WESTERN NATIONAL LIFE INSURANCE COMPANY
Executive Office: Annuity Service Office:
5555 San Felipe, Suite 900 1290 Silas Deane Highway P.O. Box 290721
Houston, TX 77056 Wethersfield, CT 06109-4303 Wethersfield, CT
06129-0721
713-888-7800 1-800-910-4455
INDIVIDUAL FIXED AND VARIABLE DEFERRED ANNUITY CONTRACTS
WITH FLEXIBLE PURCHASE PAYMENTS
ISSUED BY
WNL SEPARATE ACCOUNT A
AND
WESTERN NATIONAL LIFE INSURANCE COMPANY
The Individual Fixed and Variable Deferred Annuity Contracts with
Flexible Purchase Payments (the "Contracts") described in this Prospectus
provide for accumulation of Contract Values on a fixed or variable basis and
payment of annuity payments on a fixed and variable basis. The Contracts are
designed for use by individuals in retirement plans on a Qualified or
Non-Qualified basis. (See "Definitions.")
Purchase Payments for the Contracts will be allocated to a segregated
investment account of Western National Life Insurance Company (the "Company"),
which account has been designated WNL Separate Account A (the "Separate
Account"), or to the Company's General Account. Under certain circumstances,
however, Purchase Payments initially may be allocated to the Global Advisors
Money Market Sub-Account of the Separate Account. (See "Highlights.") The
Separate Account invests in shares of WNL Series Trust. (See "WNL Series
Trust.") WNL Series Trust is a series fund with eight Portfolios currently
available: BEA Growth and Income Portfolio, BlackRock Managed Bond Portfolio,
Credit Suisse International Equity Portfolio, EliteValue Asset Allocation
Portfolio, Global Advisors Growth Equity Portfolio, Global Advisors Money
Market Portfolio, Salomon Brothers U.S. Government Securities Portfolio, and
Van Kampen American Capital Emerging Growth Portfolio.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY
ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENT IN THE
CONTRACTS IS SUBJECT TO RISK THAT MAY CAUSE THE VALUE OF THE OWNER'S
INVESTMENT TO FLUCTUATE, AND WHEN THE CONTRACTS ARE SURRENDERED, THE VALUE MAY
BE HIGHER OR LOWER THAN THE PURCHASE PAYMENTS.
This Prospectus concisely sets forth the information for a prospective
investor. Additional information about the Contracts is contained in the
Statement of Additional Information (the "SAI") which is available at no
charge. The SAI has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated herein by reference. The Table of Contents of
the SAI can be found on Page 28 of this Prospectus. For a copy of the SAI,
call 1-800-910-4455 or write to the Company's Annuity Service Office at the
address listed above.
INQUIRIES:
Any inquiries can be made by telephone or in writing to the Annuity
Service Office listed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC, NOR HAS THE
SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus and the SAI are dated May 1, 1997.
This Prospectus should be kept for future reference.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
DEFINITIONS 1
HIGHLIGHTS 2
FEE TABLE 4
CONDENSED FINANCIAL INFORMATION 6
THE COMPANY 7
THE SEPARATE ACCOUNT 8
WNL SERIES TRUST 8
BEA Growth and Income Portfolio 8
BlackRock Managed Bond Portfolio 8
Credit Suisse International Equity Portfolio 9
EliteValue Asset Allocation Portfolio 9
Global Advisors Growth Equity Portfolio 9
Global Advisors Money Market Portfolio 9
Salomon Brothers U.S. Government Securities Portfolio 9
Van Kampen American Capital Emerging Growth Portfolio 10
Voting Rights 10
Substitution of Securities 10
CHARGES AND DEDUCTIONS 10
Deduction for Contingent Deferred Sales Charge (Sales Load) 10
Reduction or Elimination of the Contingent Deferred Sales Charge 11
Deduction for Mortality and Expense Risk Charge 11
Deduction for Enhanced Death Benefit Charge 11
Deduction for Administrative Charge 12
Deduction for Contract Maintenance Charge 12
Deduction for Premium and Other Taxes 12
Deduction for Expenses of the Trust 12
THE CONTRACTS 12
Owner 12
Joint Owners 13
Annuitant 13
Assignment 13
PURCHASE PAYMENTS AND CONTRACT VALUE 13
Purchase Payments 13
Allocation of Purchase Payments 14
Bonus 14
<PAGE>
Dollar Cost Averaging 14
Contract Value 14
Accumulation Units 15
Accumulation Unit Value 15
TRANSFERS 15
Transfers Prior to the Annuity Date 15
Transfers During the Annuity Period 16
Sweep Account Program 16
ASSET ALLOCATION PROGRAMS 17
Asset Allocation - Portfolio Rebalancing 17
Asset Allocation - Financial Intermediaries 17
WITHDRAWALS 17
Systematic Withdrawal Option 18
Texas Optional Retirement Program 18
Suspension or Deferral of Payments 18
PROCEEDS PAYABLE ON DEATH 19
Death of Owner During the Accumulation Period 19
Death Benefit Amount During the Accumulation Period 19
Enhanced Death Benefit Amount During the Accumulation Period 19
Death Benefit Options During the Accumulation Period 19
Death of Owner During the Annuity Period 20
Death of Annuitant 20
Payment of Death Benefit 20
Beneficiary 20
Change of Beneficiary 20
ANNUITY PROVISIONS 20
General 20
Annuity Date 20
Selection or Change of an Annuity Option 21
Frequency and Amount of Annuity Payments 21
Annuity 21
Fixed Annuity 21
Variable Annuity 21
Annuity Options 21
DISTRIBUTOR 22
ADMINISTRATION OF THE CONTRACTS 22
<PAGE>
PERFORMANCE INFORMATION 22
Money Market Sub-Account 22
Other Sub-Accounts 22
TAX STATUS 23
General 23
Diversification 24
Multiple Contracts 24
Contracts Owned by Other than Natural Persons 25
Tax Treatment of Assignments 25
Income Tax Withholding 25
Tax Treatment of Withdrawals - Non-Qualified Contracts 25
Qualified Plans 25
Tax Treatment of Withdrawals - Qualified Contracts 26
Tax-Sheltered Annuities - Withdrawal Limitations 27
Section 457 - Deferred Compensation Plans 27
FINANCIAL STATEMENTS 27
LEGAL PROCEEDINGS 27
TABLE OF CONTENTS OF THE SAI 28
</TABLE>
<PAGE>
DEFINITIONS
ACCUMULATION PERIOD: The period during which Purchase Payments may be made
prior to the Annuity Date.
ACCUMULATION UNIT: A unit of measure used to determine the value of the
Owner's interest in a Sub-Account of the Separate Account during the
Accumulation Period.
ADJUSTED CONTRACT VALUE: The Contract Value less any applicable premium tax
and Contract Maintenance Charge. This amount is applied to the applicable
Annuity Tables to determine Annuity Payments.
ADMINISTRATIVE CHARGE: A deduction from the Separate Account which equals, on
an annual basis, .15% of the average daily net asset value of the Separate
Account.
AGE: The age of any Owner or Annuitant on his/her last birthday.
ANNUITANT: The natural person on whose life Annuity Payments are based. On or
after the Annuity Date, the Annuitant shall also include any Joint Annuitant.
ANNUITY DATE: The date on which Annuity Payments begin.
ANNUITY OPTIONS: Options available for Annuity Payments.
ANNUITY PAYMENTS: The series of payments made to the Owner or any named payee
after the Annuity Date under the Annuity Option selected.
ANNUITY PERIOD: The period of time beginning with the Annuity Date during
which the Annuity Payments are made.
ANNUITY SERVICE OFFICE: The office indicated on the Cover Page of this
Prospectus to which notices and requests must be sent.
ANNUITY UNIT: A unit of measure used to calculate Variable Annuity payments
during the Annuity Period.
BENEFICIARY: The person(s) or entity(ies) who/that will receive the death
benefit.
BONUS: An additional amount paid by the Company, equal to 1% of the initial
Purchase Payment. The Bonus is recapturable by the Company under certain
circumstances. See the discussion of the Bonus in this Prospectus for more
information.
COMPANY: Western National Life Insurance Company.
CONTRACT ANNIVERSARY: An anniversary of the Issue Date.
CONTRACT VALUE: The sum of the Owner's interest in the General Account and the
Sub-Accounts of the Separate Account during the Accumulation Period.
CONTRACT YEAR: The first Contract Year is the annual period which begins on
the Issue Date. Subsequent Contract Years begin on each Contract Anniversary.
FIXED ANNUITY: A series of payments made during the Annuity Period that are
guaranteed as to dollar amount by the Company.
GENERAL ACCOUNT: The Company's general investment account which contains all
the assets of the Company with the exception of the Separate Account and other
segregated asset accounts.
INVESTMENT OPTION: An investment entity into which assets of the Separate
Account will be invested.
ISSUE DATE: The date on which the Contract became effective.
MORTALITY AND EXPENSE RISK CHARGE: An amount deducted by the Company from the
Separate Account each Valuation Period which is equal, on an annual basis, to
1.25% of the average daily net asset value of the Separate Account.
NON-QUALIFIED CONTRACTS: Contracts issued under non-qualified plans which do
not receive favorable tax treatment under Sections 401, 403(b), 408 or 457 of
the Internal Revenue Code of 1986, as amended (the "Code").
<PAGE> 1
OWNER: The person or entity entitled to the ownership rights stated in the
Contract.
PORTFOLIO: A segment of an Investment Option which constitutes a separate and
distinct class of shares.
PURCHASE PAYMENT: A payment made by or on behalf of an Owner with respect to
the Contract.
QUALIFIED CONTRACTS: Contracts issued under Qualified Plans which receive
favorable tax treatment under Sections 401, 403(b), 408 or 457 of the Code.
SEPARATE ACCOUNT: The Company's Separate Account designated as WNL Separate
Account A.
SUB-ACCOUNT: Separate Account assets are divided into Sub-Accounts. Assets of
each Sub-Account will be invested in shares of an Investment Option or a
Portfolio of an Investment Option.
VALUATION DATE: Each day on which the Company and the New York Stock Exchange
("NYSE") are open for business.
VALUATION PERIOD: The period of time beginning at the close of business of the
NYSE on each Valuation Date and ending at the close of business for the next
succeeding Valuation Date.
VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount in
relation to the investment performance of specified Sub-Accounts of the
Separate Account.
WRITTEN REQUEST: A request in writing, in a form satisfactory to the
Company, which is received by the Annuity Service Office, at its street
address 1290 Silas Deane Highway, Wethersfield, CT 06109-4303, or its mailing
address, P.O. Box 290721, Wethersfield, CT 06129-0721.
HIGHLIGHTS
Purchase Payments for the Contracts will be allocated to a segregated
investment account of Western National Life Insurance Company (the "Company"),
which account has been designated WNL Separate Account A (the "Separate
Account"), or to the Company's General Account. Under certain circumstances,
however, Purchase Payments may initially be allocated to the Global Advisors
Money Market Sub-Account of the Separate Account (see below). The Separate
Account invests in shares of WNL Series Trust. Owners bear the investment risk
for all amounts allocated to the Separate Account.
The Contract may be returned to the Company for any reason within 10 calendar
days after its receipt by the Owner (or, if the Contract is issued in
California, 30 calendar days after the date of receipt if the Owner is 60
years old as of the Issue Date, or 20 calendar days of the date of receipt
with respect to the circumstances described in (c) below). (See "Right to
Examine.") It may be returned to the Company at its Annuity Service Office, or
to the agent through whom it was purchased. When the Contract is received by
the Company at its Annuity Service Office, it will be voided as if it had
never been in force. Upon its return, the Company will refund the Contract
Value, less the Bonus (see "Bonus" on page 14) next computed after receipt of
the Contract by the Company at its Annuity Service Office, except in the
following circumstances: (a) when the Contract is purchased pursuant to an
Individual Retirement Annuity; (b) in those states which require the Company
to refund Purchase Payments, less withdrawals; or (c) in the case of Contracts
which are deemed by certain states to be replacing an existing annuity or
insurance contract and which require the Company to refund Purchase Payments,
less withdrawals. With respect to the circumstances described in (a), (b), and
(c) above, the Company will refund the greater of Purchase Payments, less any
withdrawals, or the Contract Value, less the Bonus, and will allocate initial
Purchase Payments to the Global Advisors Money Market Sub-Account until the
expiration of 15 days from the Issue Date (or 25 days in the case of Contracts
described under (c) above). Upon the expiration of the 15-day period (or
25-day period with respect to Contracts described under (c) above), the
Sub-Account value of the Global Advisors Money Market Sub-Account will be
allocated to the Separate Account and the General Account in accordance with
the election made by the Owner in the Application.
Each Valuation Period, the Company deducts a Mortality and Expense Risk Charge
from the Separate Account which is equal, on an annual basis, to 1.25% of the
average daily net asset value of the Separate Account. This charge compensates
the Company for assuming the mortality and expense risks under the Contracts.
(See "Charges and Deductions - Deduction for Mortality and Expense Risk
Charge.")
If the Owner selects the Enhanced Death Benefit, each Valuation Period prior
to the 75th birthday of the Owner, or oldest Joint Owner, the Company deducts
an Enhanced Death Benefit Charge from the Separate Account which is equal, on
an annual basis, to .15% of the average daily net asset value of the Separate
Account. This charge compensates the Company for assuming the mortality risks
for the Enhanced Death Benefit. (See "Charges and Deductions - Deduction for
Enhanced Death Benefit Charge.")
<PAGE> 2
Each Valuation Period, the Company deducts an Administrative Charge from the
Separate Account which is equal, on an annual basis, to .15% of the average
daily net asset value of the Separate Account. This charge compensates the
Company for costs associated with the administration of the Contracts and the
Separate Account. (See "Charges and Deductions - Deduction for Administrative
Charge.")
On each Contract Anniversary, the Company deducts a Contract Maintenance
Charge of $30 from the Contract Value by subtracting values from the General
Account and/or by canceling Accumulation Units from each applicable
Sub-Account. However, during the Accumulation Period, if the Contract Value on
the Contract Anniversary is at least $40,000, then no Contract Maintenance
Charge is deducted. If a total withdrawal is made on other than a Contract
Anniversary and the Contract Value for the Valuation Period during which the
total withdrawal is made is less than $40,000, the full Contract Maintenance
Charge will be deducted at the time of the total withdrawal. The charge will
be deducted from the General Account and the Sub-Accounts in the same
proportion that the amount of Contract Value in the General Account and each
Sub-Account bears to the total Contract Value. During the Annuity Period, the
Contract Maintenance Charge will be deducted pro rata from Annuity Payments
regardless of Contract size and will result in a reduction of each Annuity
Payment. (See "Charges and Deductions - Deduction for Contract Maintenance
Charge.")
Premium taxes will be charged against the Contract. Some states assess premium
taxes when Purchase Payments are made. Other states assess premium taxes upon
annuitization. It is the Company's current practice to deduct for premium
taxes when they become due and payable to the states. (See "Charges and
Deductions - Deduction for Premium and Other Taxes.")
The Company will, at the time of the initial Purchase Payment, add
an additional amount as a bonus (the "Bonus"), equal to 1% of such
Purchase Payment made under the Contract. Such additional amount will be
allocated to the Sub-Accounts of the Separate Account and/or the General
Account in the same manner as the Purchase Payment. If the Owner makes a
withdrawal prior to the seventh Contract Anniversary in excess of (a) 10%
of the Contract Value each Contract Year or (b) the amount permitted under the
Systematic Withdrawal Option (see "Withdrawals - Systematic Withdrawal
Option"), an amount equal to the Bonus will be deducted by the Company from
the Contract Value. (See "Purchase Payments and Contract Value-Bonus.")
There is a 10% federal income tax penalty that may be applied to the income
portion of any distribution from the Contracts. However, under certain
circumstances, the penalty is not imposed. (See "Tax Status - Tax Treatment of
Withdrawals - Non-Qualified Contracts" and "Tax Treatment of Withdrawals - -
- -- Qualified Contracts.") For a further discussion of the taxation of the
Contracts, see "Tax Status."
For Contracts purchased in connection with 403(b) plans, withdrawals of
amounts attributable to contributions made pursuant to a salary reduction
agreement (as defined in Section 403(b)(11) of the Internal Revenue Code) are
limited to circumstances only when the Owner: (a) attains age 59 1/2; (b)
separates from service; (c) dies; (d) becomes disabled (within the meaning of
Section 72(m)(7) of the Internal Revenue Code); or (e) in the case of
hardship. Withdrawals for hardship are restricted to the portion of the
Owner's Contract Value which represents contributions made by the Owner and
does not include any investment results. The limitations on withdrawals became
effective on January 1, 1989, and apply only to: (a) salary reduction
contributions made after December 31, 1988; (b) income attributable to such
contributions; and (c) income attributable to amounts held as of December 31,
1988. The limitations on withdrawals do not affect rollovers or transfers
between certain Qualified Plans. Tax penalties may also apply. (See "Tax
Status - Tax Treatment of Withdrawals - Qualified Contracts.") Owners should
consult their own tax counsel or other tax adviser regarding any
distributions. (See "Tax Status - Tax-Sheltered Annuities - Withdrawal
Limitations.")
See "Tax Status - Diversification" for a discussion of owner control of the
underlying investments in a Variable Annuity contract.
Because of certain exemptive and exclusionary provisions, interests in the
General Account are not registered under the Securities Act of 1933 and the
General Account is not registered as an investment company under the
Investment Company Act of 1940, as amended. Accordingly, neither the General
Account nor any interests therein are subject to the provisions of these acts,
and the Company has been advised that the staff of the SEC has not reviewed
the disclosures in the Prospectus relating to the General Account. Disclosures
regarding the General Account may, however, be subject to certain generally
applicable provisions of the federal securities laws relating to the accuracy
and completeness of statements made in prospectuses.
<PAGE> 3
<TABLE>
<CAPTION>
WNL SEPARATE ACCOUNT A FEE TABLE
CONTRACT OWNER TRANSACTION EXPENSES
Contingent Deferred Sales Charge Length of Time Charge
(see Note 2 below) From Purchase Payment (as a percentage of
(Number of Years) Purchase Payment)
<S> <C> <C>
1 5%
2 5%
3 5%
4 4%
5 3%
6 2%
7 1%
8 or more 0%
Transfer Fee (see Note 3 below) None
Contract Maintenance Charge (see Note 4 below) $30 per Contract per Contract Year
</TABLE>
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
<S> <C>
Mortality and Expense Risk Charge 1.25%
Administrative Charge .15%
- --------------------------------------
Total Separate Account Annual Expenses 1.40%
</TABLE>
OPTIONAL SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
Enhanced Death Benefit Charge (see Note 5 below) .15%
<TABLE>
<CAPTION>
WNL SERIES TRUST ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
Management Other Expenses Total Annual
Fees* (after expense Expenses
reimbursement)**
<S> <C> <C> <C>
BEA Growth and Income Portfolio .75% .12% .87%
BlackRock Managed Bond Portfolio .55% .12% .67%
Credit Suisse International Equity Portfolio .90% .12% 1.02%
EliteValue Asset Allocation Portfolio .65% .12% .77%
Global Advisors Growth Equity Portfolio .61% .12% .73%
Global Advisors Money Market Portfolio .45% .12% .57%
Salomon Brothers
U.S. Government Securities Portfolio .475% .12% .595%
Van Kampen American Capital
Emerging Growth Portfolio .75% .12% .87%
<FN>
* WNL INVESTMENT ADVISORY SERVICES, INC., THE TRUST'S INVESTMENT ADVISER
("ADVISER"), HAS AGREED TO WAIVE THAT PORTION OF ITS MANAGEMENT FEES WHICH IS
IN EXCESS OF THE AMOUNT PAYABLE BY THE ADVISER TO EACH SUB-ADVISER PURSUANT TO
THE RESPECTIVE SUB-ADVISORY AGREEMENTS FOR EACH PORTFOLIO UNTIL MAY 1, 1998.
(SEE THE TRUST PROSPECTUS FOR MORE INFORMATION ON ADVISORY AND SUB-ADVISORY
FEES.) THE EXAMPLES BELOW ARE CALCULATED BASED UPON THE DEDUCTION OF THE FULL
MANAGEMENT FEES.
** THE COMPANY HAS UNDERTAKEN TO REIMBURSE EACH PORTFOLIO FOR ALL
OPERATING EXPENSES, EXCLUDING MANAGEMENT FEES, THAT EXCEED .12% OF EACH
PORTFOLIO'S AVERAGE DAILY NET ASSETS UNTIL MAY 1, 1998. HAD THE COMPANY NOT
REIMBURSED SUCH EXPENSES, THE OTHER EXPENSES SHOWN ABOVE WOULD BE HIGHER. THE
EXAMPLES BELOW ARE CALCULATED BASED UPON SUCH REIMBURSEMENT OF EXPENSES.
</TABLE>
<PAGE> 4
EXAMPLES
CALCULATED WITHOUT ENHANCED DEATH BENEFIT CHARGE
(See "Charges and Deductions - Deduction for Enhanced Death Benefit Charge.")
A Contract Owner would pay the following expenses on a $1,000 investment,
assuming a 5% annual return on assets: (a) if the Contract is surrendered at
the end of each time period or (b) if the Contract is not surrendered or if
the Contract is annuitized.
<TABLE>
<CAPTION>
Time Periods
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
BEA Growth and Income Portfolio a)$73.84 $ 123.39 $155.58 $268.46
b) 23.84 73.39 125.58 268.46
BlackRock Managed Bond Portfolio a)$71.74 $ 117.07 $144.99 $247.19
b) 21.74 67.07 114.99 247.19
Credit Suisse International Equity Portfolio a)$75.41 $ 128.12 $163.45 $284.14
b) 25.41 78.12 133.45 284.14
EliteValue Asset Allocation Portfolio a)$72.79 $ 120.23 $150.30 $257.88
b) 22.79 70.23 120.30 257.88
Global Advisors Growth Equity Portfolio a)$72.37 $ 118.97 $148.18 $253.61
b) 22.37 68.97 118.18 253.61
Global Advisors Money Market Portfolio a)$70.69 $ 113.89 $139.67 $236.38
b) 20.69 63.89 109.67 236.38
Salomon Brothers a)$70.95 $ 114.69 $141.00 $239.09
U.S. Government Securities Portfolio b) 20.95 64.69 111.00 239.09
Van Kampen American Capital a)$73.84 $ 123.39 $155.58 $268.46
Emerging Growth Portfolio b) 23.84 73.39 125.58 268.46
</TABLE>
CALCULATED WITH ENHANCED DEATH BENEFIT CHARGE
(See "Charges and Deductions - Deduction for Enhanced Death Benefit Charge.")
A Contract Owner would pay the following expenses on a $1,000 investment,
assuming a 5% annual return on assets: (a) if the Contract is surrendered at
the end of each time period or (b) if the Contract is not surrendered or if
the Contract is annuitized.
<TABLE>
<CAPTION>
Time Periods
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
BEA Growth and Income Portfolio a)$75.41 $128.12 $163.45 $284.14
b) 25.41 78.12 133.45 284.14
BlackRock Managed Bond Portfolio a)$73.31 $121.81 $152.94 $263.19
b) 23.31 71.81 122.94 263.19
Credit Suisse International Equity Portfolio a)$76.99 $132.83 $171.28 $299.58
b) 26.99 82.83 141.28 299.58
EliteValue Asset Allocation Portfolio a)$74.36 $124.97 $158.21 $273.72
b) 24.36 74.97 128.21 273.72
Global Advisors Growth Equity Portfolio a)$73.94 $123.71 $156.10 $269.52
b) 23.94 73.71 126.10 269.52
Global Advisors Money Market Portfolio a)$72.26 $118.65 $147.65 $252.55
b) 22.26 68.65 117.65 252.55
Salomon Brothers a)$72.52 $119.44 $148.97 $255.22
U.S. Government Securities Portfolio b) 22.52 69.44 118.97 255.22
Van Kampen American Capital a)$75.41 $128.12 $163.45 $284.14
Emerging Growth Portfolio b) 25.41 78.12 133.45 284.14
</TABLE>
<PAGE> 5
NOTES TO FEE TABLE AND EXAMPLES
1. The purpose of the Fee Table is to assist Owners in understanding
the various costs and expenses that an Owner will incur directly or
indirectly. For additional information, see "Charges and Deductions" in this
Prospectus and the Prospectus for WNL Series Trust.
2. After the first Contract Anniversary, a withdrawal of up to 10% of
the Contract Value, determined as of the immediately preceding Contract
Anniversary, may be withdrawn once each Contract Year on a non-cumulative
basis without the imposition of the Contingent Deferred Sales Charge. The
Systematic Withdrawal Option may be selected in lieu of the 10% free
withdrawal amount. (See "Withdrawals - Systematic Withdrawal Option.")
3. Currently, no transfer fee is imposed on transfers. The Company
reserves the right to impose such a fee in the future which will not exceed
the lesser of $25 or 2% of the amount transferred.
