<PAGE>
USAA LIFE INSURANCE COMPANY
VARIABLE ANNUITY
================================================================================
ANNUAL REPORT
December 31, 1998
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<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
President's Message....................................................... 3
USAA Life Variable Annuity Separate Account......................... A-7 - A-17
Overview of the Variable Annuity Fund Accounts............................ A-8
Independent Auditors' Report.............................................. A-9
Statements of Assets and Liabilities...................................... A-10
Statements of Operations.................................................. A-11
Statements of Changes in Net Assets....................................... A-12
Notes to Financial Statements............................................. A-14
USAA Life Investment Trust......................................... B-19 - B-71
USAA Life Fund Overviews........................................... B-21 - B-38
Independent Auditors' Report.............................................. B-39
Portfolios of Investments.......................................... B-40 - B-59
Notes to Portfolios of Investments........................................ B-60
Statements of Assets and Liabilities...................................... B-62
Statements of Operations.................................................. B-63
Statements of Changes in Net Assets....................................... B-64
Notes to Financial Statements............................................. B-66
Scudder Variable Life Investment Fund (VLIF)
Capital Growth Portfolio......................................... C-73 - C-94
Letter from the Fund's President.......................................... C-75
Capital Growth Portfolio Management Discussion............................ C-76
Capital Growth Performance Update......................................... C-77
Capital Growth Portfolio Summary.......................................... C-78
Investment Portfolios, Financial Statements, and Financial Highlights
Capital Growth Portfolio....................................... C-79 - C-87
Notes to Financial Statements............................................. C-88
The Alger American Fund
Alger American Growth Portfolio............................... D-95 - D-108
Schedule of Investments.................................................. D-100
Financial Highlights..................................................... D-102
Statement of Assets and Liabilities...................................... D-103
Statement of Operations.................................................. D-104
Statement of Changes in Net Assets....................................... D-105
Notes to Financial Statements............................................ D-106
BT Insurance Funds Trust......................................... E-109 - E-172
Equity 500 Index Fund............................................ E-110 - E-125
Small Cap Index Fund............................................. E-126 - E-153
EAFE(R) Equity Index Fund........................................ E-154 - E-172
This report is for the information of USAA Life Variable Annuity contractowners
and others who have received a copy of the currently effective Variable Annuity
prospectus. It may be used as sales literature only when preceded or accompanied
by a current prospectus which includes complete information. The USAA Life
Variable Annuity is distributed by USAA Investment Management Company, a
registered broker dealer.
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<PAGE>
USAA LIFE VARIABLE ANNUITY ANNUAL REPORT
- -------------------------------------------------------------------------------
PRESIDENT'S MESSAGE
From the desk of Ed Rosane
1998 will be remembered as a highly volatile year for the stock market. With
most of the market's 1998 returns being wiped out in late summer, the market
bounced back during the fourth quarter, posting one of the best quarters of the
decade. The Dow Jones Industrial Average closed at 9181.43 on December 31, an
increase of 16.10% over 1997's year-end close.
An overview of historical performance, as well as accumulation unit values, can
be found on page A-8 of this Report.
<PAGE>
USAA LIFE VARIABLE ANNUITY ANNUAL REPORT
- -------------------------------------------------------------------------------
PRESIDENT'S MESSAGE
Annuitization: Income to Last a Lifetime
One important way to secure your retirement is through annuitization.
Annuitization is a means of guaranteeing an income stream. Some options
provide income for life while others can be selected for a specified period
of time or dollar amount. Depending on the option you select, annuity income
can even continue to your beneficiaries if you die before the end of the
guaranteed period. As an owner of a variable annuity, you have the option to
annuitize your contract when you decide to access your money. Following are a
few of the fixed annuity payout options from which you can choose:
Income Payments for Life
Under this option, you are guaranteed payments for the rest of your life.
Although this option offers the highest possible income for a lifetime, there
is no beneficiary designated. Therefore, the payments stop upon the death of
the Annuitant.
Income Payments for Life with a Certain Period Guaranteed
This option also guarantees payments for the life of the Annuitant. However,
unlike option 1, the Annuitant can designate a beneficiary. Upon the death of
the Annuitant, the beneficiary will continue to receive payments for the
remainder of the contract's guaranteed period.
Joint and Survivor Life Income
Under this option, the Annuitant and a Joint Annuitant are guaranteed
payments as long as they live. If either the Annuitant or the Joint Annuitant
die, the payments will continue to be made to the survivor for the remainder
of his/her life.
Income for a Specified Period
This option guarantees payments for whatever period of time the Annuitant
specifies (not to exceed 30 years). If the Annuitant dies before the end of
the period, the remaining payments are made to the beneficiary.
Retirement Income:
How Much Will You Need?
For many Americans, the time spent in retirement will be almost as long as
the time spent in the work force. Today's retirees are living longer,
healthier and more active lives. That's why now, more than ever, it's
important to plan ahead to ensure you will have enough income during
retirement to do all the things you've always dreamed of doing.
