<PAGE> 1
[LOGO TOUCHSTONE]
---------------------------
Touchstone Variable Annuity
- Emerging Growth
- International Equity
- Growth & Income
- Balanced
- Income Opportunity
- Bond
- Standby Income
- - --------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
<PAGE> 2
This booklet contains the Annual Reports which reflect the results of the
TOUCHSTONE VARIABLE ANNUITY, a flexible purchase payment deferred variable
annuity contract, issued by WESTERN-SOUTHERN LIFE ASSURANCE COMPANY ("Western-
Southern"). Included in this booklet are the Annual reports for
Western-Southern's Separate Account 1 and the investment portfolios underlying
the Touchstone Variable Annuity. These Annual Reports are bound together for
your convenience.
<PAGE> 3
Dear Fellow Contract Owner:
The current "golden age" of moderate growth, low interest rates, low
inflation, and robust corporate earnings has been good for stocks. Keep in mind,
though, that this kind of market will not always be around. Certainly not when
there are so many unfamiliar situations surrounding us: the Asian currency
crisis, the year 2000 issue, tensions in the Middle East, or simply that stocks
have been so hot for so long. Simply speaking, there's nothing the market hates
more than uncertainty, and we've experienced a lot of it lately.
Most people attribute the stock market's exceptionally strong rise and
recent volatility to the huge flood of money that has poured into equity mutual
funds. The 1995-97 total of nearly $600 billion of new cash invested in equity
funds is an impressive figure. It has added 70% of the total assets accumulated
by the mutual fund industry over its entire 72 years of existence. But the
dominant reason why investors have wanted to put so much money into stocks is
that the last three years have been the most favorable for corporate profit
growth in well over 50 years.
It's times like these that the Touchstone brand of investment management
makes sense. Because the truth is, no matter where the markets go, there are
always good stocks available. At Touchstone, our portfolio managers look for
these companies one at a time, using every possible means of rigorous financial
analysis to hands-on, face-to-face research, in quest of an edge nobody else
has. That's how Touchstone helps investors get where they need to go.
We've been through volatile times before, and there's a good chance we'll
have to face them again. The particulars may change, but the commitment of each
and every member of the Touchstone administrative and portfolio team--and the
discipline they employ--remains the same.
Please review the enclosed financial statements for portfolio updates and
performance numbers for important information about the investment you have
chosen.
Going forward, I urge you to be reasonable in your expectations. Now, more
than ever, it's important to take a long-term view. So I ask that you carefully
review the shorter-term risks associated with your investments and make sure
they truly fit your comfort level. Your financial advisor can help you adjust
your investment strategy to meet any of your changing needs.
We appreciate your continued confidence and investment in the Touchstone
Family of Funds and Variable Annuities(1)
Sincerely,
/s/ Edward G. Harness
- - -------------------------------------
Edward G. Harness
President and Chief Executive Officer
Touchstone Family of Funds
P.S. Please visit us on the World Wide Web at www.touchstonefunds.com
- - ---------------
(1) Touchstone Variable Annuities are underwritten by Western-Southern Life
Assurance Company, Cincinnati, Ohio, Touchstone Family of Funds and Variable
Annuities are distributed by Touchstone Securities, Inc., Member NASD and
SIPC.
<PAGE> 4
(This Page Intentionally Left Blank)
2
<PAGE> 5
[LOGO TOUCHSTONE]
---------------------------
Western-Southern Life
Assurance Company
------------------
Separate Account 1
- - --------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
<PAGE> 6
TOUCHSTONE EMERGING GROWTH SUB-ACCOUNT
Over the course of the year ending December 31, 1997, several investment
management strategies and techniques materially affected Touchstone Emerging
Growth Sub-Account's performance. Small capitalization stocks, as measured by
the Russell 2000, rose 22.4% while the total return (net of fees and expenses,
but excluding surrender charges) for the Touchstone Emerging Growth Sub-Account
was 31.9%.
As the value-style manager of the Touchstone Emerging Growth Portfolio, David L.
Babson's core strategy continued to stress bottom up fundamental analysis in
identifying low risk stocks with attractive return potential. The last part of
1997 demonstrated some of the benefits that come with this lower risk investment
style. When the markets tumbled in October, value stocks in the portfolio held
up well. Investment highlights in 1997 included good performance from Dime
Bancorp (+105%) and office furniture manufacturer Herman Miller (+93%). Babson
believes that future investment performance will increasingly depend on stock
selection capabilities. Going forward, Babson thinks the market environment will
be much more difficult and that only careful stock selection will produce
reasonable gains.
As the growth-style manager of the Touchstone Emerging Growth Portfolio,
Westfield Capital Management continued to find companies with good growth
prospects. Delving a bit deeper, Westfield believes that the second half of 1997
was the beginning of a major reversal in relative performance, favoring
small-cap issues. On an annual basis, 1997 was the first time since 1993 that
smaller-cap indices outperformed their larger brethren; and not so
coincidentally, the majority of active managers also beat index funds. This
year's third quarter showed the Russell 2000 returning double the S&P 500 and
over four times the Dow Industrials. Unfortunately, the increased visibility of
various Asian troubles derailed this momentum. Westfield believes that the Asian
troubles were counter-intuitive and therefore temporary because the very names
being bought in this flight to quality are the companies with the heaviest
foreign profit exposures.
