<PAGE> 1
LETTER FROM THE PRESIDENT
BACKGROUND ARTWORK
Dear Fellow Contract Owner:
There's no doubt that we've all experienced excessive volatility in the
financial markets in 1998. The 12-month period ending December 31, 1998, has
served as a clear example of how the performance of different asset classes can
vary widely over a given time period. For example, domestic large cap stocks
made an impressive rebound in the fourth quarter to provide the highest asset
class returns for the year, even more spectacular when viewed against the
lackluster performance of small cap stocks over the past year. Similarly, the
divergence between the returns of value versus growth styles, Europe versus
Asia, and emerging versus developed markets reflects the overall volatility that
has been inherent in 1998.
Given these wild swings in performance, we think the message is clear: expect
volatility, and understand that it's extremely difficult to predict which asset
classes will be strong performers and which ones will be weak. One way to
cushion the volatility is to be sure that you're adequately diversified in your
investments and that you've properly allocated your assets based on your
investing needs and goals. By investing with Touchstone through a financial
advisor, you have already taken the important first step in building a portfolio
that can help you meet your future goals. Your financial advisor can help you
set new guidelines when life-style changes occur, and they can help you measure
your level of patience for overall market conditions.
We're proud to note that the Touchstone Standby Income Fund has been recognized
with Morningstar's highest 5-star rating for its three-year performance as of
12-31-98(1). Those familiar with Morningstar know that they are a privately
owned company that provides unbiased mutual fund information to help individual
investors make informed investment decisions. Only the top 10% of all mutual
funds in each investment class actually receive Morningstar's highest rating.
The Touchstone Standby Income Fund, classified as an Ultrashort Bond fund by
Morningstar, was ranked among 2,126 funds in Morningstar's Taxable Bond category
as of 12/31/98.
I'd like to take this opportunity to thank you for the success we've shared
together. We appreciate your continued confidence and investment in the
Touchstone Family of Funds and Variable Annuities(2).
Sincerely,
/s/ Jill McGruder
Jill T. McGruder
President and Chief Executive Officer
Touchstone Family of Funds and Variable Annuities
P.S. Please visit us on the World Wide Web at www.touchstonefunds.com
(1) Morningstar proprietary ratings reflect historical risk-adjusted
performance, and are subject to change every month. Morningstar ratings are
calculated from the fund's three-, five-, and 10-year average annual returns in
excess of 3-month Treasury bill returns with appropriate fee adjustments, and a
risk factor that reflects fund performance below 3-month Treasury bill returns.
The top 10% of funds in a category receives 5 stars; the next 22.5% receives 4
stars. Past performance is no guarantee of future results. The Advisor waived
fees and reimbursed the Fund which had a material effect on the total return.
(2) Touchstone Variable Annuities are underwritten by Western-Southern Life
Assurance Company, Cincinnati, Ohio. The Touchstone Family of Funds and Variable
Annuities are distributed by Touchstone Securities, Inc., member NASD and SIPC.
For a prospectus containing more information, including all fees and expenses,
call 800.669.2796. Please read the prospectus carefully before investing or
sending money.
<PAGE> 2
NOTES
2
<PAGE> 3
TABLE OF CONTENTS
3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Separate Account 2
Management Discussion & Analysis......................... 3
Statement of Net Assets.................................. 16
Statement of Operations and Changes in Net Assets........ 17
Notes to Financial Statements............................ 19
Report of Independent Accountants........................ 24
Select Advisors Variable Insurance Trust
Emerging Growth.......................................... 3
International Equity..................................... 7
Income Opportunity....................................... 10
Value Plus............................................... 14
Balanced................................................. 17
Standby Income........................................... 21
Statements of Assets and Liabilities..................... 22
Statements of Operations................................. 23
Statements of Changes in Net Assets...................... 24
Financial Highlights..................................... 26
Notes to Financial Statements............................ 28
Report of Independent Accountants........................ 36
Select Advisors Portfolios
Growth & Income.......................................... 3
Bond..................................................... 6
Statements of Assets and Liabilities..................... 9
Statements of Operations................................. 10
Statements of Changes in Net Assets...................... 11
Ratios and Supplementary Data............................ 12
Notes to Financial Statements............................ 13
Report of Independent Accountants........................ 18
</TABLE>
<PAGE> 4
NOTES 4
<PAGE> 5
TOUCHSTONE
WESTERN-SOUTHERN LIFE
ASSURANCE COMPANY
SEPARATE ACCOUNT 2 LOGO
LOGO
ANNUAL REPORT
DECEMBER 31, 1998
<PAGE> 6
NOTES 2
<PAGE> 7
MANAGEMENT DISCUSSION & ANALYSIS
3
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
Touchstone Advisor Emerging Growth
Over the course of the annual period ended December 31, 1998, several investment
management strategies and techniques materially affected the performance of the
Touchstone Advisor Emerging Growth Sub-Account's performance. Small
capitalization stocks, as measured by the Russell 2000, declined 2.5% while the
total return (net of fees and expenses) for the Touchstone Advisor Emerging
Growth Sub-Account was 2.5%.
As the value-style manager of the Touchstone Advisor 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. Small
company stocks continued to have a difficult time in 1998. The domestic equity
markets overall were marked by wild swings throughout the year. In the third
quarter, the Russell 2000 declined 20% as investors sold stocks due to fears the
U.S. was shortly headed into a recession. Not surprisingly, given Babson's low
risk value discipline, the value-style portion of the Fund held its value well
during the third quarter and bettered its benchmark.
In the fourth quarter of 1998, investors dramatically shifted course and
purchased stocks as rapidly as they were sold in the previous quarter, resulting
in the Russell 2000 increasing its value by 16%. Not surprisingly, Babson's low
risk value discipline had difficulty keeping pace with the soaring market, and
the value-style portion of the Portfolio trailed its benchmark for the quarter
and for the entire year.
Standout performers for the year included Elsag Bailey (+137%) due to a buyout
offer from the large European industrial conglomerate ABB, and Martin Marietta
Materials (+70%) due to continued strong demand of their primary product,
aggregates--a fancy term for rocks, stone and gravel which are critical in road
and infrastructure building. Unfortunately, Babson's increased weighting in the
Energy sector, the worst performing sector in 1998, detracted from performance.
Babson still likes the long term outlook for the Energy sector and continues to
increase their weighting in this sector.
As the growth-style manager of the Touchstone Advisor Emerging Growth Portfolio,
Westfield Capital Management continued to find companies with good growth
prospects. Unlike 1997, small cap growth did much better than small cap value in
1998. This pattern correlates very well with past cycles where growth
outperforms relatively as overall corporate profits peak--an environment
Westfield expects to continue into 1999.
