estimates of
expected gross profits are evaluated regularly and are revised if actual
experience or other evidence indicates that revision is appropriate. Upon
revision, total amortization recorded to date is adjusted by a charge or credit
to current earnings. Deferred policy acquisition costs are adjusted for the
impact on estimated gross profits of net unrealized gains and losses on
securities.
For short duration contracts, certain acquisition costs have been deferred
and are amortized over the life of the related insurance policies. Deferred
policy acquisition costs are reviewed for recoverability from future income,
including investment income, and costs which are deemed unrecoverable are
expensed in the period in which the determination is made. No such costs have
been deemed unrecoverable during the three years in the period ending December
31, 1999.
(d) Recognition of Insurance Premium Revenue and Related Expenses
For limited payment contracts, net premiums are recorded as revenue, and
the difference between the gross premium and the net premium is deferred and
recognized in income in a constant relationship to insurance in force. For other
traditional life policies, premiums are recognized when due, less allowances for
estimated uncollectible balances.
For universal life and annuity policies, contract charges for mortality,
surrender and expense, other than front-end expense charges, are reported as
income when charged to policyholder accounts. Expenses consist primarily of
benefit payments in excess of policyholder account values and interest credited
to policyholder accounts. Profits are recognized over the life of universal life
type contracts through the amortization of deferred policy acquisition costs in
relation to estimated gross profits from mortality, interest, surrender and
expense.
8
<PAGE>
For accident and health policies, premium income is earned pro rata over
the term of the contracts. Premiums received but not earned are recorded as
liabilities.
(e) Future Policy Benefits and Policyholder Account Balances
For traditional life insurance policies, future policy benefits and
dividend liabilities are computed using a net level premium method on the basis
of actuarial assumptions as to mortality, persistency and interest established
at policy issue. Assumptions established at policy issue as to mortality and
persistency are based on industry standards and Guarantee Life's historical
experience, which, together with interest and expense assumptions, provide a
margin for adverse deviation. Interest rate assumptions principally range from
2.5% to 4.5%. When the liabilities for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for expected
future policy benefits and expenses, unrecoverable deferred policy acquisition
costs are written off and thereafter a premium deficiency reserve is established
through a charge to earnings.
Accident and health benefits for active lives are calculated using the net
level premium method and assumptions as to future morbidity, withdrawals and
interest which provide a margin for adverse deviation. Benefit liabilities for
disabled lives are calculated using the present value of benefits method and
experience assumptions as to claim termination, expense and interest which also
provide a margin for adverse deviation.
Policyholders' account balances for universal life and annuity policies
are equal to the policy account value before deduction of any surrender charges.
The policy account value represents an accumulation of gross premium payments
plus credited interest less expense and mortality charges and withdrawals. An
additional liability is established for deferred front-end expense charges on
universal life type policies. These expense charges are recognized in income as
policyholder assessments using the same assumptions as are used to amortize
deferred policy acquisition costs. Weighted average interest crediting rates for
universal life policies were 5.61%, 5.77% and 5.68%; and for annuity policies,
were 4.73%, 5.28% and 5.38% for 1999, 1998 and 1997, respectively.
(f) Policy and Contract Claims
Guarantee Life establishes a liability for unpaid claims based on
estimates of the ultimate cost of claims incurred, which is comprised of
aggregate case basis estimates and average claim costs for reported claims and
estimates of incurred but unreported losses based on past experience. Guarantee
Life's policy and contract claims liability includes a provision for both life
and accident and health claims.
The liability for unreported losses is established using various
statistical and actuarial techniques reflecting historical patterns of
development of paid and reported losses adjusted for current trends. The
liability is continually reviewed and updated as new information becomes
available. Resulting adjustments are reflected in income currently. Adjustments
related to claims incurred in prior periods have not been material for all
periods presented in the accompanying consolidated statements of income.
Management believes the liabilities for unpaid claims are adequate to
cover the ultimate liability; however, due to the underlying risks and the high
degree of uncertainty associated with the determination of the liability for
unpaid claims, the amounts which will ultimately be paid to settle these
liabilities cannot be determined precisely and may vary from the estimated
amount included in the consolidated balance sheets.
(g) Property, Plant, and Equipment
Property, plant, and equipment is presented at cost less accumulated
depreciation. Expenditures resulting in significant betterment or improvement of
the buildings are included in the cost of the building. Maintenance, repairs,
and renewals of a minor nature are charged to operations as incurred. Guarantee
Life uses the straight-line method of depreciation based upon the estimated
useful lives of the buildings and improvements.
9
<PAGE>
(h) Guaranty Fund Assessments
As a condition of doing business, states and jurisdictions in which
Guarantee Life does business have adopted laws requiring membership in life and
health insurance guaranty funds, which are organized to pay contractual
obligations under insurance policies issued by insolvent and failed life and
health insurers. Member companies are subject to assessments each year based on
life, health, or annuity premiums collected in the state. In some states these
assessments may be applied against premium taxes.
In accordance with estimates provided by the National Organization of Life
and Health Guaranty Associations, Guarantee Life has established a liability of
$1.3 million in the accompanying consolidated financial statements for amounts
due for actual and potential insurance company failures in the states where
Guarantee Life writes business. Guarantee Life capitalizes the assessments which
are deductible when they are paid and generally amortizes the payments over not
more than five years. Guaranty fund assessments capitalized are reviewed
quarterly to determine that the unamortized portion of such costs does not
exceed recoverable amounts. At December 31, 1999 and 1998, Guarantee Life had
$1.0 million and $1.5 million, respectively, of unamortized guaranty fund
assessments which are included in other assets.
(i) Pension and Other Post Retirement Benefits
Guarantee Life has a defined benefit pension plan which covers
substantially all of its employees. Current pension costs are funded at the
maximum deductible amount allowed by the Internal Revenue Service (IRS).
Periodic net pension expense is based on the cost of incremental benefits for
employee service during the period, interest on the projected benefit
obligation, actual return on plan assets and amortization of actuarial gains and
losses. In addition to providing pension benefits, Guarantee Life provides life
insurance benefits to retired employees. Substantially all of Guarantee Life's
employees may become eligible for the life benefits. Guarantee Life recognizes
the cost of these post retirement benefits as they are earned by the employees
and accrues for the expected cost of providing those benefits to employees and
their beneficiaries during the years the employees render service.
(j) Federal Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(k) Fair Value of Financial Instruments
Fair values for all fixed securities are determined by independent
valuation procedures. The fair values for mortgage loans and policy loans are
estimated using discounted cash flow analyses and 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.
Prepayments are assumed to occur at the same rate as in previous periods when
interest rates were at levels similar to current levels. The fair value of
investment real estate is based on market values for comparable local real
estate. The fair values of Guarantee Life's other invested assets are based on
current market prices and discounted expected future cash flows for related
investments.
Fair values for Guarantee Life's liabilities under investment type
reinsurance contracts (those contracts without significant mortality risks) are
estimated 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. The intangible value of
long-term relationships with policyholders is not taken into account in
estimating fair values disclosed. Fair values for Guarantee Life's insurance
contracts other than investment type contracts are not required to be disclosed.
However, the fair values of liabilities under all insurance contracts are taken
into consideration in Guarantee Life's overall management of interest rate risk,
which minimizes exposure to changing interest rates through the matching of
investment maturities with amounts due under insurance contracts.
10
<PAGE>
(l) Separate Accounts
Separate account assets, carried at market value, and liabilities
represent variable annuity and universal life contract funds invested primarily
in equity securities. The investment income, gains and losses of these accounts
accrue directly to the policyholders and are not included in the operations of
Guarantee Life.
(m) Cash Equivalents
For purposes of the consolidated statements of cash flows, Guarantee Life
considers cash equivalents to be all highly liquid debt instruments with
original maturities of three months or less when purchased. The carrying amounts
reported in the consolidated balance sheets for these instruments approximates
their fair value.