The Asian phenomenon did, however, prompt several sector shifts within the
Westfield portfolio. First, their exposure to semiconductor equipment,
semiconductors, and cellular handset infrastructure was quickly cut back.
Shortly thereafter Westfield almost completely moved out of the energy service
companies and boosted positions in REITS, consumer products, systems integration
service companies, and various broadcast arenas.
<TABLE>
<CAPTION>
Growth of a $10,000 investment
----------------------
Aggregate Total Return
----------------------
One Year Inception
Ended to 12/31/97
12/31/97
31.9% 69.1%
----------------------
<Capiton>
Touchstone
Measurement Emerging CDA/Wiesenberger
Period Growth Russell Small Company
(Fiscal Year Sub- 2000 Growth
Covered) Account Index Avg - VA
<S> <C> <C> <C>
Feb-95 10000 10000 10000
Mar-95 10094 10171 10284
Jun-95 10694 11125 11458
Sep-95 11600 12224 12955
Dec-95 11687 12488 12801
Mar-96 12227 13126 13501
Jun-96 12753 13782 14428
Sep-96 12465 13829 14706
Dec-96 12818 14548 14934
Mar-97 12419 13798 13808
Jun-97 14685 16032 16007
Sep-97 16965 18418 18439
Dec-97 16906 17801 17430
</TABLE>
Past performance is not predictive of future performance.
TOUCHSTONE INTERNATIONAL EQUITY SUB-ACCOUNT
Over the course of the year ending December 31, 1997, several investment
management strategies and techniques materially affected the Touchstone
International Equity Sub-Account's performance. International equity stocks, as
measured by the MSCI EAFE Index, rose 2.0% while the total return (net of fees
and expenses, but excluding surrender charges) for the Touchstone International
Equity Sub-Account was 13.2%.
As the international equity manager of the Touchstone International Equity
Portfolio, BEA Associates attributes the Fund's performance to primarily two
decisions. First, they were underweighted in Japan and developed Asia and,
secondly, they had an allocation to the emerging markets in Latin America.
At year-end, the Japan weighting in the portfolio was approximately one-third
that of MSCI EAFE. Given that nation's economic doldrums and the resulting drop
in equity prices, this approach proved fruitful (the Japanese market fell 24% in
1997). Stock selection in Japan, which emphasized globally oriented companies
(such as Sony, Honda, Nintendo and Toyota) and avoided most domestic sectors,
was also effective in adding value. BEA's relatively small exposure to most
other Asian markets contributed positively to performance as well, mainly in the
second half of the year.
A byproduct of reducing Asian positions was an increase in the portfolio's
allocation to Europe, which benefited from particularly good stock selection.
Holdings in France, Sweden, Italy, the Netherlands and Portugal performed best
throughout the year. As for emerging markets, their bias toward Latin America,
specifically Brazil and Mexico, boosted the portfolio's returns.
4
<PAGE> 7
<TABLE>
<CAPTION>
Growth of a $10,000 investment
----------------------
Aggregate Total Return
----------------------
One Year Inception
Ended to 12/31/97
12/31/97
13.2% 39.8%
----------------------
<CAPTION>
Touchstone
Measurement International CDA/Wiesenberger
Period Equity MSCI International
(Fiscal Year Sub- EAFE Equity
Covered) Account Index Avg - VA
<S> <C> <C> <C>
Feb-95 10000 10000 10000
Mar-95 10337 10623 10212
Jun-95 10754 10701 10913
Sep-95 11201 11147 11606
Dec-95 11231 11598 11789
Mar-96 11888 11933 12426
Jun-96 12116 12122 13063
Sep-96 11963 12107 13158
Dec-96 12351 12300 13713
Mar-97 12499 12107 13868
Jun-97 13865 13687 15521
Sep-97 14426 13600 16288
Dec-97 13985 12544 15468
</TABLE>
Past performance is not predictive of future performance.
TOUCHSTONE GROWTH & INCOME SUB-ACCOUNT
Over the course of the year ending December 31, 1997, several investment
management strategies and techniques materially affected the Touchstone Growth &
Income Sub-Account's performance. Growth & Income stocks, as measured by the S&P
500 Index, rose 33.4% while the total return (net of fees and expenses, but
excluding surrender charges) for the Touchstone Growth & Income Sub-Account was
18.3%.
As the growth and income manager of the Touchstone Growth & Income Portfolio,
Scudder Kemper Investments, Inc., focused exclusively on their relative dividend
yield discipline. This strategy requires Scudder to concentrate on stocks that
pay dividends, buy stocks when their yields are above the market yield, and sell
them when they fall below. This discipline, which is successful in identifying
when stocks are overvalued or undervalued, caused Scudder to modestly
underweight the healthcare sector, but to focus exclusively on pharmaceutical
stocks rather than the weaker performing HMO's or medical device companies. The
strategy paid off, as the Fund's pharmaceutical stocks were exceptional
performers, outperforming the sector and the broad market.