Technology (including telecommunications) led the growth-style portion of the
portfolio. Its impact can be seen in the performance pattern over the course of
the year with the first quarter and fourth quarter accounting for most of the
gains. Portfolio performance was achieved the old-fashioned way--that is,
without the presence of Internet stocks. In the liquidity-driven market of 1998,
top performance portfolio managers had to speculate on unheard of valuations in
either the Internet group or the top 50 blue chips. Neither area fit Westfield's
price/earnings-to-growth valuation discipline very well. Instead, some of
Westfield's best technology stock picks were
<PAGE> 8
MANAGEMENT DISCUSSION & ANALYSIS
4
market-penetration stories. Such names as Geotel in call routing systems,
Galileo in networking ICs, and EMC in data storage are but a few.
The portfolio kept pace with its benchmark and peers during the severe
correction of July and August, and Westfield feels that this reflects the
cushioning effect of their growth-at-a-reasonable-price style, as well as
specific portfolio sector shifts made earlier in the year. Concerns about Asian
demand caused Westfield to exit the Energy sector and several technology product
arenas. Financially-sensitive holdings were reduced as they saw signs of a
slowing economy, while service companies in the consumer and healthcare sectors
were added. The educational field was also sharply overweighted and remained a
stand-out performer.
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
TOUCHSTONE VARIABLE RUSSELL 2000 MAJOR INDEX
ANNUITY EMERGING GROWTH ------------------------ WIESENBERGER SMALL CAP
PORTFOLIO MINOR INDEX
----------------------- ----------------------
<S> <C> <C> <C>
2/95 10000 10000 10000
3/95 10100 10171 10294
6/95 10714 11125 11458
9/95 11637 12224 12955
12/95 11741 12488 12801
3/96 12300 13126 13501
6/96 12847 13782 14428
9/96 12574 13829 14705
12/96 12948 14548 14934
3/97 12562 13796 13808
6/97 14873 16032 16007
9/97 17207 18418 18439
12/97 17170 17801 17424
3/98 18750 19592 19361
6/98 18079 18678 18781
9/98 14541 14915 14838
12/98 17592 17348 17675
</TABLE>
Average Annual Total Return
One Year Ended 12/31/98 2.5% Since Inception 2/23/95 15.8%
Cumulative Total Return
Since Inception 2/23/95 75.9%
Past performance is not indicative of future performance.
Touchstone Advisor International Equity
Over the course of the annual period ended December 31, 1998, several investment
management strategies and techniques materially affected the performance of the
Touchstone Advisor International Equity Sub-Account. International equity
stocks, as measured by the MSCI EAFE Index, rose 20.3% while the total return
(net of fees and expenses) for the Touchstone Advisor International Equity
Sub-Account was 19.3%.
As the manager of the Touchstone Advisor International Equity Portfolio, Credit
Suisse Asset Management (formerly BEA Associates) attributes the Fund's
performance to three prominent drivers: the Fund's allocation to
<PAGE> 9
MANAGEMENT DISCUSSION & ANALYSIS
5
European markets, their underweight position in Japan, and their absence from
the rest of Asia.
In Europe, Credit Suisse favored several themes during the year including
companies benefiting from restructuring and businesses that help other companies
reduce costs. During the first half of the year, their positions in the auto
(Renault, Porsche, Volkswagen and BMW), business services (Cap Gemini and SAP),
and telecommunications equipment and mobile phone industries (Vodaphone and
Telefonica) added to performance.
Late in the third quarter, as the emerging markets crisis spread, they
repositioned their European allocation in favor of defensive industries and
companies whose core businesses are concentrated in Europe. This repositioning
had a negative impact in October, and was the primary cause of slight
underperformance for the year, when oversold global financials, in which they
were underweight, rallied sharply. However, their defensive positioning proved
beneficial during the end of the quarter as investors reduced their global
economic growth expectations and sought safer havens with higher earnings
visibility.
Being underweight in Japan added to performance for the year while stock
selection there hurt performance by a modest degree. For much of the year, the
portfolio was positioned in large blue chip exporters (Sony, Canon, TDK and
Honda) on the belief that their earnings would be more stable than domestic
companies that rely on Japan's domestic economy for revenues. While exporters
did well during the first part of the year, they were hurt in the third and
fourth quarters when the yen rallied sharply, thereby weakening the
profitability of exporters. Credit Suisse was also underweight in large banks in
Japan, which rallied in October causing a negative impact on performance.
Being absent from all of Asia except Japan proved to be effective on a full-
year basis. Despite the rally in the first month of the year and in the final
quarter, Asian markets were weak for most of the year, underscoring the view
that avoiding them was the most prudent approach to take.
<PAGE> 10
MANAGEMENT DISCUSSION & ANALYSIS
6
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
TOUCHSTONE VARIABLE MSCI EAFE INDEX
ANNUITY INTERNATIONAL --------------- WIESENBERGER NON-US
EQUITY PORTFOLIO EQUITY - VA
--------------------- -------------------
<S> <C> <C> <C>
2/95 10000 10000 10000
3/95 10343 10627 10271
6/95 10774 10712 10758
9/95 11238 11167 11225
12/95 11283 11628 11397
3/96 11959 11973 11961
6/96 12205 12171 12411
9/96 12068 12165 12357
12/96 12476 12368 12833
3/97 12643 12183 12979
6/97 14043 13774 14314
9/97 14631 13685 14386
12/97 14203 12622 13128
3/98 16548 14489 14737
6/98 17481 14653 14426
9/98 15013 12579 12102
12/98 16938 15189 14141
</TABLE>
Average Annual Total Return
One Year Ended 12/31/98 19.3% Since Inception 2/23/95 14.7%
Cumulative Total Return
Since Inception 2/23/95 69.4%
Past performance is not indicative of future performance.
Touchstone Advisor Income Opportunity
Over the course of the annual period ended December 31, 1998, several investment
management strategies and techniques materially affected the performance of the
Touchstone Advisor Income Opportunity Sub-Account. Corporate high yield bonds,
as measured by the Wiesenberger: Corporate High Yield Variable Annuity Index,
declined 1.5%; emerging market bonds, as measured by the Wiesenberger: Emerging
Market Income Variable Annuity Index, declined 22.7%, while corporate bonds in
general, as measured by the Lehman Brothers Corporate Bond Index, rose 8.5%.
Total return (net of fees and expenses) for the Touchstone Advisor Income
Opportunity Sub-Account was -13.1%.
As the manager of the Touchstone Advisor 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 1998 was an extremely
challenging year for financial markets, as economic turmoil spread from Asia to
encompass Russia and Latin America, particularly Brazil. Both the high yield and
emerging markets came under pressure in the second half of the year, after
Russia announced a debt moratorium in August. High yield assets also came under
pressure due to these global concerns, causing many companies to revise earning
estimates downward; liquidity in the secondary market dissipated.