(n) Earnings Per Share
Earnings per share data has not been presented because Guarantee Life
ceased being a public company on December 30, 1999.
(o) Comprehensive Income
The Company classifies items of other comprehensive income by their nature
and displays the accumulated balance of other comprehensive income separately
from retained deficit and additional paid-in capital in the equity section of
the consolidated balance sheets.
(p) Discontinued Operations
In 1994, Guarantee Life decided to withdraw from the alternate workers'
compensation benefit program segment. The operations of this segment have been
reflected on a net basis and classified as discontinued operations in the
accompanying consolidated financial statements. See also note 15.
(q) Risks and Uncertainties
Certain risks and uncertainties are inherent to the Company's day-to-day
operations and to the process of preparing its consolidated financial
statements. The more significant of those risks and uncertainties, as well as
the Company's method for mitigating the risks, are presented below and
throughout the notes to the consolidated financial statements:
Consolidated Financial Statements - The preparation of consolidated
financial statements required management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Reinsurance - Reinsurance contracts do not relieve the Company from its
obligations to reinsureds. Failure of reinsurers to honor their obligations
could result in losses to the Company; consequently, allowances are established
for amounts deemed uncollectible. The Company evaluates the financial condition
of its reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. Management believes that any liability arising from this
contingency would not be material to the Company's financial position.
Investments - The Company is exposed to risks that issuers of securities
owned by the Company will default, or that interest rates will change and cause
a decrease in the value of its investments. Management mitigates these risks by
conservatively investing in high-grade securities and by matching maturities of
its invesment with the anticipated payouts of its liabilities.
11
<PAGE>
(r) Reclassifications
Certain reclassifications have been made to the prior consolidated
financial statements to conform with the most current presentation.
(2) Investments
Fixed maturities at December 31, 1999 (in thousands) are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 87,768 $ 125 $ (2,754) $ 85,139
Obligations of states and political subdivisions 14,385 7 (475) 13,917
Debt securities issued by foreign governments 8,400 -- (452) 7,948
Corporate securities 485,996 11,638 (37,390) 460,244
Mortgage-backed securities 273,866 3,873 (14,164) 263,575
--------- --------- --------- ---------
$ 870,415 $ 15,643 $ (55,235) $ 830,823
Equity Securities 25,154 3,646 (3,915) 24,885
--------- --------- --------- ---------
$ 895,569 $ 19,289 $ (59,150) $ 855,708
========= ========= ========= =========
Held-to-maturity:
Corporate securities $ 103,361 $ 3,855 $ (6,222) $ 100,994
Mortgage-backed securities 25,650 404 (3,829) 22,225
--------- --------- --------- ---------
$ 129,011 $ 4,259 $ (10,051) $ 123,219
========= ========= ========= =========
</TABLE>
Guarantee Life manages its credit risk associated with fixed maturities by
diversifying its portfolio. At December 31, 1999, Guarantee Life held no
corporate debt securities or foreign government debt securities of a single
issuer which had a carrying value in excess of 5% of shareholders' equity.
At December 31, 1999, Guarantee Life held $132.0 million of
mortgage-backed securities issued by U.S. Government agencies and $157.2 million
of mortgage-backed securities issued by Guarantee Life. At December 31, 1999,
Guarantee Life held no other mortgage-backed securities of a single issuer which
had a carrying value in excess of 5% of shareholders' equity. Guarantee Life's
non-income earning investments in fixed maturities are not material.
12
<PAGE>
Fixed maturities at December 31, 1998 (in thousands) are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 101,338 $ 2,603 $ 89 $ 103,852
Obligations of states and political subdivisions 13,081 1,524 -- 14,605
Debt securities issued by foreign governments 15,394 1,290 4 16,680
Corporate securities 506,911 21,571 5,527 522,955
Mortgage-backed securities 228,873 3,515 2,117 230,271
--------- --------- --------- ---------
$ 865,597 $ 30,503 $ 7,737 $ 888,363
Equity Securities 20,643 4,176 984 23,835
--------- --------- --------- ---------
$ 886,240 $ 34,679 $ 8,721 $ 912,198
========= ========= ========= =========
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 3,627 $ 55 $ -- $ 3,682
Obligations of states and political subdivisions 7,654 634 -- 8,288
Corporate securities 133,203 11,103 658 143,648
Mortgage-backed securities 2,696 27 -- 2,723
--------- --------- --------- ---------
$ 147,180 $ 11,819 $ 658 $ 158,341
========= ========= ========= =========
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. The amortized cost and estimated fair value of fixed
maturities by contractual maturity (in thousands) are as follows:
December 31, 1999
------------------------
Amortized Estimated
Cost Fair Value
--------- ----------
Due in one year or less $ 34,944 $ 35,089
Due after one year through five years 169,858 167,503
Due after five years through ten years 279,549 265,606
Due after ten years 215,559 200,044
-------- --------
699,910 668,242
Mortgage-backed securities 299,516 285,800
-------- --------
$999,426 $954,042
======== ========
Guarantee Life had fixed maturities, mortgage loans, preferred stocks and
common stocks with carrying values aggregating $11 million as of December 31,
1999 on deposit with regulatory authorities.
A summary of realized investment gains (losses) (in thousands) is as
follows:
Years Ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
Fixed maturities:
Gross gains $ 1,677 $ 4,669 $ 1,883
Gross losses (2,208) (1,419) (1,851)
Equity securities:
Gross gains 654 1,944 --
Gross losses (467) -- --
Sale of Guarantee American -- -- 785
Other investments (37) (3,007) 1,401
Change in investment valuation allowances -- (209) (948)
------- ------- -------
Realized investment gains/(losses) $ (381) $ 1,978 $ 1,270
======= ======= =======
13
<PAGE>
A summary of consolidated net investment income (in thousands) is as
follows:
Years Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Fixed maturities $ 69,494 $ 65,313 $ 51,450
Equity securities 971 229 394
Mortgage loans 8,674 7,682 6,929
Policy loans 2,206 1,984 1,420
Investment real estate 1,032 990 1,415
Other 7,192 3,672 3,955
-------- -------- --------
89,569 9,870 65,563
Less investment expenses (2,313) (2,443) (5,510)
-------- -------- --------
Net investment income from invested assets 87,256 77,427 60,053
Less discontinued operations (note 15) (1,998) (2,776) (1,604)
-------- -------- --------
Net investment income $ 85,258 $ 74,651 $ 58,449
======== ======== ========
Investment expenses include depreciation and depletion of $0.7 million,
$0.7 million and $0.6 million in 1999, 1998 and 1997, respectively.
A summary of the components of the net unrealized appreciation on invested
assets, including Closed Block, carried at fair value (in thousands) is as
follows:
Years Ended December 31,
------------------------
1999 1998
-------- --------
Unrealized appreciation/(depreciation):
Fixed maturities available-for-sale $(49,820) $ 32,568
Equity securities (270) 3,485
Deferred policy acquisition costs 6,499 (5,629)
Deferred income taxes 15,447 (10,648)
-------- --------
Net unrealized appreciation/(depreciation) $(28,144) $ 19,776
======== ========
(3) Mortgage Loans
Investments in mortgage loans consist almost entirely of commercial
mortgage loans which are primarily fixed-rate first mortgages on completed
properties. The following table sets forth additions, reductions from payments
and other charges and foreclosures related to the mortgage loan portfolio (in
thousands):
Years Ended December 31,
--------------------------
1999 1998
--------- ---------
Commercial loans:
Beginning Balance $ 105,208 $ 86,166
Additions 18,415 25,900
Payments and other charges (9,138) (7,759)
--------- ---------
Ending Balance 114,485 104,307
Other mortgage loans -- 904
Valuation allowance (1,475) (1,475)
--------- ---------
$ 113,010 $ 103,736
========= =========
Guarantee Life manages its credit risk associated with these loans by
diversifying its mortgage portfolio by property type and geographic location. As
of December 31, 1999, Guarantee Life had no single mortgage loan out-
14
<PAGE>
standing which had a carrying value in excess of 5% of shareholders' equity. As
of December 31, 1999, all commercial mortgage loans bore a fixed interest rate
and Guarantee Life had no material loans over 60 days past due. Guarantee Life
had no outstanding commitments to fund mortgage loans as of December 31, 1999.