Take a look at the following table - it illustrates the option of Life with In
come Guaranteed for 15 years, for three contract values. For example, a male,
age 70, has acquired $250,000 in his contract. By annuitizing his contract,
he could receive $312,946 over 15 years, with monthly payments of $1,739.
And, the payments would continue beyond 15 years, throughout his lifetime.
Money Saved By Monthly Annuity Total Income Received
Age 70 Income After 15 yrs.
$250,000 $1,739 $312,946
500,000 3,477 625,892
1,000,000 6,954 1,251,783
These examples are for illustrative purposes only and are not intended to
reflect the performance of the USAA Life Insurance Variable Annuity. They are
based on a male annuitizing at the age of 70 and selecting a Life with Income
Guaranteed for 15 years option. The monthly fixed annuity income rates are those
in effect on 1/25/99 and are subject to change. Once a fixed annuity payout is
selected, payment amounts will not change.
As the table above illustrates, when you annuitize with this option, you have
the opportunity to get more out of your contract during the distribution phase
than you acquired during the accumulation phase.
4 ANNUAL REPORT 1998
<PAGE>
USAA LIFE VARIABLE ANNUITY ANNUAL REPORT
- -------------------------------------------------------------------------------
PRESIDENT'S MESSAGE
Comparing
Annuitization Options
Only you can determine which annuitization option is best for you. The table
below illustrates the monthly income stream of a few of the fixed annuity
payout options for a contract value of $250,000.
Annuitization Monthly
Option Payment
- -------------------------------------------------
Payments for life $2,068
- -------------------------------------------------
Payments for 15 years $1,969
- -------------------------------------------------
Payments guaranteed for the life
of the Annuitant and Joint Annuitant $1,600
- -------------------------------------------------
This table is for illustrative purposes only and is not intended to reflect the
performance of the USAA Life Insurance Variable Annuity. The Payments for Life
and Payments for 15 Years options are based on a $250,000 amount for a male, age
70. The Annuitant and Joint Annuitant Payments for Life option is based on a
$250,000 amount for a male and female both age 70. Fixed annuity payout rates
are for those in effect on January 25, 1999. Annuity payout rates are subject to
change. However, once a fixed annuity payout is selected, your payments will not
change.
After reviewing the above annuitization examples, you may have a better idea of
how your savings for retirement may be converted into retirement income. These
examples were designed to help you determine whether the value of your contract
will translate into an income stream that meets your needs during retirement.
Looking Forward
At USAA Life, we continually strive to improve our processes to make it
easier for you to do business with us. I am pleased to announce that you can
now access the following information about your Variable Annuity, 24-hours a
day, 7 days a week, through our USAA TouchLine(SM):
* Total value of your contract
* Value of the fund accounts within your contract
* Number of units and unit value of each fund account
* Contribution allocation percentage by fund account
* Accumulation unit values for all variable fund accounts
* Fixed Fund account's new money interest rate and renewal rate
* Amount and effective date of your last payment and/or withdrawal
Call 1-800-531-5433
To access this information, you will need your USAA number and the unique PIN
you use for other USAA Touchline services. If you have not established a unique
PIN, it is the last four digits of your Social Security number. To assure the
security of your contract, we suggest you change your PIN to a new four-digit
number. We hope this service will be valuable to you and encourage you to use it
if you have a need to review your contract.
In 1999, we will continue to look for ways to improve our Variable Annuity,
to ensure that we are providing you with the value and service you expect
from USAA. I encourage you to review this Report and call a USAA Life
Account Representative to discuss any questions you may have or to make
changes to your investment allocation.