<PAGE> 11
MANAGEMENT DISCUSSION & ANALYSIS
7
As emerging market assets came under pressure, several positions were more
severely impacted than others, including: Russian principal loans, overweight
positions in Indonesian corporates, a Chinese toll road, and an Ecuadorian
cellular company. The portfolio performance also suffered because of an
overweight position in emerging market corporate securities that underperformed
sovereign bonds.
During the second half of the year, Alliance decided to change the investment
strategy and began to slowly weight the portfolio with more high yield assets,
rather than emerging markets securities, reflecting their belief in the strength
of the U.S. economy. As of December 31, 1997, 60% of Touchstone Income
Opportunity was in emerging markets. By December 31, 1998, 32% of the portfolio
was in emerging market assets. They accomplished this transition by taking
advantage of positive price momentum in emerging assets. When they felt prices
reflected fair value, they sold some of the emerging market assets--thereby
minimizing the losses on the portfolio--and invested those assets in the
domestic high yield area.
Alliance believes that there will be continued strong demand for the high yield
asset class, which could offer price appreciation through spread tightening of
0.50% to 1.25%. Although high yield is not immune to external events such as the
Brazilian situation, the outlook for continued, albeit slower, growth in the
United States will have more of a positive impact on high yield performance.
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
TOUCHSTONE VARIABLE WIESENBERGER
ANNUITY INCOME LEHMAN BROTHERS WIESENBERGER EMERGING CORPORATE HIGH YIELD -
OPPORTUNITY PORTFOLIO CORPORATE BOND INDEX MARKET INCOME - VA VA
--------------------- -------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
2/95 10000 10000 10000 10000
3/95 9785 10082 9740 10083
6/95 11268 10832 11408 10595
9/95 11958 11087 12056 10933
12/95 12573 11635 13048 11277
3/96 13264 11335 13574 11545
6/96 14072 11386 14975 11770
9/96 15151 11613 16839 12286
12/96 15887 12017 18107 12667
3/97 16217 11896 18462 12695
6/97 17308 12387 20203 13382
9/97 18124 12872 21293 14115
12/97 17673 13247 20131 14285
3/98 18576 13451 21107 14844
6/98 17767 13788 19445 14824
9/98 14776 14288 13923 13639
12/98 15368 14374 15551 14065
</TABLE>
Average Annual Total Return
One Year Ended 12/31/98 13.1% Since Inception 2/23/95 11.8%
Cumulative Total Return
Since Inception 2/23/95 53.7%
Past performance is not indicative of future performance.
<PAGE> 12
MANAGEMENT DISCUSSION & ANALYSIS
8
Touchstone Advisor Value Plus
Over the course of the abbreviated period ended December 31, 1998, several
investment management strategies and techniques materially affected the
performance of the Touchstone Advisor Value Plus Sub-Account since its inception
on May 1, 1998. From the Sub-Account's inception in May until the end of 1998,
growth and value stocks, as measured by the S&P 500 Index, rose 11.7% while
value stocks, as measured by the S&P Barra Value Index, rose 1.6%. Total return
(net of fees and expenses) for the Touchstone Advisor Value Plus Sub-Account was
1.6%.
As the manager of the Touchstone Advisor Value Plus Portfolio, Fort Washington
Investment Advisors concentrated their efforts on mid to large cap common stocks
that were considered fundamentally undervalued. Fort Washington reports that
1998 marked the fourth straight year of twenty plus percent returns for the S&P
500, a first in history. The year was also characterized by several other
events:
O The Asian crisis and the Long Term Capital debacle sent shock waves
through the financial markets.
O Weakening overseas economies and a defiant Iraq headlined the foreign
political landscape.
O President Clinton weathered a flurry of setbacks including charges of
sexual misconduct and a formal impeachment by members of Congress.
With all of this as a backdrop, investors encountered the type of volatility one
would expect from an unpredictable market. Valuations for stocks continued to
increase as a combination of lower interest rates and abundant liquidity pushed
stock prices higher.
The S&P 500 return was clearly dominated by the largest twenty names as they
accounted for over 36% of the index and over 75% of the total return for the
year. Growth managers continued their outperformance versus value managers for
1998 is represented by the S&P Barra Growth and S&P Barra Value indexes, up
42.2% and 14.7% respectively. In an even starker contrast, the Russell 2000
turned in a -2.5% return for the full year.
The best performing sector in the portfolio for the time period was Finance,
with Fannie Mae and Bank One contributing the most. Technology issues such as
Computer Associates International were the weakest performing sector.
<PAGE> 13
MANAGEMENT DISCUSSION & ANALYSIS
9
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
TOUCHSTONE VARIABLE S&P 500 MAJOR INDEX
ANNUITY VALUE PLUS ------------------- S&P BAR VALUE MINOR WILSHIRE|LG CAP VALUE
PORTFOLIO INDEX MINOR INDEX
------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
4/98 10000 10000 10000 10000
6/98 9907 10227 9934 9968
9/98 8781 9210 8651 8853
12/98 10157 11171 10159 10075
</TABLE>
Average Annual Total Return
One Year Ended 12/31/98 n/a Since Inception 5/1/98 1.6%
Cumulative Total Return
Since Inception 5/1/98 1.6%
Past performance is not indicative of future performance.
Touchstone Advisor Growth & Income
Over the course of the annual period ended December 31, 1998, several investment
management strategies and techniques materially affected the performance of the
Touchstone Advisor Growth & Income Sub-Account. Growth and value stocks, as
measured by the S&P 500 Index, rose 28.6% while the total return (net of fees
and expenses) for the Touchstone Advisor Growth & Income Sub-Account was 6.6%.
As the manager of the Touchstone Advisor Growth & Income Portfolio, Scudder
Kemper Investments focused exclusively on their relative dividend yield
discipline. Scudder reports that 1998 was truly a "Jekyll and Hyde" year for the
U.S. equity market. On the one hand, the S&P 500 Index returned a remarkable
28.6%, the fourth consecutive year of returns in excess of 20%. On the other
hand, it was an extraordinarily difficult period for value-oriented strategies,
such as those employed by the Touchstone Growth & Income Portfolio. The
strongest returns were limited to a narrow subset of the U.S. market, mostly the
largest capitalization growth technology stocks. Unfortunately, these returns
did not percolate down to most other stocks in the S&P 500. The lack of market
breadth last year is captured by the following statistics: fully 70% of the
stocks in the S&P 500 underperformed the reported index return, and 40% of S&P
500 stocks actually declined for the year.