(4) Deferred Policy Acquisition Costs
A summary of the policy acquisition costs deferred and amortized (in
thousands) is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period $ 144,844 $ 102,696 $ 77,968
Policy acquisition costs deferred 102,571 80,048 55,848
Policy acquisition costs amortized (79,677) (77,964) (57,364)
Policy acquisition costs acquired in purchase -- 40,198 29,525
--------- --------- ---------
167,738 144,978 105,977
Change in deferred policy acquisition costs relating to unrealized
appreciation of invested assets carried at fair value (12,128) (134) (3,281)
--------- --------- ---------
Total reflected in consolidated balance sheet $ 155,610 $ 144,844 $ 102,696
========= ========= =========
</TABLE>
(5) Reinsurance
In the ordinary course of business, Guarantee Life assumes business from
and cedes business to other insurers under a variety of contracts. The existence
of ceded reinsurance constitutes a means by which Guarantee Life has
underwritten a portion of its business.
Amounts paid or deemed to have been paid for reinsurance contracts are
recorded as reinsurance receivables. The cost of reinsurance related to
long-duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account for
the underlying policies.
Guarantee Life's retention limit on its life insurance business in 1999
was generally $150,000 on a life risk in the Employee Benefits and Group Special
Markets Divisions, $250,000 on a life risk for individual business originally
written through Guarantee Life. Certain reinsurers have agreed to reinsure
automatically all amounts on any one life in excess of the retention amount not
to exceed eight times Guarantee Life's retention in 1999. Amounts in excess of
the automatic acceptance limits of Guarantee Life's retention may be applied for
facultatively. As of December 31, 1999 and 1998, the amount of ceded life
insurance in force was approximately $5.5 billion and $5.3 billion,
respectively.
Guarantee Life cedes 70% of an equity indexed annuity block on a true
coinsured basis. The policyholder deposits ceded on this block amounted to $28.5
million as of December 31, 1999.
Guarantee Life cedes 100% of its individual accident and health business.
Guarantee Life's retention level on group accident and health business varies by
product. On its excess loss insurance program, Guarantee Life retains 30% on the
first $300,000 of eligible expenses per claim with 100% reinsurance coverage on
expenses in excess of that amount.
Effective January 1, 1995, AGL entered into a reinsurance agreement to
assume $50,000,000 in existing single premium deferred annuity business from
Phoenix Home Mutual Life Insurance Company ("Phoenix"). Pursuant to the terms of
the reinsurance agreement, assets equal to policyholder liabilities assumed are
maintained in a trust account. As of December 31, 1999, policyholder deposits
related to this business amounted to $24.2 million.
In a separate reinsurance agreement, AGL assumed 80% quota share in all
production of a single deferred annuity product which was jointly developed with
Phoenix. Pursuant to the terms of the reinsurance agreement, assets equal to
policyholder liabilities assumed are maintained in a trust account. This
reinsurance agreement can be terminated by either party with respect to new
business with 90 days notice. As of December 31, 1999, policyholder deposits
related to this business amounted to $4.4 million. These blocks of business were
included in the business Guarantee Life Insurance assumed from AGL on October
31, 1999.
15
<PAGE>
Guarantee Life generally strives to diversify its credit risks related to
reinsurance ceded; however, certain concentrations of credit risk related to
reinsurance recoverables (including unearned premiums) exist with the insurance
organizations listed in the table below (in thousands):
December 31,
1999
-----------
RGA Reinsurance Company $ 31,623
Cologne Life Reinsurance Company 11,772
Lonestar Life Insurance Company 10,347
Phoenix Home Life Mutual Insurance Company 6,204
Swiss RE Life & Health America, Inc. 5,150
ESG (European Specialty Limited) 4,849
UNUM Life Insurance Company of America 4,674
Lincoln National Life Insurance Company 4,600
Indianapolis Life Insurance Company 3,555
Security Life of Denver 2,195
London Life Reinsurance 2,147
Business Men's Assurance Company 2,108
Life Reassurance Corp. of America 2,012
John Hancock Mutual Life Insurance Company 1,678
Great Midwest 1,000
All Others 8,036
---------
Total before discontinued operations 101,950
Less discontinued operations (note 15) (12,629)
---------
Total reflected in accompanying consolidated balance sheet $ 89,321
=========
This underwriting activity subjects Guarantee Life to certain risks. To
the extent that reinsurers who are underwriting Guarantee Life's business become
unable to meet their contractual obligations, Guarantee Life retains the primary
obligation to its direct policyholders because the existence of this reinsurance
does not discharge Guarantee Life from its obligation to its policyholders.
Guarantee Life has policies and procedures to approve reinsurers prior to
entering into an agreement and also to monitor financial stability on a
continuous basis. As of December 31, 1999 and 1998 Guarantee Life had no
significant overdue reinsurance balances. As of December 31, 1999 Guarantee Life
held funds and other collateral of $8.9 million related to the above
recoverables.
The effect of reinsurance on premiums and amounts earned is as follows (in
thousands):
Direct premiums and policyholder assessments $ 459,600
Reinsurance assumed 6,053
Reinsurance ceded (72,214)
---------
Net premiums and amounts earned $ 393,439
=========
16
<PAGE>
(6) Property, Plant, and Equipment
A summary of property, plant, and equipment (in thousands) is as follows:
December 31,
-----------------------
1999 1998
-------- --------
Home office building $ 19,928 $ 19,928
Plant and equipment 14,007 12,767
Less accumulated depreciation (15,212) (12,766)
-------- --------
$ 18,723 $ 19,929
======== ========
(7) Closed Block
On December 15, 1994, Guarantee Life Insurance's Board of Directors
adopted a plan to convert Guarantee Life Insurance from its mutual form to a
stock life insurance company (demutualization). The Holding Company, a Delaware
corporation, was formed to act as the holding company for the demutualization of
Guarantee Life Insurance.
The plan of conversion contained an arrangement, known as a Closed Block,
to provide for dividends on policies that were in force on the effective date
and are within the classes of individual policies for which Guarantee Life
Insurance had a dividend scale in effect for 1994. Guarantee Life has maintained
a book of individual life policies which are participating policies and entitle
the policyholders to receive dividends based on actual interest, mortality,
morbidity, and expense experience for the related policies. These dividends are
distributed to the policyholders through an annual dividend using current
dividend scales which are approved by the Board of Directors. These policies are
now included in the Closed Block. The Company has no other participating
policies.
The Closed Block is designed to give reasonable assurance to holders of
affected policies that assets will be available to support such policies,
including maintaining dividend scales in effect for 1994 if the experience
underlying such scales continues. The assets, including revenue therefrom,
allocated to the Closed Block will accrue solely to the benefit of the holders
of policies included in the block until the block is no longer in effect.
Guarantee Life will not be required to support the payment of dividends on
Closed Block policies from its general funds.
The Closed Block includes only those revenues, benefits, expenses, and
dividends considered in funding it. The pre-tax income of the Closed Block is
reported as a single line item of total revenues from continuing operations in
Guarantee Life's consolidated statements of income. Income tax expense
applicable to the Closed Block, which was funded, is reflected as a component of
income tax expense.
The excess of Closed Block liabilities over Closed Block assets as of
December 31, 1999, 1998 and 1997 represents the total estimated future
contribution from the Closed Block expected to emerge from operations in the
Closed Block after income taxes. The contribution from the Closed Block will be
recognized in income over the period the policies and contracts in it remain in
force.