Electric and telephone utilities were also important contributors to the Fund's
performance, as a "flight to quality" later in the year, aided further by
declining interest rates and merger activity in the industry, led these stocks
to outperform the market. The Fund is overweighted in both electrics and
telephones. The largest sector exposure in the Fund is in financial stocks,
representing about 23% of the portfolio. This overweight added value, as finance
stocks were one of the stronger performing sectors of the market.
<TABLE>
<CAPTION>
Growth of a $10,000 investment
----------------------
Aggregate Total Return
----------------------
One Year Inception
Ended to 12/31/97
12/31/97
18.3% 67.5%
----------------------
<CAPTION>
Touchstone
Measurement Growth & CDA/Wiesenberger
Period Income S & P Growth & Current
(Fiscal Year Sub- 500 Income
Covered) Account Index Avg - VA
<S> <C> <C> <C>
Feb-95 10000 10000 10000
Mar-95 10252 10295 10249
Jun-95 10998 11278 11017
Sep-95 11814 12174 11845
Dec-95 12490 12908 12386
Mar-96 13346 13600 12996
Jun-96 13623 14210 13423
Sep-96 13762 14649 13853
Dec-96 14162 15871 14856
Mar-97 13553 16298 14914
Jun-97 15062 19141 16913
Sep-97 16348 20575 18210
Dec-97 16750 21165 18411
</TABLE>
Past performance is not predictive of future performance.
TOUCHSTONE BALANCED SUB-ACCOUNT
Over the course of the year ending December 31, 1997, several investment
management strategies and techniques materially affected the Touchstone Balanced
Sub-Account's performance. Growth and value stocks, as measured by the S&P 500
Index, rose 33.4% and government and corporate bonds, as measured by the Lehman
Brothers Aggregate rose 9.7% while the total return (net of fees and expenses,
but excluding surrender charges) for the Touchstone Balanced Sub-Account was
17.0%.
As the balanced fund manager of the Touchstone Balanced Portfolio, OpCap
Advisors employed a disciplined, bottom-up approach to stock selection which has
not changed since their inception as manager of the Fund in April of 1997. Their
investment horizon is long-term, with an average holding period of 3 to 4 years.
An example of this long-term horizon is Shaw Industries, which has recently been
implementing a retail strategy with excellent prospects for the long term, but
which resulted in a $33 million fourth quarter charge against earnings for the
closing of approximately 100 retail stores. Profitability should now increase,
and the long-term strategy and financial prospects remain in place.
On the fixed income side of the portfolio, OpCap Advisors remained focused on
issue selection, believing this to be the best way to consistently add value in
the fixed income markets over time. The Fund was well diversified among sectors,
issues and maturities and was comprised of high quality securities that offer
superior total return prospects over a variety of market scenarios. Their
holdings were in well structured securities that have particularly benefited
during this annual period of declining interest rates. OpCap continued to favor
long-term non-government debt such as commercial banking
5
<PAGE> 8
and public financing issues, believing that they offer superior return
prospects.
<TABLE>
<CAPTION>
Growth of a $10,000 investment
----------------------
Aggregate Total Return
----------------------
One Year Inception
Ended to 12/31/97
12/31/97
17.0% 61.3%
----------------------
<CAPTION>
Lehman
Measurement Touchstone Brothers CDA/Wiesenberger
Period Balanced S & P Government/ Growth & Current
(Fiscal Year Sub- 500 Corporate Balance
Covered) Account Index Index Avg - VA
<S> <C> <C> <C> <C>
Feb-95 10000 10000 10000 10000
Mar-95 10283 10295 10061 10161
Jun-95 11258 11278 10674 10825
Sep-95 11915 12174 10884 11838
Dec-95 11963 12908 11348 11795
Mar-96 12339 13600 11147 12026
Jun-96 12454 14210 11210 12236
Sep-96 12842 14649 11417 12503
Dec-96 13783 15871 11760 13089
Mar-97 13652 16296 11695 13005
Jun-97 14978 19141 12125 14339
Sep-97 15871 20575 12530 15274
Dec-97 16130 21166 12895 15399
</TABLE>
Past performance is not predictive of future performance.
TOUCHSTONE INCOME OPPORTUNITY SUB-ACCOUNT
Over the course of the year ending December 31, 1997, several investment
management strategies and techniques materially affected the Touchstone Income
Opportunity Sub-Account's performance. Corporate high yield bonds, as measured
by the CDA/Wiesenberger Corporate High Yield Variable Annuity Average, rose
12.8%; international bonds, as measured by the CDA/Wiesenberger Global Income
Variable Annuity Average rose 4.4% while corporate bonds in general, as
measured by the Lehman Brothers Corporate Bond Index, rose 10.2%. Total return
(net of fees and expenses, but excluding surrender charges) for the Touchstone
Income Opportunity Sub-Account was 10.6%.