<PAGE> 14
MANAGEMENT DISCUSSION & ANALYSIS
10
Other than the headwind of large cap growth stock dominance, the primary
negative influence resulted from Scudder's overweight in industrial cyclicals,
largely chemical, paper/forest products, and metals stocks. This overweight had
been in place since 1997, having been driven by the stocks' recession level
valuations. But commodity deflation, in combination with operating (and in a few
cases, financial) leverage caused such severe pressure on earnings that even
historically low valuations were not able to mitigate downside in stocks such as
Imperial Chemical, Witco, Lyondell and Oregon Steel. One bright spot in the
chemical sector was the third quarter announcement that BetzDearborn was to be
acquired by Hercules, leading to a 20% total return for the stock for the ten
months of 1998 until it was acquired. The paper stocks fared better, largely
because of their year-end rally which had each of the Fund's paper holdings
outperforming the fourth quarter S&P 500 return of 21%. This rally was driven by
a positive sentiment shift that occurred at the depths of the September market.
The global oversupply of pulp had become so severe that U.S. companies began to
respond with meaningful closings of capacity in an attempt to stabilize pricing.
Further positive news was the surprise announcement in November that
International Paper was seeking to acquire Union Camp, which drove the entire
sector higher.
The greatest source of outperformance was the Fund's overweight in
telecommunication stocks, which in aggregate rose 48%. Standout performers were
Bellsouth (+81%), Sprint (+64%), Alltel (+50%), and Frontier (+46%). Low
relative valuations at the beginning of the year, and the increasing recognition
that the local telephone companies' earnings were being enhanced by the growth
in value-added services catalyzed the outperformance of many of these stocks.
Scudder's underweight in the consumer staple sector, as well as specific stock
selection, also added value as their value discipline enabled them to avoid the
weakness in Coca-Cola, Procter & Gamble, and Gillette. Instead, the portfolio
was led by standout performers Avon (+47%) and Unilever (+35%). The Fund also
benefited from the fact many of its best performing stocks were top holdings.
These included Ford (+87%), Bellsouth (+81%), Sprint (+64%), Xerox (+62%),
American Home Products (+50%), Bristol-Myers Squibb (+43%), and Chase Manhattan
(+33%). And finally, the tremendous level of merger and acquisition activity in
the U.S. market helped the Fund last year. Stocks which were held that were
acquired during the year (or which are pending final completion) included
MidOcean, Mercantile Stores, Firstar, Echlin, BetzDearborn, and Mobil.
Scudder continues to focus on their relative dividend yield discipline, which
seeks to identify opportunities in undervalued and misunderstood companies.
While this discipline does not add value in every year, Scudder feels that it
has proven itself over market cycles. They cannot control the normal cyclical
shifts between growth and value, but they are confident that adhering to a time
tested stock selection discipline will prove beneficial over time.
<PAGE> 15
MANAGEMENT DISCUSSION & ANALYSIS
11
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
TOUCHSTONE VARIABLE S&P 500 INDEX
ANNUITY GROWTH & INCOME ------------- WIESENBERGER GROWTH &
II PORTFOLIO INCOME - VA
----------------------- ---------------------
<S> <C> <C> <C>
2/95 10000 10000 10000
3/95 10252 10295 10249
6/95 11008 11278 11017
9/95 11839 12174 11845
12/95 12534 12908 12386
3/96 13407 13600 12996
6/96 13705 14210 13423
9/96 13866 14649 13853
12/96 14291 15871 14856
3/97 13696 16296 14914
6/97 15231 19141 16913
9/97 16566 20575 18210
12/97 16996 21165 18423
3/98 19152 24118 20487
6/98 18597 24914 20547
9/98 16222 22436 18151
12/98 18117 27213 21427
</TABLE>
Average Annual Total Return
One Year Ended 12/31/98 6.6% Since Inception 2/23/95 16.7%
Cumulative Total Return
Since Inception 2/23/95 81.2%
Past performance is not indicative of future performance.
Touchstone Advisor Balanced
Over the course of the annual period ended December 31, 1998, several investment
management strategies and techniques materially affected the performance of the
Touchstone Advisor Balanced Sub-Account. Growth and value stocks, as measured by
the S&P 500 Index, rose 28.6% and government and corporate bonds, as measured by
the Lehman Brothers Aggregate Index, rose 8.7% while the total return (net of
fees and expenses) for the Touchstone Advisor Balanced Sub-Account was 4.6%.
As the manager of the Touchstone Advisor Balanced Portfolio, OpCap Advisors
employed a disciplined, bottom-up approach to stock selection which has not
changed since they began managing this Portfolio in April of 1997. Their
investment horizon is long-term, with an average holding period of 3 to 4 years.
OpCap reports that the stock market was characterized in 1998 by exceptionally
strong crosscurrents, including wide performance disparities among individual
stocks. Many quality businesses that are inexpensive languished or even fell in
price, while many large cap growth stocks and technology issues with what OpCap
believed to be unsustainably high valuations became even more highly valued.
Subsequently, OpCap's equity performance suffered from the ownership of a
disproportionate number of quality mid cap companies that have reasonable
valuations. The mid cap sector, especially mid cap value stocks, lagged badly in
the year.
<PAGE> 16
MANAGEMENT DISCUSSION & ANALYSIS
12
Performance also suffered from the relatively limited holdings of technology
stocks. The stock market valued many technology companies as if they had
unlimited earnings growth potential. The most obvious example is the Internet
stocks, which rose dramatically in price in 1998 even though many Internet
companies have very limited revenues. For example, At Home Corporation with a
market capitalization of $11 billion had revenues for the year of $50 million.
While OpCap agrees that technology is revolutionary, they do not feel
comfortable paying high prices for large unknowns. Moreover, they believe that
highly priced technology stocks, including the Internet issues, may be
vulnerable to large declines when the euphoria that surrounds them subsides. For
these reasons, they sold their technology holdings when they believed they had
achieved a level of prudent valuation. For example, the EMC Corporation (EMC)
position was sold in August at a price of $59 per share, or 37 times 1998's
estimated earnings.
While technology stocks soared in 1998, many solid but less glamorous companies
with improving business results fell by the wayside. The most striking example
in the portfolio is the real estate company, Security Capital Group, which
experienced a 58% drop in its share price. This occurred even though the
company's funds from operations (the real estate equivalent to earnings per
share) are expected to rise 9% in 1998 and 20% in 1999. At year end, the
company's stock sold at less than eight times 1998 funds from operations and at
a large discount to its net asset value.
Even though OpCap's disciplined value style of investing did not produce strong
returns in 1998, they will stick to it because in their experience it has proven
itself over time. In other words, they will continue to invest carefully for the
long term, rather than chase highly valued stocks or buy companies that are in
vogue. Their objective is to control risk and generate superior returns by
acquiring stocks for substantially less than they are worth.
OpCap believes two of the most important long-term drivers of the price of a
stock are five-year average return on equity and five-year earnings per share
growth. In that regard, the companies they own have significantly higher return
on equity and comparable earnings per share growth than the average of the
stocks in the S&P 500 Index. The stocks owned by the Fund not only have
favorable business characteristics, but are also reasonably valued. Their
weighted average positive price/earnings ratio was 18.9 times at the end of the
year and their weighted average price to book ratio was 3.8 times, well below
the S&P 500 Index's levels of 26.7 times and 13.8 times, respectively. They
remain optimistic that investments in quality undervalued businesses will
generate superior returns over time.