If, over the period the Closed Block remains in existence, the actual
cumulative contribution is greater than the expected cumulative contribution,
only such expected contribution would be recognized in income. The excess of the
actual cumulative contribution over such expected cumulative contribution would
be paid to Closed Block policyholders as additional policyholder dividends. If
over such period, the actual cumulative contribution is less than expected, only
such actual contribution would be recognized in income. However, dividends could
be changed in the future, which would increase future actual contributions until
the actual cumulative contributions equal the expected cumulative contributions.
Therefore, management believes that over time the actual cumulative
contributions from the Closed Block will approximately equal the expected
cumulative contributions due to the effect of dividend changes.
17
<PAGE>
Summarized financial information of the Closed Block (in thousands) is as
follows:
December 31,
--------------------
1999 1998
-------- --------
Assets
------
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost
$223,695 and $210,935) $213,810 $220,603
Held-to-maturity, at amortized cost (fair value:
$29,464 and $48,460) 31,495 44,595
-------- --------
245,305 265,198
Policy loans 44,490 46,217
Other invested assets, net -- 2,693
-------- --------
Total invested assets 289,795 314,108
Cash and cash equivalents (3,224) 2,000
Accrued investment income 1,984 2,367
Deferred policy acquisition costs 8,638 10,476
Other assets 997 1,381
-------- --------
Total Closed Block assets $298,190 $330,332
======== ========
Liabilities
-----------
Life future policy benefits $297,171 $300,254
Policyholder account balances for annuity contracts 939 885
Policy and contract claims 755 839
Other policyholder funds 72,009 71,966
Dividends payable to policyholders 7,131 7,052
Deferred income taxes 2,750 3,384
Other liabilities 618 2,553
-------- --------
Total Closed Block liabilities $381,373 $386,933
======== ========
Condensed statements of income for the Closed Block (in thousands) is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Insurance premiums and policyholder assessments, net of reinsurance $ 18,603 $ 20,142 $ 20,933
Investment income, net 21,300 21,918 21,894
Realized investment (losses) 942 1,465 (155)
Other income 18 46 86
-------- -------- --------
Total revenues $ 40,863 $ 43,571 $ 42,758
-------- -------- --------
Policyholder benefits and expenses:
Total policyholder benefits $ 21,243 $ 22,162 $ 22,244
Policy acquistion costs 2,096 2,071 1,983
Other insurance operating expenses 4,103 4,189 3,404
-------- -------- --------
Total benefits and expenses 27,442 28,422 27,631
Dividends to policyholders 10,289 10,426 11,056
-------- -------- --------
Contribution from Closed Block $ 3,132 $ 4,723 $ 4,071
======== ======== ========
</TABLE>
18
<PAGE>
(8) Liability for Unpaid Accident and Health Claims and Claim Adjustment
Expenses
The change in the liability for unpaid EBD and GSM accident and health
claims and claim adjustment expenses is summarized (in thousands) as follows:
Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
Balance at January 1 $ 123,186 $ 98,233 $ 93,881
Less reinsurance recoverables (39,201) (31,781) (38,468)
--------- --------- ---------
Net balance at January 1 83,985 66,452 55,413
Incurred related to:
Current year 184,731 125,296 79,739
Prior years 3,712 5,936 1,151
--------- --------- ---------
Total incurred 188,443 131,232 80,890
Paid related to:
Current year 129,160 74,045 48,590
Prior years 28,638 39,654 21,261
--------- --------- ---------
Total paid 157,798 113,699 69,851
--------- --------- ---------
Balance at December 31 114,630 83,985 66,452
Plus reinsurance recoverables 27,451 39,201 31,781
--------- --------- ---------
Balance at December 31 $ 142,081 $ 123,186 $ 98,233
========= ========= =========
The liability for unpaid accident and health claims and claim adjustment
expenses is included in policy and contract claims and future policy benefits:
accident and health, on the consolidated balance sheet. As a result of a change
in the estimate of insured events in prior years, the provision for claims and
claim adjustment expenses increased (net of reinsurance) by approximately
$3,700, $6,000 and $1,000 in 1999, 1998 and 1997, respectively.
(9) Federal Income Taxes
The actual federal income tax expense attributable to income from
continuing operations differs from the amounts computed by applying the U.S.
federal income tax rate of 35% to income from continuing operations before
income taxes as a result of the following (in thousands):
Years Ended December 31,
----------------------------
1999 1998 1997
------ ------ ------
Computed "expected" tax expense $ 833 $5,039 $9,008
Increase in income taxes resulting from:
Other, net -- -- 90
------ ------ ------
Total $ 833 $5,039 $9,098
====== ====== ======
Total income taxes, substantially all of which are federal, are recorded
in the consolidated statements of income and directly in certain shareholders'
equity accounts. Income tax expense (benefit) was allocated as follows: (in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statements of Income:
Current $ 8,254 $ 11,356 $ 12,094
Deferred (7,421) (6,317) (2,996)
-------- -------- --------
Total income taxes from continuing operations 833 5,039 9,098
Income tax expense (benefit) in discontinued operations 202 (177) (107)
-------- -------- --------
Income taxes included in the statements of income $ 1,035 $ 4,862 $ 8,991
Shareholders' Equity:
Deferred income taxes related to unrealized appreciation (depreciation) of
invested securities within accumulated other comprehensive income
carried at fair value, net (26,095) 3,635 4,906
-------- -------- --------
Total income taxes $(25,060) $ 8,497 $ 13,897
======== ======== ========
</TABLE>
19
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities (included in
other liabilities) are presented below (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Policy liabilities $47,344 $29,828 $30,707
Unrealized loss on investments available for sale 15,447 -- --
Net operating loss carryovers 7,638 7,739 5,122
Other 15,115 10,162 10,110
------- ------- -------
Net deferred tax assets $85,544 $47,729 $45,939
Deferred tax liabilities:
Deferred policy acquisition costs 46,055 31,923 35,475
Unrealized gain on investments available for sale -- 10,648 7,013
Other 3,106 2,291 3,266
------- ------- -------
Total gross deferred tax liabilities 49,161 44,862 45,754
------- ------- -------
Net deferred tax assets $36,383 $ 2,867 $ 185
======= ======= =======
</TABLE>
As discussed in note 1, Guarantee Life carries its invested securities
classified as available-for-sale at fair value. For federal income tax purposes,
Guarantee Life believes it is not a dealer with respect to these investment
securities and, therefore, recognizes gains and losses on such investment
securities only when they are sold.
As of December 31, 1999, Guarantee Life does not believe any valuation
allowance with respect to the gross deferred tax assets is necessary as it is
more likely than not that these deferred tax assets will be realized due to the
expected reversal of existing temporary differences attributable to gross
deferred tax liabilities and the carryback potential of prior year income taxes
paid.
Prior to 1984, a portion of Guarantee Protective's current income was not
subject to current income tax but was accumulated for income tax purposes in a
memorandum account designated as "policyholders' surplus." The total of the life
companies' balances in their respective "policyholders' surplus" accounts at
December 31, 1983 was frozen by the Tax Reform Act of 1984 and, accordingly,
there have been no additions to the accounts after that date. Certain triggering
events will cause a recapture of all or part of the "policyholders' surplus"
account. Any amounts recaptured must be included in taxable income and may not
be offset by any existing NOL carryovers. As of December 31, 1999, the balance
of Guarantee Protective's "policyholders' surplus" account was approximately
$2.4 million. In addition, the accumulated amount of income subject to current
taxation, less certain adjustments, is set aside in another special memorandum
tax account called a "shareholders' surplus" account. Dividends paid by
Guarantee Protective in excess of the balance in the "shareholders' surplus"
account cannot be paid without a portion of the "policyholders' surplus"
becoming taxable. The balance of Guarantee Protective's "shareholders' surplus"
account was $1.2 million as of December 31, 1999.
During the years ended December 31, 1999, 1998, and 1997, Guarantee Life's
cash payments for federal income taxes were $11.6 million, $8.7 million, and
$10.1 million, respectively.