4. During the Accumulation Period, if the Contract Value on the
Contract Anniversary is at least $40,000, then no Contract Maintenance Charge
is deducted. If a total withdrawal is made on other than a Contract
Anniversary and the Contract Value for the Valuation Period during which the
total withdrawal is made is less than $40,000, the full Contract Maintenance
Charge will be deducted at the time of the total withdrawal. During the
Annuity Period, the full charge will be deducted regardless of Contract size.
5. There is an Enhanced Death Benefit which can be selected by the
Owner at the time of application. There are two sets of examples above. One
set has been calculated with the Enhanced Death Benefit Charge and the other
set has been calculated without it.
6. Premium taxes are not reflected. Premium taxes may apply. (See
"Charges and Deductions - Deduction for Premium and Other Taxes.")
7. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES
The following schedule includes Accumulation Unit Values for the periods
indicated. This data has been extracted from the Separate Account's Financial
Statements. The Separate Account's Financial Statements have been audited by
Coopers & Lybrand L.L.P., independent certified public accountants, whose
report thereon is included in the SAI. This information should be read in
conjunction with the Separate Account's Financial Statements and related notes
thereto, which are included in the SAI. Two sets of unit values are presented,
one with the Enhanced Death Benefit Charge and one without the Enhanced Death
Benefit Charge.
<TABLE>
<CAPTION>
WITHOUT ENHANCED DEATH WITH ENHANCED DEATH
BENEFIT CHARGE BENEFIT CHARGE
<S> <C> <C>
BEA GROWTH AND INCOME SUB-ACCOUNT
FOR PERIOD ENDED 12/31/95
Unit value at beginning of period (10/20/95) $ 10.00 Not Applicable
Unit value at end of period $ 10.62 Not Applicable
Number of units outstanding at end of period 461.8 Not Applicable
FOR YEAR ENDED 12/31/96
Unit value at beginning of period $ 10.62 $ 10.62
Unit value at end of period $ 11.92 $ 11.90
Number of units outstanding at end of period 48,634.3 11,709.8
BLACKROCK MANAGED BOND SUB-ACCOUNT
FOR PERIOD ENDED 12/31/96
Unit value at beginning of period (1/2/96) $ 10.00 $ 10.00
Unit value at end of period $ 10.20 $ 10.18
Number of units outstanding at end of period 14,436.2 11,399.4
<PAGE> 6
CREDIT SUISSE INTERNATIONAL EQUITY SUB-ACCOUNT
FOR PERIOD ENDED 12/31/95
Unit value at beginning of period (10/20/95) $ 10.00 Not Applicable
Unit value at end of period $ 10.36 Not Applicable
Number of units outstanding at end of period 430.6 Not Applicable
FOR YEAR ENDED 12/31/96
Unit value at beginning of period $ 10.36 $ 10.36
Unit value at end of period $ 11.90 $ 11.88
Number of units outstanding at end of period 17,186.2 8,510.2
ELITEVALUE ASSET ALLOCATION SUB-ACCOUNT
FOR PERIOD ENDED 12/31/96
Unit value at beginning of period (1/2/96) $ 10.00 $ 10.00
Unit value at end of period $ 12.45 $ 12.43
Number of units outstanding at end of period 69,575.7 13,965.2
GLOBAL ADVISORS GROWTH EQUITY SUB-ACCOUNT
FOR PERIOD ENDED 12/31/95
Unit value at beginning of period (10/20/95) $ 10.00 Not Applicable
Unit value at end of period $ 10.33 Not Applicable
Number of units outstanding at end of period 124.2 Not Applicable
FOR YEAR ENDED 12/31/96
Unit value at beginning of period $ 10.33 $ 10.33
Unit value at end of period $ 12.35 $ 12.33
Number of units outstanding at end of period 68,154.9 5,232.7
GLOBAL ADVISORS MONEY MARKET SUB-ACCOUNT
FOR PERIOD ENDED 12/31/95
Unit value at beginning of period (10/10/95) $ 10.00 $ 10.00
Unit value at end of period $ 10.09 $ 10.08
Number of units outstanding at end of period 2,464.4 24.9
FOR YEAR ENDED 12/31/96
Unit value at beginning of period $ 10.09 $ 10.08
Unit value at end of period $ 10.46 $ 10.44
Number of units outstanding at end of period 109,837.9 3,403.7
SALOMON BROTHERS U.S. GOVERNMENT SECURITIES SUB-ACCOUNT
FOR PERIOD ENDED 12/31/96
Unit value at beginning of period (2/6/96) $ 10.00 $ 10.00
Unit value at end of period $ 10.16 $ 10.14
Number of units outstanding at end of period 15,638.1 11,806.1
VAN KAMPEN AMERICAN CAPITAL EMERGING GROWTH SUB-ACCOUNT
FOR PERIOD ENDED 12/31/96
Unit value at beginning of period (1/2/96) $ 10.00 $ 10.00
Unit value at end of period $ 11.70 $ 11.68
Number of units outstanding at end of period 107,870.9 2,072.6
</TABLE>
THE COMPANY
Western National Life Insurance Company (the "Company"), which had $10.1
billion in assets as of December 31, 1996, develops, markets, and issues
annuity products through niche distribution channels. The Company markets
single-premium deferred annuities to the savings and retirement markets,
flexible-premium deferred annuities to the tax-qualified retirement market,
and single-premium immediate annuities to the structured settlement and
retirement markets. The Company primarily distributes its annuity products
through financial institutions, general agents, and specialty brokers.
The Company, which was incorporated in Texas in 1944, is licensed to do
business in 46 states and the District of Columbia. It is a wholly owned
subsidiary of Western National Corporation. The Company's executive offices
are located at 5555 San Felipe, Suite 900, Houston, Texas 77056. Its telephone
number is 713-888-7800.
<PAGE> 7
THE SEPARATE ACCOUNT
The Board of Directors of the Company adopted a resolution on November 9,
1994, to establish a segregated asset account pursuant to Texas insurance law.
This segregated asset account has been designated WNL Separate Account A (the
"Separate Account"). The Company has caused the Separate Account to be
registered with the SEC as a unit investment trust pursuant to the provisions
of the Investment Company Act of 1940.
The assets of the Separate Account are the property of the Company. However,
the assets of the Separate Account, equal to the reserves and other contract
liabilities with respect to the Separate Account, are not chargeable with
liabilities arising out of any other business the Company may conduct. Income,
gains, and losses, whether or not realized, are, in accordance with the
Contracts, credited to or charged against the Separate Account without regard
to other income, gains, or losses of the Company. The Company's obligations
arising under the Contracts are general obligations.
The Separate Account meets the definition of a "separate account" under
federal securities laws.
The Separate Account is divided into Sub-Accounts. Each Sub-Account invests in
one Portfolio of the WNL Series Trust. There is no assurance that the
investment objectives of any of the Portfolios will be met. Owners bear the
complete investment risk for Purchase Payments allocated to a Sub-Account.
Contract Values will fluctuate in accordance with the investment performance
of the Sub-Accounts to which Purchase Payments are allocated, and in
accordance with the imposition of the fees and charges assessed under the
Contracts.
WNL SERIES TRUST
WNL Series Trust (the "Trust") has been established to act as the funding
vehicle for the Contracts offered. The Trust is managed by WNL Investment
Advisory Services, Inc. (the "Adviser"), an affiliate of the Company. The
Adviser has retained Sub-Advisers for each Portfolio to make investment
decisions and place orders. The Sub-Advisers for the Portfolios are: BEA
Associates for the BEA Growth and Income Portfolio; BlackRock Financial
Management for the BlackRock Managed Bond Portfolio; Credit Suisse Asset
Management Ltd. for the Credit Suisse International Equity Portfolio; OpCap
Advisors for the EliteValue Asset Allocation Portfolio; State Street Global
Advisors for the Global Advisors Growth Equity Portfolio and the Global
Advisors Money Market Portfolio; Salomon Brothers Asset Management Inc for the
Salomon Brothers U.S. Government Securities Portfolio; and Van Kampen American
Capital Asset Management, Inc. for the Van Kampen American Capital Emerging
Growth Portfolio. See "Management of the Trust" in the Trust Prospectus, which
accompanies this Prospectus, for additional information concerning the Adviser
and the Sub-Advisers, including a description of advisory and sub-advisory
fees.
The Trust is a diversified, open-end management investment company. While a
brief summary of the investment objectives of the Portfolios is set forth
below, more comprehensive information, including a discussion of potential
risks, is found in the current Prospectus for the Trust which is included with
this Prospectus. Purchasers should read the Prospectus for the Trust carefully
before investing. Additional Prospectuses and the SAI can be obtained by
calling or writing the Company at its Annuity Service Office.
The Trust is intended to meet differing investment objectives with its
currently available separate Portfolios.
BEA GROWTH AND INCOME PORTFOLIO
The Portfolio's fundamental investment objective is to provide long-term
capital growth, current income, and growth of income, consistent with
reasonable investment risk. The Portfolio will invest primarily in domestic
equity as well as domestic debt securities. The proportion of the Portfolio's
assets to be invested in each type of security will vary from time to time in
accordance with the Sub-Adviser's assessment of economic conditions and
investment opportunities. The asset allocation strategy is based on the
premise that, from time to time, certain asset classes are more attractive
long term than others. The Sub-Adviser anticipates that under normal market
conditions, between 35% and 65% of the Portfolio's total assets will be
invested in equity securities, and between 35% and 65% will be invested in
debt securities.
BLACKROCK MANAGED BOND PORTFOLIO
The Portfolio's fundamental investment objective is to provide a high
total return consistent with moderate risk of capital and maintenance of
liquidity. Total return will consist of income, plus realized and unrealized
capital gains and losses. Although the net asset value of the Portfolio will
fluctuate, the Portfolio attempts to preserve the value of its investments to
the extent consistent with its objective. The Sub-Adviser actively manages the
Portfolio's duration, the allocation of securities across market sectors, and
the selection of specific securities within sectors. The Sub-Adviser also
actively allocates the Portfolio's assets among the broad sectors of the
fixed-income market including, but not limited to, U.S. government and agency
securities, corporate securities, private placements, and asset-backed and
mortgage-related securities, including residential and commercial
mortgage-backed securities. Under normal circumstances, the Sub-Adviser
intends to keep the Portfolio essentially fully invested with at least 65% of
the Portfolio's assets invested in bonds.
<PAGE> 8
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
The Portfolio's fundamental investment objective is long-term capital
appreciation. The Portfolio seeks to achieve its objective primarily by
investing in equity and equity-related securities of companies from at least
five different countries, excluding the United States. This Portfolio is
intended for investors who can accept the risks involved in investments in
equity and equity-related securities of non-U.S. issuers, as well as in
foreign currencies, and in the active management techniques that the Portfolio
generally employs. Under normal conditions, the Portfolio will invest at least
65% of its total assets in equity securities of issuers whose principal places
of business (as determined by location of the issuer's principal headquarters)
are located in countries other than the United States. The balance of the
Portfolio, up to 35% of its total assets, may be invested in equity or debt
securities of U.S. issuers or foreign entities. Investing in foreign
securities generally involves risks not ordinarily associated with investing
in securities of domestic issuers. Purchasers are cautioned to read the
"Appendix - Foreign Investments" in the Trust Prospectus for a discussion of
the risks involved in foreign investing.
ELITEVALUE ASSET ALLOCATION PORTFOLIO
The Portfolio's fundamental investment objective is to achieve growth of
capital over time through investment in a portfolio consisting of common
stocks, bonds, and cash equivalents, the percentages of which will vary based
on the Sub-Adviser's assessments of the relative outlook for such investments.
In seeking to achieve its investment objective, the types of equity securities
in which the Portfolio may invest are likely to be primarily those of
companies that are believed by the Sub-Adviser to be undervalued in the
marketplace in relation to factors such as the companies' assets or earnings.
Debt securities are expected to be predominantly investment-grade,
intermediate to long-term U.S. government and corporate debt, although the
Portfolio will also invest in high-quality, short-term money market and cash
equivalent securities, and may invest almost all of its assets in such
securities when the Sub-Adviser deems it advisable to preserve capital. In
addition, the Portfolio may also purchase foreign securities, provided they
are listed on a domestic or foreign securities exchange or represented by
American Depository Receipts ("ADRs") listed on a domestic securities exchange
or traded in domestic or foreign over-the-counter markets. Investing in
foreign securities generally involves risks not ordinarily associated with
investing in securities of domestic issuers. Purchasers are cautioned to read
the "Appendix - Foreign Investments" in the Trust Prospectus for a discussion
of the risks involved in foreign investing. The allocation of the Portfolio's
assets among the different types of permitted investments will vary from time
to time based upon the Sub-Adviser's evaluation of economic and market trends
and its perception of the relative values available from such types of
securities at any given time. There is neither a minimum nor a maximum
percentage of the Portfolio's assets that may, at any given time, be invested
in any of the types of investments identified above.
GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
The Portfolio's fundamental investment objective is to provide total
returns that exceed, over time, the Standard & Poor's 500 Composite Stock
Price Index through investment in equity securities. Equity securities are
selected on the basis of a proprietary analytical model of the Portfolio's
Sub-Adviser. Each security is ranked according to two separate and
uncorrelated measures: value and the momentum of Wall Street sentiment. The
Portfolio invests at least 65% of its total assets in equity securities.
However, the Portfolio may invest temporarily for defensive purposes, without
limitation, in certain short-term, fixed-income securities. Such securities
may be used to invest uncommitted cash balances or to maintain liquidity.
GLOBAL ADVISORS MONEY MARKET PORTFOLIO
The Portfolio's fundamental investment objective is to maximize current
income, to the extent consistent with the preservation of capital and
liquidity and the maintenance of a stable $1.00 per share net asset value, by
investing in dollar-denominated securities with remaining maturities of one
year or less. The Portfolio attempts to meet its investment objective by
investing in high-quality money market instruments. An investment in this
Portfolio is neither insured nor guaranteed by the U.S. government.
SALOMON BROTHERS U.S. GOVERNMENT SECURITIES PORTFOLIO
The Portfolio's fundamental investment objective is to seek a high level
of current income. The Portfolio seeks to attain its objective by investing a
substantial portion of its assets in debt obligations and mortgage-backed
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, and collateralized mortgage obligations backed by such
securities. The Portfolio may also invest a portion of its assets in U.S.
dollar-denominated corporate investment-grade debt securities.
<PAGE> 9
VAN KAMPEN AMERICAN CAPITAL EMERGING GROWTH PORTFOLIO
The Portfolio's investment objective is to seek to provide capital
appreciation; any ordinary income received from portfolio securities is
entirely incidental. The Portfolio, under normal conditions, invests at least
65% of its total assets in common stocks of small and medium-sized companies,
both domestic and foreign, in the early stages of their life cycles that the
Sub-Adviser believes have the potential to become major enterprises. While the
Portfolio invests primarily in common stocks, to a limited extent, it may
invest in other securities such as preferred stocks, convertible securities,
and warrants. The Portfolio may invest up to 20% of its assets in securities
of foreign issuers. Investing in foreign securities generally involves risks
not ordinarily associated with investing in securities of domestic issuers.
Purchasers are cautioned to read the "Appendix - Foreign Investments" in the
Trust Prospectus for a discussion of the risks involved in foreign investing.
VOTING RIGHTS
In accordance with its view of present applicable law, the Company will
vote the shares of the Trust held in the Separate Account at special meetings
of the shareholders in accordance with instructions received from persons
having the voting interest in the Separate Account. The Company will vote
shares for which it has not received instructions, as well as shares
attributable to it, in the same proportion as it votes shares for which it has
received instructions. The Trust does not hold regular meetings of
shareholders.
The number of shares which a person has a right to vote will be determined as
of a date to be chosen by the Company not more than 60 days prior to a
shareholder meeting of the Trust. Voting instructions will be solicited by
written communication at least 10 days prior to the meeting.
SUBSTITUTION OF SECURITIES
If the shares of an Investment Option (or any Portfolio within an
Investment Option or any other Investment Option or Portfolio) are no longer
available for investment by the Separate Account or, if in the judgment of the
Company's Board of Directors, further investment in the shares should become
inappropriate in view of the purpose of the Contracts, the Company may limit
further purchase of such shares or may substitute shares of another Investment
Option or Portfolio for shares already purchased under the Contracts. No
substitution of securities may take place without prior approval of the SEC
and under the requirements it may impose.
CHARGES AND DEDUCTIONS
Various charges and deductions are made from the Contract Value and the
Separate Account. These charges and deductions are:
DEDUCTION FOR CONTINGENT DEFERRED SALES CHARGE (SALES LOAD)
The Contracts do not provide for a front-end sales charge. However, if
all or a portion of the Contract Withdrawal Value (see "Withdrawals") is
withdrawn, a Contingent Deferred Sales Charge (sales load) will be calculated
at the time of each withdrawal and will be deducted from the Contract Value.
This charge reimburses the Company for expenses incurred in connection with
the promotion, sale, and distribution of the Contracts. The Contingent
Deferred Sales Charge is based upon the length of time from when each Purchase
Payment was made as follows:
<TABLE>
<CAPTION>
Length of Time Charge
From Purchase Payment (as a percentage of
(Number of Years) Purchase Payment)
<S> <C>
1 5%
2 5%
3 5%
4 4%
5 3%
6 2%
7 1%
8 or more 0%
</TABLE>
<PAGE> 10
After the first Contract Anniversary, a withdrawal of up to 10% of the
Contract Value, determined as of the immediately preceding Contract
Anniversary, may be withdrawn once each Contract Year on a non-cumulative
basis without the imposition of the Contingent Deferred Sales Charge (the
"Free Withdrawal Amount"). The Systematic Withdrawal Option may be selected in
lieu of the Free Withdrawal Amount. (See "Withdrawals - Systematic Withdrawal
Option.")
REDUCTION OR ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
The amount of the Contingent Deferred Sales Charge may be reduced or
eliminated when sales of the Contracts are made to individuals or to a group
of individuals in a manner that results in savings of sales expenses. The
entitlement to a reduction of the Contingent Deferred Sales Charge will be
determined by the Company after examination of all the relevant factors, such
as:
1. The size and type of group to which sales are to be made will be
considered. Generally, the sales expenses for a larger group are less than for
a smaller group because of the ability to implement large numbers of Contracts
with fewer sales contacts;
2. The total amount of Purchase Payments to be received will be
considered. Per Contract sales expenses are likely to be less on larger
Purchase Payments than on smaller ones;
3. Any prior or existing relationship with the Company will be considered.
Per Contract sales expenses are likely to be less when there is a prior
existing relationship because of the likelihood of implementing the Contract
with fewer sales contacts; and
4. There may be other circumstances, of which the Company is not presently
aware, which could result in reduced sales expenses.
If, after consideration of the foregoing factors, the Company determines
that there will be a reduction in sales expenses, the Company may provide for
a reduction or elimination of the Contingent Deferred Sales Charge.
The Contingent Deferred Sales Charge may be eliminated when the Contracts are
issued to an officer, director, or employee of the Company or any of its
affiliates. In no event will reductions or elimination of the Contingent
Deferred Sales Charge be permitted where reductions or elimination will be
unfairly discriminatory to any person.
DEDUCTION FOR MORTALITY AND EXPENSE RISK CHARGE
Each Valuation Period, the Company deducts a Mortality and Expense Risk
Charge from the Separate Account which is equal, on an annual basis, to 1.25%
of the average daily net asset value of the Separate Account. The mortality
risks assumed by the Company arise from its contractual obligation to make
Annuity Payments after the Annuity Date (determined in accordance with the
Annuity Option chosen by the Owner), regardless of how long all Annuitants
live. This assures that neither an Annuitant's own longevity, nor an
improvement in life expectancy greater than that anticipated in the mortality
tables, will have any adverse effect on the Annuity Payments the Annuitant
will receive under the Contract. Further, the Company bears a mortality risk
in that it guarantees the annuity purchase rates for the Annuity Options under
the Contract, whether for a Fixed Annuity or a Variable Annuity. Also, the
Company bears a mortality risk with respect to the death benefit and with
respect to the waiver of the Contingent Deferred Sales Charge if Purchase
Payments have been held in the Contract less than seven years. The expense
risk assumed by the Company is that all actual expenses involved in
administering the Contracts, including Contract maintenance costs,
administrative costs, mailing costs, data processing costs, legal fees,
accounting fees, filing fees, and the costs of other services, may exceed the
amount recovered from the Contract Maintenance Charge and the Administrative
Charge.
If the Mortality and Expense Risk Charge is insufficient to cover the actual
costs, the loss will be borne by the Company. Conversely, if the amount
deducted proves more than sufficient, the excess will be a profit to the
Company. The Company expects a profit from this charge.
The Mortality and Expense Risk Charge is guaranteed by the Company and cannot
be increased.
DEDUCTION FOR ENHANCED DEATH BENEFIT CHARGE
If the Owner selects the Enhanced Death Benefit, each Valuation Period
prior to the 75th birthday of the Owner or oldest Joint Owner, the Company
deducts an Enhanced Death Benefit Charge from the Separate Account which is
equal, on an annual basis, to .15% of the average daily net asset value of the
Separate Account. This charge compensates the Company for assuming the
mortality risks for the Enhanced Death Benefit. (See "Proceeds Payable on
Death - Enhanced Death Benefit Amount During the Accumulation Period.") The
Company expects a profit from this charge.
<PAGE> 11
DEDUCTION FOR ADMINISTRATIVE CHARGE
Each Valuation Period, the Company deducts an Administrative Charge from
the Separate Account which is equal, on an annual basis, to .15% of the
average daily net asset value of the Separate Account. This charge, together
with the Contract Maintenance Charge (see below), is to reimburse the Company
for the expenses it incurs in the establishment and maintenance of the
Contracts and the Separate Account. These expenses include, but are not
limited to: preparation of the Contracts, confirmations, annual reports and
statements: maintenance of Owner records; maintenance of Separate Account
records; administrative personnel costs; mailing costs; data processing costs;
legal fees; accounting fees; filing fees; the costs of other services
necessary for Owner servicing; and all accounting, valuation, regulatory, and
reporting requirements. Since this charge is an asset-based charge, the amount
of the charge attributable to a particular Contract may have no relationship
to the administrative costs actually incurred by that Contract. The Company
does not intend to profit from this charge. This charge will be reduced to the
extent that the amount of this charge is in excess of that necessary to
reimburse the Company for its administrative expenses. Should this charge
prove to be insufficient, the Company will not increase this charge and will
incur the loss.
DEDUCTION FOR CONTRACT MAINTENANCE CHARGE
On each Contract Anniversary, the Company deducts a Contract Maintenance
Charge from the Contract Value by subtracting values from the General Account
and/or by canceling Accumulation Units from each applicable Sub-Account to
reimburse it for expenses relating to maintenance of the Contracts. The
Contract Maintenance Charge is currently $30 each Contract Year. However,
during the Accumulation Period, if the Contract Value on the Contract
Anniversary is at least $40,000, then no Contract Maintenance Charge is
deducted. If a total withdrawal is made on other than a Contract Anniversary
and the Contract Value for the Valuation Period during which the total
withdrawal is made is less than $40,000, the full Contract Maintenance Charge
will be deducted at the time of the total withdrawal. During the Annuity
Period, the Contract Maintenance Charge will be deducted pro rata from Annuity
Payments, regardless of Contract size and will result in a reduction of each
Annuity Payment. The Contract Maintenance Charge will be deducted from the
General Account and the Sub-Accounts in the Separate Account in the same
proportion that the amount of the Contract Value in the General Account and
each Sub-Account bears to the total Contract Value. The Company has set this
charge at a level so that, when considered in conjunction with the
Administrative Charge (see above), the Company will not make a profit from the
charges assessed for administration.
DEDUCTION FOR PREMIUM AND OTHER TAXES
Any taxes, including any premium taxes, paid to any governmental entity
relating to the Contracts, may be deducted from the Purchase Payments or
Contract Value when incurred. The Company will, in its sole discretion,
determine when taxes have resulted from: the investment experience of the
Separate Account, receipt by the Company of the Purchase Payments, or
commencement of Annuity Payments. The Company may, at its sole discretion, pay
taxes when due and deduct that amount from the Contract Value at a later date.
Payment at an earlier date does not waive any right the Company may have to
deduct amounts at a later date. The Company's current practice is to deduct
for premium taxes when they become due and payable to the states. Premium
taxes generally range from 0% to 4%. While the Company is not currently
maintaining a provision for federal income taxes with respect to the Separate
Account, the Company has reserved the right to establish a provision for
income taxes if it determines, in its sole discretion, that it will incur a
tax as a result of the operation of the Separate Account. The Company will
deduct for any income taxes incurred by it as a result of the operation of the
Separate Account, whether or not there was a provision for taxes and whether
or not it was sufficient.
The Company will deduct any withholding taxes required by applicable law.
DEDUCTION FOR EXPENSES OF THE TRUST
There are other deductions from, and expenses (including management fees
paid to the investment adviser and other expenses) paid out of, the assets of
the Trust which are described in the Prospectus for the Trust.
THE CONTRACTS
OWNER
The Owner has all rights and may receive all benefits under the Contract.
The Owner is the person designated as such on the Issue Date, unless changed.