1-800-531-2923
(In San Antonio, 456-9035)
Sincerely,
/s/ Edwin Rosane
- ----------------------------
Edwin Rosane, CLU, FLMI
President
USAA Life Insurance Company
1998 ANNUAL REPORT 5
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<PAGE>
USAA LIFE
VARIABLE ANNUITY
SEPARATE ACCOUNT
================================================================================
ANNUAL REPORT
December 31, 1998
[USAA LOGO APPEARS HERE]
<PAGE>
SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
- -------------------------------------------------------------------------------
AN OVERVIEW
<TABLE>
<CAPTION>
Fund Accounts December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
AUV Average AUV Average AUV Average
Accumulation Annual Annual Annual
Inception Unit Value Total Return Total Return Total Return
Fund Account Objective Date (AUV) One Year Three Year Since Inception
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Seeks the highest level of current
USAA Life income consistent with preservation of
Money Market capital and maintenance of liquidity 2/6/95 $ 1.18 4.32% 4.11% 4.20%
USAA Life Seeks maximum current income without
Income undue risk to principal 2/6/95 $14.09 8.19% 5.83% 9.10%
USAA Life
Growth and Seeks capital growth and current 2/6/95 $20.47 6.02% 17.52% 20.08%
Income income
USAA Life
World Growth/1/ Seeks long-term capital appreciation 2/6/95 $17.86 10.50% 14.24% 15.95%
USAA Life Seeks long-term capital growth,
Diversified consistent with preservation of
Assets capital and balanced by current income 2/6/95 $17.97 8.69% 13.55% 16.14%
USAA Life
Aggressive
Growth Appreciation of capital 5/1/97 $13.99 19.16% -- 22.26%
USAA Life Capital appreciation with current
International/1/ income as a secondary objective 5/1/97 $10.42 2.91% -- 2.43%
Scudder VLIF
Capital Growth Seeks to maximize long-term
Portfolio capital growth 2/6/95 $24.45 22.20% 24.82% 25.68%
Alger American Seeks long-term capital
Growth Portfolio appreciation 2/6/95 $26.81 46.83% 26.87% 28.68%
Seeks to match as closely as
possible the performance of the
Morgan Stanley Capital International
Europe Australia Far East (EAFE)
BE EAFE (R) Index before the deduction of Fund
Equity Index/1/ expenses 5/1/98 $10.39 -- -- 3.78%/2/
Seeks to match as closely as
possible the performance of the
Russell 2000 (R) Mark Small
BT Small Stock Index before the deduction
Cap Index of Fund expenses 5/1/98 $ 8.83 -- -- -11.83%/2/
Seeks to match as closely as
possible the performance of the
BT Equity S&P 500 (R) Mark Index/3/, before
500 Index the deduction of Fund expenses 5/1/98 $11.00 -- -- 9.94%/2/
- ----------------------
</TABLE>
/1/ Foreign investing is subject to additional risks, such as currency
fluctuations, market illiquidity, and political instability, which are
discussed in the Variable Annuity prospectus.
/2/ Total returns for periods of less than one year are not annualized. These
returns are cumulative.
/3/ The S&P 500 Index is an unmanaged index representing the average
performance of a group of 500 widely held, publicly traded stocks. It is
not possible to invest directly in the S&P 500 Index.
The AUV total return figures are computed in accordance with a formula
prescribed by the Securities and Exchange Commission which includes the
deduction of all contract charges. . The performance data quoted represent past
performance and do not represent the actual experience of amounts invested by a
particular owner. Past performance is not a guarantee of future results. . An
investment in the USAA Life Money Market Fund is not insured or guaranteed by
the F. D. I. C. or any other government agency. Although the fund seeks to
preserve the value of your investment at $1 per share, it is possible to lose
money by investing in the fund.
A-8 ANNUAL REPORT 1998
<PAGE>
SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of USAA Life Insurance Company and
Contractowners of the Separate Account of USAA Life Insurance Company:
We have audited the accompanying statements of assets and liabilities as of
December 31, 1998, the related statements of operations for the year ended
December 31, 1998, the statements of changes in net assets for each of the
years or periods in the two-year period ended December 31, 1998, and the unit
value information presented in note 6 for each of the years or periods in the
four-year period ended December 31, 1998, for the USAA Life Money Market Fund
Account, USAA Life Income Fund Account, USAA Life Growth and Income Fund
Account, USAA Life World Growth Fund Account, USAA Life Diversified Assets
Fund Account, USAA Life Aggressive Growth Fund Account, USAA Life
International Fund Account, the Fund Account of the Capital Growth
Portfolio-Class A shares of the Scudder Variable Life Investment Fund
(Scudder VLIF Capital Growth Portfolio Fund Account), and the Fund Account of
the American Growth Portfolio of the Alger American Fund (Alger American
Growth Portfolio Fund Account); the statements of assets and liabilities as
of December 31, 1998, the related statements of operations,
statements of changes in net assets, and the unit value information presented
in note 6, for the period May 1, 1998 (commencement of operations) through
December 31, 1998, for the Fund Accounts of the Equity 500 Index Fund, Small Cap
Index Fund and EAFE (R) Mark Equity Index Fund, which are funds of the Bankers
Trust (BT) Insurance Funds Trust series (BT Equity 500 Index Fund Account, BT
Small Cap Index Fund Account and BT EAFE (R) Equity Index Fund Account),
available within the Separate Account of USAA Life Insurance Company. These
financial statements and the unit value information 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 the
unit value information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Investments owned at December 31, 1998 were verified
by examination of the underlying portfolios of the USAA Life Investment Trust or
through confirmation for the Scudder, Alger, and BT Insurance Funds Trust Funds'