As the manager of the Touchstone Income Opportunity Portfolio, Alliance Capital
Management continued to concentrate its portfolio strategy on investments in
emerging market corporates, emerging market sovereign and U.S. corporate high
yield debt. Alliance reports that during the second half of 1997, U.S. economic
activity remained healthy but started to slow from its rapid pace. The Federal
Reserve did not take any action regarding interest rates due to improving
inflation fundamentals and a stronger dollar coupled with turmoil in Asian
financial markets. Global economic growth suffered a setback in the fourth
quarter due to sharply devalued currencies and falling equity markets in
Southeast Asia and Hong Kong. The lack of clear and prompt responses to these
crises led many investors to re-evaluate the risk premiums associated with
emerging market debt. Many countries such as Brazil, Russia and Argentina faced
increased scrutiny and their debt came under pressure.
The portfolio's investments in emerging market debt were diversified across
Latin America, Southeast Asia and Eastern Europe with only two countries having
an exposure of over 6%. Alliance chose to invest in Southeast Asia and emerging
market corporates because they had been the best sources of yield in 1997. They
continue to closely monitor their small position in Thailand and also their
holdings in Indonesia, where they feel they own some of the stronger, more
diversified credits. Due, however, to the increased uncertainty and volatility
in emerging market debt, Alliance decided to increase the Fund's weighting in
U.S. corporate high yield to 40%. This high yield market continued to be driven
by new issuance and provided strong returns in the second half of the year. As
emerging market prices improve, Alliance will selectively sell down their
exposure there and continue to increase their U.S. high yield percentage.
<TABLE>
<CAPTION>
Growth of a $10,000 investment
----------------------
Aggregate Total Return
----------------------
One Year Inception
Ended to 12/31/97
12/31/97
10.6% 74.0%
----------------------
<CAPTION>
Touchstone Lehman
Measurement Income Brothers CDA/Wiesenberger CDA/Wiesenberger
Period Opportunity Corporate International Corporate
(Fiscal Year Sub- Bond Bond High Yield
Covered) Account Index Avg - VA Avg - VA
<S> <C> <C> <C> <C>
Feb-95 10000 10000 10000 10000
Mar-95 9780 10082 10161 10083
Jun-95 11247 10832 10727 10695
Sep-95 11919 11087 10908 10933
Dec-95 12515 11635 11304 11277
Mar-96 13185 11335 11214 11545
Jun-96 13970 11386 11359 11770
Sep-96 15020 11613 11712 12285
Dec-96 15728 12017 12067 12667
Mar-97 16033 11896 11855 12695
Jun-97 17089 12387 12213 13382
Sep-97 17870 12872 12523 14115
Dec-97 17401 13247 12592 14288
</TABLE>
Past performance is not predictive of future performance.
TOUCHSTONE BOND SUB-ACCOUNT
Over the course of the annual period ending December 31, 1997, several
investment management strategies and techniques materially affected the
Touchstone Bond Sub-Account's performance. Corporate bonds, as measured by the
Lehman Brothers Aggregate Index, rose 9.7% while the return of the
CDA/Wiesenberger Corporate Bond (Investment Grade) Variable Annuity Average rose
8.0%. Total return (net of fees and expenses, but excluding surrender charges)
for the Touchstone Bond Sub-Account was 6.5%.
As the core fixed income manager of the Touchstone Bond Fund Portfolio II, Fort
Washington Investment Advisors continued to emphasize over-weightings in high
quality corporate bonds and
6
<PAGE> 9
underweightings in mortgage-backed securities. This strategy should provide
above market returns at current interest rate levels if the mortgage sector
continues to experience above average re-financing activity.
The last quarter of 1997, however, was one of tremendous dislocation and
transition for the U.S. Bond market. The currency and economic instability in
East Asia caused downgrades and large price deterioration in what were once high
quality, bellwether credits in the marketplace. Bonds of issuers in Korea, Hong
Kong, Malaysia and Thailand suffered serious price declines as investors
worldwide sold their bonds. This unprecedented plunge in highly rated securities
fueled a simultaneous flight to quality as investors repositioned their assets
in U.S. Treasury bonds.
<TABLE>
<CAPTION>
Growth of a $10,000 investment
----------------------
Aggregate Total Return
----------------------
One Year Inception
Ended to 12/31/97
12/31/97
6.5% 21.4%
----------------------
<CAPTION>
Measurement Touchstone Lehman CDA/Wiesenberger
Period Bond Brothers Corporate
(Fiscal Year Sub- Aggregate Bond
Covered) Account Index Avg - VA
<S> <C> <C> <C>
Feb-95 10000 10000 10000
Mar-95 10068 10061 10050
Jun-95 10686 10674 10651
Sep-95 10832 10884 10830
Dec-95 11263 11348 11216
Mar-96 10974 11147 11055
Jun-96 10972 11210 11087
Sep-96 11129 11417 11280
Dec-96 11395 11760 11606
Mar-97 11322 11695 11560
Jun-97 11649 12125 11935
Sep-97 11983 12530 12299
Dec-97 12137 12895 12530
</TABLE>
Past performance is not predictive of future performance.