In the second half of the year, OpCap established new positions in the common
stocks of Compaq Computer, Computer Associates International and News
Corporation Limited. Each is expected to deliver strong business results in
1999. In the case of Compaq, for instance, they believe the stock is inexpensive
because of uncertainties created by acquisitions and recent poor operating
performance. They believe management has a sound plan for integrating
acquisitions and improving core operating results. The five largest equity
holdings at December 31, 1998 were Security Capital Group (Class B), a real
estate company; Teva Pharmaceutical Industries Ltd., the
<PAGE> 17
MANAGEMENT DISCUSSION & ANALYSIS
13
leading global generic pharmaceutical company; Sabre Group Holdings, which
operates a travel reservation and information system; Monsanto Co., a life
sciences company; and Sprint Corp., a leading provider of telecommunications
services.
In addition to its holdings of common stocks, which represented 59.7% of the
Fund's net assets at year end, 34.7% of net assets were invested in fixed income
securities. The balance was invested in cash and cash equivalents. The fixed
income portion of the portfolio performed well in 1998. OpCap's fixed income
holdings include a diverse group of high-quality corporate bonds, U.S.
Government and agency securities, foreign government debt and tax-exempt
municipal bonds.
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
TOUCHSTONE S&P 500 MAJOR LEHMAN BROS. WIESENBERGER
VARIABLE INDEX AGGREGATE MAJOR BLEND: 60% BALANCED MINO
ANNUITY ------------- INDEX 2 S&P 40% LB INDEX
BALANCED --------------- AGGREGATE MINOR -------------
PORTFOLIO INDEX
---------- ---------------
<S> <C> <C> <C> <C> <C>
2/95 10000 10000 10000 10000 10000
3/95 10288 10295 10061 10202 10161
6/95 11279 11278 10674 11034 10825
9/95 11954 12174 10884 11645 11383
12/95 12018 12908 11348 12266 11795
3/96 12412 13600 11147 12569 12026
6/96 12545 14210 11210 12936 12236
9/96 12954 14649 11417 13278 12503
12/96 13922 15871 11760 14102 13089
3/97 13808 16296 11695 14303 13005
6/97 15170 19141 12125 15993 14339
9/97 16097 20575 12530 16935 15274
12/97 16382 21165 12895 17433 15396
3/98 17472 24118 13094 18986 16596
6/98 17531 24914 13402 19544 16923
9/98 15896 22436 13968 18731 15784
12/98 17136 27213 14015 21091 17777
</TABLE>
Average Annual Total Return
One Year Ended 12/31/98 4.6% Since Inception 2/23/95 15.0%
Cumulative Total Return
Since Inception 2/23/95 71.4%
Past performance is not indicative of future performance.
Touchstone Advisor Bond
Over the course of the annual period ended December 31, 1998, several investment
management strategies and techniques materially affected the performance of the
Touchstone Advisor Bond Sub-Account. Corporate bonds, as measured by the Lehman
Brothers Aggregate Index, rose 8.7% while the return of the Wiesenberger:
Corporate Bond (Investment Grade) Variable Annuity Average rose 6.3%. Total
return (net of fees and expenses) for the Touchstone Advisor Bond Sub-Account
was 7.4%.
As the manager of the Touchstone Advisor Bond Portfolio, Fort Washington
Investment Advisors continued to strategically rotate between govern-
<PAGE> 18
MANAGEMENT DISCUSSION & ANALYSIS
14
ment, corporate and mortgage securities throughout the year. Fort Washington
reports that the Fund generated solid returns in a market that was very
unfriendly to the average manager. The returns were the result of an above
average market yield and a portfolio duration equal to that of the Fund's
overall market index.
The portfolio was overweight in corporate and asset-backed securities. A 5% cash
position and a core position (5%) in preferred stocks generated significant
current income with low market volatility. The goal of the portfolio was to find
market niches of mispriced securities that generated above average returns for
their quality or duration. The portfolio position in preferred stock was a
perfect example of this strategy.
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
TOUCHSTONE VARIABLE LEHMAN BROTHERS AGGREGATE WIESENBERGER CORPORATION -
ANNUITY BOND II PORTFOLIO INDEX INV GRADE - VA
------------------------- ------------------------- --------------------------
<S> <C> <C> <C>
2/95 10000 10000 10000
3/95 10068 10061 10050
6/95 10702 10674 10651
9/95 10863 10884 10830
12/95 11309 11348 11216
3/96 11036 11147 11055
6/96 11048 11210 11087
9/96 11222 11417 11280
12/96 11506 11760 11606
3/97 11447 11695 11560
6/97 11794 12125 11935
9/97 12149 12530 12299
12/97 12322 12895 12524
3/98 12551 13094 12723
6/98 12815 13402 12944
9/98 13103 13968 13315
12/98 13228 14015 13315
</TABLE>
Average Annual Total Return
One Year Ended 12/31/98 7.4% Since Inception 2/23/95 7.5%
Cumulative Total Return
Since Inception 2/23/95 32.3%
Past performance is not indicative of future performance.
Touchstone Advisor Standby Income
Over the course of the annual period ended December 31, 1998, several investment
management strategies and techniques materially affected the performance of the
Touchstone Advisor Standby Income Sub-Account. Cash equivalents, as measured by
the Smith Barney 3-Month Treasury Bill Index rose 5.1% while the Merrill Lynch
91-Day Treasury Index rose 5.2% and the return of the 30-Day Money Market Yield
Index rose 5.1%. Total return (net of fees and expenses) for the Touchstone
Advisor Standby Income Sub-Account was 4.9%.
<PAGE> 19
MANAGEMENT DISCUSSION & ANALYSIS
15
As the manager of the Touchstone Advisor Standby Income Portfolio, Fort
Washington Investment Advisors maintained its core investment strategy by using
a sector rotation strategy and trend analysis. As the year began, the Portfolio
was overweight in commercial paper and had an average maturity that matched the
3-Month Treasury Bill Index. As the year concluded, they had a significantly
higher corporate and asset-backed weighting. They had also extended the average
maturity of the fund making it roughly 50% longer than the 3-month Treasury
bill. This dual focus restructuring was accomplished by rotating into corporate
and asset-backed securities as spreads widened to near historic highs. In the
process, Fort Washington was able to pare back their commercial paper exposure
and better position the portfolio for the coming year.