portfolios. 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 the unit value information referred
to above present fairly, in all material respects, the financial position of the
aforementioned fund accounts of the Separate Account of USAA Life Insurance
Company as of December 31, 1998, the results of their operations for the year or
period ended December 31, 1998, the changes in their net assets for each of the
years or periods in the two-year period ended December 31, 1998, and the unit
value information for each of the years or periods in the four-year period then
ended, as described in the first paragraph above, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
---------------------------
KPMG LLP
San Antonio, Texas
February 5, 1999
<PAGE>
SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
VARIABLE FUND ACCOUNTS (In Thousands, except Per Unit Data) December 31, 1998
<TABLE>
<CAPTION>
Investment at
Fund Shares Cost Market Vlaue
----------- -------------- --------------
<S> <C> <C> <C>
Assets
Investments at market value:
USAA Life Money Market Fund 22,110 $ 22,110 $ 22,110
USAA Life Income Fund 1,664 18,924 18,119
USAA Life Growth and Income Fund 4,171 71,258 75,710
USAA Life World Growth Fund 1,329 18,132 19,096
USAA Life Diversified Assets Fund 2,199 31,298 33,141
USAA Life Aggressive Growth Fund 320 3,870 4,442
USAA Life International Fund 155 1,677 1,596
Scudder VLIF Capital Growth Portfolio - Class A shares 1,575 30,599 37,720
Alger American Growth Portfolio 1,037 39,992 55,172
BT Equity 500 Index Fund 982 11,323 12,500
BT Small Cap Index Fund 225 2,290 2,267
BT EAFE(R) Equity Index Fund 51 538 566
----------- --------
Total investments $ 252,011 282,439
Other assets:
Receivable from USAA Life Insurance Company 1
--------
Total assets 282,440
Liabilities
Payable to USAA Life Insurance Company 1
--------
Net assets $282,439
========
Fund Account Accumulation
Units Unit Value Annuity Reserves
------------- ------------ ----------------
Net assets
Deferred annuity contracts in the accumulation period:
USAA Life Money Market Fund Account 18,760 $ 1.178565 $22,110
USAA Life Income Fund Account 1,280 14.089499 18,034
USAA Life Growth and Income Fund Account 3,697 20.468785 75,682
USAA Life World Growth Fund Account 1,066 17.860722 19,046
USAA Life Diversified Assets Fund Account 1,841 17.974654 33,087
USAA Life Aggressive Growth Fund Account 317 13.993064 4,442
USAA Life International Fund Account 153 10.417977 1,596
Scudder VLIF Capital Growth Portfolio Fund Account 1,543 24.448446 37,720
Alger American Growth Portfolio Fund Account 2,053 26.806157 55,026
BT Equity 500 Index Fund Account 1,136 11.003536 12,500
BT Small Cap Index Fund Account 257 8.825971 2,267
BT EAFE(R) Equity Index Fund Account 55 10.386978 566
---------
Net assets attributable to contractowners'
deferred annuity reserves 282,076
Annuity contracts in the annuity period:
USAA Life Income Fund Account 6 14.089499 85
USAA Life Growth and Income Fund Account 1 20.468785 28
USAA Life World Growth Fund Account 3 17.860722 50
USAA Life Diversified Assets Fund Account 3 17.974654 54
Alger American Growth Portfolio Fund Account 5 26.806157 146
---------
Net assets attributable to contractowners'
annuity payment reserves 363
---------
Net assets $282,439
=========
</TABLE>
See accompanying Notes to Financial Statements on page A-14.
A-10 ANNUAL REPORT 1998
<PAGE>
SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
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STATEMENTS OF OPERATIONS
VARIABLE FUND ACCOUNTS (In Thousands) Year Ended December 31, 1998
<TABLE>
<CAPTION> Scudder VLIF Alger
USAA Life USAA Life USAA Life USAA Life USAA Life Capital American
Money USAA Life Growth World Diversified Agressive USAA Life Growth Growth
Market Income and Income Growth Assets Growth International Portfolio Portfolio
Fund Fund Fund Fund Fund Fund Fund Fund Fund
Account Account Account Account Account Account Account Account Account
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME:
Income dividends and
capital gains
distributions $943 $1,619 $ 4,318 $ 651 $1,672 $ 44 $ 17 $1,583 $ 6,142
---- ------ ------ ------ ------ ---- ---- ------ -------
Expenses
Mortality and
expense risk
charge 119 78 474 127 191 23 11 201 265
Administrative charge 18 12 73 20 29 3 2 31 41
---- ------ ------ ------ ------ ---- ---- ------ -------
Total expenses 137 90 547 147 220 26 13 232 306
---- ------ ------ ------ ------ ---- ---- ------ -------
Net investment
income 806 1,529 3,771 504 1,452 18 4 1,351 5,836
---- ------ ------ ------ ------ ---- ---- ------ -------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) - 221 1,971 433 485 28 (12) 826 1,010
Change in net unrealized
appreciation/
depreciation - (809) (2,428) 784 323 765 33 3,581 9,335
---- ------ ------ ------ ------ ---- ---- ------ -------
Net realized and
unrealized gain
(loss) on
investments - (588) (457) 1,217 808 793 21 4,407 10,345
---- ------ ------ ------ ------ ---- ---- ------ -------
Increase (decrease) in net
assets resulting from
operations $806 $ 941 $3,314 $1,721 $2,260 $811 $ 25 $5,758 $16,181
==== ====== ====== ====== ====== ==== ==== ====== =======
BT BT BT
Equity 500 Small Cap EAFE(R) Equity
Index Index Index
Fund Account* Fund Account* Fund Account*
NET INVESTMENT INCOME:
Income dividends and capital
gains distributions $ 335 $ 45 $ 8
------ ----- ---
Expenses
Mortality and expense
risk charge 29 7 2
Administrative charge 5 1 -
------ ----- ---
Total expenses 34 8 2
------ ----- ---
Net investment
income 301 37 6
------ ----- ---
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) (30) (113) (5)
Change in net unrealized
appreciation/depreciation 1,177 (23) 28
------ ----- ---
Net realized and
unrealized gain (loss)
on investments 1,147 (136) 23
------ ----- ---
Increase (decrease) in net
assets resulting from
operations $1,448 $ (99) $29
====== ===== ===
</TABLE>
* Variable fund accounts commenced operations on May 1, 1998.