The Company will not issue a Contract to any Owner older than 85 years.
The Owner may change owners at any time prior to the Annuity Date by Written
Request. A change of Owner will automatically revoke any prior designation of
Owner. The change will become effective as of the date the Written Request is
signed. A new designation of Owner will not apply to any payment made or
action taken by the Company prior to the time it was received.
<PAGE> 12
An Owner may make inquiries regarding his or her Contract by telephone or in
writing to the Annuity Service Office listed on the cover page of this
Prospectus.
For Non-Qualified Contracts, in accordance with Code Section 72(u), a deferred
annuity contract held by a corporation or other entity that is not a natural
person is not treated as an annuity contract for tax purposes. Income on the
contract is treated as ordinary income received by the owner during the
taxable year. However, for purposes of Internal Revenue Code (the "Code")
Section 72(u), an annuity contract held by a trust or other entity as agent
for a natural person is considered held by a natural person and treated as an
annuity contract for tax purposes. Tax advice should be sought prior to
purchasing a Contract which is to be owned by a trust or other non-natural
person.
JOINT OWNERS
The Contract can be owned by Joint Owners. If Joint Owners are named, any
Joint Owner must be the spouse of the other Owner. Upon the death of either
Owner, the surviving Joint Owner will be the primary Beneficiary. Any other
Beneficiary designation will be treated as a contingent Beneficiary unless
otherwise indicated in a Written Request. Unless otherwise specified, if there
are Joint Owners, both signatures will be required for all Owner transactions
except telephone transfers. If the telephone transfer option is elected and
there are Joint Owners, either Joint Owner can give telephone instructions.
ANNUITANT
The Annuitant is the person on whose life Annuity Payments are based. The
Annuitant is the person designated by the Owner at the Issue Date, unless
changed prior to the Annuity Date. The Annuitant may not be changed in a
Contract which is owned by a non-natural person. Any change of Annuitant is
subject to the Company's underwriting rules then in effect.
ASSIGNMENT
A Written Request specifying the terms of an assignment of the Contract
must be provided to the Annuity Service Office. Until a Written Request is
received, the Company will not be required to take notice of or be responsible
for any transfer of interest in the Contract by assignment, agreement, or
otherwise.
The Company will not be responsible for the validity or tax consequences of
any assignment. Any assignment made after the death benefit has become payable
will be valid only with the Company's consent.
If the Contract is assigned, the Owner's rights may only be exercised with the
consent of the assignee of record.
If the Contract is issued pursuant to a retirement plan which receives
favorable tax treatment under the provisions of Sections 401, 403(b), 408, or
457 of the Internal Revenue Code, it may not be assigned, pledged, or
otherwise transferred except as may be allowed under applicable law.
PURCHASE PAYMENTS AND CONTRACT VALUE
PURCHASE PAYMENTS
The initial Purchase Payment is due on the Issue Date. The minimum
initial Purchase Payment for Non-Qualified Contracts is $5,000 and for
Qualified Contracts is $2,000 ($50 for Contracts issued in connection with
Section 403(b) plans). The minimum subsequent Purchase Payment for
Non-Qualified Contracts is $1,000, or if the automatic premium check option is
elected, $50. The minimum subsequent Purchase Payment for Qualified Contracts
is $50. Subject to the maximum and minimum Purchase Payments discussed herein,
the Owner may make subsequent Purchase Payments and may increase or decrease
or change the frequency of such payments. The maximum total Purchase Payments
the Company will accept without Company approval is $500,000 for issue Ages up
to 75. The maximum total Purchase Payments the Company will accept without
Company approval for issue Ages 75 and older is $250,000. The Company reserves
the right to reject any application or Purchase Payment.
All Purchase Payments and sums payable to the Company under the Contract are
payable only at the Company's lock box at State Street Bank and Trust Company
at the following addresses: via mail to: Western National Life Insurance
Company, P.O. Box 5429, Boston, MA 02206-5429; via overnight delivery to:
State Street Bank and Trust Company, Attn: Lock Box A3W, 1778 Heritage Drive,
North Quincy, MA 02171.
<PAGE> 13
ALLOCATION OF PURCHASE PAYMENTS
Purchase Payments are allocated to the General Account and/or the
Sub-Accounts of the Separate Account in accordance with the selection made by
the Owner. The allocation of the initial Purchase Payment is made in
accordance with the selection made by the Owner at the Issue Date. However,
the Company will, under certain circumstances, allocate initial Purchase
Payments to the Global Advisors Money Market Sub-Account until the expiration
of the Right to Examine contract period. (See "Highlights.") Unless otherwise
changed by the Owner, subsequent Purchase Payments are allocated in the same
manner as the initial Purchase Payment. Allocation of the Purchase Payments is
subject to the terms and conditions imposed by the Company. There are
currently no limitations on the number of Sub-Accounts that can be selected by
an Owner. Allocations must be in whole percentages with a minimum allocation
of 10% of each Purchase Payment or transfer, unless the Purchase Payment is
being made pursuant to an approved Dollar Cost Averaging Program or one of the
Asset Allocation Programs.
For initial Purchase Payments, if the forms required to issue the Contract are
in good order, the Company will apply the Purchase Payment to the Separate
Account and credit the Contract with Accumulation Units and/or to the General
Account and credit the Contract with dollars within two business days of
receipt.
In addition to the underwriting requirements of the Company, good order means
that the Company has received federal funds (monies credited to a bank's
account with its regional Federal Reserve Bank). If the forms required to
issue a Contract are not in good order, the Company will attempt to get them
in good order or the Company will return the forms and the Purchase Payment
within five business days. The Company will not retain the Purchase Payment
for more than five business days while processing incomplete forms, unless it
has been so authorized by the purchaser. For subsequent Purchase Payments, the
Company will apply Purchase Payments to the Separate Account and credit the
Contract with Accumulation Units as of the end of the Valuation Period during
which the Purchase Payment was received in good order.
BONUS
The Company will, at the time of the initial Purchase Payment, add an
additional amount, as a Bonus, equal to 1% of such Purchase Payment made under
the Contract. The Bonus will be allocated to the Sub-Accounts of the Separate
Account and/or the General Account in the same manner as the Purchase Payment
to which it is attributable. The Company reserves the right to limit its
payment of such Bonus to $5,000.
If the Owner makes a withdrawal prior to the seventh Contract Anniversary
in excess of the Free Withdrawal Amount and/or in excess of the amount
permitted under the Systematic Withdrawal Option, an amount equal to the
Bonus will be deducted by the Company from the Contract Value. (This
deduction is not applicable in New Jersey.) The deduction will be pro
rata from the Sub-Accounts and/or the General Account in the proportion
that the amount of Contract Value in the Sub-Accounts and General Account
bears to the total Contract Value. The Company will not recapture any
investment earnings on the Bonus. Investment earnings are deemed to be
withdrawn on a first-in, first-out basis. Owners do not have a vested
interest in the principal amount of the Bonus until seven Contract Years
from the date of the Bonus payment have elapsed, and until that time, the
additional amount belongs to the Company.
For purposes of distributions under the Contract, the Bonus payment and any
investment earnings thereon shall be treated as taxable income and not as part
of the cost basis of the Contract. (See "Tax Status - General.")
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which, if elected, permits an Owner to
systematically transfer amounts on a monthly, quarterly, semi-annual, or
annual basis from the Global Advisors Money Market Sub-Account to one or more
Sub-Accounts. By allocating amounts on a regularly scheduled basis, as opposed
to allocating the total amount at one particular time, an Owner may be less
susceptible to the effect of market fluctuations. The minimum amount which may
be transferred is $250 per transfer. The amount may be specified as a
percentage of Contract Values in the source Sub-Account(s) (in whole
percentages) or by dollar amount.
If selected, Dollar Cost Averaging must be for at least 12 months. There is no
current charge for Dollar Cost Averaging. The standard date of the month for
transfers is the date the Owner's request for an enrollment in the program is
received and processed by the Company, and subsequent monthly, quarterly,
semi-annual, or annual anniversaries of that date. The Owner may specify a
different future date. If the Company imposes a transfer fee, transfers made
pursuant to the Dollar Cost Averaging program will not be taken into account
in determining any transfer fee.
CONTRACT VALUE
The Contract Value is the sum of the Owner's interest in the General
Account and the Sub-Accounts of the Separate Account during the Accumulation
Period.
<PAGE> 14
ACCUMULATION UNITS
Accumulation Units will be used to account for all amounts allocated to
or withdrawn from the Sub-Accounts of the Separate Account as a result of
Purchase Payments, withdrawals, transfers, or fees and charges. The Company
will determine the number of Accumulation Units of a Sub-Account purchased or
canceled. This will be done by dividing the amount allocated to (or the amount
withdrawn from) the Sub-Account by the dollar value of one Accumulation Unit
of the Sub-Account as of the end of the Valuation Period during which the
request for the transaction is received at the Annuity Service Office.
ACCUMULATION UNIT VALUE
The Accumulation Unit Value for each Sub-Account was arbitrarily set
initially at $10. The investment performance of the Trust, as well as the
deduction of the charges discussed in this Prospectus, affect Accumulation
Unit Values (see below). Subsequent Accumulation Unit Values for each
Sub-Account are determined by multiplying the Accumulation Unit Value for the
immediately preceding Valuation Period by the Net Investment Factor for the
Sub-Account for the current period.
The Net Investment Factor for each Sub-Account is determined by dividing A by
B and subtracting C where:
A is (i) the net asset value per share of the Investment Option or
Portfolio of an Investment Option held by the Sub-Account
for the current Valuation Period; plus
(ii) any dividend per share declared on behalf of such Investment
Option or Portfolio that has an ex-dividend date within the
current Valuation Period; less
(iii) the cumulative per share charge or credit for taxes reserved
which is determined by the Company to have resulted from the
operation or maintenance of the Sub-Account.
B is the net asset value per share of the Investment Option or
Portfolio of an Investment Option held by the Sub-Account for
the immediately preceding Valuation Period, plus or minus the
cumulative per share charge or credit for taxes reserved for the
immediately preceding Valuation Date.
C is the factor representing the cumulative per share unpaid charges
for the Mortality and Expense Risk Charge, for the
Administrative Charge and for the Enhanced Death Benefit Charge,
if any.
The Accumulation Unit Value may increase or decrease from Valuation
Period to Valuation Period.
TRANSFERS
TRANSFERS PRIOR TO THE ANNUITY DATE
Subject to any limitations imposed by the Company on the number of
transfers that can be made during the Accumulation Period, the Owner may
transfer all or part of the Owner's Contract Value by Written Request without
the imposition of any fee or charge if there have been no more than the number
of free transfers. Currently, there are no restrictions on the number of
transfers that can be made each Contract Year. However, if the Company does
limit the number of transfers in the future, Owners are guaranteed four
transfers per year without a transfer fee during the Accumulation Period. All
transfers are subject to the following:
1. Currently, the Company does not impose a transfer fee. The Company
reserves the right to charge a fee for transfers in the future which will not
exceed the lesser of $25 or 2% of the amount transferred (which will be
deducted from the amount that is transferred). If more than the number of free
transfers have been made in a Contract Year, the Company will deduct a
transfer fee for each subsequent transfer permitted.
2. The minimum amount which can be transferred is $250 (from (i) one
or multiple Sub-Accounts or (ii) the General Account) or the Owner's entire
interest in the Sub-Account or the General Account, if less. The minimum
amount which must remain in a Sub-Account after a transfer is $500 per
Sub-Account, or $0 if the entire amount in the Sub-Account is transferred. The
minimum amount which must remain in the General Account after a transfer is
$500, or $0 if the entire amount in the General Account is transferred.
3. The maximum amount which can be transferred from the General
Account to the Separate Account is 20% of the Owner's Contract Value in the
General Account as of the last Contract Anniversary. However, if the Sweep
Account option has been elected, any funds transferred pursuant to that
program will not be included in this limitation. (See "Sweep Account Program,"
below.)
4. Transfers from any Sub-Account to the General Account may not be
made for the six-month period following any transfer from the General Account
into one or more of the Sub-Accounts.
5. The Company reserves the right, at any time and without prior
notice to any party, to terminate, suspend, or modify the transfer privilege
described above.
<PAGE> 15
Owners can elect to make transfers by telephone. To do so, Owners must
complete a Written Request. The Company will use reasonable procedures to
confirm that instructions communicated by telephone are genuine. If it does
not, the Company may be liable for any losses due to unauthorized or
fraudulent instructions. The Company may tape record all telephone
instructions. The Company will not be liable for any loss, liability, cost, or
expense incurred by the Owner for acting in accordance with such telephone
instructions believed to be genuine. The telephone transfer privilege may be
discontinued at any time by the Company.
If there are Joint Owners, unless the Company is informed to the contrary,
telephone instructions will be accepted from either of the Joint Owners.
Neither the Separate Account nor the Trust is designed for professional market
timing organizations or other entities using programmed and frequent
transfers. A pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to a Portfolio. The Company reserves the right to
restrict the transfer privilege or reject any specific Purchase Payment
allocation request for any person whose transactions seem to follow a timing
pattern. Although not contractually obligated to do so, the Company may, in
its sole discretion, provide prior or contemporaneous notice of restrictions
on the transfer privilege to Owners.
TRANSFERS DURING THE ANNUITY PERIOD
During the Annuity Period, the Owner may make transfers by Written
Request, as follows:
1. The Owner may make transfers of Contract Values between
Sub-Accounts, subject to any limitations imposed by the Company on the number
of transfers that can be made during the Annuity Period. Currently, there are
no restrictions on the number of transfers that can be made. However, if the
Company does limit the number of transfers in the future, Owners are
guaranteed four transfers per year free of any transfer fee during the Annuity
Period. Currently, the Company does not impose a transfer fee. The Company
reserves the right to charge a fee for transfers in the future which will not
exceed the lesser of $25 or 2% of the amount transferred (which will be
deducted from the amount which is transferred).
2. The Owner may, once each Contract Year, make a transfer from one
or more Sub-Accounts to the General Account. The Owner may not make a transfer
from the General Account to the Separate Account.
3. Transfers between Sub-Accounts will be made by converting the
number of Annuity Units being transferred to the number of Annuity Units of
the Sub-Account to which the transfer is made, so that the next Annuity
Payment, if it were made at that time, would be the same amount that it would
have been without the transfer. Thereafter, Annuity Payments will reflect
changes in the value of the new Annuity Units.
The amount transferred to the General Account from a Sub-Account
will be based on the annuity reserves for the Owner in that Sub-Account.
Transfers to the General Account will be made by converting the Annuity Units
being transferred to purchase fixed Annuity Payments under the Annuity Option
in effect and based on the Age of the Annuitant at the time of the transfer.
4. The minimum amount which can be transferred is $250 from one or
multiple Sub-Accounts, or the Owner's entire interest in the Sub-Account, if
less. The minimum amount which must remain in a Sub-Account after a transfer
is $500 per Sub-Account, or $0 if the entire amount in the Sub-Account is
transferred.
5. The Company reserves the right, at any time and without prior
notice to any party, to terminate, suspend, or modify the transfer privilege
described above.
Owners can elect to make transfers by telephone. To do so, Owners must
complete a Written Request. The Company will use reasonable procedures to
confirm that instructions communicated by telephone are genuine. If it does
not, the Company may be liable for any losses due to unauthorized or
fraudulent instructions. The Company may tape record all telephone
instructions. The Company will not be liable for any loss, liability, cost, or
expense incurred by the Owner for acting in accordance with such telephone
instructions believed to be genuine. The telephone transfer privilege may be
discontinued at any time by the Company.
If there are Joint Owners, unless the Company is informed to the contrary,
telephone instructions will be accepted from either of the Joint Owners.
SWEEP ACCOUNT PROGRAM
During the Accumulation Period, an Owner may elect to participate in the
Sweep Account Program which permits the Owner to transfer ("sweep") the income
from the General Account to the Sub-Accounts, on a quarterly basis, as long as
the General Account balance is at least $25,000. The transfer will be made on
quarterly anniversaries of the Issue Date of the Contract unless the Owner
specifies a different date.
<PAGE> 16
ASSET ALLOCATION PROGRAMS
ASSET ALLOCATION - PORTFOLIO REBALANCING
From time to time, the Company may make available a program (Asset
Allocation - Portfolio Rebalancing) which provides for periodic pre-authorized
automatic transfers among the Sub-Accounts pursuant to written allocation
instructions from the Owner. Such transfers are made to maintain a particular
percentage allocation among the Portfolios as selected by the Owner. The
minimum allocation is 10% per selection.
An Owner may elect that rebalancing occur on a monthly, quarterly,
semi-annual, or annual basis, and currently, all Portfolios are available
investment options under the Program. The General Account is not an available
investment option under the Program.
ASSET ALLOCATION - FINANCIAL INTERMEDIARIES
In addition, the Company may make available another Asset Allocation
program whereby certain financial intermediaries will make their services
available to Owners to provide advice for the selection of the Sub-Accounts
and the General Account under the Contracts. The Company has recognized the
value to Owners of having available (on a continuous basis) advice for the
selection of the Sub-Accounts and the General Account. An Owner participating
in such a program authorizes the financial intermediary to make transfers of
his or her Contract Values among the Sub-Accounts and/or the General Account.
The Company has not, and will not, make any independent investigation of such
financial intermediaries, their services, or the costs, if any, for such
services. The financial intermediaries will be required to comply with the
Company's administrative systems and rules, including the prohibition against
market timers. A Written Request will be required to participate in such Asset
Allocation programs.
An Owner may enter into an advisory agreement with such financial
intermediaries. If such an agreement is entered into, an Owner will need to
complete certain administrative forms. Compensation, if any, for the services
of the financial intermediaries is a matter between the intermediaries and the
Owners.
THE SELECTION OF FINANCIAL INTERMEDIARIES OR OTHER ADVISERS IS SOLELY THE
RESPONSIBILITY OF THE OWNER. ANY COMPENSATION DUE ANY FINANCIAL INTERMEDIARY
OR OTHER ADVISER, AS A RESULT OF INVESTMENT ADVICE HE OR SHE MAY HAVE RENDERED
AN OWNER IN CONNECTION WITH THE CONTRACTS, IS SOLELY THE OWNER'S
RESPONSIBILITY. THE COMPANY HAS NOT MADE ANY INDEPENDENT INVESTIGATION OF THE
FINANCIAL INTERMEDIARIES OFFERING ANY ASSET ALLOCATION PROGRAMS OR OF THE
PROGRAMS THEY OFFER. THE COMPANY DOES NOT ENDORSE THE FINANCIAL INTERMEDIARIES
OFFERING "ASSET ALLOCATION PROGRAMS."
The above Asset Allocation programs are only available during the Accumulation
Period. Currently, there is no minimum Contract Value required for
participants in such a program. However, the Company reserves the right to
require a minimum Contract Value for Asset Allocation programs. The Company
does not currently charge for enrollment in the programs, but reserves the
right to to do so. Owners can terminate their participation in any program by
Written Request. If the Company imposes a transfer fee, transfers made
pursuant to an Asset Allocation program will not be taken into account in
determining any transfer fee. The Company reserves the right to modify,
suspend, or terminate either of the Asset Allocation programs at any time.
WITHDRAWALS
During the Accumulation Period, the Owner may, upon a Written Request,
make a total or partial withdrawal of the Contract Withdrawal Value. The
Contract Withdrawal Value is:
1. The Contract Value as of the end of the Valuation Period during
which a Written Request for a withdrawal is received; less
2. Any applicable taxes not previously deducted; less
3. Any applicable Contingent Deferred Sales Charge; less
4. The Contract Maintenance Charge, if any.
A withdrawal will result in the cancellation of Accumulation Units from
each applicable Sub-Account or a reduction in the Owner's General Account
Contract Value in the ratio that the Owner's interest in the Sub-Account
and/or General Account bears to the total Contract Value. The Owner must
specify by Written Request in advance which Sub-Account Units are to be
canceled, if other than the above method is desired.
<PAGE> 17
The Company will pay the amount of any withdrawal from the Separate Account
within seven days of receipt of a request in good order unless the Suspension
or Deferral of Payments provision is in effect.
Each partial withdrawal must be for at least $500. The minimum Contract Value
which must remain in the Contract after a partial withdrawal is $5,000 for
Non-Qualified Contracts and $2,000 for Qualified Contracts.
Certain tax withdrawal penalties and restrictions may apply to withdrawals
from the Contracts. (See "Tax Status.") For Contracts purchased in connection
with 403(b) plans, the Code limits the withdrawal of amounts attributable to
contributions made pursuant to a salary reduction agreement (as defined in
Section 403(b)(11) of the Code) to circumstances only when the Owner: (a)
attains age 59 1/2; (b) separates from service; (c) dies; (d) becomes disabled
(within the meaning of Section 72(m)(7) of the Code); or (e) incurs a
qualifying hardship.
However, withdrawals for hardship are restricted to the portion of the Owner's
Contract Value which represents contributions made by the Owner and does not
include any investment results. The limitations on withdrawals became
effective on January 1, 1989, and apply only to salary reduction contributions
made after December 31, 1988, to income attributable to such contributions and
to income attributable to amounts held as of December 31, 1988. The
limitations on withdrawals do not affect rollovers or transfers between
certain Qualified Plans. Owners should consult their own tax counsel or other
tax adviser regarding any distributions.
SYSTEMATIC WITHDRAWAL OPTION
The Company permits a systematic withdrawal option which enables an Owner
to pre-authorize a periodic exercise of the contractual withdrawal rights
described above. The total permitted systematic withdrawals in a Contract Year
are limited to not more than 10% of the Contract Value as of the immediately
preceding Contract Anniversary or, if during the first Contract Year, the
Issue Date. The Systematic Withdrawal Option can be exercised at any time
including during the first Contract Year. The exercise of the systematic
withdrawal option in any Contract Year replaces the Free Withdrawal Amount
which is allowable once per Contract Year after the first Contract Anniversary
without incurring a Contingent Deferred Sales Charge.
Systematic withdrawals are not available for Non-Qualified Contracts where the
Owner is under age 59 1/2. Certain tax penalties and restrictions may apply to
systematic withdrawals from the Contracts. (See "Tax Status - Tax Treatment of
Withdrawals - Qualified Contracts" and "Tax Treatment of Withdrawals -
Non-Qualified Contracts.") Owners entering into such a program instruct the
Company to withdraw an amount specified as a percentage of Contract Value, or
in dollars on a monthly, quarterly, or semi-annual basis. The minimum
withdrawal amount is $100 per payment. The standard date of the month for
withdrawals is the date the Owner's request for enrollment in the program is
received and processed by the Company, and subsequent monthly (or the payment
schedule selected) anniversaries of that date. The Owner may specify a
different future date.
TEXAS OPTIONAL RETIREMENT PROGRAM
A Contract issued to a participant in the Texas Optional Retirement
Program ("ORP") will contain an ORP endorsement that will amend the Contract
as follows: (a) if for any reason a second year of ORP participation is not
begun, the total amount of the State of Texas' first-year contribution will be
returned to the appropriate institution of higher education upon its request
and (b) no benefits will be payable, through surrender of the Contract or
otherwise, until the participant dies, accepts retirement, terminates
employment in all Texas institutions of higher education, or attains the age
of 70 1/2. The value of the Contract may, however, be transferred to other
contracts or carriers during the period of ORP participation. A participant in
the ORP is required to obtain a certificate of termination from the
participant's employer before the value of a Contract can be withdrawn.
SUSPENSION OR DEFERRAL OF PAYMENTS
The Company reserves the right to suspend or postpone payments for a
withdrawal or transfer for any period when:
1. The New York Stock Exchange (the "NYSE") is closed (other than
customary weekend and holiday closings);
2. Trading on the NYSE is restricted;
3. An emergency exists as a result of which disposal of securities
held in the Separate Account is not reasonably practicable or it is not
reasonably practicable to determine the value of the Separate Account's net
assets; or
4. During any other period when the SEC, by order, so permits for the
protection of Owners; provided that applicable rules and regulations of the
SEC will govern as to whether the conditions described in (2) and (3) exist.
The Company reserves the right to defer payment for a withdrawal or
transfer from the General Account for the period permitted by law, but not for
more than six months after written election is received by the Company.
<PAGE> 18
PROCEEDS PAYABLE ON DEATH
DEATH OF OWNER DURING THE ACCUMULATION PERIOD
Upon the death of the Owner or Joint Owner during the Accumulation
Period, the death benefit will be paid to the Beneficiary(ies) designated by
the Owner. Upon the death of a Joint Owner, the surviving Joint Owner, if any,
will be treated as the primary Beneficiary. Any other Beneficiary designation
on record at the time of death will be treated as a contingent Beneficiary.
A Beneficiary may request that the death benefit be paid under one of the
Death Benefit Options below. If the Beneficiary is the spouse of the Owner, he
or she may elect to continue the Contract at the then-current Contract Value
in his or her own name and exercise all the Owner's rights under the Contract.