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
TOUCHSTONE VARIABLE
ANNUITY INCOME 30-DAY MM MINOR MERRILL 91-DAY MINOR NEW SBR 3-MTH
OPPORTUNITY PORTFOLIO INDEX INDEX TREASURY INDEX
--------------------- --------------- -------------------- --------------
<S> <C> <C> <C> <C>
2/95 10000 10000 10000 10000
3/95 10059 10046 10051 10049
6/95 10135 10185 10202 10196
9/95 10223 10321 10347 10339
12/95 10365 10457 10499 10480
3/96 10469 10586 10628 10616
6/96 10582 10713 10765 10750
9/96 10701 10842 10914 10890
12/96 10820 10974 11056 11031
3/97 10925 11107 11197 11171
6/97 11049 11246 11350 11315
9/97 11191 11387 11502 11461
12/97 11315 11532 11646 11610
3/98 11440 11679 11797 11760
6/98 11576 11826 11949 11909
9/98 11727 11975 12119 12060
12/98 11868 12114 12254 12198
</TABLE>
Average Annual Total Return
One Year Ended 12/31/98 4.9% Since Inception 2/23/95 4.5%
Cumulative Total Return
Since Inception 2/23/95 18.7%
Past performance is not indicative of future performance.
<PAGE> 20
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 2
STATEMENT OF NET ASSETS 16
December 31, 1998
<TABLE>
<S> <C> <C> <C>
ASSETS:
Investments at current market value:
Select Advisors Variable Insurance
Trust
Emerging Growth Portfolio (11,189 shares, cost $166,980) $ 171,529
International Equity Portfolio (11,556 shares, cost $152,581) 161,316
Balanced Portfolio (12,287 shares, cost $174,676) 171,523
Income Opportunity Portfolio (20,202 shares, cost $196,125) 175,556
Standby Income Portfolio (46,659 shares, cost $467,053) 467,053
Value Plus Portfolio (10 shares, cost $ 97) 102
Select Advisors Portfolios
Growth & Income Portfolio II (0.318505% beneficial interest $201,433) 237,910
Bond Portfolio II (0.283934% beneficial interest $ 96,433) 109,301
- ---------------------------------------------------------------------------------------------------
Total assets 1,494,290
LIABILITIES:
Accounts payable 35
- ---------------------------------------------------------------------------------------------------
Total liabilities 35
Total net assets $1,494,255
- ---------------------------------------------------------------------------------------------------
NET ASSETS:
Variable annuity contracts $1,493,051
Retained in the variable account by Western-Southern Life Assurance Company 1,204
- ---------------------------------------------------------------------------------------------------
Total net assets $1,494,255
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 21
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 2
17 STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME STANDBY
GROWTH EQUITY BALANCED OPPORTUNITY INCOME VALUE PLUS
TOTAL SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME:
Dividends and capital gains $ 90,346 $ 5,973 $ 5,347 $ 9,305 $ 63,278 $ 6,443
Miscellaneous income (loss) (4,698) 188 (1,300) (1,800) (2,054) 388 $ 5
EXPENSES:
Mortality and expense risk,
and administrative charge 13,748 1,845 1,312 1,432 5,436 928 5
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 71,900 4,316 2,735 6,073 55,788 5,903 0
- --------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation)
on investments 29,707 (12,141) 6,483 (8,062) 23,279 43 5
Realized gain (loss) on
investments (60,160) 5,778 19,119 10,103 (95,409) 19 230
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (30,453) (6,363) 25,602 2,041 (72,130) 62 235
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from
operations 41,447 (2,047) 28,337 8,114 (16,342) 5,965 235
- --------------------------------------------------------------------------------------------------------------------------------
CONTRACT OWNERS ACTIVITY:
Payments received from
contract owners 1,109,428 59,053 60,324 32,031 127,683 641,970 100
Net transfers between sub-
accounts -- 103,499 13,119 24,334 (830,696) 617,134 (233)
Withdrawals and surrenders (1,739,080) (247,322) (89,500) (61,060) (131,066) (925,092) --
Contract maintenance charge (1,224) (200) (207) (238) (211) (43) --
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
from contract activity (630,876) (84,970) (16,264) (4,933) (834,290) 333,969 (133)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets (589,429) (87,017) 12,073 3,181 (850,632) 339,934 102
Net assets, at beginning of
period 2,083,684 258,541 149,238 168,337 1,026,184 127,103 --
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, at end of period $1,494,255 $171,524 $161,311 $171,518 $ 175,552 $467,037 $102
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH &
INCOME BOND
SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C>
INCOME:
Dividends and capital gains -- --
Miscellaneous income (loss) $ (50) $ (75)
EXPENSES:
Mortality and expense risk,
and administrative charge 2,156 634
- ---------------------------------------------------------------------
Net investment income (loss) (2,206) (709)
- ----------------------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation)
on investments 13,754 6,346
Realized gain (loss) on
investments -- --
- -----------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 13,754 6,346
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from
operations 11,548 5,637
- -------------------------------------------------------------------------------------------------------------------------
CONTRACT OWNERS ACTIVITY:
Payments received from
contract owners 99,943 88,324
Net transfers between sub-
accounts 90,949 (18,106)
Withdrawals and surrenders (232,204) (52,836)
Contract maintenance charge (285) (40)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
from contract activity (41,597) 17,342
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets (30,049) 22,979
Net assets, at beginning of
period 267,959 86,322
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, at end of period $237,910 $109,301
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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> <C>
INCOME:
Dividends and capital gains $ 98,985 $ 13,867 $ 7,984 $ 12,525 $ 48,689 $ 15,920
Miscellaneous income (loss) 2,046 424 242 151 491 (21)
EXPENSES:
Mortality and expense risk,
and administrative charge 8,013 946 799 789 1,297 2,346
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 93,018 13,345 7,427 11,887 47,883 13,553
- --------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation)
on investments (16,192) 15,477 (131) 1,715 (45,887) (43)
Realized gain (loss) on
investments 15,346 7,624 4,509 2,405 1,824 (1,016)
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (846) 23,101 4,378 4,120 (44,063) (1,059)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from
operations 92,172 36,446 11,805 16,007 3,820 12,494
- --------------------------------------------------------------------------------------------------------------------------------
CONTRACT OWNERS ACTIVITY:
Payments received from
contract owners 1,524,644 33,978 41,159 51,326 59,528 1,247,173
Net transfers between sub-
accounts -- 144,764 47,420 48,835 909,558 (1,310,153)
Withdrawals and surrenders (68,116) (9,166) (7,648) (2,812) (3,655) (36,193)
Contract maintenance charge (665) (126) (111) (118) (102) (37)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
from contract activity 1,455,863 169,450 80,820 97,231 965,329 (99,210)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets 1,548,035 205,896 92,625 113,238 969,149 (86,716)
Net assets, at beginning of
period 535,649 52,645 56,613 55,099 57,035 213,819
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, at end of period $2,083,684 $258,541 $149,238 $168,337 $1,026,184 $ 127,103
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH &
INCOME BOND
SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C>
INCOME:
Dividends and capital gains $ -- $ --
Miscellaneous income (loss) 719 40
EXPENSES:
Mortality and expense risk,
and administrative charge 1,413 423
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (694) (383)
- --------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation)
on investments 8,426 4,251
Realized gain (loss) on
investments -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 8,426 4,251
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from
operations 7,732 3,868
- --------------------------------------------------------------------------------------------------------------------------------
CONTRACT OWNERS ACTIVITY:
Payments received from
contract owners 58,171 33,309
Net transfers between sub-
accounts 143,810 15,766
Withdrawals and surrenders (8,642) --
Contract maintenance charge (140) (31)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
from contract activity 193,199 49,044
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets 200,931 52,912
Net assets, at beginning of
period 67,028 33,410
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, at end of period $267,959 $ 86,322
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 22
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 2
NOTES 18
<PAGE> 23
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 2
19
NOTES TO FINANCIAL STATEMENTS
1. Organization
Western-Southern Life Assurance Company Separate Account 2 (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 eight investment sub-accounts each of which invests in the
corresponding portfolio (a "Portfolio") of Select Advisors Variable Insurance
Trust or of Select Advisors Portfolios, each of which is an open-ended
diversified management investment company. The sub-account's value fluctuates on
a day to day basis depending on the investment performance of the Portfolio in
which each sub-account is invested. 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 description 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 .80% of the contract value.