See accompanying Notes to Financial Statements on page A-14.
1998 ANNUAL REPORT A-11
<PAGE>
SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
VARIABLE FUND ACCOUNTS (In Thousands) Years Ended December 31,
<TABLE>
<CAPTION>
USAA Life USAA Life USAA Life USAA Life
Money Market Income Growth and Income World Growth
Fund Account Fund Account Fund Account Fund Account
------------------------- ------------------- ----------------------- -------------------------
1998 1997 1998 1997 1998 1997 1998 1997
--------- ----------- --------- -------- ----------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase in net assets
From operations:
Net investment income (loss) $ 806 $ 599 $ 1,529 $ 391 $ 3,771 $ 2,834 $ 504 $ 1,378
Net realized gain (loss)
on investments - - 221 (1) 1,971 1,125 433 332
Change in net unrealized
appreciation/depreciation - - (809) 150 (2,428) 5,197 784 (217)
-------- -------- -------- ------- ------- ------- ------- -------
Increase (decrease) in net
assets resulting
from operations 806 599 941 540 3,314 9,156 1,721 1,493
-------- -------- -------- ------- ------- ------- ------- -------
From contract transactions:
Units issued 31,473 60,064 13,695 3,968 17,854 33,823 2,249 9,018
Units redeemed (25,299) (56,776) (3,597) (2,501) (8,064) (3,790) (3,766) (1,567)
-------- -------- -------- ------- ------- ------- ------- -------
Increase (decrease) in net
assets from contract
transactions 6,174 3,288 10,098 1,467 9,790 30,033 (1,517) 7,451
-------- -------- -------- ------- ------- ------- ------- -------
Net increase in net assets 6,980 3,887 11,039 2,007 13,104 39,189 204 8,944
Net assets:
Beginning of period 15,130 11,243 7,080 5,073 62,606 23,417 18,892 9,948
-------- -------- -------- ------- ------- ------- ------- -------
End of period $ 22,110 $ 15,130 $ 18,119 $ 7,080 $75,710 $62,606 $19,096 $18,892
======== ======== ======== ======= ======= ======= ======= =======
Units issued and redeemed:
Beginning balance 13,416 10,383 544 430 3,246 1,518 1,171 695
Units issued 60,600 58,727 1,121 348 1,317 1,980 215 594
Units redeemed (55,256) (55,694) (379) (234) (865) (252) (317) (118)
-------- -------- -------- ------- ------- ------- ------- -------
Ending balance 18,760 13,416 1,286 544 3,698 3,246 1,069 1,171
======== ======== ======== ======= ======= ======= ======= =======
Scudder VLIF Capital Alger American BT Equity BT Small BT EAFE(R)
Growth Portfolio Growth Portfolio 500 Index Cap Index Equity Index
Portfolio Fund Account Fund Account Fund Account Fund Account Fund Account
--------------------------- ---------------------- ------------ ------------ -------------
1998 1997 1998 1997 1998** 1998** 1998**
---------- ----------- ---------- --------- ------------ ------------ -------------
Increase in net assets
From operations:
Net investment income (loss) $ 1,351 $ 821 $ 5,836 $ (72) $ 301 $ 37 $ 6
Net realized gain (loss)
on investments 826 464 1,010 1,524 (30) (113) (5)
Change in net unrealized
appreciation/depreciation 3,581 2,765 9,335 4,490 1,177 (23) 28
------- ------- ------- ------- ------- ------ ----
Increase (decrease) in net
assets resulting from
operations 5,758 4,050 16,181 5,942 1,448 (99) 29
------- ------- ------- ------- ------- ------ ----
From contract transactions:
Units issued 12,666 11,094 11,212 9,279 12,072 2,915 610
Units redeemed (3,188) (2,926) (3,762) (7,848) (1,020) (549) (73)
------- ------- ------- ------- ------- ------ ----
Increase (decrease) in net
assets from contract
transactions 9,478 8,168 7,450 1,431 11,052 2,366 537
------- ------- ------- ------- ------- ------ ----
Net increase in net assets 15,236 12,218 23,631 7,373 12,500 2,267 566
Net assets:
Beginning of period 22,484 10,266 31,541 24,168 - - -
------- ------- ------- ------- ------- ------ ----
End of period $37,720 $22,484 $55,172 $31,541 $12,500 $2,267 $566
======= ======= ======= ======= ======= ====== ====
Units issued and redeemed:
Beginning balance 1,125 689 1,730 1,648 - - -
Units issued 686 626 607 592 1,267 338 63
Units redeemed (268) (190) (279) (510) (131) (81) (8)
------- ------- ------- ------- ------- ------ ----
Ending balance 1,543 1,125 2,058 1,730 1,136 257 55
======= ======= ======= ======= ======= ====== ====
</TABLE>
A-12 ANNUAL REPORT 1998
<PAGE>
SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