TOUCHSTONE STANDBY INCOME SUB-ACCOUNT
Over the course of the annual period ending December 31, 1997, several
investment management strategies and techniques materially affected the
Touchstone Standby Income Sub-Account's performance. Cash equivalents, as
measured by the Merrill Lynch 91-Day Treasury, rose 5.3% while the return of the
Donoghue Money Market Average rose by 5.1%. Total return (net of fees and
expenses, but excluding surrender charges) for the Touchstone Standby Income
Sub-Account was 4.0%.
As the ultra-short fixed income manager of the Touchstone Standby Income
Portfolio, Ft. Washington Investment Advisors maintained its core investment
strategy by maintaining a stable average maturity slightly longer than the
90-day Treasury bill. During the second half of 1997, Ft. Washington's portfolio
was overweighted in commercial paper and underweighted in asset-backed
securities and corporate bonds. This gave them liquidity as interest rates rose.
When Ft. Washington believed that interest rates had stabilized, they reacted by
buying longer maturity corporates and asset-backed securities. These types of
securities had become cheap, on a relative basis, as other investors began to
sell their positions in search of liquidity. Finally, as the Asian crisis
started to unfold and spreads began to widen in the corporate bond market,
asset-backed securities were in short supply and high demand. This sector
selection strategy protected principal and keep the fund liquid.
<TABLE>
<CAPTION>
Growth of a $10,000 investment
----------------------
Aggregate Total Return
----------------------
One Year Inception
Ended to 12/31/97
12/31/97
4.0% 11.4%
----------------------
<CAPTION>
Merrill
Measurement Touchstone Lynch IBC Donoghue CDA/Wiesenberger
Period Standby Income 91-Day Money Money
(Fiscal Year Sub- Treasury Market Market
Covered) Account Index Index Avg - VA
<S> <C> <C> <C> <C>
Feb-95 10000 10000 10000 10000
Mar-95 10053 10046 10051 10038
Jun-95 10115 10185 10202 10148
Sep-95 10190 10321 10347 10253
Dec-95 10317 10457 10499 10359
Mar-96 10407 10586 10628 10456
Jun-96 10505 10713 10765 10552
Sep-96 10608 10842 10914 10652
Dec-96 10711 10974 11056 10753
Mar-97 10801 11107 11197 10852
Jun-97 10908 11246 11350 10958
Sep-97 11033 11387 11502 11064
Dec-97 11141 11532 11646 11214
</TABLE>
Past performance is not predictive of future performance.
7
<PAGE> 10
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
Statement of Net Assets
As of December 31, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at current market value:
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio (1,011,132 shares, cost
$14,102,125) $ 15,571,429
International Equity Portfolio (1,094,533 shares,
cost $12,968,031) 13,145,336
Balanced Portfolio (1,330,036 shares, cost
$18,150,256) 18,607,210
Income Opportunity Portfolio (2,045,113 shares, cost
$23,590,436) 22,557,601
Standby Income Portfolio (1,151,627 shares, cost
$11,526,134) 11,516,273
Select Advisors Portfolios
Growth & Income Portfolio II (59.548236% beneficial
interest, cost $24,411,541) 27,783,480
Bond Portfolio II(46.030520% beneficial interest,
cost $10,776,380) 11,365,878
------------
Total investments 120,547,207
Accounts receivable from Western-Southern Life
Assurance Company 894
------------
Total net assets $120,548,101
============
NET ASSETS
Variable Annuity Contracts $120,547,058
Retained in the variable account by Western-Southern Life
Assurance Company 1,043
------------
Total net assets $120,548,101
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE> 11
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
Statement of Operations and Changes in Net Assets
For the year ended December 31, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME STANDBY
GROWTH EQUITY BALANCED OPPORTUNITY INCOME
TOTAL SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------ ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCOME:
Dividends and capital gains $ 5,409,296 $ 834,976 $ 709,520 $ 1,376,386 $ 2,070,121 $ 418,293
Miscellaneous income (loss) 3,218 3,731 2,880 (2,658) (3,840) 328
EXPENSES:
Mortality and expense risk,
and administrative charge 939,202 122,709 108,285 135,364 179,897 103,640
------------ ----------- ----------- ----------- ----------- -----------
Net Investment Income (loss) 4,473,312 715,998 604,115 1,238,364 1,886,384 314,981
------------ ----------- ----------- ----------- ----------- -----------
Net change in unrealized
appreciation (depreciation)
on investments 4,261,510 1,424,333 71,338 292,397 (1,073,439) (10,274)
Realized gain (loss) on
investments 735,060 360,604 196,132 25,029 154,273 (978)
------------ ----------- ----------- ----------- ----------- -----------
Net realized and unrealized gain
(loss) on investments 4,996,570 1,784,937 267,470 317,426 (919,166) (11,252)
------------ ----------- ----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations 9,469,882 2,500,935 871,585 1,555,790 967,218 303,729
------------ ----------- ----------- ----------- ----------- -----------
Contract owners activity:
Payments received from contract
owners 85,891,128 9,661,438 8,570,847 12,652,990 17,117,095 14,114,244
Net transfers between
sub-accounts and/or fixed
account 414,133 764,178 877,161 1,086,970 (243,339) (5,891,834)
Withdrawals and surrenders (2,638,983) (384,782) (287,848) (364,055) (532,734) (293,869)
Contract maintenance change (23,424) (3,521) (3,073) (3,299) (4,491) (1,006)
------------ ----------- ----------- ----------- ----------- -----------
Net increase from contract
activity 83,642,854 10,037,313 9,157,087 13,372,606 16,336,531 7,927,535
------------ ----------- ----------- ----------- ----------- -----------
Net increase in net assets 93,112,736 12,538,248 10,028,672 14,928,396 17,303,749 8,231,264
Net assets, at beginning of
