As filed with the Securities and Exchange Commission on May 5, 1999
Registration File Nos. 333-38343/811-8878
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
FORM S-6
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FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
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AUSA SERIES LIFE ACCOUNT
(Exact Name of Trust)
AUSA LIFE INSURANCE COMPANY, INC.
(Name of Depositor)
4 Manhattanville Road
Purchase, New York 10577
(Complete Address of Depositor's Principal Executive Offices)
Thomas E. Pierpan, Esq.
Assistant Secretary
AUSA Life Insurance Company, Inc.
P.O. Box 9054
Clearwater, Florida 34618-9054
(Name and Complete Address of Agent for Service)
Copies to:
Stephen E. Roth, Esq.
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2415
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Title of Securities being registered: Units of interest in the separate account
under flexible payment deferred variable life policies.
It is proposed that this filing will become effective (check appropriate space):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 5, 1999, pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485
[ ] on _____________, pursuant to paragraph (a) of Rule 485
<PAGE>
P R O S P E C T U S
MAY 5, 1999
AUSA FINANCIAL FREEDOM BUILDERSM
issued through
AUSA Series Life Account
by
AUSA Life Insurance Company, Inc.
4 Manhattanville Road
Purchase, New York 10577
1-800-322-7353
AN INDIVIDUAL FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
CONSIDER CAREFULLY THE RISK
FACTORS BEGINNING ON PAGE 8
OF THIS PROSPECTUS.
An investment in this Policy is
not a bank deposit. The Policy
is not insured or guaranteed by
the Federal Deposit Insurance
Corporation or any other
THE SECURITIES AND EXCHANGE government agency.
COMMISSION HAS NOT APPROVED
OR DISAPPROVED THESE SECURITIES The prospectus for the WRL
OR PASSED UPON THE ADEQUACY Series Fund, Inc. must
OF THIS PROSPECTUS. ANY accompany this prospectus.
REPRESENTATION TO THE CONTRARY Certain portfolios may not be
IS A CRIMINAL OFFENSE. available. Please read this
document before investing and
save it for future reference.
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TABLE OF CONTENTS
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Glossary ....................................................... 1
Policy Summary ................................................. 4
Risk Summary ................................................... 8
Portfolio Annual Expense Table ................................. 12
AUSA Life and the Fixed Account ................................ 13
AUSA Life .................................................. 13
The Fixed Account .......................................... 13
The Separate Account and the Portfolios ........................ 14
The Separate Account ....................................... 14
The Fund ................................................... 15
Addition, Deletion, or Substitution of Investments ......... 18
Your Right to Vote Portfolio Shares ........................ 19
The Policy ..................................................... 20
Purchasing a Policy ........................................ 20
Underwriting Standards ..................................... 20
When Insurance Coverage Takes Effect ....................... 21
Ownership Rights ........................................... 22
Canceling a Policy ......................................... 23
Premiums ....................................................... 23
Premium Flexibility ........................................ 23
Planned Periodic Payments .................................. 24
No Lapse Period ............................................ 24
Premium Limitations ........................................ 24
Making Premium Payments .................................... 24
Allocating Premiums ........................................ 25
Policy Values .................................................. 26
Cash Value ................................................. 26
Net Surrender Value ........................................ 26
Subaccount Value ........................................... 26
Subaccount Unit Value ...................................... 27
Fixed Account Value ........................................ 27
Transfers ...................................................... 28
General .................................................... 28
Fixed Account Transfers .................................... 29
Conversion Rights .......................................... 29
Dollar Cost Averaging ...................................... 29
Asset Rebalancing Program .................................. 30
Third Party Asset Allocation Services ...................... 31
This Policy is available only in the State of New York.