VARIABLE FUND ACCOUNTS (In Thousands) Years Ended December 31,
<TABLE>
<CAPTION>
USAA Life Diversified USAA Life Aggressive USAA Life International
Assets Fund Account Growth Fund Account Fund Account
- --------------------------- --------------------- ------------------------
1998 1997 1998 1997* 1998 1997*
- --------- ------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
$ 1,452 $ 1,346 $ 18 $ 13 $ 4 $ 13
485 249 28 115 (12) 11
323 1,327 765 (193) 33 (114)
- ------- ------- ------- ------ ------ ------
2,260 2,922 811 (65) 25 (90)
- ------- ------- ------- ------ ------ ------
10,280 12,395 3,295 3,066 767 1,912
(2,589) (1,802) (1,984) (681) (740) (278)
- ------- ------- ------- ------ ------ ------
7,691 10,593 1,311 2,385 27 1,634
- ------- ------- ------- ------ ------ ------
9,951 13,515 2,122 2,320 52 1,544
23,190 9,675 2,320 - 1,544 -
- ------- ------- ------- ------ ------ ------
$33,141 $23,190 $ 4,442 $2,320 $1,596 $1,544
======= ======= ======= ====== ====== ======
1,404 699 198 - 153 -
748 846 306 259 79 180
(308) (141) (187) (61) (79) (27)
- ------- ------- ------- ------ ------ ------
1,844 1,404 317 198 153 153
======= ======= ======= ====== ====== ======
</TABLE>
* Variable fund accounts commenced operations May 1, 1997.
** Variable fund accounts commenced operations May 1, 1998.
See accompanying Notes to Financial Statements on page A-14.
1998 ANNUAL REPORT A-13
<PAGE>
SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1) ORGANIZATION
The Separate Account of USAA Life Insurance Company (the Separate Account) is
registered under the Investment Company Act of 1940, as amended, as a segregated
unit investment account of USAA Life Insurance Company (USAA Life), a wholly
owned subsidiary of the United Services Automobile Association (USAA).
The Separate Account is divided into twelve variable fund accounts, each of
which invests in a corresponding fund. The funds' objectives can be found on
page A-8 in this report. Units of the Separate Account are sold only in
connection with the Variable Annuity Contract.
The fund accounts available within the Separate Account include: the USAA Life
Money Market Fund Account, USAA Life Income Fund Account, USAA Life Growth and
Income Fund Account, USAA Life World Growth Fund Account, USAA Life Diversified
Assets Fund Account, USAA Life Aggressive Growth Fund Account, and USAA Life
International Fund Account; the Fund Account of the Capital Growth Portfolio-
Class A shares of the Scudder Variable Life Investment Fund (Scudder VLIF
Capital Growth Portfolio Fund Account); the Fund Account of the American Growth
Portfolio of the Alger American Fund (Alger American Growth Portfolio Fund
Account); the Fund Accounts of the Equity 500 Index Fund, Small Cap Index Fund
and EAFE(R) Equity Index Fund, which are funds of the Bankers Trust (BT)
Insurance Funds Trust series (BT Equity 500 Index Fund Account, BT Small Cap
Index Fund Account and BT EAFE(R) Equity Index Fund Account), available within
the Separate Account of USAA Life Insurance Company.
The assets of the Separate Account are the property of USAA Life and are not
chargeable with liabilities arising out of any other business of USAA Life.
2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Investments in mutual fund securities are carried in the Statements of Assets
and Liabilities at net asset value as reported by the fund. Gains or losses on
securities transactions are determined on the basis of the first-in first-out
(FIFO) cost method. Security transactions are recorded on the trade date.
Dividend income, if any, is recorded on ex-dividend date.
ANNUITY RESERVES
Annuity reserves for contracts in the payout phase are comprised of net contract
purchase payments, less benefits. These reserves are adjusted daily for the net
investment income and net realized gain (loss) and change in net unrealized
appreciation/depreciation on investments. The mortality risk is fully borne by
USAA Life. The mortality calculations are based on the 1983a Individual
Annuitant Mortality Table at 3.0% interest. This may result in additional
amounts being transferred into the Separate Account by USAA Life to cover
greater longevity of annuitants than expected. Conversely, if reserves exceed
amounts required, transfers may be made to USAA Life.