DEATH BENEFIT AMOUNT DURING THE ACCUMULATION PERIOD
For a death occurring prior to the 80th birthday of the Owner, or the
oldest Joint Owner, the death benefit during the Accumulation Period will be
the greatest of:
1. The Purchase Payments, less any withdrawals, including any
previously deducted Contingent Deferred Sales Charge; or
2. The Contract Value determined as of the end of the Valuation
Period during which the Company receives, at its Annuity Service Office, both
due proof of death and an election of the payment method; or
3. The highest Step-up Value prior to the date of death. The Step-up
Value is equal to the Contract Value on each seventh Contract Anniversary,
plus any Purchase Payments made after such Contract Anniversary, less any
withdrawals and Contingent Deferred Sales Charge deducted after such Contract
Anniversary.
For a death occurring on or after the 80th birthday of the Owner, or the
oldest Joint Owner, the death benefit during the Accumulation Period will be
the Contract Value determined as of the end of the Valuation Period during
which the Company receives, at its Annuity Service Office, both due proof of
death and an election of the payment method.
ENHANCED DEATH BENEFIT AMOUNT DURING THE ACCUMULATION PERIOD
If the Owner selects the Enhanced Death Benefit, for a death occurring
prior to the 75th birthday of the Owner, or the oldest Joint Owner, the death
benefit will be the greatest of:
1. The Purchase Payments, less any withdrawals and previously
deducted Contingent Deferred Sales Charge; or
2. The Contract Value determined as of the end of the Valuation
Period during which the Company receives, at its Annuity Service Office, both
due proof of death and an election of the payment method; or
3. The highest Step-up Value prior to the date of death. The Step-up
Value is equal to the Contract Value on each seventh Contract Anniversary,
plus any Purchase Payments made after such Contract Anniversary, less any
withdrawals and Contingent Deferred Sales Charge deducted after such Contract
Anniversary; or
4. The total amount of Purchase Payments compounded up to the date of
death at 3% interest, minus the total withdrawals and previously deducted
Contingent Deferred Sales Charges compounded up to the date of death at 3%
interest, not to exceed 200% of Purchase Payments, less withdrawals and
previously deducted Contingent Deferred Sales Charges.
For a death occurring on or after the 75th birthday and before the 80th
birthday of the Owner, or the oldest Joint Owner, the death benefit during the
Accumulation Period will be the greatest of 1, 2, or 3 above.
For death occurring on or after the 80th birthday of the Owner, or the oldest
Joint Owner, the death benefit during the Accumulation Period will be the
Contract Value determined as of the Valuation Period during which the Company
receives at its Annuity Service Office both due proof of death and an election
of the payment method.
Owners should refer to their Contract for the applicable Death Benefit
provision.
DEATH BENEFIT OPTIONS DURING THE ACCUMULATION PERIOD
A non-spousal Beneficiary must elect the death benefit to be paid under
one of the following options in the event of the death of the Owner during the
Accumulation Period:
Option 1 - lump sum payment of the death benefit; or
Option 2 - payment of the entire death benefit within five years of
the date of the death of the Owner; or
Option 3 - payment of the death benefit under an Annuity Option over
the lifetime of the Beneficiary or over a period not
extending beyond the life expectancy of the Beneficiary,
with distribution beginning within one year of
the date of death of the Owner or any Joint Owner.
<PAGE> 19
Any portion of the death benefit not applied under Option 3, within one
year of the date of the Owner's death, must be distributed within five years
of the date of death.
A spousal Beneficiary may elect to continue the Contract in his or her own
name at the then-current Contract Value, elect a lump sum payment of the death
benefit, or apply the death benefit to an Annuity Option.
If a lump sum payment is requested, the amount will be paid within seven days
of receipt of proof of death and the election, unless the Suspension or
Deferral of Payments provision is in effect.
Payment to the Beneficiary, other than in a lump sum, may only be elected
during the 60-day period beginning with the date of receipt of proof of death.
DEATH OF OWNER DURING THE ANNUITY PERIOD
If the Owner or a Joint Owner, who is not the Annuitant, dies during the
Annuity Period, any remaining payments under the Annuity Option elected will
continue at least as rapidly as under the method of distribution in effect at
such Owner's death. Upon the death of the Owner during the Annuity Period, the
Beneficiary becomes the Owner.
DEATH OF ANNUITANT
Upon the death of the Annuitant, who is not the Owner, during the
Accumulation Period, the Owner may designate a new Annuitant, subject to the
Company's underwriting rules then in effect. If no designation is made within
30 days of the death of the Annuitant, the Owner will become the Annuitant. If
the Owner is a non-natural person, the death of the Annuitant will be treated
as the death of the Owner and a new Annuitant may not be designated.
Upon the death of the Annuitant during the Annuity Period, the death benefit,
if any, will be as specified in the Annuity Option elected. Death benefits
will be paid at least as rapidly as under the method of distribution in effect
at the Annuitant's death.
PAYMENT OF DEATH BENEFIT
The Company will require due proof of death before any death benefit is
paid. Due proof of death will be:
1. A certified death certificate;
2. A certified decree of a court of competent jurisdiction as to the
finding of death; or
3. Any other proof satisfactory to the Company.
All death benefits will be paid in accordance with applicable law or
regulations governing death benefit payments.
BENEFICIARY
The Beneficiary designation in effect on the Issue Date will remain in
effect until changed. The Beneficiary is entitled to receive the benefits to
be paid at the death of the Owner. Unless the Owner provides otherwise, the
death benefit will be paid in equal shares to the survivor(s) as follows:
1. To the primary Beneficiary(ies) who survive the Owner's and/or the
Annuitant's death, as applicable; or if there are none,
2. To the contingent Beneficiary(ies) who survive the Owner's and/or
the Annuitant's death, as applicable; or if there are none,
3. To the estate of the Owner.
CHANGE OF BENEFICIARY
Subject to the rights of any irrevocable Beneficiary(ies), the Owner may
change the primary Beneficiary(ies) or contingent Beneficiary(ies). Any change
must be made by Written Request. The change will take effect as of the date
the Written Request is signed. The Company will not be liable for any payment
made or action taken before it records the change.
ANNUITY PROVISIONS
GENERAL
On the Annuity Date, the Adjusted Contract Value will be applied under
the Annuity Option selected by the Owner. Annuity Payments may be made on a
fixed or variable basis, or both.
ANNUITY DATE
The Annuity Date is selected by the Owner on the Issue Date. The Annuity
Date must be the first day of a calendar month and must be at least five years
after the Issue Date. The Annuity Date may not be later than that required
under state law.
Prior to the Annuity Date, the Owner, subject to the above, may change
the Annuity Date by Written Request. Any change must be requested at least
15 days prior to the new Annuity Date.
<PAGE> 20
SELECTION OR CHANGE OF AN ANNUITY OPTION
An Annuity Option is selected by the Owner at the time the Contract is
issued. If no Annuity Option is selected, Option B, with 120 monthly payments
guaranteed, will automatically be applied. Prior to the Annuity Date, the
Owner can change the Annuity Option selected by Written Request. Any change
must be requested at least 15 days prior to the Annuity Date.
FREQUENCY AND AMOUNT OF ANNUITY PAYMENTS
Annuity Payments are paid in monthly, quarterly, semi-annual, or annual
installments. The Adjusted Contract Value is applied to the Annuity Table for
the Annuity Option selected. If the Adjusted Contract Value to be applied
under an Annuity Option is less than $2,000, the Company reserves the right to
make a lump sum payment in lieu of Annuity Payments. If the Annuity Payment
would be or become less than $200 where only a Fixed Annuity or a Variable
Annuity is selected, or if the Annuity Payment would be or become less than
$100 on each basis when a combination of Fixed and Variable Annuities is
selected, the Company will reduce the frequency of payments to an interval
which will result in each payment being at least $200, or $100 on each basis
if a combination of Fixed and Variable Annuities is selected.
ANNUITY
If the Owner selects a Fixed Annuity, the Adjusted Contract Value is
allocated to the General Account and the Annuity is paid as a Fixed Annuity.
If the Owner selects a Variable Annuity, the Adjusted Contract Value will be
allocated to the Sub-Account(s) of the Separate Account in accordance with the
selection made by the Owner, and the Annuity will be paid as a Variable
Annuity. The Owner can also select a combination of a Fixed and Variable
Annuity and the Adjusted Contract Value will be allocated accordingly. Unless
the Owner specifies otherwise, the payee of the Annuity Payments shall be the
Annuitant and any Joint Annuitant.
The Adjusted Contract Value will be applied to the applicable Annuity Table
contained in the Contract based upon the Annuity Option selected by the Owner.
FIXED ANNUITY
The Owner may elect to have the Adjusted Contract Value applied to
provide a Fixed Annuity. The dollar amount of each Fixed Annuity payment will
be determined in accordance with Annuity Tables contained in the Contract,
which are based on the minimum guaranteed interest rate of 3% per year. After
the initial Fixed Annuity payment, the payments will not change regardless of
investment, mortality, or expense experience.
VARIABLE ANNUITY
Variable Annuity payments reflect the investment performance of the
Separate Account in accordance with the allocation of the Adjusted Contract
Value to the Sub-Accounts during the Annuity Period. Variable Annuity payments
are not guaranteed as to dollar amount. See the SAI regarding how Annuity
Payments and Annuity Units are calculated.
ANNUITY OPTIONS
The following Annuity Options or any other Annuity Option acceptable to
the Company may be selected:
Option A (Life Annuity) - Monthly Annuity Payments during the life of the
Annuitant.
Option B (Life Annuity with Periods Certain of 60, 120, 180, or 240
Months) - Monthly Annuity Payments during the lifetime of the Annuitant and in
any event for 60, 120, 180, or 240 months certain as selected.
Option C (Joint and Survivor Annuity) - Monthly Annuity Payments payable
during the joint lifetime of the Annuitant and a Joint Annuitant and then
during the lifetime of the survivor at the percentage (100%, 75%, 66 2/3%, or
50%) selected.
Annuity Options A, B, and C are available on a Fixed Annuity basis, a
Variable Annuity basis, or a combination of both. Election of a Fixed Annuity
or a Variable Annuity must be made no later than 15 days prior to the Annuity
Date. If no election is made with respect to whether the Annuity Option will
be on a Fixed Annuity basis, Variable Annuity basis, or a combination of both,
the Annuity Option will be paid to reflect the allocation of the Contract
Value on the Annuity Date between the Separate Account and the General
Account, if any.
<PAGE> 21
DISTRIBUTOR
WNL Brokerage Services, Inc. ("WNL Brokerage"), 5555 San Felipe, Suite
900, Houston, Texas 77056, is the distributor and underwriter of the
Contracts. WNL Brokerage is registered as a broker-dealer with the SEC and is
a member of the National Association of Securities Dealers, Inc. WNL Brokerage
and the Company are owned by the same corporation.
Commissions will be paid to broker-dealers who sell the Contracts.
Broker-dealers will be paid commissions, up to an amount currently equal to 7%
of Purchase Payments, for promotional or distribution expenses associated with
the marketing of the Contracts.
ADMINISTRATION OF THE CONTRACTS
While the Company has primary responsibility for all administration of
the Contracts, it has retained the services of Financial Administrative
Services, Inc. ("FAS"), pursuant to an Insurance Service Agreement. Such
administrative services include issuance of the Contracts and maintenance of
Owners' records. The Company pays all fees and charges of FAS. FAS serves as
the administrator to various insurance companies. The Company's ability to
administer the Contracts could be adversely affected should FAS elect to
terminate the Agreement.
PERFORMANCE INFORMATION
MONEY MARKET SUB-ACCOUNT
From time to time, the Company may advertise the "yield" and "effective
yield" of the Global Advisors Money Market Sub-Account ("Money Market
Sub-Account") of the Separate Account. Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the Money Market Sub-Account refers to the income generated by
Contract Values in the Money Market Sub-Account over a seven-day period (which
period will be stated in the advertisement). This income is "annualized." That
is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the Contract Value in the Money Market Sub-Account. The
"effective yield" is calculated similarly. However, when annualized, the
income earned by Contract Value is assumed to be reinvested. This results in
the "effective yield" being slightly higher than the "yield" because of the
compounding effect of the assumed reinvestment. The yield figure will reflect
the deduction of any asset-based charges and any applicable Contract
Maintenance Charge.
OTHER SUB-ACCOUNTS
From time to time, the Company may advertise performance data for the
various other Sub-Accounts under the Contract. Such data will show the
percentage change in the value of an Accumulation Unit based on the
performance of an Investment Option over a period of time, usually a calendar
year, determined by dividing the increase (decrease) in value for that Unit by
the Accumulation Unit value at the beginning of the period. This percentage
figure will reflect the deduction of any asset-based charges and any
applicable Contract Maintenance Charge under the Contracts.
Any advertisement will also include average annual total return figures
calculated as described in the SAI. The total return figures reflect the
deduction of all charges and deductions under the Contracts and the fees and
expenses of the Portfolios. The Company may also advertise performance
information computed on a different basis.
The Company may make available yield information with respect to some of the
Sub-Accounts. Such yield information will be calculated as described in the
SAI. The yield information will reflect the deduction of all charges and
deductions under the Contracts and the fees and expenses of the Portfolios.
The Company may also show historical Accumulation Unit values in certain
advertisements containing illustrations. These illustrations will be based on
actual Accumulation Unit values.
In addition, the Company may distribute sales literature which compares the
percentage change in Accumulation Unit values for any of the Sub-Accounts
against established market indexes such as the Standard & Poor's 500 Composite
Stock Price Index, the Dow Jones Industrial Average, or other management
investment companies which have investment objectives similar to the
underlying Portfolio being compared. The Standard & Poor's 500 Composite Stock
Price Index is an unmanaged, unweighted average of 500 stocks, the majority of
which are listed on the NYSE. The Dow Jones Industrial Average is an
unmanaged, weighted average of 30 blue chip industrial corporations listed on
the NYSE. Both the Standard & Poor's 500 Composite Stock Price Index and the
Dow Jones Industrial Average assume quarterly reinvestment of dividends.
<PAGE> 22
In addition, the Company may, as appropriate, compare each Sub-Account's
performance to that of other types of investments such as certificates of
deposit, savings accounts, and U.S. Treasuries, or to certain interest rate
and inflation indexes, such as the Consumer Price Index, which is published by
the U.S. Department of Labor and measures the average change in prices over
time of a fixed "market basket" of certain specified goods and services.
Similar comparisons of Sub-Account performance may also be made with
appropriate indexes measuring the performance of a defined group of securities
widely recognized by investors as representing a particular segment of the
securities markets. For example, Sub-Account performance may be compared with
Donoghue Money Market Institutional Averages (money market rates), Lehman
Brothers Corporate Bond Index (corporate bond interest rates), or Lehman
Brothers Government Bond Index (long-term U.S. government obligation interest
rates).
The Company may also distribute sales literature which compares the
performance of the Accumulation Unit values of the Contracts issued through
the Separate Account with the unit values of variable annuities issued through
the separate accounts of other insurance companies. Such information will be
derived from the Lipper Variable Insurance Products Performance Analysis
Service, the VARDS Report, or from Morningstar.
The Lipper Variable Insurance Products Performance Analysis Service is
published by Lipper Analytical Services, Inc., a publisher of statistical data
which currently tracks the performance of almost 4,000 investment companies.
The rankings compiled by Lipper may or may not reflect the deduction of
asset-based insurance charges. The Company's sales literature utilizing these
rankings will indicate whether or not such charges have been deducted. Where
the charges have not been deducted, the sales literature will indicate that if
the charges had been deducted, the ranking might have been lower.
The VARDS Report is a monthly variable annuity industry analysis compiled by
Variable Annuity Research & Data Service of Georgia and published by Financial
Planning Resources, Inc. The VARDS Report rankings may or may not reflect the
deduction of asset-based insurance charges. Where the charges have not been
deducted, the sales literature will indicate that if the charges had been
deducted, the rankings might have been lower.
Morningstar rates a variable annuity Sub-Account against its peers with
similar investment objectives. Morningstar does not rate any Sub-Account that
has less than three years of performance data. The Morningstar rankings may or
may not reflect the deduction of charges. Where the charges have not been
deducted, the sales literature will indicate that if the charges had been
deducted, the rankings might have been lower.
TAX STATUS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING
OF CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE
COMPANY CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE
MADE. PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE
FURTHER UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT
SPECIAL RULES NOT DESCRIBED IN THIS PROSPECTUS MAY BE APPLICABLE IN CERTAIN
SITUATIONS. MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE
STATE OR OTHER TAX LAWS.
Section 72 of the Code governs taxation of annuities in general. An Owner
is not taxed on increases in the value of a Contract until distribution
occurs, either in the form of a lump sum payment or as Annuity Payments under
the Annuity Option selected. For a lump sum payment received as a total
withdrawal (total surrender), the recipient is taxed on the portion of the
payment that exceeds the cost basis of the Contract. For Non-Qualified
Contracts, this cost basis is generally the Purchase Payments, while for
Qualified Contracts there may be no cost basis. The taxable portion of the
lump sum payment is taxed at ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includible in taxable income. The exclusion amount for payments
based on a Fixed Annuity Option is determined by multiplying the payment by
the ratio that the cost basis of the Contract (adjusted for any period certain
or refund feature) bears to the expected return under the Contract. The
exclusion amount for payments based on a Variable Annuity Option is determined
by dividing the cost basis of the Contract (adjusted for any period certain or
refund guarantee) by the number of years over which the annuity is expected to
be paid. Payments received after the investment in the Contract has been
recovered (i.e., when the total of the excludible amounts equals the
investment in the Contract) are fully taxable. The taxable portion is taxed at
ordinary income tax rates. For certain types of Qualified Plans, there may be
no cost basis in the Contract within the meaning of Section 72 of the Code.
Owners, Annuitants, and Beneficiaries under the Contracts should seek
competent financial advice about the tax consequences of any distributions.
<PAGE> 23
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company, and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on
the underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the U.S. Treasury Department
("Treasury Department"), adequately diversified. Disqualification of the
Contract as an annuity contract would result in imposition of federal income
tax to the Owner with respect to earnings allocable to the Contract prior to
the receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the Contracts meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company,
and no more than 55% of the total assets consist of cash, cash items, U.S.
government securities, and securities of other regulated investment companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
1.817-5), which established diversification requirements for the investment
portfolios underlying variable contracts such as the Contracts. The
Regulations amplify the diversification requirements for variable contracts
set forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if: (a) no more than 55% of the value of the total
assets of the portfolio is represented by any one investment; (b) no more than
70% of the value of the total assets of the portfolio is represented by any
two investments; (c) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (d) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate issuer."
The Company intends that all Portfolios of the Trust underlying the Contracts
will be managed by the Adviser for the Trust in such a manner as to comply
with these diversification requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Account will cause the Owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time, it cannot be
determined whether additional guidance will be provided and what standards may
be contained in such guidance.
The amount of Owner control which may be exercised under the Contract is
different, in some respects, from the situations addressed in published
rulings issued by the Internal Revenue Service in which it was held that the
policyowner was not the owner of the assets of the Separate Account. It is
unknown whether these differences, such as the Owner's ability to transfer
among investment choices or the number and type of investment choices
available, would cause the Owner to be considered as the owner of the assets
of the Separate Account, resulting in the imposition of federal income tax to
the Owner with respect to earnings allocable to the Contract, prior to receipt
of payments under the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a
new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively, resulting in the Owner
being retroactively determined to be the Owner of the assets of the Separate
Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts, which
are issued within a calendar year to the same contract owner by one company or
its affiliates, are treated as one annuity contract for purposes of
determining the tax consequences of any distribution. Such treatment may
result in adverse tax consequences, including more rapid taxation of the
distributed amounts from such combination of contracts. Owners should consult
a tax adviser prior to purchasing more than one non-qualified annuity contract
in any calendar year.
<PAGE> 24
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for
the Contracts will be taxed currently to the Owner, if the Owner is a
non-natural person (e.g., a corporation or certain other entities). Such
Contracts generally will not be treated as annuities for federal income tax
purposes. However, this treatment is not applied to Contracts held by a trust
or other entity, as an agent for a natural person, nor to Contracts held by
certain Qualified Plans. Purchasers should consult their own tax counsel or
other tax adviser before purchasing a Contract to be owned by a non-natural
person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners
should therefore consult a competent tax adviser should they wish to assign or
pledge their Contracts.
INCOME TAX WITHHOLDING
All distributions, or the portion thereof which is includible in the
gross income of the Owner, are subject to federal income tax withholding.
Generally, amounts are withheld from periodic payments at the same rate as
wages and at the rate of 10% from non-periodic payments. However, the Owner,
in most cases, may elect not to have taxes withheld or to have withholding
done at a different rate.
Effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or Section 403(b) of the Code, which are not
directly rolled over to another eligible retirement plan or individual
retirement account or individual retirement annuity, are subject to a
mandatory 20% withholding for federal income tax. The 20% withholding
requirement generally does not apply to: (a) a series of substantially equal
payments made at least annually for the life or life expectancy of the
participant or joint and last survivor expectancy of the participant and a
designated beneficiary, or distributions for a specified period of 10 years or
more; or (b) distributions which are required minimum distributions; or (c)
the portion of the distributions not includible in gross income (i.e., returns
of after-tax contributions). Participants under such plans should consult
their own tax counsel or other tax adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS - - NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the contract value exceeds the aggregate
purchase payments made, any amount withdrawn will be treated as coming first
from the earnings and then, only after the income portion is exhausted, as
coming from the principal. Withdrawn earnings are includible in gross income.
It further provides that a 10% penalty will apply to the income portion of any
distribution. However, the penalty is not imposed on amounts received: (a)
after the taxpayer reaches age 59 1/2; (b) after the death of the Owner; (c)
if the taxpayer is totally disabled (for this purpose disability is as defined
in Section 72(m)(7) of the Code); (d) in a series of substantially equal
periodic payments made not less frequently than annually for the life
(or life expectancy) of the taxpayer, or for the joint lives (or
joint life expectancies) of the taxpayer and his or her Beneficiary;
(e) under an immediate annuity; or (f) which are allocable to purchase
payments made prior to August 14, 1982.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified
Contracts. (See "Tax Treatment of Withdrawals - Qualified Contracts," below.)
QUALIFIED PLANS
The Contracts offered by this Prospectus are designed to be suitable for
use under various types of qualified plans. Taxation of participants in each
qualified plan varies with the type of plan and terms and conditions of each
specific plan. Owners, Annuitants, and Beneficiaries are cautioned that
benefits under a Qualified Plan may be subject to the terms and conditions of
the plan, regardless of the terms and conditions of the Contracts issued
pursuant to the plan. Some retirement plans are subject to distribution and
other requirements that are not incorporated into the Company's administrative
procedures. Owners, participants, and Beneficiaries are responsible for
determining that contributions, distributions, and other transactions, with
respect to the Contracts, comply with applicable law. Following are general
descriptions of the types of qualified plans with which the Contracts may be
used. Such descriptions are not exhaustive and are for general informational
purposes only. The tax rules regarding qualified plans are very complex and
will have differing applications, depending on individual facts and
circumstances. Each purchaser should obtain competent tax advice prior to
purchasing a Contract issued under a Qualified Plan.
<PAGE> 25
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described
in this Prospectus. Generally, Contracts issued pursuant to Qualified Plans
are not transferable except upon surrender or annuitization. Various penalty
and excise taxes may apply to contributions or distributions made in violation
of applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals - Qualified Contracts," below.)
On July 6, 1983, the Supreme Court decided, in Arizona Governing Committee v.
Norris, that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company, in connection
with certain Qualified Plans, will utilize annuity tables which do not
differentiate on the basis of sex. Such annuity tables will also be available
for use in connection with certain non-qualified deferred compensation plans.
A. H.R. 10 PLANS
Section 401 of the Code permits self-employed individuals to establish
Qualified Plans for themselves and their employees, commonly referred to as
"H.R. 10" or "Keogh" plans. Contributions made to the plan for the benefit of
the employees will not be included in the gross income of the employees until
distributed from the plan. The tax consequences to participants may vary
depending upon the particular plan design. However, the Code places
limitations and restrictions on all Plans, including on such items as: amount
of allowable contributions; form, manner, and timing of distributions;
transferability of benefits; vesting and non-forfeitability of interests;
nondiscrimination in eligibility and participation; and the tax treatment of
distributions, withdrawals, and surrenders. (See "Tax Treatment of Withdrawals
- - Qualified Contracts," below.) Purchasers of Contracts for use with an H.R.
10 plan should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
B. TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities"
by public schools and certain charitable, educational, and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includible in the gross income of the
employees until the employees receive distributions from the Contracts. The
amount of contributions to the tax-sheltered annuity is limited to certain
maximums imposed by the Code. Furthermore, the Code sets forth additional
restrictions governing such items as transferability, distributions,
nondiscrimination, and withdrawals. (See "Tax Treatment of Withdrawals -
Qualified Contracts" and "Tax-Sheltered Annuities - Withdrawal Limitations,"
below.) Any employee should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
C. INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity
("IRA"). Under applicable limitations, certain amounts may be contributed to
an IRA which will be deductible from the individual's gross income. These IRAs
are subject to limitations on eligibility, contributions, transferability, and
distributions. (See "Tax Treatment of Withdrawals - Qualified Contracts,"
below.) Under certain conditions, distributions from other IRAs and other
Qualified Plans may be rolled over or transferred on a tax-deferred basis into
an IRA. Sales of Contracts for use with IRAs are subject to special
requirements imposed by the Code, including the requirement that certain
informational disclosures be given to persons desiring to establish an IRA.