Guarantee Life has net operating loss carryovers (NOL) as of December 31,
1999 of approximately $21.8 million. These NOLs, if not utilized, will expire in
the years 2000 to 2018. A majority of these NOLs relate to non-life members.
(10) Employee Benefit Plans
Pension Plans
Guarantee Life Insurance has a noncontributory defined benefit cash
balance pension plan (qualified plan) covering substantially all home office
employees. Contributions credited to a participant based on a percentage
(determined by the participation age) times eligible compensation. Interest
credited rates are also applied annually.
20
<PAGE>
It is Guarantee Life Insurance's policy to fund pension costs in accordance with
the requirements of the Employee Retirement Income Security Act of 1974 and,
based on such standards, no funding was required for each of the years
presented. Substantially all of the plan assets are invested in the general and
separate investment accounts of two life insurance companies. The plan will be
merged into the Jefferson Pilot defined benefit pension plan at December 31,
2000.
Net periodic benefit cost related to the qualified plan included the
following components (in thousands):
Years Ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
Service cost-benefits earned during the year $ 2,188 $ 1,682 $ 1,752
Interest cost on projected benefit obligations 2,034 1,939 1,811
Actual return on plan assets (3,314) (2,951) (5,479)
Net amortization and deferral (617) (523) 2,450
------- ------- -------
Net periodic benefit cost $ 291 $ 147 $ 534
======= ======= =======
The changes in benefit obligation and plan assets for the qualified plan
included in the consolidated balance sheets are as follows (in thousands):
December 31,
---------------------
1999 1998
-------- --------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $ 32,620 $ 30,866
Service cost 2,188 1,682
Interest cost 2,034 1,939
Plan amendments -- (1,597)
Actuarial loss (4,880) 1,490
Benefits paid (3,822) (1,760)
-------- --------
Projected benefit obligation at end of year $ 28,140 $ 32,620
-------- --------
Change in fair value of plan assets:
Plan assets at beginning of year $ 42,066 $ 37,528
Actual return on plan assets 2,612 6,298
Benefits paid (3,822) (1,760)
-------- --------
Plan assets at end of year $ 40,856 $ 42,066
-------- --------
Funded status $ 12,716 $ 9,446
Unrecognized net actuarial gain (12,002) (8,141)
Unrecognized prior service cost (1,349) (1,473)
Unrecognized net asset at transition (527) (703)
-------- --------
Accrued pension benefit cost $ (1,162) $ (871)
======== ========
The assumptions used in determining pension information were as follows:
Years Ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
Discount rate assumed 7.50% 6.50% 6.75%
Rate of compensation progression 5.50 5.50 5.50
Expected return on assets 8.00 8.00 8.00
Guarantee Life maintained two nonqualified pension plans to provide equal
retirement benefits for employees whose benefits would otherwise be restricted
due to Internal Revenue Code restrictions or the deferral of compensation. As of
December 31, 1999 and 1998, Guarantee Life's unfunded liability for these plans
was approximately $1.5 million and $2.1 million, respectively, which has been
accrued for in these statements. As a result of the change in control, these two
plans were terminated.
21
<PAGE>
Retiree Benefit Plans
In addition to providing pension benefits, Guarantee Life provides certain
life insurance benefits for retired employees. Substantially all employees may
become eligible for those benefits if they reach normal retirement age while
working for Guarantee Life. The benefits are determined at retirement and are
based upon retirement age, length of service and amount of group term life
insurance in force at retirement, subject to a maximum amount of $50,000.
Guarantee Life has established a liability in the amount of $250 thousand and
$1.1 million as of December 31, 1999 and 1998, respectively. The liability is
based upon the present value (including mortality and persistency) of the amount
required to fund the obligation. Guarantee Life recognizes the cost of providing
these benefits as earned. Guarantee Life does not have a separate plan for
retiree medical benefits. No significant medical benefits have been paid for
retirees for the years presented. No formal decision has been made regarding the
future of this plan.
Incentive Compensation, Deferred Compensation, Phantom Stock and 401(k)
Plans
Guarantee Life maintains the 1994 Long-Term Incentive Plan (Incentive
Plan), which includes incentive and nonqualified stock options, performance
shares and, under limited circumstances, restricted stock to officers and key
employees of Guarantee Life. The maximum number of shares of common stock that
could be issued under the Incentive Plan was increased by 600,000 in May 1997 to
1,345,828. The options vest in annual increments of 25% beginning on the second
anniversary of the grant date. Guarantee Life also maintains the Directors Stock
Incentive Plan (Directors Plan) which includes nonqualified stock options for
the members of the Board of Directors of the Holding Company. The maximum number
of shares of common stock that could be issued under the Directors Plan is
90,000. The options vest six months after grant date. Under both plans, the
exercise price of each option equaled the market price of the Holding Company's
stock on the date of grant, and an option's maximum term is ten years.
In February 1997, Guarantee Life's Board of Directors approved the 1997
Associate Stock Incentive Plan (Associate Plan). Under this plan, nonqualified
stock options could be granted to employees and agents. The maximum number of
shares of common stock that could be issued under the Associate Plan is 120,000.
These three plans (Incentive Plan, Directors Plan and Associate Plan) were
terminated December 31, 1999, due to the change in control.
Guarantee Life applies APB Opinion No. 25 and related interpretations in
accounting for the Incentive Plan, Associate Plan and the Directors Plan.
Accordingly, no compensation cost has been recognized for the three plans since
the exercise price of the options was equal to the fair value of the company's
common stock on the date of grant. Had compensation cost been determined using a
fair value based method, Guarantee Life's net income would have been reduced to
the pro forma amounts indicated below. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions used for the grants during the years ended December
31, 1999, 1998 and 1997, respectively: dividend yield of 1.3%, 1.4% and 1.4%;
expected volatility of 35%, 35% and 33%; risk-free interest rate of 5.50%, 5.50%
and 5.87%; for expected lives of six years for the Incentive Plan options and
two years for the Directors Plan option. The weighted average fair values of
stock options granted in 1999, 1998 and 1997 were $17.31, $24.75 and $20.71,
respectively.
22
<PAGE>
Year Ended December 31,
-------------------------------
1999 1998 1997
------- ------- -------
Net income (in thousands)
As reported $ 1,920 $ 9,029 $16,444
======= ======= =======
Pro forma -- 8,127 $15,924
======= ======= =======
A summary of the status of Guarantee Life's stock option plans as of
December 31, 1999, 1998, and 1997, and changes for the years ended is presented
below:
Years Ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
Outstanding, beginning of year 976,433 898,102 512,878
Granted 88,517 248,514 415,057
Exercised (106,862) (42,730) (1,496)
Forfeited (35,890) (127,453) (28,337)
Cancelled due to change in control (922,198) -- --
-------- -------- --------
Outstanding, end of year -- 976,433 898,102
======== ======== ========
Options exercisable at year-end -- 209,607 143,917
======== ======== ========
Guarantee Life maintains the Guarantee Life Insurance Company Incentive
Compensation Plan (Incentive Compensation Plan) which provides short-term
incentives to eligible employees based upon financial and other performance
measures. As of December 31, 1999, 1998 and 1997, benefits in the amount of $5.1
million, $0.4 million and $1.7 million had been expensed and accrued for the
years then ended. Certain amounts awarded under the Incentive Compensation Plan
may be deferred under the Management Deferred Plan. Due to the change in
control, the Incentive Compensation Plan was cancelled at December 30, 1999.
Accrued amounts were paid subsequent to year-end.
Guarantee Life maintained the Guarantee Life Insurance Company Phantom
Stock Plan (Phantom Stock Plan) for certain management employees. The amounts
awarded under the Phantom Stock Plan are based on long-term improvements in
Guarantee Life's capital performance. At December 31, 1998, the accrued benefits
of the plan included in other liabilities was $754,000. As of December 31, 1999,
the Phantom Stock Plan has terminated due to a change in control. All vested
benefits were paid to participants in full.