period 27,435,365 3,033,208 3,116,692 3,678,829 5,253,947 3,285,736
------------ ----------- ----------- ----------- ----------- -----------
Net assets, at end of period $120,548,101 $15,571,456 $13,145,364 $18,607,225 $22,557,696 $11,517,000
============ =========== =========== =========== =========== ===========
<CAPTION>
GROWTH &
INCOME II BOND II
SUB-ACCOUNT SUB-ACCOUNT
----------- -----------
<S> <C> <C>
INCOME:
Dividends and capital gains $ -- $ --
Miscellaneous income (loss) 3,168 (391)
EXPENSES:
Mortality and expense risk,
and administrative charge 207,267 82,040
----------- -----------
Net Investment Income (loss) (204,099) (82,431)
----------- -----------
Net change in unrealized
appreciation (depreciation)
on investments 3,058,688 498,467
Realized gain (loss) on
investments -- --
----------- -----------
Net realized and unrealized gain
(loss) on investments 3,058,688 498,467
----------- -----------
Net increase in net assets
resulting from operations 2,854,589 416,036
----------- -----------
Contract owners activity:
Payments received from contract
owners 17,225,945 6,548,569
Net transfers between
sub-accounts and/or fixed
account 1,881,077 1,939,920
Withdrawals and surrenders (560,767) (214,928)
Contract maintenance change (6,180) (1,854)
----------- -----------
Net increase from contract
activity 18,540,075 8,271,707
----------- -----------
Net increase in net assets 21,394,664 8,687,743
Net assets, at beginning of
period 6,388,817 2,678,136
----------- -----------
Net assets, at end of period $27,783,481 $11,365,879
=========== ===========
</TABLE>
Statement of Operations and Changes in Net Assets
For the year ended December 31, 1996
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME STANDBY
GROWTH EQUITY BALANCED OPPORTUNITY INCOME
TOTAL SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCOME:
Dividends and capital gains $ 632,218 $ 78,087 $ 19,427 $ 106,100 $ 359,226 $ 69,378
Miscellaneous income (loss) 11,618 1,457 (196) 1,531 840 334
EXPENSES:
Mortality and expense risk, and
administrative charge 139,808 15,425 16,207 19,935 22,201 18,034
----------- ---------- ---------- ---------- ---------- -----------
Net Investment Income (loss) 504,028 64,119 3,024 87,696 337,865 51,678
----------- ---------- ---------- ---------- ---------- -----------
Net change in unrealized
appreciation (depreciation) on
investments 736,735 51,240 103,391 182,124 34,430 304
Realized gain (loss) on
investments 55,105 14,060 25,572 3,877 12,639 (1,043)
----------- ---------- ---------- ---------- ---------- -----------
Net realized and unrealized gain
(loss) on investments 791,840 65,300 128,963 186,001 47,069 (739)
----------- ---------- ---------- ---------- ---------- -----------
Net increase in net assets resulting
from operations 1,295,868 129,419 131,987 273,697 384,934 50,939
----------- ---------- ---------- ---------- ---------- -----------
Contract owners activity:
Payments received from contract
owners 24,271,995 2,915,558 2,950,701 3,035,487 3,973,450 3,946,882
Net transfers between sub-accounts
and/or fixed account (51,686) (166,332) (120,369) 47,771 672,000 (1,138,789)
Withdrawals and surrenders (147,317) (20,170) (21,168) (17,803) (26,742) (16,705)
Contract maintenance change (1,706) (249) (163) (256) (188) (134)
----------- ---------- ---------- ---------- ---------- -----------
Net increase from contract
activity 24,071,286 2,728,807 2,809,001 3,065,199 4,618,520 2,791,254
----------- ---------- ---------- ---------- ---------- -----------
Net increase in net assets 25,367,154 2,858,226 2,940,988 3,338,896 5,003,454 2,842,193
Net assets, at beginning of period 2,068,211 174,982 175,704 339,933 250,493 443,543
----------- ---------- ---------- ---------- ---------- -----------
Net assets, at end of period $27,435,365 $3,033,208 $3,116,692 $3,678,829 $5,253,947 $ 3,285,736
=========== ========== ========== ========== ========== ===========
<CAPTION>
GROWTH &
INCOME II BOND II
SUB-ACCOUNT SUB-ACCOUNT
----------- -----------
<S> <C> <C>
INCOME:
Dividends and capital gains $ -- $ --
Miscellaneous income (loss) 6,979 673
EXPENSES:
Mortality and expense risk, and
administrative charge 31,803 16,203
---------- ----------
Net Investment Income (loss) (24,824) (15,530)
---------- ----------
Net change in unrealized
appreciation (depreciation) on
investments 288,509 76,737
Realized gain (loss) on
investments
---------- ----------
Net realized and unrealized gain
(loss) on investments 288,509 76,737
---------- ----------
Net increase in net assets resulting
from operations 263,685 61,207
---------- ----------
Contract owners activity:
Payments received from contract
owners 5,241,129 2,208,788
Net transfers between sub-accounts
and/or fixed account 555,914 98,119
Withdrawals and surrenders (29,858) (14,871)
Contract maintenance change (538) (178)
---------- ----------
Net increase from contract
activity 5,766,647 2,291,858
---------- ----------
Net increase in net assets 6,030,332 2,353,065
Net assets, at beginning of period 358,485 325,071
---------- ----------
Net assets, at end of period $6,388,817 $2,678,136
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE> 12
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
Notes to Financial Statements
- - --------------------------------------------------------------------------------
1. ORGANIZATION
Western-Southern Life Assurance Company Separate Account 1 (the "Account")
is a unit investment trust registered under the Investment Company Act of 1940
(the "1940 Act"), established by the Western-Southern Life Assurance Company
(the "Company"), a life insurance company which is a wholly-owned subsidiary of
The Western and Southern Life Insurance Company ("Western & Southern"). The
Account is a funding vehicle for individual variable annuity contracts and
commenced operations on February 23, 1995.