Purchasers of Contracts to be qualified as an IRA should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
D. CORPORATE PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 401(k) of the Code permit corporate employers to establish
various types of retirement plans for employees. These retirement plans may
permit the purchase of the Contracts to provide benefits under the Plan.
Contributions to the Plan for the benefit of employees will not be includible
in the gross income of the employees until distributed from the Plan. The tax
consequences to participants may vary, depending upon the particular plan
design. However, the Code places limitations and restrictions on all plans,
including on such items as: amount of allowable contributions; form, manner,
and timing of distributions; transferability of benefits; vesting and
non-forfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals, and
surrenders. (See "Tax Treatment of Withdrawals - Qualified Contracts," below.)
Purchasers of Contracts for use with Corporate Pension or Profit Sharing Plans
should obtain competent tax advice as to the tax treatment and suitability of
such an investment.
<PAGE> 26
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS
In the case of a withdrawal under a Qualified Contract, a ratable portion
of the amount received is taxable, generally based on the ratio of the
individual's cost basis to the individual's total accrued benefit under the
retirement plan. Special tax rules may be available for certain distributions
from a Qualified Contract. Section 72(t) of the Code imposes a 10% penalty tax
on the taxable portion of any distribution from qualified retirement plans,
including Contracts issued and qualified under Code Sections 401 (H.R. 10 and
Corporate Pension and Profit Sharing Plans), 403(b) (Tax-Sheltered Annuities),
and 408(b) (Individual Retirement Annuities). To the extent amounts are not
includible in gross income because they have been rolled over to an IRA or
another eligible qualified plan, no tax penalty will be imposed. The tax
penalty will not apply to the following distributions: (a) if distribution is
made on or after the date on which the Owner or Annuitant (as applicable)
reaches age 59 1/2; (b) distributions following the death or disability of the
Owner or Annuitant (as applicable) (for this purpose disability is as defined
in Section 72(m)(7) of the Code); (c) after separation from service,
distributions that are part of substantially equal periodic payments made not
less frequently than annually for the life (or life expectancy) of the Owner
or Annuitant (as applicable), or the joint lives (or joint life expectancies)
of such Owner or Annuitant (as applicable) and his or her designated
Beneficiary; (d) distributions to an Owner or Annuitant (as applicable) who
has separated from service after he has attained age 55; (e) distributions
made to the Owner or Annuitant (as applicable) to the extent such
distributions do not exceed the amount allowable as a deduction under Code
Section 213 to the Owner or Annuitant (as applicable) for amounts paid during
the taxable year for medical care; (f) distributions made to an alternate
payee, pursuant to a qualified domestic relations order; and (g) distributions
from an Individual Retirement Annuity for the purchase of medical insurance
(as described in Section 213(d) (1) (D) of the Code) for the Contract Owner or
Annuitant (as applicable) and his or her spouse and dependents if the Contract
Owner or Annuitant (as applicable) has received unemployment compensation for
at least 12 weeks. This exception will no longer apply after the Contract
Owner or Annuitant (as applicable) has been re-employed for at least 60 days.
The exceptions stated in (d) and (f) above do not apply in the case of an
Individual Retirement Annuity. The exception stated in (c) above applies to an
Individual Retirement Annuity without the requirement that there be a
separation from service.
Generally, distributions from a qualified plan must commence no later than
April 1 of the calendar year following the year in which the employee attains
age 70 1/2 and, in some cases, the later of age 70 1/2 or the date of
retirement. Required distributions must be over a period not exceeding the
life expectancy of the individual or the joint lives or life expectancies of
the individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed.
TAX-SHELTERED ANNUITIES - WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions
made pursuant to a salary reduction agreement (as defined in Section
403(b)(11) of the Code) to circumstances only when the Owner: (a) attains age
59 1/2; (b) separates from service; (c) dies; (d) becomes disabled (within the
meaning of Section 72(m)(7) of the Code); or (e) in the case of hardship.
However, withdrawals for hardship are restricted to the portion of the Owner's
Contract Value which represents contributions made by the Owner and does not
include any investment results. The limitations on withdrawals became
effective on January 1, 1989, and apply only to salary reduction contributions
made after December 31, 1988, to income attributable to such contributions and
to income attributable to amounts held as of December 31, 1988. The
limitations on withdrawals do not affect rollovers or transfers between
certain qualified plans. Owners should consult their own tax counsel or other
tax adviser regarding any distributions.
SECTION 457 - DEFERRED COMPENSATION PLANS
Under Section 457 of the Code, governmental and certain other tax-exempt
employers may establish deferred compensation plans for the benefit of their
employees who may invest in annuity contracts. The Code, as in the case of
qualified plans, establishes limitations and restrictions on eligibility,
contributions, and distributions. Under these Plans, contributions made for
the benefit of the employees will not be includible in the employee's gross
income until distributed from the Plan. Under a Section 457 Plan, all the Plan
assets remain solely the property of the employer, subject only to the claims
of the employer's general creditors until such time as made available to the
participant or beneficiary. However, for Plans established after August 20,
1996, it is required that Plan assets be held in trust for the benefit of plan
participants and are not subject to the claims of the general creditors of the
employer. Furthermore, this requirement must be met for all Plans no later
than January 1, 1999.
FINANCIAL STATEMENTS
Financial Statements of the Company and the Separate Account have been
included in the SAI.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Separate
Account, the Distributor, or the Company is a party.
<PAGE> 27
<TABLE>
<CAPTION>
TABLE OF CONTENTS
OF THE STATEMENT OF ADDITIONAL INFORMATION
Page
<S> <C>
COMPANY 3
EXPERTS 3
LEGAL OPINIONS 3
DISTRIBUTOR 3
YIELD CALCULATION FOR THE GLOBAL ADVISORS MONEY MARKET SUB-ACCOUNT 3
PERFORMANCE INFORMATION 4
ANNUITY PROVISIONS 6
FINANCIAL STATEMENTS 6
</TABLE>
<PAGE> 28
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FIXED AND VARIABLE DEFERRED ANNUITY CONTRACTS
WITH FLEXIBLE PURCHASE PAYMENTS
ISSUED BY
WNL SEPARATE ACCOUNT A
AND
WESTERN NATIONAL LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION (THE "SAI")
SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 1997, FOR THE
INDIVIDUAL FIXED AND VARIABLE DEFERRED ANNUITY CONTRACTS WITH FLEXIBLE
PURCHASE PAYMENTS WHICH ARE REFERRED TO HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION FOR A PROSPECTIVE INVESTOR.
FOR A COPY OF THE PROSPECTUS, CALL 1-800-910-4555, OR WRITE THE COMPANY AT
P.O. BOX 290721, WETHERSFIELD, CT 06129-0721.
THIS SAI IS DATED MAY 1, 1997.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Company 3
Experts 3
Legal Opinions 3
Distributor 3
Yield Calculation For The Global Advisors Money Market
Sub-Account 3
Performance Information 4
Annuity Provisions 5
Annuity Unit 6
Financial Statements 6
</TABLE>
<PAGE>
COMPANY
Information regarding Western National Life Insurance Company (the "Company")
and its ownership is contained in the Prospectus.
The Company contributed the initial capital to the WNL Separate Account A
(the "Separate Account"). As of December 31, 1996, the initial capital
contributed by the Company represented approximately 61% of the total assets
of the Separate Account. The Company currently intends to remove these assets
from the Separate Account on a pro rata basis in proportion to money invested
in the Separate Account by Owners.
EXPERTS
The balance sheet of the Company as of December 31, 1996 and 1995, and the
related statements of income, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1996, and the statement of
assets and liabilities of the Separate Account as of December 31, 1996, and
the related statement of operations for the year ended December 31, 1996, and
the statement of changes in net assets for the year ended December 31, 1996,
and the period from October 10, 1995 (commencement of operations) through
December 31, 1995, all of which are included in the SAI, have been included
herein in reliance on the reports of Coopers & Lybrand, L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
LEGAL OPINIONS
Legal matters in connection with the Contracts described herein are being
passed upon by the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut.
DISTRIBUTOR
WNL Brokerage Services, Inc. ("WNL Brokerage") acts as the distributor. WNL
Brokerage is an affiliate of the Company. The offering is on a continuous
basis.
YIELD CALCULATION FOR
THE GLOBAL ADVISORS MONEY MARKET SUB-ACCOUNT
The Global Advisors Money Market Sub-Account of the Separate Account will
calculate its current yield based upon the seven days ended on the date of
calculation. For the seven calendar days ending December 31, 1996, the
annualized effective yield for the Global Advisors Money Market Sub-Account
was 3.66% and the yield was 3.60%.
The current yield of the Global Advisors Money Market Sub-Account is computed
by determining the net change (exclusive of capital changes) in the value of a
hypothetical pre-existing Owner account having a balance of one Accumulation
Unit of the Sub-Account at the beginning of the period, subtracting the
Mortality and Expense Risk Charge, the Administrative Charge, and the Contract
Maintenance Charge, dividing the difference by the value of the account at the
beginning of the same period to obtain the base period return, and multiplying
the result by (365/7). The calculation does not take into account any
applicable Enhanced Death Benefit Charge.
For the seven calendar days ended December 31, 1996, the annualized effective
yield and yield for the Global Advisors Money Market Sub-Account calculated
with the applicable Enhanced Death Benefit Charge was 3.50% and 3.45%,
respectively.
The Global Advisors Money Market Sub-Account computes its effective compound
yield according to the method prescribed by the Securities and Exchange
Commission (the "SEC"). The effective yield reflects the reinvestment of net
income earned daily on Global Advisors Money Market Sub-Account assets.
Net investment income for yield quotation purposes will not include either
realized capital gains and losses or unrealized appreciation and depreciation,
whether reinvested or not.
The yields quoted should not be considered a representation of the yield of
the Global Advisors Money Market Sub-Account in the future since the yield is
not fixed. Actual yields will depend not only on the type, quality, and
maturities of the investments held by the Global Advisors Money Market
Sub-Account and changes in the interest rates on such investments, but also on
changes in the Global Advisors Money Market Sub-Account's expenses during the
period.
Yield information may be useful in reviewing the performance of the Global
Advisors Money Market Sub-Account and for providing a basis for comparison
with other investment alternatives. However, the Global Advisors Money Market
Sub-Account's yield fluctuates, unlike bank deposits or other investments
which typically pay a fixed yield for a stated period of time.
PERFORMANCE INFORMATION
From time to time, the Company may advertise performance data as described in
the Prospectus. Any such advertisement will include two sets of total return
figures for the time periods indicated in the advertisement. One set of such
total return figures will reflect the deduction of a 1.25% Mortality and
Expense Risk Charge, a .15% Administrative Charge, the investment advisory fee
and expenses for the underlying Portfolio being advertised, and any applicable
Contract Maintenance Charge. The other set of such total return figures will
reflect the same deductions mentioned plus the deduction of a .15% Enhanced
Death Benefit Charge.
The hypothetical value of a Contract purchased for the time periods described
in the advertisement will be determined by using the actual Accumulation Unit
values for an initial $1,000 purchase payment, and deducting any applicable
Contract Maintenance Charge to arrive at the ending hypothetical value. The
average annual total return is then determined by computing the fixed interest
rate that a $1,000 purchase payment would have to earn annually, compounded
annually, to grow to the hypothetical value at the end of the time periods
described. The formula used in these calculations is:
P (1 + T )n = ERV
Where:
P = A hypothetical initial payment of $1,000
T = Average annual total return
n = Number of years
ERV = Ending redeemable value at the end of the time periods used (or
fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the time periods used.
In addition to total return data, the Company may include yield information in
its advertisements. Each Sub-Account (other than the Global Advisors Money
Market Sub-Account) for which the Company will advertise yield, will show a
yield quotation based on a 30-day (or one-month) period ended on the date of
the most recent balance sheet of the Separate Account included in the
registration statement, computed by dividing the net investment income per
Accumulation Unit earned during the period by the maximum offering price per
Unit on the last day of the period, according to the following formula:
a-b
---
Yield = 2 [( cd + 1)6 - 1]
Where:
a = Net investment income earned during the period by the Trust
attributable to shares owned by the Sub-Account
b = Expenses accrued for the period (net of reimbursements)
c = The average daily number of Accumulation Units outstanding during
the period
d = The maximum offering price per Accumulation Unit on the last day
of the period
The Company may also advertise performance data which will be computed on a
different basis.
Investment operations for the Sub-Accounts which invest in Portfolios of the
WNL Series Trust (the "Trust") depicted in the chart below commenced on the
following dates:
<TABLE>
<CAPTION>
Portfolio Inception Date
- -------------------------------------------- --------------
<S> <C>
BEA Growth and Income Portfolio 10/20/95
BlackRock Managed Bond Portfolio 01/02/96
Credit Suisse International Equity Portfolio 10/20/95
EliteValue Asset Allocation Portfolio 01/02/96
Global Advisors Growth Equity Portfolio 10/20/95
Global Advisors Money Market Portfolio 10/10/95
Salomon Brothers U.S. Government
Securities Portfolio 02/06/96
Van Kampen American Capital Emerging
Growth Portfolio 01/02/96
</TABLE>
Chart 1 below shows performance figures which reflect the deduction of all
charges and deductions (except the Enhanced Death Benefit Charge) under the
Contracts (see "Charges and Deductions" in the Prospectus) and also reflect
the actual fees and expenses paid by the underlying Portfolios. Chart 2 below
is identical to Chart 1 except that it also reflects the deduction of the
Enhanced Death Benefit Charge, where applicable.
AVERAGE TOTAL RETURN FOR THE PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Chart 1
- --------
Sub-Accounts One Year From Inception
- -------------------------------------------- --------- ---------------
<S> <C> <C>
BEA Growth and Income Portfolio 7.21% 10.81%
BlackRock Managed Bond Portfolio N/A (2.84)
Credit Suisse International Equity Portfolio 9.89 10.63
EliteValue Asset Allocation Portfolio N/A 20.10
Global Advisors Growth Equity Portfolio 14.76 14.34
Global Advisors Money Market Portfolio (1.41) (1.41)
Salomon Brothers U.S. Government
Securities Portfolio N/A (3.06)
Van Kampen American Capital Emerging
Growth Portfolio N/A 12.76
</TABLE>
<TABLE>
<CAPTION>
Chart 2
- --------
Sub-Accounts One Year From Inception
- -------------------------------------------- --------- ---------------
<S> <C> <C>
BEA Growth and Income Portfolio 7.06% 10.66%
BlackRock Managed Bond Portfolio N/A (2.99)
Credit Suisse International Equity Portfolio 9.74 10.48
EliteValue Asset Allocation Portfolio N/A 19.95
Global Advisors Growth Equity Portfolio 14.61 14.19
Global Advisors Money Market Portfolio (1.56) (1.56)
Salomon Brothers U.S. Government
Securities Portfolio N/A (3.20)
Van Kampen American Capital Emerging
Growth Portfolio N/A 12.61
</TABLE>
Owners should note that the investment results of each Sub-Account will
fluctuate over time, and any presentation of the Sub-Account's total return or
yield for any period should not be considered a representation of what an
investment may earn or what an Owner's total return or yield may be in any
future period.
ANNUITY PROVISIONS
A Variable Annuity is an annuity with payments which: (a) are not
predetermined as to dollar amount and (b) will vary in amount with the net
investment results of the applicable Sub-Accounts of the Separate Account.
Annuity Payments also depend upon the Age of the Annuitant and any Joint
Annuitant and the assumed interest factor utilized. The Annuity Table used
will depend upon the Annuity Option chosen. The dollar amount of Annuity
Payments after the first is determined as follows:
1. The dollar amount of the first Variable Annuity Payment is divided by
the value of an Annuity Unit for each applicable Sub-Account as of the Annuity
Date. This sets the number of Annuity Units for each monthly payment for the
applicable Sub-Account. The number of Annuity Units remains fixed during the
Annuity Period.
2. The fixed number of Annuity Units per payment in each Sub-Account is
multiplied by the Annuity Unit Value for that Sub-Account for the last
Valuation Period of the month preceding the month for which the payment is
due. This result is the dollar amount of the payment for each applicable
Sub-Account.
The total dollar amount of each Variable Annuity Payment is the sum of all
Sub-Account Variable Annuity Payments reduced by the applicable portion of the
Contract Maintenance Charge.
The dollar amount of the first Variable Annuity payment is determined in
accordance with the description above. The dollar amount of Variable Annuity
payments for each applicable Sub-Account after the first Variable Annuity
payment is determined as follows:
1. The dollar amount of the first Variable Annuity payment is divided by
the value of an Annuity Unit for each applicable Sub-Account as of the Annuity
Date. This sets the number of Annuity Units for each monthly payment for the
applicable Sub-Account. The number of Annuity Units for each applicable
Sub-Account remains fixed during the Annuity Period.
2. The fixed number of Annuity Units per payment in each Sub-Account is
multiplied by the Annuity Unit value for that Sub-Account for the last
Valuation Period of the month preceding the month for which the payment is
due. This result is the dollar amount of the payment for each applicable
Sub-Account.
The total dollar amount of each Variable Annuity payment is the sum of all
Sub-Account Variable Annuity payments reduced by the applicable portion of the
Contract Maintenance Charge.
ANNUITY UNIT
The value of any Annuity Unit for each Sub-Account of the Separate Account was
set initially at $10. The Sub-Account Annuity Unit value at the end of any
subsequent Valuation Period is determined as follows:
1. The Net Investment Factor for the current Valuation Period is
multiplied by the value of the Annuity Unit for the Sub-Account for the
immediately preceding Valuation Period.
2. The result in (1) is then divided by the Assumed Investment Rate
Factor, which equals 1.00, plus the Assumed Investment Rate for the number of
days since the preceding Valuation Date. The Assumed Investment Rate is equal
on an annual rate to 3%.
The value of an Annuity Unit may increase or decrease from Valuation Period to
Valuation Period.
FINANCIAL STATEMENTS
The financial statements of the Company included herein should be considered
only as bearing upon the ability of the Company to meet its obligations under
the Contracts.
This space intentionally left blank.
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
WNL SEPARATE ACCOUNT A
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD OCTOBER 10, 1995 (COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1995
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of WNL Separate
Account A and Board of Directors of
Western National Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of
WNL Separate Account A as of December 31, 1996, the related statement of
operations for the year then ended and the statement of changes in net assets
for the year ended December 31, 1996, and the period October 10, 1995
(commencement of operations) through December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of shares owned as of December 31, 1996, by
correspondence with WNL Series Trust. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of WNL Separate
Account A as of December 31, 1996, and the results of its operations for the
year then ended, and the changes in its net assets for the year ended December
31, 1996, and the period October 10, 1995 (commencement of operations) through
December 31, 1995, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 20, 1997
WESTERN NATIONAL LIFE INSURANCE COMPANY
WNL SEPARATE ACCOUNT A
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<PAGE>
<TABLE>
<CAPTION>
GLOBAL ADVISORS GLOBAL ADVISORS BEA GROWTH CREDIT SUISSE
MONEY MARKET GROWTH EQUITY AND INCOME INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO EQUITY PORTFOLIO
---------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Investments:
Net asset value per share $ 1.00 $ 11.85 $ 11.04 $ 10.67
================ ================ =========== =================
Number of shares 1,291,024 288,620 284,882 255,681
================ ================ =========== =================
Identified cost $ 1,291,024 $ 3,013,782 $ 2,934,285 $ 2,611,792
================ ================ =========== =================
Market value $ 1,291,024 $ 3,420,466 $ 3,145,099 $ 2,726,982
---------------- ---------------- ----------- -----------------
NET ASSETS $ 1,291,024 $ 3,420,466 $ 3,145,099 $ 2,726,982
================ ================ =========== =================
Net assets attributable to:
Contract owners $ 1,184,456 $ 906,522 $ 719,168 $ 305,608
Western National Life
Insurance Company
(Note 7) $ 106,568 $ 2,513,944 $ 2,425,931 $ 2,421,374
---------------- ---------------- ----------- -----------------
$ 1,291,024 $ 3,420,466 $ 3,145,099 $ 2,726,982
================ ================ =========== =================
Accumulation units of contract owners:
Standard benefit units 109,837.9 68,154.9 48,634.3 17,186.2
Enhanced benefit units 3,403.7 5,232.7 11,709.8 8,510.2
Accumulation value per unit:
Standard benefit units $ 10.460 $ 12.354 $ 11.922 $ 11.900
Enhanced benefit units 10.441 12.331 11.900 11.878
</TABLE>
The accompanying notes are an integral part of the financial statements.
WESTERN NATIONAL LIFE INSURANCE COMPANY
WNL SEPARATE ACCOUNT A
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<PAGE>
<TABLE>
<CAPTION>
VAN KAMPEN
AMERICAN CAPITAL BLACKROCK SALOMON BROTHERS ELITEVALUE
EMERGING GROWTH MANAGED BOND U.S. GOVERNMENT ASSET ALLOCATION
PORTFOLIO PORTFOLIO SECURITIES PORTFOLIO PORTFOLIO
----------------- ------------- --------------------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Investments:
Net asset value per share $ 11.54 $ 9.78 $ 9.79 $ 12.32
================= ============= ===================== =================
Number of shares 163,082 345,168 239,683 187,301
================= ============= ===================== =================
Identified cost $ 1,881,215 $ 3,438,965 $ 2,387,738 $ 2,000,144
================= ============= ===================== =================
Market value $ 1,881,837 $ 3,376,118 $ 2,346,717 $ 2,307,038
----------------- ------------- --------------------- -----------------
NET ASSETS $ 1,881,837 $ 3,376,118 $ 2,346,717 $ 2,307,038
================= ============= ===================== =================
Net assets attributable to:
Contract owners $ 1,286,566 $ 263,271 $ 278,697 $ 1,040,024
Western National Life
Insurance Company
(Note 7) $ 595,271 $ 3,112,847 $ 2,068,020 $ 1,267,014
----------------- ------------- --------------------- -----------------
$ 1,881,837 $ 3,376,118 $ 2,346,717 $ 2,307,038
================= ============= ===================== =================
Accumulation units of contract owners:
Standard benefit units 107,870.9 14,436.2 15,638.1 69,575.7
Enhanced benefit units 2,072.6 11,399.4 11,806.1 13,965.2
Accumulation value per unit:
Standard benefit units $ 11.702 $ 10.198 $ 10.163 $ 12.453
Enhanced benefit units 11.681 10.180 10.144 12.430
</TABLE>
The accompanying notes are an integral part of the financial statements.