Guarantee Life maintains the Guarantee Life Insurance Company Deferred
Compensation Plan (Management Deferred Plan) and Guarantee Life Insurance
Company Board of Directors Deferred Compensation Plan (Director Deferred Plan)
that allow management and directors to defer compensation into an
interest-bearing account, which earns interest at a rate equal to that received
by employees for a Guarantee Life Insurance Company IRA, or into a separate
phantom stock account. Under this phantom stock account option, contributions
are deemed to have been used to purchase shares in the Holding Company at
current quoted market rates. Concurrent with the declaration and payment of
shareholder dividends, similar per share amounts are contributed to accounts in
the Management Deferred Plan and Director Deferred Plan. At December 31, 1998,
compensation in the amount of $1.9 million was accrued in these plans which
fully funded the amounts due to participants. As of December 31, 1999, the
Deferred Compensation Plans were terminated due to change in control. All vested
benefits were paid to participants in full. Guarantee Life charged approximately
$1,300,000 and $314,000 to expense relating to this plan in 1999 and 1998,
respectively.
Guarantee Life maintains the Guarantee Life Insurance Company Thrift
Savings Plan (401(k) Plan) for eligible salaried employees. Effective January 1,
1999, the PFG qualified 401(k) plan was merged into the Guarantee Life Insurance
Company Thrift Savings Plan. All employee contributions are vested immediately
and all Company contributions are vested after three years. Guarantee Life
charged $719,000, $686,000 and $594,000 to expense relating to this plan in
1999, 1998 and 1997, respectively. This plan will be merged into Jefferson
Pilot's 401(k) Plan at December 31, 2000.
23
<PAGE>
PFG maintains a nonqualified, unfunded deferred compensation plan for
certain key management personnel and certain directors which provides for
payments upon retirement, death, or disability. Under the plan, management
personnel receive retirement payments equal to a portion of the average prior
five years' base compensation. Directors receive retirement payments based upon
the amount of years of service at PFG and their age at retirement. These
payments are to be made to the individuals or their designated beneficiary for a
maximum period of fifteen years for management personnel and five years for
directors. The plan also provides for reduced benefits upon early retirement,
disability, or termination of employment/service. The plan provided for full
vesting immediately upon a change in control of PFG, as occurred with the
acquisition by Guarantee Life. At December 31, 1999 and 1998, the accrued
benefits of the plan included in other liabilities were $2.5 million and $4.1
million, respectively. Due to the change in control, the plan will be terminated
in 2000, with all vested amounts to be paid to participants.
(11) Fair Value Information
The carrying value and estimated fair value of Guarantee Life's invested
assets and investment type insurance contracts (without material mortality risk)
were as follows (in thousands):
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets:
Fixed maturities $ 959,834 $ 954,042 $1,035,543 $1,046,704
Equity securities 24,885 24,885 23,835 23,835
Mortgage loans 113,010 109,901 103,736 109,438
Policy loans 32,527 32,527 31,767 29,730
Investment real estate 3,162 7,904 3,211 7,800
Other invested assets 14,236 14,236 54,970 54,970
Liabilities:
Annuity contracts $ 324,255 $ 317,001 $ 349,834 $ 336,326
Other policyholder funds 51,475 51,475 43,751 43,751
========== ========== ========== ==========
</TABLE>
(12) Regulatory Matters
A reconciliation of statutory net income determined for Guarantee Life
under statutory accounting practices to that reflected herein (in thousands and
including Closed Block and discontinued operations) is as follows:
Years Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Net gain from operations as reported to
regulatory authorities $ 17,958 $ 26,035 $ 15,078
Pre-acquisition statutory earning -- (10,131) --
Change in deferred acquisition costs 10,776 (3,437) (3,210)
Deferred federal income taxes 7,421 6,317 2,996
Differences in statutory and GAAP reserves (26,540) (1,332) 1,074
Other, net (7,695) (8,423) 506
-------- -------- --------
Net income as reported herein $ 1,920 $ 9,029 $ 16,444
======== ======== ========
24
<PAGE>
A reconciliation of statutory surplus for Guarantee Life determined under
statutory accounting practices to shareholders' equity reflected herein (in
thousands and including Closed Block and discontinued operations):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Statutory surplus as reported to regulatory authorities $ 157,477 $ 165,650
Deferred policy acquisition costs 155,610 144,844
Deferred federal income taxes 36,383 6,251
Asset valuation and interest maintenance reserves 28,310 29,175
Fixed maturities available-for-sale unrealized appreciation (49,820) 32,568
Insurance reserves (71,733) (45,193)
Shareholders' equity in Holding Company (95,764) (110,016)
Other, net 22,479 6,763
--------- ---------
Shareholders' equity as reported herein $ 182,942 $ 230,042
========= =========
</TABLE>
Under the NAIC solvency monitoring program known as Risk-Based Capital
(RBC), Guarantee Life's insurance subsidiaries are required to measure its
solvency against certain parameters. As of December 31, 1999, Guarantee Life
Insurance exceeded the established minimums in the RBC program. In addition,
Guarantee Life Insurance exceeded the minimum statutory capital and surplus
requirements of its state of domicile, Nebraska.
The payment of dividends by Guarantee Life Insurance is subject to
restrictions set forth in the insurance laws and regulations of Nebraska. Under
state law, Guarantee Life Insurance may pay, within a twelve-month period,
dividends only from the earned surplus arising from its business and must
receive the prior approval of the state departments to pay a dividend, if such
dividend would exceed the greater of (i) 10% of statutory capital and surplus as
of the preceding year end or (ii) the net gain from operations for the previous
calendar year. State law gives the broad discretion to disapprove requests for
dividends in excess of these limits.
The Board of Directors of Guarantee Life Insurance declared a $15 million
extraordinary dividend to the Holding Company in November 1997, which was paid
in January 1998. In December 1998, the Board of Directors of Westfield declared
and paid a $20 million extraordinary distribution of excess capital to the
Holding Company. The State of Nebraska approved both of these transactions. In
September 1998, AGL's Board of Directors declared and paid a $2.4 million
dividend to PFG, Inc. No dividends were paid in 1999. In 2000, Guarantee Life
Insurance can declare a dividend of up to $18.0 million without permission from
the Nebraska Department of Insurance.
(13) Commitments and Contingencies
Guarantee Life is party to certain claims and legal actions arising during
the ordinary course of business. In the opinion of management, after consulting
with legal counsel, these matters will not have a material adverse effect on the
operations or financial condition of Guarantee Life. Guarantee Life has accrued
$5 million as its best estimate of the cost to settle its outstanding
litigation.
At December 31, 1998, Guarantee Life had debt obligations outstanding
totaling $112.5 million from available credit totaling $132.5 million. This debt
consisted of a six-year Senior Secured Term Loan Facility with a balance of
$82.5 million and a five-year Senior Secured Revolving Credit Facility with a
balance of $30 million. These Facilities are part of a credit agreement dated
May 28, 1998 with eleven banks including Chase Manhattan Bank who acts as lender
and administrative agent. The interest rate is computed as LIBOR plus a margin
based upon Guarantee Life's leverage ratio and AM Best Rating. This rate was
6.75% at December 31, 1998. As a result of the change in control, the debt
obligation was paid off.
Guarantee Life's credit agreement contains certain restrictions and
covenants related to, among other, minimum net worth, leverage ratio, interest
coverage ratio and Risk-Based Capital ratio. Prior to the debt pay-off,
Guarantee Life was in compliance with these covenants.
25
<PAGE>
Guarantee Life has commitments under noncancelable operating leases for
facilities principally used by regional and district offices. Rental expense and
associated future minimum lease payments required under these leases are
insignificant.
(14) Related Party Transaction
On December 30, 1999, Jefferson Pilot Corporation advanced Guarantee Life
$91.3 million for the purpose of retiring their external credit facility. At
December 31, 1999, this liability was outstanding.