The variable annuity contracts are designed for individual investors and
group plans that desire to accumulate capital on a tax-deferred basis for
retirement or other long-term objectives. The variable annuity contracts are
distributed across the United States through a network of broker-dealers and
wholesalers.
2. SIGNIFICANT ACCOUNTING POLICIES
The Account has seven investment sub-accounts each of which invests in the
corresponding portfolio (a "Portfolio") of Select Advisors Variable Insurance
Trust or of Select Advisers Portfolios, each of which is an open-ended
diversified management investment company. The sub-accounts' values fluctuate on
a day to day basis depending on the investment performance of the Portfolio in
which each sub-account is invested. A contractholder may also allocate funds to
the Fixed Account, which is part of the general account of the Company. Due to
exemptive and exclusionary provisions, interest in the Fixed Account have not
been registered under the Securities Act of 1933 (the "1933 Act") and the
Company's general account has not been registered as an investment company under
the 1940 Act. Sub-account transactions are recorded on the trade date and income
from dividends is recorded on the ex-dividend date. Realized gains and losses on
the sales of investments are computed on the basis of specific identification.
Upon annuitization, the contract assets are transferred to the general
account of the Company. Accordingly, contract reserves are recorded by the
Company. See the related prospectus for a more detailed understanding of the
annuity contracts.
3. CONTRACT CHARGES
Certain deductions for administrative and risk charges are deducted from
the contract value, in order to compensate the Company for administrative
expenses and for the assumption of mortality and expense risks. These charges
are made daily at an annual effective rate of 1.35%.
The Company also deducts an annual contract maintenance charge from the
contract value on each contract anniversary and upon any full surrender. The
contract maintenance charge is $35 for the first ten Contract Years and the
lesser of (a) $35 or (b) 0.17% of the Contract Value after the tenth Contract
Anniversary.
Since no deduction for a sales charge is made from the payments received
from contract owners, a surrender charge is imposed on certain surrenders and
partial withdrawals to cover expenses relating to promotion, sale and
distribution of the contracts. The surrender charge is assessed on each
redemption, except for certain amounts excluded from charges under the contract.
This charge ranges from 7% to 0% depending on the number of years since the
payment was received.
4. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
5. TAXES
The Account is not taxed separately because the operations of the Account
are part of the total operations of the Company. The Company is taxed as a life
insurance company under the Internal Revenue Code. Under existing federal income
tax law, no taxes are payable on the investment income or on the capital gains
of the Account.
10
<PAGE> 13
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
Notes to Financial Statements
- - --------------------------------------------------------------------------------
6. PURCHASES AND SALES OF INVESTMENTS
The following table shows aggregate cost of shares and beneficial interests
of the portfolios purchased and proceeds from shares and beneficial interests of
the portfolios sold by the corresponding sub-accounts for the period January 1,
1997 to December 31, 1997.
<TABLE>
<CAPTION>
PURCHASES SALES
----------- ----------
<S> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio $13,170,887 $2,417,682
International Equity Portfolio 10,972,885 1,211,737
Balanced Portfolio 14,823,266 212,387
Income Opportunity Portfolio 20,215,886 1,993,295
Standby Income Portfolio 17,107,511 8,865,373
Select Advisors Portfolio
Growth & Income Portfolio II 20,562,741 2,226,763
Bond Portfolio II 8,565,550 376,274
</TABLE>
7. UNIT VALUES
The following table shows a summary of units outstanding for variable
annuity contracts for the period January 1, 1997 to December 31, 1997.