WESTERN NATIONAL LIFE INSURANCE COMPANY
WNL SEPARATE ACCOUNT A
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<PAGE>
<TABLE>
<CAPTION>
GLOBAL ADVISORS GLOBAL ADVISORS BEA GROWTH CREDIT SUISSE
MONEY MARKET GROWTH EQUITY AND INCOME INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO EQUITY PORTFOLIO
---------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Income:
Dividends $ 37,566 $ 47,555 $ 120,147 $ 87,920
Expenses:
Mortality and expense risk
and administrative fees 9,039 5,211 5,145 2,464
---------------- ---------------- ----------- -----------------
Net investment income (loss) 28,527 42,344 115,002 85,456
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss)
on sale of Trust shares 0000 2,446 649 3,291
Net unrealized gain (loss)
on investments 0000 345,342 118,099 48,275
Capital gain distributions
from the Trust 0000 123,806 102,803 223,678
---------------- ---------------- ----------- -----------------
Net realized and unrealized
gain (loss) on investments 0000 471,594 221,551 275,244
---------------- ---------------- ----------- -----------------
Increase in net assets
resulting from operations $ 28,527 $ 513,938 $ 336,553 $ 360,700
================ ================ =========== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
WESTERN NATIONAL LIFE INSURANCE COMPANY
WNL SEPARATE ACCOUNT A
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<PAGE>
<TABLE>
<CAPTION>
VAN KAMPEN
AMERICAN CAPITAL BLACKROCK SALOMON BROTHERS ELITEVALUE
EMERGING GROWTH MANAGED BOND U.S. GOVERNMENT ASSET ALLOCATION
PORTFOLIO PORTFOLIO SECURITIES PORTFOLIO PORTFOLIO
------------------ -------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Income:
Dividends $ 5,070 $ 189,281 $ 121,541 $ 26,046
Expenses:
Mortality and expense risk
and administrative fees 9,843 2,200 2,349 5,528
------------------ -------------- ---------------------- -----------------
Net investment income (loss) (4,773) 187,081 119,192 20,518
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on
on sale of Trust shares 83,267 (116) (225) 2,490
Net unrealized gain
(loss) on investments 622 (62,846) (41,021) 306,894
Capital gain distributions
from the Trust 49,696 0000 0000 28,615
------------------ -------------- ---------------------- -----------------
Net realized and unrealized
gain (loss) on investments 133,585 (62,962) (41,246) 337,999
------------------ -------------- ---------------------- -----------------
Increase in net assets
resulting from operations $ 128,812 $ 124,119 $ 77,946 $ 358,517
================== ============== ====================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
WESTERN NATIONAL LIFE INSURANCE COMPANY
WNL SEPARATE ACCOUNT A
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<PAGE>
<TABLE>
<CAPTION>
GLOBAL ADVISORS GLOBAL ADVISORS BEA GROWTH CREDIT SUISSE
MONEY MARKET GROWTH EQUITY AND INCOME INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO EQUITY PORTFOLIO
----------------- ----------------- ------------ ------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss) $ 28,527 $ 42,344 $ 115,002 $ 85,456
Net realized gain (loss)
on investments 0000 2,446 649 3,291
Net unrealized gain (loss)
on investments 0000 345,342 118,099 48,275
Realized gain distributions
reinvested 0000 123,806 102,803 223,678
----------------- ----------------- ------------ ------------------
Increase in net assets
from operations 28,527 513,938 336,553 360,700
INCREASE (DECREASE) IN NET
ASSETS FROM VARIABLE ANNUITY
CONTRACT TRANSACTIONS:
Contract purchase payments 5,880,850 65,850 65,642 12,334
Surrenders and withdrawals (3,961) (2,169) (3,500) (9,327)
Transfers to general accounts (483,232) 0000 0000 0000
Intra-portfolio transfers (4,257,439) 770,208 610,085 280,251
----------------- ----------------- ------------ ------------------
Increase in net assets
from variable annuity
contract transactions 1,136,218 833,889 672,227 283,258
CAPITAL CONTRIBUTION FROM
WESTERN NATIONAL LIFE
INSURANCE COMPANY 0000 0000 0000 0000
----------------- ----------------- ------------ ------------------
Total increase in net assets 1,164,745 1,347,827 1,008,780 643,958
Net assets at beginning
of year 126,279 2,072,639 2,136,319 2,083,024
----------------- ----------------- ------------ ------------------
Net assets at end of year $ 1,291,024 $ 3,420,466 $ 3,145,099 $ 2,726,982
================= ================= ============ ==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
WESTERN NATIONAL LIFE INSURANCE COMPANY
WNL SEPARATE ACCOUNT A
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<PAGE>
<TABLE>
<CAPTION>
VAN KAMPEN
AMERICAN CAPITAL BLACKROCK SALOMON BROTHERS ELITEVALUE
EMERGING GROWTH MANAGED BOND U.S. GOVERNMENT ASSET ALLOCATION
PORTFOLIO PORTFOLIO SECURITIES PORTFOLIO PORTFOLIO
------------------ -------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss) $ (4,773) $ 187,081 $ 119,192 $ 20,518
Net realized gain (loss)
on investments 83,267 (116) (225) 2,490
Net unrealized gain (loss)
on investments 622 (62,846) (41,021) 306,894
Realized gain distributions
reinvested 49,696 0000 0000 28,615
------------------ -------------- ---------------------- ------------------
Increase in net assets from
operations 128,812 124,119 77,946 358,517
INCREASE (DECREASE) IN NET
ASSETS FROM VARIABLE ANNUITY
CONTRACT TRANSACTIONS:
Contract purchase payments 122,596 1,882 400 31,419
Surrenders and withdrawals (4,606) (915) (10,042) (12,454)
Transfers to general account 0000 0000 0000 0000
------------------ -------------- ---------------------- ------------------
Intra-portfolio transfers 1,135,035 251,032 278,413 929,556
Increase in net assets from
variable annuity contract
transactions 1,253,025 251,999 268,771 948,521
CAPITAL CONTRIBUTION FROM
WESTERN NATIONAL LIFE
INSURANCE COMPANY 500,000 3,000,000 2,000,000 1,000,000
------------------ -------------- ---------------------- ------------------
Total increase in net assets 1,881,837 3,376,118 2,346,717 2,307,038
Net assets at beginning
of year 0000 0000 0000 0000
------------------ -------------- ---------------------- ------------------
Net assets at end of year $ 1,881,837 $ 3,376,118 $ 2,346,717 $ 2,307,038
================== ============== ====================== ==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
WESTERN NATIONAL LIFE INSURANCE COMPANY
WNL SEPARATE ACCOUNT A
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD OCTOBER 10, 1995 (COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1995
<PAGE>
<TABLE>
<CAPTION>
GLOBAL ADVISORS GLOBAL ADVISORS BEA GROWTH CREDIT SUISSE
MONEY MARKET GROWTH EQUITY AND INCOME INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO EQUITY PORTFOLIO
----------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 1,217 $ 10,034 $ 28,947 $ 11,681
Net unrealized gain
on investments 0000 61,341 92,715 66,917
Realized gain distributions
reinvested 0000 0000 9,791 0000
----------------- ---------------- ----------- -----------------
Increase in net assets from
operations 1,217 71,375 131,453 78,598
INCREASE (DECREASE) IN NET
ASSETS FROM VARIABLE ANNUITY
CONTRACT TRANSACTIONS:
Contract purchase payments 34,261 946 373 59
Transfers to general account (21) 0000 0000 0000
Intra-portfolio transfers (9,178) 318 4,493 4,367
----------------- ---------------- ----------- -----------------
Increase in net assets from
variable annuity contract
transactions 25,062 1,264 4,866 4,426
CAPITAL CONTRIBUTION FROM
WESTERN NATIONAL LIFE
INSURANCE COMPANY 100,000 2,000,000 2,000,000 2,000,000
----------------- ---------------- ----------- -----------------
Total increase in net assets
and net assets at end of period $ 126,279 $ 2,072,639 $ 2,136,319 $ 2,083,024
================= ================ =========== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
--
WESTERN NATIONAL LIFE INSURANCE COMPANY
WNL SEPARATE ACCOUNT A
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
WNL Separate Account A (the "Separate Account") was established by Western
National Life Insurance Company (the "Company") on November 9, 1994, for
funding variable annuity insurance contracts issued by the Company. The
Separate Account is registered with the Securities and Exchange Commission as
a unit investment trust pursuant to the provisions of the Investment Company
Act of 1940, as amended, and it commenced operations on October 10, 1995.
The Separate Account is divided into eight sub-accounts. Each sub-account
invests in one portfolio of WNL Series Trust (the "Trust"). The Trust is
managed by WNL Investment Advisory Services, Inc. (the "Adviser"), an
affiliate of the Company. As of December 31, 1996, the Trust portfolios
available to contract holders through the various sub-accounts ("Portfolios")
are as follows:
WNL Series Trust
BEA Growth and Income Portfolio
BlackRock Managed Bond Portfolio
Credit Suisse International Equity Portfolio
EliteValue Asset Allocation Portfolio
Global Advisors Growth Equity Portfolio
Global Advisors Money Market Portfolio
Salomon Brothers U.S. Government Securities Portfolio
Van Kampen American Capital Emerging Growth Portfolio
As of December 31, 1995, the BEA Growth and Income Portfolio, Credit Suisse
International Equity Portfolio, Global Advisors Growth Equity Portfolio, and
Global Advisors Money Market Portfolio were actively funded. The remaining
four funds were actively funded during 1996.
In addition to the eight sub-accounts above, a contract owner may allocate
contract funds to a fixed account, which is part of the Company's general
account.
Net premiums from the contracts are allocated to the sub-accounts and invested
in the Portfolios in accordance with contract owner instructions and are
recorded as variable annuity contract transactions in the statement of changes
in net assets. There is no assurance that the investment objectives of any of
the Portfolios will be met. Contract owners bear the complete investment risk
for purchase payments allocated to a sub-account.
2. SIGNIFICANT ACCOUNTING POLICIES:
The accompanying financial statements of the Separate Account have been
prepared on the basis of generally accepted accounting principles. The
accounting principles followed by the Separate Account and the methods of
applying those principles are presented below or in the footnotes which
follow:
INVESTMENT VALUATION
The investment shares of the Portfolios are valued at the closing net asset
value (market) per share as determined by the fund on the day of measurement.
Changes in the economic environment have a direct impact on the net asset
value per share of a portfolio. It is reasonably possible that changes in the
economic environment will occur in the near term and that such changes will
have a material effect on the net asset value per share of the portfolios
included in the Trust.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME
Investment transactions are accounted for on the date the order to buy or sell
is executed (trade date). Dividend income and distributions of capital gains
are recorded on the ex-dividend date. Realized gains and losses from
investment transactions are reported on the basis of first-in, first-out for
financial reporting and federal income tax purposes.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ANNUITY RESERVES
At December 31, 1996 and 1995, the Separate Account did not have any contracts
in the annuity payout phase; therefore, no future policy benefit reserves were
required.
FEDERAL INCOME TAXES
The Company is taxed as a life insurance company and includes the operations
of the Separate Account in its federal income tax return. As a result, the
Separate Account is not taxed as a "Regulated Investment Company" under
subchapter M of the Internal Revenue Code. Under existing laws, taxes are not
currently payable on the investment income or on the realized gains of the
Separate Account. The Company reserves the right to allocate to the Separate
Account any federal, state or other tax liability that may result in the
future from maintenance of the Separate Account. No charges are currently
being made against the Separate Account for such tax.
OVERALL EFFECT 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 the reported
amounts of revenue and expenses during the period. Actual results could
differ from those estimates.
3. CONTRACT CHARGES:
Deductions for the administrative expenses and mortality and expense risks
assumed by the Company are calculated daily, at an annual rate, on the average
daily net asset value of the Portfolios attributable to the contract owners
and are paid to the Company. The annual rate for the administrative expenses
is .15% and the annual rate for the mortality and expense risks is 1.25%. The
annual rate for the enhanced death benefit option is .15%. For the year ended
December 31, 1996, deductions for administrative expenses and mortality and
expense risk charges were $4,390 and $37,389, respectively.
An annual maintenance charge of $30 per contract is assessed on the contract
anniversary during the accumulation period for the maintenance of the
contract. The maintenance charge is not assessed if the contract value on the
contract anniversary equals or exceeds $40,000. Maintenance charges totaled
$600 for the year ended December 31, 1996.
A contingent deferred sales charge is applicable to certain contract
withdrawals pursuant to the contract and is payable to the Company. For the
year ended December 31, 1996, deferred sales charges totaled $959.
There are other deductions from and expenses (including management fees paid
to the investment adviser and other expenses) paid out of the assets of the
Trust. As full compensation for its services under the Investment Advisory
Agreement, the Adviser receives a monthly fee from the Trust based on annual
rates which range from .45% to .90% based on the average daily net assets of
each Portfolio. The Adviser has agreed to waive that portion of its
management fee which is in excess of the amount payable by the Adviser to each
sub-adviser pursuant to the respective subadvisory agreements for each
portfolio until May 1, 1997. In addition, the Company has agreed to reimburse
each portfolio for all operating expenses, excluding management fees, that
exceed .12% of each portfolio's average daily net assets until May 1, 1997.
For the year ended December 31, 1996, the Adviser waived advisory fees and the
Company reimbursed operating expenses as follows:
<TABLE>
<CAPTION>
ADVISORY
FEES EXPENSES
WAIVED REIMBURSED
--------- -----------
<S> <C> <C>
BEA Growth and Income Portfolio $ 9,918 $ 62,218
BlackRock Managed Bond Portfolio 12,335 39,849
Credit Suisse International Equity Portfolio 10,342 73,107
Global Advisors Growth Equity Portfolio 9,010 58,668
Global Advisors Money Market Portfolio 1,984 47,013
EliteValue Asset Allocation Portfolio 6,128 36,700
Salomon Brothers U.S. Government Securities Portfolio 7,227 32,867
Van Kemper American Capital Emerging Growth Portfolio 5,171 67,677
</TABLE>
4. PURCHASE AND SALE OF INVESTMENTS:
Portfolio shares are purchased at net asset value with net contract payments
(contract purchase payments less surrenders) and with reinvestment of dividend
and capital distributions made by the Portfolios. The aggregate cost of
purchases and proceeds from sales of investment in Trust shares for the period
ended December 31, 1996, was $21,165,690 and $7,804,034, respectively. The
cost of total investments in Trust shares owned at December 31, 1996, was the
same for financial reporting and federal income tax purposes. At December 31,
1996, gross unrealized appreciation on Trust shares and depreciation was
$1,042,204 and $103,868, respectively.
5. NET INCREASE (DECREASE) IN ACCUMULATION UNITS:
The increase (decrease) in accumulation units for the year ended December 31,
1996, and for the period October 10, 1995 (commencement of operations) through
December 31, 1995, are as follows:
For the year ended December 31, 1996:
<TABLE>
<CAPTION>
GLOBAL ADVISORS GLOBAL ADVISORS BEA GROWTH CREDIT SUISSE
MONEY MARKET GROWTH EQUITY AND INCOME INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO EQUITY PORTFOLIO
---------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C>
Standard benefit units:
Outstanding at beginning of year 2,464.4 124.2 461.8 430.6
Increased for payments received 500,186.2 5,781.3 4,927.3 978.8
Decrease for surrendered contracts (386.1) (193.0) (308.2) (497.1)
Change for net inter-fund exchanges (392,426.6) 62,442.4 43,553.4 16,273.9
---------------- ---------------- ----------- -----------------
Outstanding at end of period 109,837.9 68,154.9 48,634.3 17,186.2
================ ================ =========== =================
Enhanced benefit units:
Outstanding at beginning of year 24.9
Increased for payments received 71,973.9 3.6 933.4 108.1
Decrease for surrendered contracts (2.5) (629.8)
Change for net inter-fund exchanges (68,595.1) 5,229.1 10,778.9 9,031.9
---------------- ---------------- ----------- -----------------
Outstanding at end of period 3,403.7 5,232.7 11,709.8 8,510.2
================ ================ =========== =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VAN KAMPEN
AMERICAN CAPITAL BLACKROCK SALOMON BROTHERS ELITEVALUE
EMERGING GROWTH MANAGED BOND U.S. GOVERNMENT ASSET ALLOCATION
PORTFOLIO PORTFOLIO SECURITIES PORTFOLIO PORTFOLIO
----------------- ------------- --------------------- -----------------
<S> <C> <C> <C> <C>
Standard benefit units:
Outstanding at beginning of year
Increased for payments received 10,902.4 154.5 2,570.1
Decrease for surrendered contracts (387.3) (94.3) (155.7) (357.2)
Change for net inter-fund exchanges 97,355.8 14,376.0 15,793.8 67,362.8
----------------- ------------- --------------------- -----------------
Outstanding at end of period 107,870.9 14,436.2 15,638.1 69,575.5
================= ============= ===================== =================
Enhanced benefit units:
Outstanding at beginning of year
Increased for payments received 41.6 41.4 237.0
Decrease for surrendered contracts (855.9) (769.0)
Change for net inter-fund exchanges 2,072.6 11,357.8 12,620.6 14,497.2
----------------- ------------- --------------------- -----------------
Outstanding at end of period 2,072.6 11,399.4 11,806.1 13,965.2
================= ============= ===================== =================
</TABLE>
For the period October 10, 1995 (commencement of operations) through
December 31, 1995:
<TABLE>
<CAPTION>
GLOBAL ADVISORS GLOBAL ADVISORS BEA GROWTH CREDIT SUISSE
MONEY MARKET GROWTH EQUITY AND INCOME INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO EQUITY PORTFOLIO
---------------- --------------- ---------- ----------------
<S> <C> <C> <C> <C>
ACCUMULATION UNITS:
Standard benefit units:
Increased for payments received 3,377.2 92.4 35.8 5.8
Change for net inter-fund exchanges (912.8) 31.8 426.0 424.8
---------------- --------------- ---------- ----------------
Outstanding at end of period 2,464.4 124.2 461.8 430.6
================ =============== ========== ================
Enhanced benefit units:
Increased for payments received 24.9
----------------
Outstanding at end of period 24.9
================
</TABLE>
6. DISTRIBUTION AGREEMENT:
WNL Brokerage Services, Inc. ("WNL Brokerage"), a wholly-owned subsidiary of
WNL Holding Corp., acts as the principal underwriter of the contracts funded
by the Separate Account. WNL Brokerage is registered as a broker-dealer under
the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. The contracts are sold by registered
representatives of the Company, who are also insurance agents under state law.
7. RELATED PARTIES:
During 1996, the Company contributed additional capital in the amount of
$6,500,000 to the Separate Account. Total capital contributed by the Company
to the Separate Account was $12,600,000 through December 31, 1996. The
capital was contributed to provide diversification and to enhance investment
performance. The capital will be removed as the funds grow large enough to
meet the diversification requirements without the additional capital.
Dividends, realized gain distributions and unrealized gains related to the
contributed capital for the year ended December 31, 1996, were $519,994,
$407,609 and $922,062, respectively.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
- --------------------------------------------------------------------------------------
<S> <C>
Report of Independent Accountants 2
Balance Sheet as of December 31, 1996 and 1995 3
Statement of Operations for the years ended December 31, 1996, 1995 and 1994 F-4
Statement of Shareholder's Equity for the years ended December 31, 1996, 1995 and 1994 F-5
Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 F-6
Notes to Financial Statements 7
Report of Independent Accountants on Financial Statement Schedule F-26
Financial Statement Schedule:
Schedule VI-Reinsurance for the years ended December 31, 1996, 1995 and 1994 F-27
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Western National Life Insurance Company
We have audited the accompanying balance sheet of Western National Life
Insurance Company as of December 31, 1996 and 1995, and the related statements
of operations, shareholder's equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Western National
Life Insurance Company as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 5, 1997
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEET
DECEMBER 31, 1996 AND 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ------------------------------------------------------------------- --------- --------
<S> <C> <C>
INVESTMENTS:
Fixed maturities-actively managed at fair value (amortized cost:
1996-$8,738.4; 1995-$7,654.5): $ 8,842.5 $7,996.7
Fixed maturities-held to maturity at amortized cost (fair value:
1995-$2.1) 1.1
Equity securities at fair value (cost: 1995 $0.8) 0.8
Mortgage loans 122.7 86.5
Credit-tenant loans 208.5 249.7
Policy loans 66.8 68.3
Other invested assets 24.5 24.5
Short-term investments 105.8 414.8
--------- --------
Total investments 9,370.8 8,842.4
Accrued investment income 156.6 131.7
Funds held by reinsurer and reinsurance receivables 98.0 1.8
Cost of policies purchased 50.4 35.8
Cost of policies produced 380.2 228.7
Other assets 15.7 20.8
--------- --------
Total assets $10,071.7 $9,261.2
========= ========
LIABILITIES AND SHAREHOLDER'S EQUITY
- -------------------------------------------------------------------
LIABILITIES:
Insurance liabilities $ 8,679.9 $7,915.8
Investment borrowings and due to brokers 156.3 257.3
Deferred income taxes 96.4 118.4
Other liabilities 44.1 25.0
--------- --------
Total liabilities 8,976.7 8,316.5
--------- --------
SHAREHOLDER'S EQUITY:
Common stock and additional paid-in capital
(par value $50 per share; 100,000 shares authorized;
50,000 shares issued and outstanding) 448.5 322.6
Unrealized appreciation of investments, net 39.1 125.2
Retained earnings 607.4 496.9
--------- --------
Total shareholder's equity 1,095.0 944.7
--------- --------
Total liabilities and shareholder's equity $10,071.7 $9,261.2
========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Revenues:
Insurance policy income $ 91.0 $ 26.4 $ 26.3
Net investment income 703.1 662.2 638.2
Equity in earnings of partnership investments 7.0 3.8
Net trading income 3.7
Net realized losses (2.3) (126.2) (52.9)
------- -------- -------
Total revenues 798.8 566.2 615.3
------- -------- -------
Benefits and expenses:
Insurance policy benefits 109.6 108.3 104.7
Change in future policy benefits and other liabilities 74.6 14.1 13.6
Interest expense on annuities and financial products 381.7 364.9 344.2
Interest expense on investment borrowings 8.1 8.6 7.3
Amortization related to operations 41.6 37.1 20.1
Amortization and change in future policy benefits
related to realized gains (losses) 0.6 (29.8) (16.8)
Other operating costs and expenses 13.5 41.3 16.1
------- -------- -------
Total benefits and expenses 629.7 544.5 489.2
------- -------- -------
Income before income taxes 169.1 21.7 126.1
Income tax expense 59.1 6.3 45.1
------- -------- -------
Net income $110.0 $ 15.4 $ 81.0
======= ======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Common stock and additional paid-in capital:
Balance, beginning of year $ 322.6 $ 322.6 $ 322.6
Capital contribution from parent 125.9
--------- -------- --------
Balance, end of year $ 448.5 $ 322.6 $ 322.6
========= ======== ========
Unrealized appreciation (depreciation) of investments, net:
Balance, beginning of year $ 125.2 $(322.1) $ 37.8
Change in unrealized appreciation (depreciation), net (86.1) 447.3 (359.9)
--------- -------- --------
Balance, end of year $ 39.1 $ 125.2 $(322.1)
========= ======== ========
Retained earnings:
Balance, beginning of year $ 496.9 $ 481.5 $ 400.5
Beginning balance for WNL Investment
Advisory Services, Inc. 0.5
Net income 110.0 15.4 81.0
--------- -------- --------
Balance, end of year $ 607.4 $ 496.9 $ 481.5
========= ======== ========
Total shareholder's equity $1,095.0 $ 944.7 $ 482.0
========= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 110.0 $ 15.4 $ 81.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and depreciation 42.6 7.3 0.9
Realized (gains) losses on investments, net (2.5) 119.4 47.1
Income taxes 50.4 60.7 26.6
Increase in insurance liabilities 8.2 116.0 22.3
Interest credited to insurance liabilities 391.8 370.2 348.7
Fees charged to insurance liabilities (4.4) (4.2) (4.7)
Amortization (accrual) of investment income, net (27.3) 3.7 (14.2)
Deferral of cost of policies produced (120.7) (62.2) (57.4)
Change in trading account securities 60.8
Other (9.0) (0.4) 6.4
---------- ---------- ----------
Net cash provided by operating activities 439.1 625.9 517.5
---------- ---------- ----------
Cash flows from investing activities:
Sales of investments 3,086.8 3,151.9 3,482.8
Maturities and redemptions of investments 431.0 376.3 441.6
Purchases of investments (4,571.8) (3,686.4) (4,568.5)
---------- ---------- ----------
Net cash used in investing activities (1,054.0) (158.2) (644.1)
---------- ---------- ----------
Cash flows from financing activities:
Deposits to insurance liabilities 1,711.3 747.2 728.8
Withdrawals from insurance liabilities (1,402.7) (1,052.5) (662.2)
Capital contribution from parent 125.9
Investment borrowings, net (128.6) 226.6 (189.9)
---------- ---------- ----------
Net cash provided by (used in) financing activities 305.9 (78.7) (123.3)
---------- ---------- ----------
Net increase (decrease) in short-term investments (309.0) 389.0 (249.9)
Short-term investments-beginning of year 414.8 25.8 275.7
---------- ---------- ----------
Short-term investments-end of year $ 105.8 $ 414.8 $ 25.8
========== ========== ==========
Supplemental cash flow disclosure:
Income taxes (refunded) paid, net $ (25.4) $ (4.7) $ 17.9
========== ========== ==========
Interest paid on investment borrowings $ 8.4 $ 8.0 $ 7.9
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Western National Life Insurance Company (the "Company") is a State of
Texas domiciled life insurance company that was founded in 1944. The Company
is a wholly-owned subsidiary of Western National Corporation ("Western
National"). In February 1994, Conseco Holding transferred ownership of the
Company to Western National, an insurance holding company formed by Conseco.
The transactions were approved by the Texas Department of Insurance. Western
National completed an initial public offering of its common stock in February
1994 whereby Conseco Holding retained approximately 40% ownership of Western
National's common stock. On December 23, 1994, AGC Life Insurance Company
("AGC Life"), a Missouri-domiciled life insurer, purchased the remaining
shares of common stock held by Conseco. These shares represented
approximately 40% of Western National's outstanding common stock. AGC Life is
a wholly-owned subsidiary of American General Corporation, a Texas corporation
("AGC"). References to "American General" are references to AGC and its
direct and indirect majority controlled subsidiaries. As of December 31,
1996, American General owned approximately a 46.2% equity interest in Western
National. The increase in American General's equity interest was the result
of Western National issuing preferred stock to American General in September
1996.
WNL Investment Advisory Services, Inc. ("WNLIAS") was formed primarily to
manage the Company's investment portfolio and to own certain investments of
the Company. WNLIAS is an investment subsidiary as defined by the National
Association of Insurance Commissioners. During 1996, investments of the
Company, consisting of mortgage loans, CMO residual investments and certain
credit-tenant loans were transferred to WNLIAS in exchange for preferred stock
and cash in an amount equal to the statutory carrying value of the
investments. The Company and WNLIAS are subsidiaries of Western National and
are under common management control. The accompanying financial statements
include the accounts of WNLIAS as of and for the year ended December 31, 1996.