DISTRIBUTIONS
The net investment income (loss) and realized capital gains of the Separate
Account are not distributed, but instead are retained and reinvested for the
benefit of unit owners.
FEDERAL INCOME TAX
Operations of the Separate Account are included in the federal income tax return
of USAA Life, which is taxed as a "Life Insurance Company" under the Internal
Revenue Code. Under current federal income tax law, no income taxes are payable
with respect to operation of the Separate Account.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
may affect the reported amounts in the financial statements.
3) RELATED PARTY TRANSACTIONS
During the year ended December 31, 1998, advisory and administrative fees of
$1.1 million were paid or payable to USAA Investment Management Company (USAA
IMCO) by the funds of the USAA Life Investment Trust (the Trust). USAA IMCO is
indirectly wholly owned by USAA. The funds' advisory fees are computed on an
annualized rate of 0.20% of the monthly average net assets for each calendar
month of each fund of the Trust except for the USAA Life Aggressive Growth Fund,
which accrues at an annualized rate of 0.50%, and USAA Life International Fund,
which accrues at an annualized rate of 0.65%. The funds are an investment option
for both the Variable Universal Life Policy and the Flexible Premium Deferred
Combination Fixed and Variable Annuity Contract. Administrative fees are based
on estimated time incurred to provide such services.
A-14 ANNUAL REPORT 1998
<PAGE>
SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(Continued) December 31, 1998
4) EXPENSES
A mortality and expense risk charge is deducted by USAA Life from the Separate
Account on a daily basis which is equal, on an annual basis, to 0.65% of the
daily net assets of each variable fund account. The mortality risks assumed by
USAA Life arise from its contractual obligation to make annuity payments after
the annuity date for the life of the annuitant in accordance with annuity rates
guaranteed in the contracts under distribution options that involve life
contingencies. USAA Life will also assume a mortality risk by its contractual
obligation to pay a death benefit upon the death of an annuitant or
contractowner prior to the Distribution Phase. The expense risk assumed by USAA
Life is that the costs of administering the contracts and the Separate Account
may exceed the amount recovered from the contract maintenance and administration
expense charges. The mortality and expense risk charge is guaranteed by USAA
Life and cannot be increased.
The following expenses are charged to reimburse USAA Life for the expenses it
incurs in the establishment and maintenance of the Contracts and each
variable fund account. USAA Life assesses each variable fund account a daily
charge at an annualized rate of 0.10% of the daily net assets of each
variable fund account. Beginning on the first anniversary of the effective
date, and on each anniversary thereafter, a maintenance charge of $30 is
deducted by USAA Life through a redemption of units from the accumulated
value of each contract. This charge will apply only while the contract is in
the accumulation phase. For the year ended December 31, 1998, contract
maintenance charges totaled approximately $178,000 and such charges have been
classified as contract redemptions.
Any premium tax levied by a state or government entity with respect to the
Separate Account will be charged against the contract.
5) YEAR 2000 (unaudited)
Like other companies, the Separate Account could be adversely affected if the
computer systems used by its service providers are not able to perform their
intended functions effectively after 1999 because of the inability of computer
software to distinguish the year 2000 from the year 1900. USAA Life is taking
steps to address this potential year 2000 problem with respect to the computer
systems that they use and to obtain satisfactory assurances that comparable
steps are being taken by the Separate Account's service providers. At this time,
however, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Separate Account from this problem.
1998 ANNUAL REPORT A-15
<PAGE>
SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
Notes To Financial Statements
(Continued) December 31, 1998
6) Unit Values
A summary of unit values and units outstanding for variable annuity
contracts and the expense ratios, including expenses of the underlying funds,
for each period is as follows:
<TABLE>
<CAPTION>
USAA Life Money Market Fund Account USAA Life Income Fund Account
Year Ended December 31, Year Ended December 31,
1998 1997 1996 1995 (a) 1998 1997 1996 1995 (a)
------- ------- -------- -------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At end of period:
Accumulation units (000) 18,760 13,416 10,383 5,478 1,280 545 430 89
Annuity units (000) - - - - 6 - - -
Accumulation unit value $1.178565 $ 1.127755 $1.082816 $1.040729 $14.089499 $13.002940 $11.785992 $11.848795
Net assets (000) $ 22,110 $ 15,130 $ 11,243 $ 5,702 $ 18,119 $ 7,080 $ 5,073 $ 1,051
Ratio of expenses to
average net assets 1.10%(d) 1.50%(d) 1.50%(d) 1.50%(d)(e) 1.10%(d) 1.50%(d) 1.50%(d) 1.50%(d)(e)
Ratio of expenses to
average net assets,
excluding reimbursements 1.55% 1.85% 2.39% 3.44%(e) 1.30% 1.67% 1.80% 1.80%(e)
USAA Life Aggressive USAA Life International
Growth Fund Account Fund Account
Year Ended Period Ended Year Ended Period Ended
USAA Life Diversified Assets Fund Account December December December December
Year Ended December 31, 31, 31, 31, 31,
1998 1997 1996 1995 (a) 1998 1997 (b) 1996 1995 (b)
------- ------- -------- -------- ------- -------- --------- ----------
At end of period:
Accumulation units (000) 1,841 1,401 696 86 317 197 153 153
Annuity units (000) 3 3 3 - - - - -
Accumulation unit value $17.974654 $16.518656 $13.844197 $12.243941 $13.993064 $11.735078 $10.417977 $10.113861
Net assets (000) $ 33,141 $ 23,190 $ 9,675 $ 1,047 $ 4,442 $ 2,320 $ 1,596 $ 1,544
Ratio of expenses to
average net assets 1.10%(d) 1.50%(d) 1.50%(d) 1.50%(d)(e) 1.45%(d) 1.85%(d)(e) 1.85%(d) 2.25%(d)(e)
Ratio of expenses to
average net assets,
excluding reimbursements 1.20% 1.57% 1.76% 1.79%(e) 1.59% 2.00%(e) 2.10% 2.39%(e)
</TABLE>
<TABLE>
<CAPTION>
BT Equity 500 BT Small Cap BT EAFE(R) Equity
Index Fund Account Index Fund Account Index Fund Account
Period Ended Period Ended Period Ended
December 31, December 31, December 31,
1998 (c) 1998 (c) 1998 (c)
---------- ---------- ---------
<S> <C> <C> <C>
At end of period:
Accumulation units (000) 1,136 257 55
Annuity units (000) - - -
Accumulation unit value $11.003536 $ 8.825971 $10.386978
Net assets (000) $ 12,500 $ 2,267 $ 566
Ratio of expenses to
average net assets 1.05%(d)(e) 1.20%(d)(e) 1.40%(d)(e)
Ratio of expenses to
average net assets,
excluding reimbursements 1.94%(e) 2.33%(e) 2.41%(e)
</TABLE>
A-16 Annual Report 1998
<PAGE>
SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(Continued) December 31, 1998
<TABLE>
<CAPTION>
USAA Life Growth and Income Fund Account USAA Life World Growth Fund Account
Year Ended December 31, Year Ended December 31,
1998 1997 1996 1995(a) 1998 1997 1996 1995(a)
- ------- ------ ------ -------- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
3,697 3,242 1,515 205 1,066 1,168 692 161
1 4 3 - 3 3 3 -
$20.468785 $19.287258 $15.432048 $12.579981 $17.860722 $16.144375 $14.314911 $11.947438
$ 75,710 $ 62,606 $ 23,417 $ 2,574 $ 19,096 $ 18,892 $ 9,948 $ 1,924
1.10%(d) 1.49% 1.50%(d) 1.50%(d)(e) 1.40%(d) 1.74% 1.80%(d) 1.80%(d)(e)
1.12% NA 1.68% 1.81%(e) 1.41% NA 1.97% 2.02%(e)
Scudder VLIF Capital Growth Portfolio Fund Account Alger American Growth Portfolio Fund Account
Year Ended December 31, Year Ended December 31,
1998 1997 1996 1995 (a) 1998 1997 1996 1995 (a)
---------- -------- -------- ---------- --------- ------- ------- -----------
1,543 1,125 689 93 2,053 1,722 1,639 630
- - - - 5 8 9 -
$24.448446 $19.989715 $14.894774 $12.543192 $26.806157 $18.239579 $14.672583 $13.095503
$ 37,720 $ 22,484 $ 10,266 $ 1,165 $ 55,172 $ 31,541 $ 24,168 $ 8,245
1.26% 1.66% 1.68% 1.72%(e) 1.54% 1.94% 1.94% 2.00%(e)
NA NA NA NA NA NA NA NA
</TABLE>
(a) Variable fund accounts commenced operations February 6, 1995 with an
initial accumulation unit value of $10.00 per unit, except for USAA Life
Money Market Fund Account which commenced operations with an initial
accumulation value of $1.00 per unit.
(b) Variable fund accounts commenced operations May 1, 1997 with an initial
accumulation unit value of $10.00 per unit.
(c) Variable fund accounts commenced operations May 1, 1998 with an initial
accumulation unit value of $10.00 per unit.
(d) The information is based on actual expenses to the contractowner for the
period, including the expenses of the underlying fund, after giving effect
to reimbursement of fund expenses by USAA Life.
(e) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
1998 ANNUAL REPORT A-17
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY
<PAGE>
USAA LIFE INSURANCE COMPANY
To discuss your investment strategy,
the Variable Annuity's features or performance,
call an Account Representative toll free
Monday--Friday 7:15 a.m. to 8:00 p.m.
1-800-531-2923
(456-9035 in San Antonio)
-------------------------------------
If you wish to discuss your particular contract,
transfer money from one fund account to another or select a payout option
call a Service Representative toll free,
Monday--Friday 8 a.m. to 5 p.m.
1-800-531-4265
-------------------------------------
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