<TABLE>
<CAPTION>
TRANSFERS
BEGINNING UNITS UNITS BETWEEN SUB- ENDING UNIT ENDING
UNIT PURCHASED REDEEMED ACCOUNTS UNITS VALUE VALUE
--------- --------- -------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth Sub-account 236,639 658,639 (24,977) 50,785 921,086 16.905544 $ 15,571,456
International Equity
Sub-account 252,346 636,140 (21,290) 72,784 939,980 13.984724 13,145,364
Balanced Sub-account 266,916 839,471 (24,039) 71,219 1,153,567 16.130170 18,607,225
Income Opportunity Sub-account 334,062 1,008,989 (31,392) (15,333) 1,296,326 17.401250 22,557,696
Standby Income Sub-account 306,751 1,291,272 (26,966) (537,276) 1,033,781 11.140654 11,517,000
Growth & Income Sub-account 451,141 1,129,801 (36,756) 114,534 1,658,720 16.749955 27,783,481
Bond Sub-account 235,025 557,735 (18,397) 162,068 936,431 12.137441 11,365,879
------------
$120,548,101
============
</TABLE>
11
<PAGE> 14
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
Supplementary Information-selected Per Unit Data and Ratios
(Selected data for a share of accumulation unit outstanding throughout each
year)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME STANDBY GROWTH &
GROWTH EQUITY BALANCED OPPORTUNITY INCOME INCOME II BOND II
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31, 1997
Per share data
Investment income $ 0.914814 $ 0.759815 $ 1.297872 $ 2.211330 $ 0.586459 $ -- $ --
Expenses 0.197048 0.179407 0.200630 0.227065 0.146437 0.204446 0.156956
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment income-net 0.717766 0.580408 1.097242 1.984265 0.440022 (0.204446) (0.156956)
Net realized and unrealizable
gain (loss) on investments 3.369931 1.053431 1.250190 (0.310492) (0.010786) 2.792923 0.899266
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
asset value 4.087697 1.633839 2.347432 1.673773 0.429236 2.588477 0.742310
Beginning of year 12.817847 12.350885 13.782738 15.727477 10.711418 14.161478 11.395131
---------- ---------- ---------- ---------- ---------- ---------- ----------
End of year $16.905544 $13.984724 $16.130170 $17.401250 $11.140654 $16.749955 $12.137441
========== ========== ========== ========== ========== ========== ==========
Ratios
Ratio of operating expense
to average net assets(%) 1.32% 1.33% 1.21% 1.29% 1.40% 1.21% 1.17%
Ratio of investment
income-net to average net
assets(%) 7.70% 7.43% 11.11% 13.57% 4.26% -1.19% -1.17%
FOR THE YEAR ENDED
DECEMBER 31, 1996
- - ---------------------------------------------------------------------------------------------------------------------------------
Per share data
Investment income $ 0.334587 $ 0.083236 $ 0.564184 $ 1.961352 $ 0.546191 $ -- $ --
Expenses 0.165347 0.159808 0.170051 0.189796 0.141698 0.181541 0.149925
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment income-net 0.169240 (0.076572) 0.394133 1.771556 0.404493 (0.181541) (0.149925)
Net realized and unrealizable
gain (loss) 0.961438 1.196627 1.425763 1.440778 (0.010269) 1.852780 0.282532
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase in net asset
value 1.130678 1.120055 1.819896 3.212334 0.394224 1.671239 0.132607
Beginning of year 11.687169 11.230830 11.962842 12.515143 10.317194 12.490239 11.262524
---------- ---------- ---------- ---------- ---------- ---------- ----------
End of year $12.817847 $12.350885 $13.782738 $15.727477 $10.711418 $14.161478 $11.395131
========== ========== ========== ========== ========== ========== ==========
Ratios
Ratio of operating expense
to average net assets(%) 0.96% 0.98% 0.99% 0.81% 0.97% 0.94% 1.08%
Ratio of investment
income-net to average net
assets(%) 4.00% 0.18% 4.36% 12.28% 2.77% (0.74)% (1.03)%
</TABLE>
The above information has been prepared using daily weighted-average units
outstanding.
The accompanying notes are an integral part of the financial statements.
12
<PAGE> 15
REPORT OF INDEPENDENT ACCOUNTANTS
- - --------------------------------------------------------------------------------
To the Contractholders and Board of
Directors of Western-Southern Life
Assurance Company
We have audited the accompanying statement of net assets of Western-Southern
Life Assurance Company Separate Account 1 as of December 31, 1997, and the
related statements of operations, changes in net assets and selected per unit
data and ratios for the years ended December 31, 1997 and 1996. These financial
statements and per unit data and ratios are the responsibility of the Separate
Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per unit data
and ratios are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997 by correspondence with the custodians. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and selected per unit data and ratios
referred to above present fairly, in all material respects, the financial
position of Western-Southern Life Assurance Company Separate Account 1 as of
December 31, 1997, the results of operations, the changes in its net assets and
the selected per unit data and ratios for the years ended December 31, 1997 and
1996 in conformity with generally accepted accounting principles.
Cincinnati, Ohio
January 16, 1998
<PAGE> 16
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14