The Company's investment in WNLIAS preferred stock, intercompany investment
advisory fees, and other intercompany accounts have been eliminated.
The Company develops, markets and issues annuity products through niche
distribution channels. The Company sells deferred annuities, including its
proprietary fixed annuities, to the savings and retirement markets through
financial institutions (principally banks and thrifts), and sells deferred
annuities to both the tax-qualified and nonqualified retirement markets
through personal producing general agents ("PPGAs"). The Company also sells
deferred annuities through its direct sales operations. Under a joint
marketing arrangement with American General Life Insurance Company ("AGLIC"),
the Company markets and coinsures single premium immediate annuities ("SPIAs")
through specialty brokers to the structured settlement market. The Company
also sells SPIAs (other than structured settlement SPIAs) through its
financial institution and PPGA distribution channels. The Company commenced
sales of its first variable annuity product in fourth quarter 1995. Sales of
deferred annuities through financial institutions comprised 82%, 68%, and 74%
of net premiums collected in 1996, 1995, and 1994, respectively. Sales
through a single financial institution comprised 45% of net premiums
collected in 1996.
OVERALL EFFECT 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, the
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.
INVESTMENTS
Fixed maturity investments ("fixed maturities") are debt securities that
have original maturities greater than one year and are comprised of
investments such as U.S. Treasury securities, mortgage-backed securities,
corporate bonds and redeemable preferred stocks. Equity securities would
include common and non-redeemable preferred stocks. WESTERN NATIONAL LIFE
INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company follows the provisions of Statement of Financial Accounting
Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES ("SFAS 115"), and, accordingly, classifies its fixed maturities and
equity securities into the following categories:
-Actively managed fixed maturities and equity securities are securities
that may be sold prior to maturity due to changes that might occur in market
interest rates, changes in prepayment risk, the Company's management of its
income tax position, general liquidity needs, increase in loan demand, the
need to increase regulatory capital or similar factors. Actively managed
securities are carried at estimated fair value and the net unrealized gains
(losses) are recorded as a component of shareholder's equity, net of tax and
related adjustments described below. All of the Company's fixed maturities
and equity securities were classified as actively managed as of December 31,
1996, compared to all but $1.1 million at December 31, 1995.
-Held to maturity securities are those debt securities which the Company
has the ability and positive intent to hold to maturity, and are carried at
amortized cost. The Company may dispose of such securities under certain
unforeseen circumstances, such as issuer credit deterioration or changes in
regulatory requirements. The Company had no securities classified as held to
maturity as of December 31, 1996, compared to $1.1 million at December 31,
1995.
-Trading account securities are fixed maturity and equity securities that
are bought and held primarily for the purpose of selling them in the near
term. Trading account securities are carried at estimated fair value and the
net unrealized gains (losses) are included as a component of net trading
income. The Company had no trading account activities in 1996 or 1995.
Changes in interest rates have a direct, inverse impact on the market
value of fixed-income investments. It is reasonably possible that changes in
interest rates will occur in the near term and, as a result of SFAS 115, such
changes will have a material impact on the carrying value of actively managed
fixed maturity and equity securities, with an offsetting effect to
stockholder's equity, net of the related effects on cost of policies purchased
and produced and deferred income taxes.
Anticipated returns, including realized gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of the cost of policies purchased and the cost of policies
produced. When actively managed fixed maturity and equity securities are
stated at fair value, an adjustment is made to the cost of policies purchased
and the cost of policies produced equal to the change in amortization that
would have been recorded if such securities had been sold at their fair value
and the proceeds reinvested at current yields. Furthermore, if future yields
expected to be earned on such securities decline, it may be necessary to
increase certain insurance liabilities. Adjustments to such liabilities are
required when their balances, in addition to future net cash flows including
investment income, are insufficient to cover future benefits and expenses.
Mortgage loans and credit-tenant loans are carried at amortized cost.
Policy loans are carried at their current unpaid principal balance. Fees
received and costs incurred in connection with the Company's origination of
these loans are deferred, and are amortized as yield adjustments over their
remaining contractual lives in accordance with SFAS 91. Short-term
investments, which principally include commercial paper, cash and other
financial instruments with original maturities of typically 90 days or less,
are carried at amortized cost.
Discounts and premiums of investment securities to par are amortized as
yield adjustments over the contractual lives of the underlying securities and
callable corporate bonds. Principal prepayments can alter the cash flow
pattern and yield of prepayment-sensitive investments such as mortgage-backed
securities ("MBS"). The accretion of discount and amortization of premium
takes into consideration actual and estimated principal prepayments. In the
case of MBS, the Company utilizes estimated prepayment speed information
obtained from published sources or from estimates developed by its investment
advisor. The effects on the yield of a security from changes in principal
prepayments are recognized retrospectively, except for interest only or
residual interests in structured securities which are recognized
prospectively. The degree to which a security is susceptible to yield
adjustments is influenced by the difference between its carrying value and
par, the relative sensitivity of the underlying assets backing the securities
to changing interest rates, and the repayment priority of the securities in
the overall securitization structure. Prepayments may also reduce future
yield to the extent that proceeds are reinvested in a lower rate environment.
The Company manages the extent of these risks by (i) principally
purchasing securities which are backed by collateral with lower prepayment
sensitivity (such as MBS priced at or near par value that are highly
seasoned), (ii) avoiding securities with values heavily influenced by changes
in prepayments (such as interest-only and principal-only securities), and
(iii) purchasing securities with prepayment protected structures.
The specific identification method is used to account for the disposition
of investments. The differences between the sales proceeds and the carrying
values are reported as gains (losses), or in the case of prepayments, as
adjustments to investment income. Declines in values of investments which are
considered other than temporary are recognized as realized losses. Subsequent
recoveries in value are recognized only when the investments are sold.
The Company occasionally uses derivative financial instruments to alter
interest rate exposure arising from mismatches between assets and liabilities.
Certain of the Company's fixed maturities are floating-rate instruments. In
an effort to reasonably closely match the average duration of assets and
liabilities, the Company has entered into interest rate swap contracts that
effectively convert the floating-rate securities to fixed-rate instruments.
Specifically, the Company contracts with counterparties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed notional amount. The
Company pays the floating rate and receives the fixed rate, with the net
difference charged or credited as an adjustment to investment income. The
Company's investment guidelines provide that all swap contracts must be either
(i) with parties rated "A" or better by a nationally recognized statistical
rating service, and/or (ii) secured by collateral approved by the Company's
Investment Committee.
The Company occasionally enters into mortgage dollar roll and reverse
repurchase transactions (collectively, "dollar rolls") when earnings
enhancement opportunities arise. Dollar rolls are agreements with an outside
source, usually broker/dealers, to sell mortgage-backed securities and then,
at a predetermined date, to buy back "substantially the same securities". The
Company's investment guidelines require that the original term of a dollar
roll be no longer than 30 days and that all proceeds of such short-term
transactions be invested in short-term investments. The securities involved
must also have been issued, assumed or guaranteed by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
The Company enters into dollar rolls whenever a positive spread can be
realized from the implicit interest cost of the investment borrowings and the
reinvestment of the proceeds in short-term financial instruments. Because
both sides of the transaction are entered into on the basis of short-term,
money-market rates, dollar rolls involve no duration risk while providing an
enhancement to investment income. The Company's dollar rolls are accounted
for as short-term investment borrowings, with like amounts included in
short-term investments. The carrying values of the Company's investment
borrowings are assumed to approximate estimated fair value.
Other invested assets include investments in limited partnerships. The
Company follows the equity method of accounting for these investments.
Limited partnership investments are likely to result in a higher degree of
volatility in reported earnings than is typically the case with fixed income
investments, and present a greater risk of loss, as they reflect claims on an
issuer's capital structure junior to that of most fixed-income investments.
COST OF POLICIES PURCHASED
The cost of policies purchased represents the portion of Conseco's cost
of acquiring the Company in 1987 that was attributable to the value of the
right to receive future cash flows from insurance contracts existing at the
date of acquisition. The value of the cost of policies purchased is the
actuarially determined present value of the projected future cash flows from
the acquired policies.
Expected future cash flows used in determining the cost of policies
purchased are based on actuarially determined projections of future premium
collection, mortality, surrenders, benefit payments, operating expenses,
changes in insurance liabilities, investment yields on the assets held to back
such policy liabilities and other factors. These projections take into account
all factors known or expected at the valuation date based on the collective
judgment of the management of the Company. Actual experience on purchased
business may vary from projections due to differences in renewal premiums
collected, investment spread, investment gains (losses), mortality and
morbidity costs, and other factors. These variances from original projections,
whether positive or negative, are included in net income as they occur. To the
extent that these variances indicate that future cash flows will differ from
those reflected in the scheduled amortization of the cost of policies
purchased, current and future amortization is adjusted. Therefore, when the
Company sells fixed maturities and recognizes a gain (loss), it also reduces
(increases) the future investment spread because the proceeds from the sale
of investments are reinvested at a lower (higher) earnings rate and
amortization is increased (decreased) to reflect the change in the incidence
of cash flows. The discount rate used to determine such value is the current
rate of return the Company would require to justify the investment.
The cost of policies purchased is amortized (with interest at the same
rate used to determine the discounted value of the asset) based on the
incidence of the expected cash flows. Recoverability of the cost of policies
purchased is evaluated regularly by comparing the current estimate of expected
future cash flows (discounted at the rate of interest that accrues to the
policies) to the unamortized asset balance by line of insurance business. If
such current estimate indicates that the existing insurance liabilities,
together with the present value of future net cash flows from the business,
will not be sufficient to recover the cost of policies purchased, the
difference is charged to expense. Amortization is also adjusted for the
current and future years to reflect (i) the revised estimate of future cash
flows and (ii) the revised interest rate (but not greater than the rate
initially used and not lower than the rate of interest earned on invested
assets) at which the discounted present value of such expected future profits
equals the unamortized asset balance. Expected future cash flows used in
determining the amortization pattern and recoverability of cost of policies
purchased is based on historical gross profits and management's estimates and
assumptions regarding future investment spreads, maintenance expenses, and
persistency of the block of business. The accuracy of the estimates and
assumptions are impacted by several factors, including factors outside the
control of management such as movements in interest rates and competition from
other investment alternatives. It is reasonably possible that conditions
impacting the estimates and assumptions will change and that such changes will
result in future adjustments to cost of policies purchased.
COST OF POLICIES PRODUCED
Costs of producing new business (primarily commissions and certain costs
of policy issuance and underwriting) which vary with and are primarily related
to the production of new business, are deferred to the extent recoverable from
future profits. Such costs are amortized with interest as follows:
-For universal life-type contracts and investment-type contracts, in
relation to the present value of expected gross profits from these contracts,
discounted using the interest rate credited to the policy;
-For immediate annuities with mortality risks, in relation to the present
value of benefits to be paid;
-For traditional life contracts, in relation to future anticipated
premium revenue using the same assumptions that are used in calculating the
insurance liabilities.
Recoverability of the unamortized balance of the cost of policies
produced is evaluated regularly. For universal life-type contracts and
investment-type contracts, the accumulated amortization is adjusted (whether
an increase or a decrease) whenever there is a material change in the
estimated gross profits expected over the life of a block of business in order
to maintain a constant relationship between cumulative amortization and the
present value (discounted at the rate of interest that accrues to the
policies) of expected gross profits. For most other contracts, the unamortized
asset balance is reduced by a charge to income only when the sum of the
present value of future cash flows and the policy liabilities is not
sufficient to cover such asset balance. Expected gross profits used in
determining the amortization pattern and recoverability of cost of policies
produced is based on historical gross profits and management's estimates and
assumptions regarding future investment spreads, maintenance expenses, and
persistency of the block of business. The accuracy of the estimates and
assumptions are impacted by several factors, including factors outside the
control of management such as movements in interest rates and competition
from other investment alternatives. It is reasonably possible that conditions
impacting the estimates and assumptions will change and that such changes will
result in future adjustments to cost of policies produced.
INSURANCE LIABILITIES, RECOGNITION OF INSURANCE POLICY INCOME
AND RELATED BENEFITS AND EXPENSES
Reserves for universal life-type and investment-type contracts are based
on the contract account balance, if future benefit payments in excess of the
account balance are not guaranteed, or on the present value of future benefit
payments when such payments are guaranteed. Additional increases to insurance
liabilities are made if future cash flows, including investment income, are
insufficient to cover future benefits and expenses.
For investment contracts without mortality risk (such as deferred
annuities and immediate annuities with benefits paid for a period certain) and
for contracts that permit the Company or the insured to make changes in the
contract terms (such as single-premium whole life and universal life), premium
deposits and benefit payments are recorded as increases or decreases in a
liability account rather than as revenue and expense. Amounts charged against
the liability account for the cost of insurance, policy administration and
surrender penalties are recorded as revenues. Interest credited to the
liability account and benefit payments made in excess of the contract
liability account balance are charged to expense.
Reserves for traditional and limited-payment contracts are generally
calculated using the net level premium method and assumptions as to investment
yields, mortality, withdrawals, and dividends. The assumptions are based on
projections of past experience and include provisions for possible adverse
deviation. These assumptions are made at the time the contract is issued or,
in the case of contracts acquired by purchase, at the purchase date.
For traditional insurance contracts, premiums are recognized as income
when due. Benefits and expenses are associated with earned premiums so as to
result in their recognition over the premium-paying period of the contracts.
Such recognition is accomplished through the provision for future policy
benefits and the amortization of deferred policy acquisition costs.
For contracts with mortality risk, but with premiums paid for only a
limited period (such as single-premium immediate annuities with benefits paid
for the life of the annuitant), the accounting treatment is similar to
traditional contracts. However, the excess of the gross premium over the net
premium is deferred and recognized in relation to the present value of
expected future benefit payments.
Liabilities for incurred claims are determined using historical
experience and represent an estimate of the present value of the ultimate net
cost of all reported and unreported claims. Management believes these
estimates are adequate. Such estimates are periodically reviewed and any
adjustments are reflected in current operations.
INCOME TAXES
Pursuant to a tax sharing agreement, the Company was included in
Conseco's consolidated tax return beginning January 1, 1993. Under the
agreement, income taxes were allocated based upon separate return calculations
with certain adjustments. Commencing with the income tax reporting period
ended December 31, 1994, the Company has filed separate life insurance company
tax returns. WNLIAS is included in the consolidated tax return of Western
National.
Deferred income taxes are provided for the future tax effects of
temporary differences between the tax bases of assets and liabilities and
their financial reporting amounts, measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. The
Company provides a valuation allowance, if necessary, to reduce deferred tax
assets, if any, to their estimated realizable value.
2. INVESTMENTS:
The amortized cost, gross unrealized gains and losses, estimated fair
value and carrying value of actively managed and held to maturity fixed
maturities were as follows:
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ----------- ----------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Actively managed:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 20.8 $ 0.6 $ - $ 21.4 $ 21.4
Obligations of states and
political subdivisions 224.1 2.6 4.7 222.0 222.0
Public utility securities 1,251.6 21.0 30.4 1,242.2 1,242.2
Other corporate securities 4,583.6 140.0 36.2 4,687.4 4,687.4
Asset-backed securities 349.3 5.2 2.6 351.9 351.9
Mortgage-backed securities 2,309.0 28.4 19.8 2,317.6 2,317.6
---------- ----------- ----------- -------- ---------
Total actively managed $ 8,738.4 $ 197.8 $ 93.7 $8,842.5 $ 8,842.5
========== =========== =========== ======== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ----------- ----------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Actively managed:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 57.8 $ 2.2 $ - $ 60.0 $ 60.0
Obligations of states and
political subdivisions 169.8 5.7 2.7 172.8 172.8
Public utility securities 1,335.1 51.1 10.2 1,376.0 1,376.0
Other corporate securities 3,519.9 233.0 9.1 3,743.8 3,743.8
Asset-backed securities 280.4 8.9 0.1 289.2 289.2
Mortgage-backed securities 2,291.5 70.3 6.9 2,354.9 2,354.9
---------- ----------- ----------- -------- ---------
Total actively managed $ 7,654.5 $ 371.2 $ 29.0 $7,996.7 $ 7,996.7
========== =========== =========== ======== =========
Held to maturity-obligations of
states and political subdivisions $ 1.1 $ 1.0 $ 0.0 $ 2.1 $ 1.1
========== =========== =========== ======== =========
</TABLE>
The following table sets forth the amortized cost and estimated fair
value of fixed maturities as of December 31, 1996, based upon the source of
the estimated fair value:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Nationally recognized pricing services $ 7,340.4 $7,416.1
Broker-dealer market makers 1,176.4 1,204.8
Internally developed methods 221.6 221.6
---------- --------
Total fixed maturities $ 8,738.4 $8,842.5
========== ========
</TABLE>
The following table sets forth the quality of total fixed maturities as
of December 31, 1996, classified in accordance with the highest rating by a
nationally recognized statistical rating organization or, as to $159.1 million
of fixed maturities not commercially rated, then based on ratings assigned by
the National Association of Insurance Commissioners ("NAIC") as follows (for
purposes of the table, and only for fixed maturities not commercially rated:
NAIC Class 1 securities would be included in the "A" rating; Class 2, "BBB-";
Class 3, "BB-"; and Classes 4-6, "B" and below):
<TABLE>
<CAPTION>
FAIR VALUE
AS A % OF AS A % OF AS A % OF
AMORTIZED CARRYING FAIR FIXED AMORTIZED TOTAL
COMMERCIAL RATING COST VALUE VALUE MATURITIES COST INVESTMENTS
- --------------------------------- ---------- ---------- ---------- ----------- ---------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
AAA $ 2,491.6 $ 2,498.9 $ 2,498.9 28.3% 100.3% 26.7%
AA 801.0 801.6 801.6 9.1 100.1 8.5
A 2,461.4 2,500.4 2,500.4 28.3 101.6 26.7
BBB+ 834.1 855.4 855.4 9.7 102.6 9.1
BBB 991.8 1,009.2 1,009.2 11.4 101.8 10.8
BBB- 553.3 558.3 558.3 6.2 100.9 5.9
---------- ---------- ---------- ----------- ---------- ------------
Total investment grade 8,133.2 8,223.8 8,223.8 93.0 101.1 87.7
---------- ---------- ---------- ----------- ---------- ------------
BB+ 138.5 140.9 140.9 1.6 101.7 1.6
BB 75.4 77.5 77.5 0.9 102.8 0.8
BB- 165.2 171.7 171.7 1.9 103.9 1.8
B and below 226.1 228.6 228.6 2.6 101.1 2.4
---------- ---------- ---------- ----------- ---------- ------------
Total below investment grade 605.2 618.7 618.7 7.0 102.2 6.6
---------- ---------- ---------- ----------- ---------- ------------
Total fixed maturities $ 8,738.4 $ 8,842.5 $ 8,842.5 100.0% 101.2% 94.3%
========== ========== ========== =========== ========== ============
</TABLE>
The amortized cost and estimated fair value of fixed maturities by
contractual maturity as of December 31, 1996, were as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Due in one year or less $ 66.7 $ 68.6
Due after one year through five years 619.5 629.8
Due after five years through ten years 2,437.9 2,482.6
Due after ten years 3,305.3 3,343.9
-------- --------
Subtotal 6,429.4 6,524.9
Mortgage-backed securities 2,309.0 2,317.6
-------- --------
Total fixed maturities $8,738.4 $8,842.5
======== ========
</TABLE>
Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations, with or without
call or prepayment penalties, and because most mortgage-backed securities
provide for periodic payments throughout their lives.
Net investment income consisted of the following:
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities $656.8 $610.1 $593.8
Equity securities 0.8 0.2 0.9
Mortgage loans 9.7 9.4 11.7
Credit-tenant loans 19.8 23.9 20.9
Policy loans 4.1 4.4 4.4
Equity in earnings of partnership investments 7.0 3.8
Other invested assets 8.3 6.0 2.8
Short-term investments 6.8 12.8 11.3
------- ------- -------
Gross investment income 713.3 670.6 645.8
Investment expenses (3.2) (4.6) (7.6)
------- ------- -------
Net investment income and equity
in earnings of partnership investments $710.1 $666.0 $638.2
======= ======= =======
</TABLE>
The Company had no investments on nonaccrual status as of December 31,
1996, compared to $0.6 million and $13.6 million at December 31, 1995 and
1994, respectively. The Company had no fixed maturities in default as to the
payment of principal or interest at December 31, 1996 and 1995. During 1996,
1995 and 1994, the Company recorded writedowns of fixed maturities totaling
$5.6 million, $6.4 million, and $0.4 million, respectively. Of the $5.6
million in 1996, $1.6 million of the writedowns were related to value
impairments for credit risk.
The proceeds from sales of actively managed fixed maturities were $3.1
billion, $3.2 billion, and $3.5 billion for the years ended December 31, 1996,
1995, and 1994, respectively.
Net trading income for the year ended December 31, 1994, was as follows:
<TABLE>
<CAPTION>
1994
------
(DOLLARS IN MILLIONS)
<S> <C>
Gross trading gains $ 6.2
Gross trading losses (1.7)
------
Net realized gains from trading account
securities before expenses 4.5
Trading expenses (0.8)
------
Net trading income $ 3.7
======
</TABLE>
Net realized gains (losses) were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities:
Gross realized gains $ 34.0 $ 17.8 $ 34.4
Gross realized losses (25.6) (128.6) (80.4)
Decline in net realizable value
that is other than temporary (5.6) (6.4) (0.4)
------- -------- -------
2.8 (117.2) (46.4)
Equity securities 0.8
Mortgages loans (0.2)
Other (3.0) (0.7)
------- -------- -------
Net realized gains (losses)
before expenses 2.6 (119.4) (47.1)
Investment expenses (4.9) (6.8) (5.8)
------- -------- -------
Net realized gains (losses) $ (2.3) $(126.2) $(52.9)
======= ======== =======
</TABLE>
Changes in unrealized appreciation (depreciation) on investments carried
at estimated fair value, net of the effects on other balance sheet accounts,
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Investments carried at estimated fair value:
Actively managed fixed maturities $(238.1) $ 947.5 $(837.2)
Equity securities 0.4 (0.4)
Other (10.1) 11.0
-------- -------- --------
Change in unrealized appreciation
(depreciation), gross (248.2) 958.9 (837.6)
Less effect on other balance sheet accounts:
Cost of policies purchased 18.9 (63.7) 44.9
Cost of policies produced 68.3 (196.7) 215.9
Insurance liabilities 36.3 (36.3) 36.9
Other liabilities (7.8) 25.8 (13.6)
Deferred income taxes 46.4 (240.7) 193.6
-------- -------- --------
Change in unrealized appreciation
(depreciation), net $ (86.1) $ 447.3 $(359.9)
======== ======== ========
</TABLE>
At December 31, 1996, the aggregate carrying value of the Company's MBS
portfolio was $2.3 billion, or 24.5% of total invested assets. The following
table sets forth the carrying value of the Company's MBS portfolio by
structural type and underlying collateral coupon class as of December 31,
1996:
<TABLE>
<CAPTION>
COLLATERAL COUPON CLASS
-------------------------
9.01%
7% AND 7.01- 8.01- AND
MBS TYPE BELOW 8.00% 9.00% ABOVE TOTAL
- --------- ------ ----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Agency pass-throughs $ 815.7 $ 469.9 $ 29.7 $ 10.9 $1,326.2
Commercial MBS 38.2 29.5 1.2 68.9
CMOs:
PACs, TACs and VADMs 231.2 45.6 6.1 282.9
Sequentials 48.6 141.5 94.5 53.3 337.9
Supports and other 10.6 3.3 13.9
Mezzanines and subordinates 23.3 22.1 45.4
Z-tranches 28.0 28.0
ARMs and floaters (a) (a) (a) (a) 214.4
--------
Total CMOs 922.5
--------
Total MBS/CMOs $2,317.6
========
<FN>
_______________
(a) The collateral coupon rates are not meaningful as they reset
periodically in accordance with changes in market interest rates. In
addition, such security coupons have been swapped for fixed rate payments.
</TABLE>
Asset-backed securities ("ABS") are securitized pools of assets, such as
manufactured housing loans and credit card receivables, that are
collateralized by the underlying loans. ABS are typically structured
similarly to CMOs or MBS pass-throughs, but are usually not subject to as much
prepayment risk as MBS. Senior-tranche ABS contain credit enhancement
features that raise the quality of the ABS above that of the underlying loans.