The Company also deducts an annual contract maintenance charge of $35 from the
contract value on each contract anniversary and upon any full surrender.
<PAGE> 24
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 2
20
Notes to Financial Statements continued
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.
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, 1998 to December 31, 1998.
<TABLE>
<CAPTION>
PURCHASES SALES
<S> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio $ 202,196 $ 282,854
International Equity Portfolio 93,458 106,988
Balanced Portfolio 129,570 128,432
Income Opportunity Portfolio 207,511 986,021
Standby Income Portfolio 1,581,274 1,241,366
Value Plus Portfolio 4,605 4,738
Select Advisors Portfolio
Growth & Income Portfolio II 235,698 279,501
Bond Portfolio II 135,081 118,447
</TABLE>
<PAGE> 25
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 2
21
7. Unit Values
The following table shows a summary of units outstanding
for variable annuity contracts for the period January 1,
1998 to December 31, 1998.
<TABLE>
<CAPTION>
TRANSFERS
BEGINNING UNITS UNITS BETWEEN ENDING UNIT ENDING
UNITS PURCHASED REDEEMED SUB-ACCOUNTS UNITS VALUE VALUE
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth
Sub-Account 15,058 3,505 (15,161) 6,347 9,749 17.592298 $ 171,524
International Equity
Sub-Account 10,507 3,615 (5,519) 921 9,524 16.937997 $ 161,311
Balanced Sub-Account 10,276 1,838 (3,595) 1,490 10,009 17.135699 $ 171,518
Income Opportunity
Sub-account 58,064 8,109 (8,127) (46,622) 11,424 15.367598 $ 175,552
Standby Income
Sub-Account 11,233 54,614 (79,371) 52,878 39,354 11.867636 $ 467,037
Value Plus Sub-Account -- 10 -- -- 10 10.156803 $ 102
Growth & Income
Sub-Account 15,766 5,442 (13,341) 5,265 13,132 18.117147 $ 237,910
Bond Sub-Account 7,005 6,761 (4,064) (1,439) 8,263 13.227693 $ 109,301
- ------------------------------------------------------------------------------------------------------------
$1,494,255
- ------------------------------------------------------------------------------------------------------------
</TABLE>
8. Subsequent Event
Effective immediately after the close of business on
December 31, 1998, two new portfolios, namely Touchstone
Growth & Income Fund and Touchstone Bond Fund were
established in the Select Advisors Variable Insurance
Trust. Effective after the close of business on December
31, 1998, Select Advisors Variable Insurance Trust was
renamed Touchstone Variable Series Trust ("VST"). The
shares of the newly established VST: Touchstone Growth &
Income Fund and VST: Touchstone Bond Fund, (collectively
"VST Funds") were substituted for shares of the Select
Advisors Portfolios: Growth & Income Portfolio II and the
Select Advisors Portfolios: Bond Portfolio II respectively,
(collectively "SAP Funds") held by Western-Southern Life
Assurance Company Separate Account 1 and Separate Account 2
and The Western and Southern Life Insurance Company
Separate Account A. This transaction was achieved through
an in-kind redemption from the SAP Funds and a
corresponding in-kind contribution to the VST Funds of the
net assets of the SAP Funds. As a result of this
transaction, the SAP Funds ceased to be available as
investment options for Separate Accounts 1, 2 and A. The
VST Funds have substantially identical investment
objectives, policies and risks as those of the respective
SAP Funds. In addition, the VST Funds will employ the same
investment advisor and investment techniques as those
employed by the respective SAP Funds. The SAP Funds will be
dissolved and terminated as soon as practicable.