(15) Discontinued Operations
In November 1994, Guarantee Life made a decision to withdraw from its
alternative workers' compensation benefit program segment. To facilitate its
exit, Guarantee Life entered into a reinsurance arrangement whereby it cedes 80%
of all claims incurred after October 31, 1994. In addition, Guarantee Life
entered into a reinsurance arrangement to limit its exposure to $10,000 per
claim relating to its 20% retention.
Concurrent with the implementation of the reinsurance coverage, Guarantee
Life amended its agreement with the managing general agent which marketed this
product for Guarantee Life, whereby Guarantee Life agreed to write new or
renewal business for this line only until the earlier replacement by another
insurance carrier or November 1, 1995. In September 1995, a replacement carrier
began issuing policies in Louisiana and Georgia. Effective November 1, 1995,
Guarantee Life ceased writing Special Risk policies.
Guarantee Life intends to allow the liabilities related to this business
to run off, unless an appropriate sale can be made. Guarantee Life does not
believe the disposal of this segment will result in a loss which would be
significant. Any gain resulting from a potential disposition would be recognized
when realized using the installment method of accounting.
The composition of the assets (liabilities) classified as discontinued are
as follows:
December 31,
--------------------
1999 1998
-------- --------
Ceded reinsurance recoverables $ 12,629 $ 29,758
Policy and contract claims (34,435) (51,042)
Other liabilities 186 209
-------- --------
Net liabilities relating to discontinued operations $(21,620) $(21,075)
======== ========
The results of operations for the discontinued segment are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net premiums $ (21) $ 28 $ (581)
Investment income, net and realized investment gains 1,969 2,937 1,634
Ceding commissions -- 14 241
------- ------- -------
Total revenues 1,948 2,979 1,294
Net policyholder benefits 552 3,015 (1,307)
Policy acquisition costs and other operating expense 820 469 2,903
------- ------- -------
Income (loss) before income taxes 576 (505) (302)
Income tax expense (benefit) (202) (177) (107)
------- ------- -------
Net income (loss) from discontinued operations $ 374 $ (328) $ (195)
======= ======= =======
</TABLE>
26
<PAGE>
PART C OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
All required financial statements are included in Part A and Part B
of this Registration Statement.
(b) Exhibits:
(1) (a) Resolution of the Board of Directors of Alexander Hamilton
Life Insurance Company of America authorizing establishment of
the Separate Account (filed herewith)
(b) Resolution of Board of Directors of Jefferson Pilot
Financial Insurance Company authorizing transfer of the Separate
Account and amending and restating resolution authorizing
establishment of the Separate Account (filed herewith)
(2) Not Applicable.
(3) (a) Separate Account Distribution Agreement by and between
Jefferson Pilot Variable Corporation, Jefferson Pilot Financial
Insurance Company, and JPF Variable Annuity Separate Account 4/
(b) Amendment to Separate Account Distribution Agreement (filed
herewith)
(4) (a) Specimen Contract for the Alexander Hamilton Life Insurance
Company of America Variable Annuity (filed herewith)
(b) Specimen IRA Endorsement (filed herewith)
(c) Specimen IRA Disclosure and Financial Disclosure Endorsement
(filed herewith)
(d) Specimen TSA Endorsement (filed herewith)
(e) Specimen 401(a) Endorsement (filed herewith)
(f) Specimen Endorsement of Contract by Jefferson Pilot
Financial Insurance Company (filed herewith)
(5) (a) Form of Application for the Alexander Hamilton Life
Insurance Company of America Variable Annuity Contract 1/
(b) Specimen Application Supplement for 1035 Exchange (filed
herewith)
C-1
<PAGE>
(6) (a) Amended and Restated Articles of Incorporation and
Redomestication of Jefferson Pilot Financial Insurance Company
(filed herewith)
(b) By-Laws of Jefferson Pilot Financial Insurance Company
(filed herewith)
(7) Not Applicable
(8) (a)(1) Participation Agreement by and between Alexander Hamilton
Life Insurance Company of America, Fidelity Distributors
Corporation and Variable Insurance Products Fund 1/
(a)(2) Novation letter and agreement (filed herewith)
(b)(1) Participation Agreement by and between the Alexander
Hamilton Life Insurance Company of America, Fidelity
Distributors Corporation and Variable Insurance Products Fund II
1/
(b)(2) Novation letter and agreement (filed herewith)
(c)(1) Participation Agreement by and between Alexander Hamilton
Life Insurance Company of America, Massachusetts Financial
Services Company and MFS Variable Insurance Trust 1/
(c)(2) Novation letter and agreement (filed herewith)
(d)(1) Participation Agreement by and between Alexander Hamilton
Life Insurance Company of America, OppenheimerFunds, Inc. and
Oppenheimer Variable Account Funds 2/
(d)(2) Novation letter and agreement (filed herewith)
(9) Opinion and Consent of Counsel (filed herewith)
(10) Consent of Ernst & Young LLP (filed herewith)
Consent of KPMG LLP (filed herewith)
(11) Not Applicable
(12) Not Applicable
(13) Schedule of Computation of Performance 3/
(14) Not Applicable
--------------------------------------------------------------------
C-2
<PAGE>
1/ Incorporated by reference to Post-Effective Amendment No. 4 to the
Registration Statement on Form N-4 for the Alexander Hamilton
Variable Annuity Separate Account filed on February 26, 1998
(Registration No. 33-75714).
2/ Incorporated by reference to Post-Effective Amendment No. 5 to the
Registration Statement on Form N-4 for the Alexander Hamilton
Variable Annuity Separate Account filed on April 20, 1998
(Registration No. 33-75714).
3/ Incorporated by reference to Post-Effective Amendment No. 8 to the
Registration Statement on Form N-4 for the Alexander Hamilton
Variable Annuity Separate Account filed on April 18, 2000
(Registration No. 333-75714).
4/ Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4 for the JPF Variable Annuity
Separate Account, filed on June 9, 2000 (Registration Statement No.
333-94539.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
Name and Principal Position and Offices
Business Address with Depositor
David A. Stonecipher Director; Chairman of the Board and
Chief Executive Officer
Kenneth C. Mlekush Director; President
Dennis R. Glass Director; Executive Vice President
Robert D. Bates Director
8801 Indian Hills Drive
Omaha, NE 68114
John D. Hopkins Executive Vice President and General Counsel
Charles C. Cornelio Executive Vice President
Leslie L. Durland Executive Vice President
John C. Ingram Executive Vice President
Reggie D. Adamson Senior Vice President
Ronald R. Angarella Senior Vice President
One Granite Place
Concord, NH 03301
Hal B. Phillips, Jr. Senior Vice President and Chief Life Actuary
C-3
<PAGE>
Richard T. Stange Senior Vice President, Deputy General Counsel
David K. Booth Vice President
One Granite Place
Concord, NH 03301
Kenneth S. Dwyer Vice President
Peter N. Ellinwood Vice President
One Granite Place
Concord, NH 03301
Ronald H. Emery Vice President
One Granite Place
Concord, NH 03301
Patrick A. Lang Vice President
One Granite Place
Concord, NH 03301
Shari J. Lease Vice President
One Granite Place
Concord, NH 03301
Robert A. Reed Vice President and Secretary
Russell C. Simpson Vice President and Treasurer
Frank A. Sutherland, Jr. Vice President
John A. Weston Vice President
One Granite Place
Concord, NH 03301
*/ Except as otherwise noted, the principal business address for each officer
and director is 100 N. Greene St., Greensboro, North Carolina 27401.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The Company owns the assets comprising each Variable Sub-account of the
Registrant. The Company is a wholly-owned subsidiary of Jefferson-Pilot
Corporation.
Separate financial statements are filed for the Registrant.