At December 31, 1996, the aggregate carrying value of the Company's ABS
portfolio was $351.9 million, or 3.8% of total invested assets. The following
table sets forth the carrying value of the Company's ABS portfolio by
collateral type as of December 31, 1996:
<TABLE>
<CAPTION>
CARRYING VALUE
---------------
(DOLLARS IN AS A
COLLATERAL TYPE MILLIONS) PERCENT
---------------- --------- -------
<S> <C> <C>
Manufactured housing loans $161.0 45.8%
Credit card receivables 52.2 14.8
Home equity loans 36.9 10.5
Home improvement loans 23.6 6.7
Energy receivables 16.7 4.7
Airplane leases 13.5 3.8
Farm equipment leases 13.2 3.8
All other 34.8 9.9
------ ------
Total asset-backed securities $351.9 100.0%
------ ------
</TABLE>
At December 31, 1996, the Company had total mortgage loans of $122.7
million, or 1.3% of total invested assets, consisting of $89.6 million of
commercial mortgages and $33.1 million of mortgage investments in junior and
residual interests of CMOs ("CMO residuals"). Total mortgage loans at
year-end 1996 increased by $36.2 million from year-end 1995. This increase
reflects the Company's reclassification during the second quarter 1996 of
$43.5 million of investments from the credit-tenant loan category to the
mortgage loan category. The reclassified investments represented
credit-tenant loans on which the commercial credit rating of the tenant, Kmart
Corp., was downgraded to below investment grade status by several national
statistical rating services. Additionally, approximately 12% of the
collateral underlying the Company's CMO residuals involved Kmart Corp. at
December 31, 1996. The Company has not incurred any losses as a result of its
investments involving Kmart Corp. Approximately 72% of the commercial
mortgages were on properties located in four states - Florida (24%), Texas
(21%), North Carolina (15%), and Indiana (12%), respectively. No other state
comprised greater than 7% of the total commercial mortgage loan balance.
The CMO residuals entitle the Company to the excess cash flows arising
from the difference between (i) the cash flows required to make principal and
interest payments on the other tranches of the CMO and (ii) the actual cash
flows received on the mortgage loan assets backing the CMO. If prepayments or
credit losses on the underlying mortgage loan assets vary from projections,
the total cash flows to the Company could differ from projections. Changes in
projected cash flows which impact the yields of the CMO residuals are
recognized in investment income prospectively. The average yield of the
Company's CMO residuals were 9.5% at December 31, 1996. If the carrying value
of CMO residuals exceed the projected cash flows discounted at a risk free
rate, the carrying value is adjusted to fair value and a realized loss is
recognized.
During 1996, the Company recognized $0.2 million of realized losses on
mortgage loans, compared with none in 1995 or 1994. At December 31, 1996, the
Company had no nonperforming mortgage loans.
At December 31, 1996, the Company held $208.5 million, or 2.2% of total
invested assets, of credit-tenant loans ("CTLs") compared to $249.7 million at
year-end 1995. CTLs are mortgage loans for commercial properties which
require, as stipulated by the Company's underwriting guidelines, (i) the lease
of the principal tenant to be assigned to the Company (including the direct
receipt by the Company of the tenant's lease payments) and to produce adequate
cash flow to fund the requirements of the loan and (ii) the principal tenant
(or the guarantor of such tenant's obligations) to have a credit rating of
generally at least "BBB" or its equivalent. The underwriting guidelines take
into account such factors as the lease terms on the subject property; the
borrower's management ability, including business experience, property
management capabilities and financial soundness; and such economic,
demographic or other factors that may affect the income generated by the
property or its value. The underwriting guidelines also require a
loan-to-value ratio of 75% or less. Because CTLs are principally underwritten
on the basis of the creditworthiness of the tenant rather than on the value of
the underlying property, they are classified as a separate class of securities
for financial reporting purposes. As with commercial mortgage loans, CTLs are
additionally secured by liens on the underlying property.
As part of its investment strategy, the Company enters into mortgage
dollar roll and reverse repurchase transactions principally to increase
investment earnings and to improve liquidity. These transactions are
terminable after 30 days and are accounted for as short-term investment
borrowings, with the proceeds of such borrowings reinvested in short-term
financial instruments. They are collateralized by mortgage-backed agency
pass-throughs with fair values approximating the underlying loan value. Such
borrowings were $134.6 million and $257.3 million at December 31, 1996 and
1995, respectively.
At December 31, 1996 and 1995, the Company had outstanding interest rate
swap agreements with total notional contract amounts of $330.0 million and
which expire at various dates through 1999. At December 31, 1996 and 1995,
the average contractual floating-pay rates approximated 5.7% and 5.9%,
respectively, and fixed-receipt rates approximated 7.3% for both years. Based
on these rates, the Company's interest rate swaps had an estimated fair value
of a positive $4.4 million and $12.2 million at year-end 1996 and 1995,
respectively.
The Company had no investments in any entity in excess of 10% of
shareholder's equity or $91.5 million as of December 31, 1996, excluding
investments issued, assumed or guaranteed by the U.S. government or U.S.
government agencies. The Company's 20 non-U.S. government issuer
concentrations were as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COLLATERAL TYPE COST VALUE
---------------- ------------ ---------
(DOLLARS IN MILLIONS)
<C> <S> <C> <C>
1. GTE Corporation $ 86.8 $ 83.5
2. Occidental Petroleum 75.9 81.0
3. Ontario Province 71.8 68.0
4. American Reinsurance 68.2 67.4
5. Telecommunications Inc./TCI International 67.0 64.1
6. PaineWebber Group 66.3 68.8
7. May Department Stores 64.2 63.9
8. Philips Electronics NV 63.8 64.1
9. Salomon, Inc. 62.9 64.8
10. BankAmerica Corporation 60.5 61.0
11. News America Holdings 59.1 62.7
12. Phillips Petroleum 57.6 64.5
13. American Airlines/AMR Corporation 55.3 61.5
14. Northern Indiana Public Service 54.9 52.7
15. McDonnell Douglas 54.2 58.7
16. Countrywide Credit 53.8 54.2
17. Dayton Hudson 53.1 53.8
18. Wal-Mart Stores 52.3 52.8
19. Lehman Brothers 51.8 3.6
20. Commonwealth Edison 51.3 51.0
-------- -------
$1,230.8 1,252.1
</TABLE>
<PAGE>
3. INSURANCE LIABILITIES:
Insurance liabilities consisted of the following:
<TABLE>
<CAPTION>
INTEREST
WITHDRAWAL MORTALITY RATE DECEMBER 31,
-------------
ASSUMPTION ASSUMPTION ASSUMPTION 1996 1995
- --------------------------------- ----------- ----------- ---------- --------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Investment contracts N/A N/A (d) $ 7,274.3 $6,566.5
Limited-payment contracts None (b) 4%-11% 1,328.1 1,267.2
Traditional life insurance
contracts (a) (c) (e) 32.5 32.7
Universal life-type contracts N/A N/A N/A 43.5 47.7
Claims payable and other
policyholders' funds N/A N/A N/A 1.5 1.7
--------- --------
Total insurance liabilities - - - $ 8,679.9 $7,915.8
========= ========
<FN>
_______________
(a) Company experience.
(b) Principally the 1984 United States Population Table.
(c)Principally modifications of the 1965-70 Basic, Select, and Ultimate
Tables.
(d)In 1996 and 1995, approximately 95% of this liability represented account
balances where future benefits were not guaranteed and 5% represented the
present value of guaranteed future benefits determined using interest rates
ranging from 3% to 12%.
(e) Various, ranging from 3% to 6% in 1996 and 1995.
</TABLE>
Realized gains on fixed maturities during 1994 reduced the expected
future yields on the investment of policyholder balances to the extent that
future cash flows on certain products were insufficient to cover future
benefits and expenses. Accordingly, an additional estimated insurance
liability of $2.2 million was established by a charge to expense in 1994. No
additions to liabilities were required in 1996 and 1995.
4. REINSURANCE:
In the normal course of business, the Company seeks to limit its exposure
to loss on any single policy and to recover a portion of benefits paid by
ceding reinsurance to other insurance enterprises or reinsurers under excess
coverage contracts. The Company has set its retention limit for acceptance of
risk on life insurance policies at various levels up to $0.8 million. To the
extent that reinsuring companies are unable to meet obligations under these
agreements, the Company remains contingently liable. The Company evaluates
the financial condition of its reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. Assets and liabilities
relating to reinsurance contracts are reported gross of the effects of
reinsurance. Reinsurance receivables and prepaid reinsurance premiums,
including amounts related to insurance liabilities, are reported as assets.
Direct and assumed life insurance in force totaled $561.5 million, $628.6
million, and $706.3 million at December 31, 1996, 1995, and 1994,
respectively, and ceded life insurance in force totaled $247.6 million, $286.1
million, and $329.1 million at December 31, 1996, 1995 and 1994, respectively.
The cost of ceded policies containing mortality risks totaled $1.5
million in 1996 and $1.3 million in 1995 and 1994, and was deducted from
insurance premium revenue. Reinsurance recoveries netted against insurance
policy benefits totaled $1.4 million, $4.5 million, and $3.5 million in 1996,
1995, and 1994, respectively.
Effective October 1, 1995, the Company recaptured certain annuity
business with assets approximately equal to insurance liabilities of $72.8
million that had previously been ceded.
In October 1995, the Company and AGC Life entered into a modified
coinsurance agreement. Under the agreement, AGC Life issues the SPIAs, and
50% of each risk is reinsured to the Company. Under this arrangement, the
Company reports its pro rata share of premiums and shares in its pro rata
portion of the gain or loss on policies sold. Pursuant to this arrangement in
1996, the Company assumed $90.9 million of premiums. The arrangement resulted
in $91.3 million of revenues and expenses for the Company in 1996. As of
December 31, 1996, the funds held by reinsurer and the insurance liabilities
resulting from this agreement were $96.6 million.
Since 1994, the Company has been a party to a standby reinsurance
agreement for new SPDA sales through selected financial institutions, which
becomes effective only if the Company's risk-based capital ratio falls below a
prescribed level. No reinsurance pursuant to this agreement has become
effective.
5. INCOME TAXES:
The components of income tax included in the balance sheet are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Deferred income tax liabilities:
Investments $ 21.1 $ 20.0
Cost of policies produced and purchased 143.6 118.4
Unrealized appreciation of investments 21.1 67.5
------- --------
Gross deferred income tax liabilities 185.8 205.9
Deferred income tax assets:
Insurance liabilities 80.6 76.7
Other 8.8 10.8
------- --------
Gross deferred income tax assets 89.4 87.5
------- --------
Net deferred income tax liabilities $(96.4) $(118.4)
======= ========
</TABLE>
Income tax expense was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Current tax provision (benefit) $31.6 $(23.0) $(5.0)
Deferred tax provision 27.5 29.3 50.1
----- ------- ------
Income tax expense $59.1 $ 6.3 $45.1
===== ======= ======
</TABLE>
Income tax expense differed from that computed at the applicable federal
statutory rate (35% during 1996, 1995, and 1994) for the following reasons:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Federal tax on income before income taxes
at statutory rates $59.1 $ 7.6 $44.2
State taxes 0.3 0.5 0.5
Additional tax on unrealized gains and
income of prior periods related to
increase in corporate income tax rate - - -
Various adjustments (0.3) (1.8) 0.4
------ ------ -----
Income tax expense $59.1 $ 6.3 $45.1
====== ====== =====
</TABLE>
During 1995, the Company assigned its right to tax benefits related to
realized investment losses generated during 1995 to an affiliate in return for
cash payments equal to the tax benefits. During 1995, the Company received
$36.9 million and at December 31, 1995, $9.7 million, included in other
assets, related to the remaining 1995 tax benefits receivable from the
affiliate.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT
FAIR VALUES OF FINANCIAL INSTRUMENTS ("SFAS 107") requires disclosures of fair
value information about financial instruments, and includes assets and
liabilities recognized or not recognized in the balance sheet, for which it is
practicable to estimate their fair value. In cases where quoted market prices
are not available, fair values are based on estimates using discounted cash
flow or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rates and estimates
of the amount and timing of future cash flows. SFAS 107 excludes certain
insurance liabilities and other non-financial instruments from its disclosure
requirements, such as the amount for the value associated with customer or
agent relationships, the expected interest margin (interest earnings over
interest credited) to be earned in the future on investment-type products, or
other intangible items. Accordingly, the aggregate fair value amounts
presented herein do not necessarily represent the underlying value of the
Company; likewise, care should be exercised in deriving conclusions about the
Company's business or financial condition based on the fair value information
presented herein.
The following methods and assumptions were used by the Company in
determining estimated fair values of financial instruments:
FIXED MATURITIES AND EQUITY SECURITIES: The estimated fair values for fixed
maturities are based on quoted market prices, where available. For fixed
maturities not actively traded, the estimated fair values are determined using
values obtained from independent pricing services or, in the case of private
placements, are determined by discounting expected future cash flows using a
current market rate applicable to the yield, credit quality, and maturity
of the securities. The estimated fair values for equity securities are based
on quoted market prices.
SHORT-TERM INVESTMENTS: The carrying values approximate estimated fair
value.
MORTGAGE LOANS, CREDIT-TENANT LOANS, AND POLICY LOANS: The estimated fair
values for mortgage loans, CTLs, and policy loans are determined by
discounting future expected cash flows using interest rates currently being
offered for similar loans to borrowers with similar credit ratings.
OTHER INVESTED ASSETS: The estimated fair values are determined using quoted
market prices for similar instruments.
INSURANCE LIABILITIES FOR INVESTMENT CONTRACTS: The estimated fair values are
determined using discounted cash flow calculations based on interest rates
currently being offered for similar contracts with maturities consistent with
those remaining for the contracts being valued. The estimated fair values of
the insurance liabilities for investment contracts were approximately equal to
the carrying values as of December 31, 1996 and 1995, because interest rates
credited on the vast majority of account balances approximate current rates
paid on similar investments and are not generally guaranteed beyond one year.
Fair values for the Company's insurance liabilities other than those for
investment-type insurance contracts are not required to be disclosed.
However, the estimated fair values of liabilities for all insurance contracts
are taken into consideration in the Company's overall management of interest
rate risk, which minimizes exposure to changing interest rates through the
matching of investment maturities with amounts due under insurance contracts.
INVESTMENT BORROWINGS: The carrying values approximate estimated fair
value.
The estimated fair values and carrying values of the Company's financial
instruments were as follows:
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
---- ----
FAIR CARRYING FAIR CARRYING
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS:
Fixed maturities and equity securities $8,842.5 $8,842.5 $7,999.6 $7,998.6
Mortgage loans, credit-tenant loans,
and policy loans 396.2 398.0 400.0 404.5
Other invested assets 24.5 24.5 24.5 24.5
Short-term investments 105.8 105.8 414.8 414.8
LIABILITIES:
Insurance liabilities for investment
contracts 7,274.3 7,274.3 6,566.5 6,566.5
Investment borrowings 156.3 156.3 257.3 257.3
</TABLE>
7. SHAREHOLDER'S EQUITY:
Generally, dividends that can be paid by the Company during any 12-month
period cannot exceed the greater of statutory net gain from operations
(excluding realized gains on investments) for the preceding year or 10% of
statutory surplus at the end of the preceding year. In 1997, the Company can
pay dividends of up to $57.0 million.
During 1995, the Company increased its authorized number of common stock
shares from 30,000 shares to 100,000 shares and issued a stock dividend of
20,000 shares. The stock dividend was accounted for as a stock split.
The components of the balance sheet caption "unrealized appreciation
(depreciation) of investments, net" in shareholder's equity are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- -------------------
EFFECT OF EFFECT OF
COST FAIR VALUE CARRYING COST FAIR VALUE CARRYING
BASIS ADJUSTMENTS VALUE BASIS ADJUSTMENTS VALUE
--------- -------- ---------- --------- ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INVESTMENTS:
Actively managed fixed maturities $ 8,738.4 $104.1 $ 8,842.5 $ 7,654.5 $342.2 $ 7,996.7
Other invested assets 23.6 0.9 24.5 13.5 11.0 24.5
---------- ------- ---------- ---------- ------- ----------
8,762.0 105.0 8,867.0 7,668.0 353.2 8,021.2
OTHER BALANCE SHEET ITEMS:
Cost of policies purchased 71.5 (21.1) 50.4 75.8 (40.0) 35.8
Cost of policies produced 408.3 (28.1) 380.2 325.1 (96.4) 228.7
Insurance liabilities (8,679.9) (8,679.9) (7,879.5) (36.3) (7,915.8)
Other liabilities (39.7) 4.4 (44.1) (37.2) 12.2 (25.0)
Deferred income taxes (75.3) (21.1) (96.4) (50.9) (67.5) (118.4)
---------- ------- ---------- ---------- ------- ----------
Unrealized appreciation of
investments, net $ 39.1 $125.2
======== =======
</TABLE>
In September 1996, Western National generated net proceeds of $125.9
million from the issuance of preferred stock to American General. Such net
proceeds were contributed to the Company.
8. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The Company leases office space and equipment under noncancellable
operating leases. The approximate future minimum lease rental commitments
under such leases as of December 31, 1996, are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ---------------------------
<S> <C>
1997 993
1998 1,002
1999 993
2000 968
2001 581
Thereafter 1,405
-----
5,942
=====
</TABLE>
Rent expense was $1,018,000, $752,000, and $788,000 in 1996, 1995, and
1994, respectively.
Until May 1, 1997, the Company is committed to reimburse the WNL Series
Trust for administrative expenses in excess of .12% of the market value of
investments related to variable annuity policies issued by the Company.
During 1996, the Company incurred approximately $0.6 million related to this
commitment.
CONTINGENCIES
Assessments are levied on the Company from time to time by guaranty fund
associations of states in which it is licensed to provide for payment of
covered claims or to meet other insurance obligations, subject to prescribed
limits, of insolvent insurance enterprises. Assessments are allocated to an
insurer based on the ratio of premiums written by an insurer to total premiums
written in the state. The terms of the assessments depend on how each
guaranty fund association elects to fund its obligations. Assessments levied
by certain states may be recoverable through a reduction in future premium
taxes. The Company provides a liability, net of discount and estimated
premium tax offsets, for estimated future assessments of known insolvencies.
Included in other liabilities is a reserve for guaranty fund assessments of
$22.1 million, $29.2 million and $7.4 million, at December 31, 1996, 1995, and
1994, respectively. The Company determines guaranty fund liabilities by
utilizing a report prepared annually by the National Organization of Life and
Health Insurance Guaranty Associations which provides estimates of assessments
by insolvency. Although management believes the provision for guaranty fund
assessments is adequate for all known insolvencies, and does not currently
anticipate the need for any material additions to the reserve for known
insolvencies. However, it is reasonably possible that the estimates on which
the provision is based will change and that such changes will result in future
adjustments.
From time to time, the Company is involved in lawsuits which are related
to its operations. In most cases, such lawsuits involve claims under
insurance policies or other contracts of the Company. None of the lawsuits
currently pending, either individually or in the aggregate, is expected to
have a material effect on the Company's financial condition or results of
operations.
9. EMPLOYEE BENEFIT PLANS:
Western National sponsors a qualified defined contribution plan (the
"Plan") covering all full-time employees of the Company. The Plan provides
for the Company to match, with equivalent value of Western National stock, 50%
of a participant's voluntary contributions up to 4% of a participant's
compensation (subject to certain Internal Revenue Code limitations). The
Company can also elect to make additional discretionary contributions to the
Plan. For 1996 and 1995, the Company made a matching contribution in an
amount equal to 65% and 50%, respectively, of each participant's elective
contributions, up to 6% of annual compensation (subject to Internal Revenue
Code limitations). Subsequent to year end, the Company's matching contribution
was increased to 75% for 1997 contributions. The Company's Supplemental Plan
is an unfunded, nonqualified plan that provides to certain employees similar
benefits that cannot be provided by a qualified defined contribution plan due
to Internal Revenue Code limitations. Participants can also defer additional
amounts of salary and bonus under the Supplemental Plan, but there is no
employer match for such additional contributions. Expense recorded related to
the Company's reimbursement to Western National for matching contributions
under both plans was approximately $394,000, $232,000, and $92,000 in 1996,
1995, and 1994, respectively.
10. RELATED PARTY TRANSACTIONS:
See Note 4 for a description of the modified coinsurance agreement with
AGC Life.
The Company was an affiliate of Conseco through December 23, 1994. In
1994, the Company incurred $17.3 million of fees under investment management
and service agreements with Conseco and its subsidiaries. Subsequent to 1994,
Conseco has continued to provide investment accounting services and investment
advisory services for a substantial majority of the Company's portfolio.
Total investment advisory and accounting fees paid to Conseco were $7.4
million and $7.9 million for the years ended December 31, 1996 and 1995,
respectively.
11. OTHER OPERATING STATEMENT DATA:
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Direct premiums collected $ 1,625.5 $ 720.4 $ 751.9
Reinsurance ceded (1.5) (0.9) (1.2)
---------- -------- --------
Premiums collected, net 1,624.0 719.5 750.7
Less premiums on universal life and
investment contracts without mortality
risk which are recorded as additions to
insurance liabilities (1,613.4) (697.8) (729.6)
---------- -------- --------
Direct premiums on products with mortality
risk, recorded as insurance policy income 10.6 21.7 21.1
Reinsurance assumed 71.1
Amortization of deferred revenue 0.5 0.5 0.4
Fees and surrender charges 4.4 4.2 4.8
Other income 4.4
---------- -------- --------
Insurance policy income $ 91.0 $ 26.4 $ 26.3
========== ======== ========
</TABLE>
The changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year before effect of
fair value adjustments of actively managed
fixed maturities $ 75.8 $ 80.5 $ 83.1
Scheduled amortization (4.3) (4.7) (4.9)
Amortization related to realized gains
and losses 2.3
------- ------- -------
Balance, end of year before effect of fair
value adjustments of actively managed
fixed maturities 71.5 75.8 80.5
Effect of fair value adjustment of actively
managed fixed maturities (21.1) (40.0) 23.7
------- ------- -------
Balance, end of year $ 50.4 $ 35.8 $104.2
======= ======= =======
</TABLE>
The changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year before effect of
fair value adjustments of actively managed
fixed maturities $325.1 $265.0 $200.5
Acquisition costs incurred 120.6 62.2 62.4
Scheduled amortization (37.3) (34.0) (15.1)
Amortization related to realized gains and losses (0.6) 29.8 16.7
Amortization of deferred revenue 0.5 0.5 0.5
Effects of reinsurance 1.6
------- ------- -------
Balance, end of year before effect of fair value
adjustments of actively managed fixed
maturities 408.3 325.1 265.0
Effect of fair value adjustment of actively
managed fixed maturities (28.1) (96.4) 100.3
------- ------- -------
Balance, end of year $380.2 $228.7 $365.3
======= ======= =======
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, approximately 6% to 7% of the cost of policies purchased as
of December 31, 1996, excluding the effect of fair value adjustments for
actively managed fixed maturities, is expected to be amortized in each of the
next five years. The average discount rate for the cost of policies purchased
was approximately 19% for the year ended December 31, 1996.
12. STATUTORY INFORMATION:
Statutory accounting practices prescribed or permitted for the Company by
regulatory authorities differ from generally accepted accounting principles.
The Company reported the following amounts to regulatory agencies:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Statutory capital and surplus $572.4 $426.1
Asset valuation reserve 109.0 91.1
Interest maintenance reserve 104.4 105.3
------ ------
Total $785.8 $622.5
====== ======
</TABLE>
Statutory accounting practices require that certain investment-related
portions of surplus, called the asset valuation reserve ("AVR") and the
interest maintenance reserve ("IMR"), be appropriated and reported as
liabilities. The purpose of these reserves is to stabilize statutory surplus
against fluctuations in the market value of investments. The AVR captures
realized and unrealized investment gains and losses related to changes in
creditworthiness. The IMR captures realized investment gains and losses on
debt instruments resulting from changes in interest rates and provides for
subsequent amortization of such amounts into statutory net income on a basis
reflecting the remaining life of the assets sold.
The following table compares the pre-tax income determined on a statutory
accounting basis with such income reported herein in accordance with generally
accepted accounting principles:
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Statutory net gain from operations $ 65.3 $ 51.6 $ 68.8
IMR amortization (8.7) (8.7) (13.5)
Realized gains (losses) 15.1 (118.2) (39.4)
------- -------- -------
Pre-tax statutory income before transfers
to and from and amortization of tax IMR 71.7 (75.3) 15.9
Net effect of adjustments for generally
accepted accounting principles 97.4 97.0 110.2
------- -------- -------
Pre-tax income, generally accepted
accounting principles $169.1 $ 21.7 $126.1
======= ======== =======
</TABLE>
<PAGE>
25
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Western National Life Insurance Company
Our report on the financial statements of Western National Life Insurance
Company is included on page F-2 of this Form N-4. In connection with our
audits of such financial statements, we have also audited the related
financial statement schedules listed in the index on page F-1 of this Form
N-4.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 5, 1997
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
SCHEDULE VI
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995 1994
------ -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
LIFE INSURANCE IN FORCE:
Direct $ 559.3 $ 626.0 $ 703.1
Assumed 2.2 2.6 3.2
Ceded (247.6) (286.1) (329.1)
-------- -------- --------
Net insurance in force $ 313.9 $ 342.5 $ 377.2
======== ======== ========
Percentage of assumed to net 0.7% 0.7% 0.8%
PREMIUMS RECORDED AS REVENUE FOR GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES:
Direct 12.1 23.0 22.4
Assumed 71.1
Ceded (1.5) (1.3) (1.3)
-------- -------- --------
Net premiums $ 81.7 $ 21.7 $ 21.1
======== ======== ========
Percentage of assumed to net 87.0% 0.0% 0.0%
</TABLE>