<PAGE> 26
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 2
22
Notes to Financial Statements continued
9. Supplementary Information -- Selected Per Share Data and Ratios
TOUCHSTONE VARIABLE ANNUITY
Selected data for an accumulation unit outstanding throughout each year:
<TABLE>
<CAPTION>
TOUCHSTONE EMERGING GROWTH FUND SUB-ACCOUNT
---------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
PER SHARE DATA
Investment income $ 0.612142 $ 0.929048 $ 0.337947 $ 0.789879
Expenses 0.134380 0.118607 0.098968 0.073756
- ----------------------------------------------------------------------------------------
Net investment income
(loss) 0.477762 0.810441 0.238979 0.716123
Net realized and unrealized
gain (loss) on
investments (0.05531) 3.411742 0.967583 1.024979
- ----------------------------------------------------------------------------------------
Net increase (decrease) in
net asset value 0.422451 4.222183 1.206562 1.741102
Beginning of period 17.169847 12.947664 11.741102 10.000000
- ----------------------------------------------------------------------------------------
End of period $17.592298 $17.169847 $12.947664 $11.741102
- ----------------------------------------------------------------------------------------
RATIOS
Ratio of operating expense
to average net assets (%) 0.86% 0.61% 0.76% 0.64%
Ratio of net investment
income (loss) to average
net assets (%) 2.01% 8.58% 0.97% 12.73%
<CAPTION>
TOUCHSTONE INTERNATIONAL EQUITY SUB-ACCOUNT
---------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
PER SHARE DATA
Investment income $ 0.560971 $ 0.771640 $ 0.084052 $ 0.033748
Expenses 0.128478 0.107978 0.095651 0.073298
- ----------------------------------------------------------------------------------------
Net investment income
(loss) 0.432493 0.663662 (0.011599) (0.039550)
Net realized and unrealized
gain (loss) on
investments 2.302091 1.063784 1.204897 1.322219
- ----------------------------------------------------------------------------------------
Net increase (decrease) in
net asset value 2.734584 1.727446 1.193298 1.282669
Beginning of period 14.203413 12.475967 11.282669 10.000000
- ----------------------------------------------------------------------------------------
End of period $16.937997 $14.203413 $12.475967 $11.282669
- ----------------------------------------------------------------------------------------
RATIOS
Ratio of operating expense
to average net assets (%) 0.84% 0.78% 0.70% 0.67%
Ratio of net investment
income (loss) to average
net assets (%) 1.76% 7.22% 1.08% 0.17%
</TABLE>
<TABLE>
<CAPTION>
TOUCHSTONE BALANCED SUB-ACCOUNT
---------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
PER SHARE DATA
Investment income $ 0.918046 $ 1.317477 $ 0.569146 $ 1.125981
Expenses 0.134922 0.120752 0.101787 0.076118
- ----------------------------------------------------------------------------------------
Net investment income
(loss) 0.783124 1.196725 0.467359 1.049863
Net realized and unrealized
gain (loss) on
investments (0.029731) 1.263315 1.436884 0.968160
- ----------------------------------------------------------------------------------------
Net increase (decrease) in
net asset value 0.753393 2.460040 1.904243 2.018023
Beginning of period 16.382306 13.922266 12.018023 10.000000
- ----------------------------------------------------------------------------------------
End of period $17.135699 $16.382306 $13.922266 $12.018023
- ----------------------------------------------------------------------------------------
RATIOS
Ratio of operating expense
to average net assets (%) 0.84% 0.71% 0.78% 0.69%
Ratio of net investment
income (loss) to average
net assets (%) 3.58% 10.64% 5.34% 14.78%
<CAPTION>
TOUCHSTONE INCOME OPPORTUNITY SUB-ACCOUNT
---------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
PER SHARE DATA
Investment income $ 1.751570 $ 2.241559 $ 1.977619 $ 1.550039
Expenses 0.134780 0.136658 0.113609 0.076165
- ----------------------------------------------------------------------------------------
Net investment income
(loss) 1.616790 2.104901 1.864010 1.473874
Net realized and unrealized
gain (loss) on
investments (3.922423) (0.318302) 1.449756 1.098992
- ----------------------------------------------------------------------------------------
Net increase (decrease) in
net asset value (2.305633) 1.786599 3.313766 2.572866
Beginning of period 17.673231 15.886632 12.572866 10.000000
- ----------------------------------------------------------------------------------------
End of period $15.367598 $17.673231 $15.886632 $12.572866
- ----------------------------------------------------------------------------------------
RATIOS
Ratio of operating expense
to average net assets (%) 0.90% 0.24% 0.75% 0.66%
Ratio of net investment
income (loss) to average
net assets (%) 9.28% 8.84% 12.25% 10.26%
</TABLE>
* Calculation of the Value Plus Unit Values began May 1, 1998, when that
sub-account commenced operations.
<PAGE> 27
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 2
23
<TABLE>
<CAPTION>
TOUCHSTONE STANDBY INCOME SUB-ACCOUNT
---------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
PER SHARE DATA
Investment income $ 0.633473 $ 0.594041 $ 0.550219 $ 0.483304
Expenses 0.092320 0.088130 0.084812 0.068599
- --------------------------------------------------------------------------------------------
Net investment income
(loss) 0.541153 0.505911 0.465407 0.414705
Net realized and unrealized
gain (loss) on
investments 0.011590 (0.010926) (0.010339) (0.049865)
- --------------------------------------------------------------------------------------------
Net increase (decrease) in
net asset value 0.552743 0494985 0.455068 0.364840
Beginning of period 11.314893 10.819908 10.364840 10.000000
- --------------------------------------------------------------------------------------------
End of period $11.867636 $11.314893 $10.819908 $10.364840
- --------------------------------------------------------------------------------------------
RATIOS
Ratio of operating expense
to average net assets (%) 0.31% 1.38% 0.50% 0.78%
Ratio of net investment
income (loss) to average
net assets (%) 1.99% 7.95% 2.67% 4.35%
</TABLE>
<TABLE>
<CAPTION>
TOUCHSTONE GROWTH & INCOME SUB-ACCOUNT
---------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995
<S> <C> <C> <C>
PER SHARE DATA
Investment income $ -- $ -- $ -- $ --
Expenses 0.141929 0.122934 0.108541 0.075378
- -------------------------------------------------------------------------------------------
Net investment income
(loss) (0.141929) (0.122934) (0.108541) (0.075378)
Net realized and unrealized
gain (loss) on
investments 1.263248 2.827415 1.865939 2.609327
- -------------------------------------------------------------------------------------------
Net increase (decrease) in
net asset value 1.121319 2.704481 1.757398 2.533949
Beginning of period 16.995828 14.291347 12.533949 10.000000
- -------------------------------------------------------------------------------------------
End of period $18.117147 $16.995828 $14.291347 $12.533949
- -------------------------------------------------------------------------------------------
RATIOS
Ratio of operating expense
to average net assets (%) 0.85% 0.84% 0.87% 0.62%
Ratio of net investment
income (loss) to average
net assets (%) (0.87)% (0.41)% (9.54)% (0.55)%
</TABLE>
<TABLE>
<CAPTION>
TOUCHSTONE
VALUE PLUS
TOUCHSTONE BOND SUB-ACCOUNT SUB-ACCOUNT*
--------------------------------------------------------- -------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED*
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Investment income $ -- $ -- $ -- $ -- $ 0.029387
Expenses 0.101441 0.094423 0.089697 0.071770 0.050319
- --------------------------------------------------------------------------------------------------------
Net investment income
(loss) (0.101144) (0.094423) (0.089697) (0.071770) (0.020932)
Net realized and unrealized
gain (loss) on
investments 1.007083 0.910882 0.285772 1.381287 0.177735
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net asset value 0.905642 0.816459 0.196075 1.309517 0.156803
Beginning of period 12.322051 11.505592 11.309517 10.000000 10.000000
- --------------------------------------------------------------------------------------------------------
End of period $13.227693 $12.322051 $11.505592 $11.309517 $10.156803
- --------------------------------------------------------------------------------------------------------
RATIOS
Ratio of operating expense
to average net assets (%) 0.65% 0.71% 0.83% 0.69% 9.80%
Ratio of net investment
income (loss) to average
net assets (%) (0.72)% (0.64)% (2.09)% (0.66)% 0.00%
</TABLE>
<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
REPORT OF INDEPENDENT ACCOUNTANTS 24
To the Contractholders and Board of Directors of
Western-Southern Life Assurance Company
In our opinion, the accompanying statement of net assets and statement of
operations and changes in net assets present fairly, in all material respects,
the financial position of Western-Southern Life Assurance Company Separate
Account 2 as of December 31, 1998 and the results of their operations and
changes in net assets for the years ended December 31, 1998 and 1997 in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
January 22, 1999
Cincinnati, Ohio