The following is a list of corporations controlled by Jefferson-Pilot
Corporation:
C-4
<PAGE>
Names of Subsidiaries Organized Under Laws % Voting Stock
of: Owned by
Jefferson-Pilot Life Insurance Company North Carolina 100%
Jefferson Pilot Variable Corporation North Carolina 100%
Jefferson-Pilot Communications Company North Carolina 100%
First Alexander Hamilton Life Insurance
Company New York 100%
Jefferson Pilot Financial Insurance
Company Nebraska 100%
Jefferson Pilot LifeAmerica Insurance
Company New Jersey 100%
Jefferson Pilot Securities Corporation New Hampshire 100%
Jefferson Pilot Investment Advisory
Corporation Tennessee 100%
The Guarantee Life Companies, Inc. Delaware 100%
PFG, Inc. Pennsylvania 100%
Westfield Assigned Benefits Company Ohio 100%
The Polaris Group, Inc. Connecticut 100%
Polaris Financial Services, Inc. Connecticut 100%
Polaris Advisory Services, Inc. Connecticut 100%
Omitted from the list are subsidiaries of Jefferson-Pilot Corporation and the
other companies listed which, considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary. Since none of the
companies listed is a subsidiary of the registrant, only the financial
statements of the registrant are filed.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of July 19, 2000, there were 5,405 Contract Owners of the Contracts, 2,416 of
which owned non-qualified Contracts and 2,989 of which owned qualified
Contracts.
ITEM 28. INDEMNIFICATION
The following provisions regarding the Indemnification of Directors and Officers
of the Depositor are applicable:
Section 21-2004 of the Nebraska Business Corporation Act, in general, allows a
corporation to indemnify any director, officer, employee or agent of the
corporation for amounts paid in settlement actually and reasonably incurred by
him or her in connection with an action, suit or proceeding, if he or she acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. In a case of a derivative action, no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for negligence or misconduct in the performance
of his or her duty to the corporation, unless a court in which the action was
brought shall determine that such person is fairly and reasonably entitled to
indemnify for such expenses which the Court shall deem proper.
C-5
<PAGE>
Article 6 of the Amended and Restated Charter of Jefferson Pilot Financial
Insurance Company states: "The Corporation shall have the power to indemnity its
directors to the fullest extent permitted by law."
Insofar as indemnification for liability arising under the Securities Act of
1933 (the "Securities Act") may be permitted to directors, officers, or
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Company will, unless, in
the opinion of its counsel, the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITER
(a) Jefferson Pilot Variable Corporation also acts as principal
underwriter for the following:
- JPF Separate Account A of Jefferson Pilot Financial Insurance Company
- JPF Separate Account C of Jefferson Pilot Financial Insurance Company
- JPF Separate Account B of Jefferson Pilot LifeAmerica Insurance
Company
- JPF Separate Account D of Jefferson Pilot LifeAmerica Insurance
Company
- Jefferson Pilot Variable Fund, Inc.
- JPF Variable Annuity Separate Account of Jefferson Pilot Financial
Insurance Company
(b) The Directors and Officers of Jefferson Pilot Variable Corporation,
the principal underwriter for the Registrant, are as follows:
Name and Principal Positions and
Business Address Offices with Underwriter
Ronald R. Angarella Director and President
David K. Booth Vice President, Marketing
W. Thomas Boulter Assistant Vice President, Variable Product Compliance
Lisa S. Clifford Assistant Vice President, Compliance
Charles C. Cornelio Director
Carol R. Hardiman Director
Shari J. Lease Secretary
John A. Weston Chief Financial Officer
Address (except as otherwise noted):
One Granite Place
Concord, NH 03301
C-6
<PAGE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting
Discounts and Compensation Brokerage
Name of Principal Underwriter Commissions and Redemption Commissions Compensation
<S> <C> <C> <C> <C>
Jefferson Pilot Variable Corporation $0 $0 $0 $0
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder, are maintained by
the Company at One Granite Place, Concord, New Hampshire 03301.
ITEM 31. MANAGEMENT SERVICES.
None.
ITEM 32. UNDERTAKINGS
(a) Registrant undertakes that it will file a post-effective amendment to
this registration statement as frequently as necessary to ensure that the
audited financial statements in the registration statement are never more than
16 months old for so long as premium payments under the Contract may be accepted
(except in accordance with SEC staff no-action correspondence)
(b) Registrant undertakes that it will include either (i) a postcard or
similar written communication affixed to or included in the Prospectus that the
applicant can remove to send for a Statement of Additional Information or (ii) a
space in the Contract Application that an applicant can check to request a
Statement of Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form promptly upon written or oral request to the Company at the address or
phone number listed in the Prospectus.
(d) Jefferson Pilot Financial Insurance Company hereby represents that the
fees and charges deducted under the Contract, in the aggregate, are reasonable
in relation to the services rendered, the expenses expected to be incurred, and
the risks assumed by Jefferson Pilot Financial Insurance Company.
SECTION 403(b) REPRESENTATIONS
The Company represents that it is relying on a no-action letter dated November
28, 1988, to the American Council of Life Insurance (Ref. No. IP-6-88),
regarding Sections 22(e), 27(c)(1), and 27(d) of the Investment Company Act of
1940, in connection with redeemability restrictions on Section 403(b) Contracts,
and that paragraphs numbered (1) through (4) of that letter will be complied
with.
C-7
<PAGE>
STATEMENT PURSUANT TO RULE 6c-7: TEXAS OPTIONAL RETIREMENT PROGRAM
The Company and the Separate Account rely on 17 C.F.R. Section 270.6c-7, and
represent that the provisions of that Rule have been or will be complied with.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Greensboro, State of North Carolina on this 31st day of July, 2000.
JPF VARIABLE ANNUITY SEPARATE ACCOUNT II
JEFFERSON PILOT FINANCIAL INSURANCE COMPANY
Depositor
/s/ David A. Stonecipher
----------------------------------------
David A. Stonecipher
Chairman of the Board,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ David A. Stonecipher Director; Chairman of the Board July 31, 2000
------------------------------ and Chief Executive Office
Davis A. Stonecipher
/s/ Kenneth C. Mlekush Director; President July 31, 2000
------------------------------
Kenneth C. Mlekush
/s/ Dennis R. Glass Director, Executive July 31, 2000
------------------------------ Vice President and Chief
Dennis R. Glass Financial
/s/ Reggie D. Adamson Senior Vice President and July 31, 2000
------------------------------ Chief Accounting Officer
Reggie D. Adamson
/s/ Robert D. Bates Director July 31, 2000
------------------------------
Robert D. Bates
</TABLE>
C-9
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description of Exhibit Page No.
1(a) Resolution of Board of Directors of Alexander Hamilton
Life Insurance Company of America authorizing
establishment of the Separate Account
1(b) Resolution of Board of Directors of Jefferson Pilot
Financial Insurance Company authorizing transfer of the
Separate Account and amending and restating resolution
authorizing establishment of the Separate Account
3(b) Form of Amendment to Separate Account Distribution
Agreement
4(a) Specimen Contract for the Alexander Hamilton Life
Insurance Company of America Variable Annuity
(b) Specimen IRA Endorsement Specimen IRA Disclosure and
Financial Disclosure
(c) Endorsement
(d) Specimen TSA Endorsement
(e) Specimen 401(a) Endorsement
(f) Specimen Endorsement of Contract by Jefferson Pilot
Financial Insurance Company
5(b) Specimen Application Supplement for 1035 Exchange
6(a) Amended and Restated Articles of Incorporation and
Redomestication of Jefferson Pilot Financial Insurance
Company
6(b) By-Laws of Jefferson Pilot Financial Insurance Company
8(a)(2) Form of Novation letter and agreement
8(b)(2) Form of Novation letter and agreement
8(c)(2) Form of Novation letter and agreement
8(d)(2) Form of Novation letter and agreement
9 Opinion of Counsel
10 Consent of Ernst & Young LLP,
Consent of KPMG LLP
C-10