</TABLE>
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Charges and Deductions ....................................... 32
Premium Charges .......................................... 32
Monthly Deduction ........................................ 33
Mortality and Expense Risk Charge ........................ 34
Surrender Charge ......................................... 34
Pro Rata Decrease Charge ................................. 36
Transfer Charge .......................................... 36
Cash Withdrawal Charge ................................... 37
Taxes .................................................... 37
Portfolio Expenses ....................................... 37
Death Benefit ................................................ 37
Death Benefit Proceeds ................................... 37
Death Benefit ............................................ 37
Effects of Cash Withdrawals on the Death Benefit ......... 40
Choosing Death Benefit Options ........................... 40
Changing the Death Benefit Option ........................ 40
Decreasing the Specified Amount .......................... 40
Payment Options .......................................... 41
Surrenders and Cash Withdrawals .............................. 41
Surrenders ............................................... 41
Cash Withdrawals ......................................... 41
Loans ........................................................ 42
General .................................................. 42
Interest Rate Charged .................................... 43
Loan Reserve Interest Rate Credited ...................... 44
Effect of Policy Loans ................................... 44
Policy Lapse and Reinstatement ............................... 44
Lapse .................................................... 44
No Lapse Period .......................................... 45
Reinstatement ............................................ 45
Federal Income Tax Considerations ............................ 46
Tax Status of the Policy ................................. 46
Tax Treatment of Policy Benefits ......................... 47
Other Policy Information ..................................... 49
Our Right to Contest the Policy .......................... 49
Suicide Exclusion ........................................ 49
Misstatement of Age or Gender ............................ 49
Modifying the Policy ..................................... 49
Benefits at Maturity ..................................... 49
Payments We Make ......................................... 50
Settlement Options ....................................... 50
Reports to Owners ........................................ 51
</TABLE>
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<TABLE>
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Records .................................................. 52
Policy Termination ....................................... 52
Supplemental Benefits (Riders) ............................... 52
Children's Insurance Rider ............................... 52
Accidental Death Benefit Rider ........................... 52
Other Insured Rider ...................................... 52
Primary Insured Rider ("PIR") ............................ 53
Terminal Illness Accelerated Death Benefit Rider ......... 53
IMSA ......................................................... 54
Performance Data ............................................. 55
Rates of Return .......................................... 55
Hypothetical Illustrations Based on Adjusted
Portfolio Performance.................................... 56
Other Performance Data in Advertising Sales Literature ... 64
AUSA Life's Published Ratings ............................ 65
Additional Information ....................................... 65
Sale of the Policies ..................................... 65
Legal Matters ............................................ 65
Legal Proceedings ........................................ 66
Year 2000 Readiness Disclosure ........................... 66
Experts .................................................. 66
Financial Statements ..................................... 67
Additional Information about AUSA Life ................... 67
AUSA Life's Directors and Officers ....................... 68
Additional Information about the Separate Account ........ 70
Appendix A -- Illustrations .................................. 71
Appendix B -- Wealth Indices of Investments in the
U.S. Capital Market ................................ 75
Appendix C -- Surrender Charge Per Thousand (Based on
the gender and rate class of the insured) .......... 77
Index to Financial Statements ................................ 79
AUSA Life Insurance Company, Inc. ........................ 80
</TABLE>
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GLOSSARY
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accounts The options to which you can allocate your money. The accounts include the fixed
account and the subaccounts in the separate account.
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attained age The issue age of the person insured, plus the number of completed years
since the Policy date.
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beneficiary(ies) The person or persons you select to receive the death benefit from this Policy.
You can name the primary beneficiary and contingent beneficiaries.
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cash value The sum of your Policy's value in the subaccounts and the fixed account. If
there is a Policy loan outstanding, the cash value includes any amounts held
in our general account to secure the Policy loan.
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death benefit The amount we will pay to the beneficiary on the insured's death. We will
proceeds reduce the death benefit proceeds by the amount of any outstanding loan
amount and any due and unpaid monthly deduction. We will increase the
death benefit proceeds by any interest you paid in advance on the loan for the
period between the date of death and the next Policy anniversary.
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fixed account An option to which you may allocate premiums and cash value. We guarantee
that any amounts you allocate to the fixed account will earn interest at a
declared rate.
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free look period The period during which you may return the Policy and receive a refund as
described in this prospectus. The length of the free look period varies by
state. The free look period is listed in the Policy.
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fund(s) The WRL Series Fund, Inc., an investment company which is registered with
the U.S. Securities and Exchange Commission, and other registered invest-
ment companies that may be added to the Policy.
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in force While coverage under the Policy is active and the insured's life remains
insured.
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initial premium The amount you must pay before insurance coverage begins under this Policy.
The initial premium is shown on the schedule page of your Policy.
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insured The person whose life is insured by this Policy.
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issue age The insured's age on his or her birthday nearest to the Policy date.
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lapse When life insurance coverage ends because you do not have enough cash
value in the Policy to pay the monthly deduction, the surrender charges and
any outstanding loan amount, and you have not made a sufficient payment by
the end of a grace period.
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</TABLE>
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loan amount The total amount of all outstanding Policy loans, including both principal and
interest due.
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loan reserve A part of the fixed account to which amounts are transferred as collateral for
Policy loans.
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maturity date The Policy anniversary nearest the insured's 95th birthday. It is the date when
life insurance coverage under this Policy ends.
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minimum The amount shown on your Policy schedule page that we use during the no
monthly lapse period to determine whether a grace period will begin. We make this
guarantee determination whenever your net surrender value is not enough to meet
premium monthly deductions.
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monthly This is the day of each month when we determine Policy charges and deduct
anniversary or them from cash value. It is the same date each month as the Policy date. If
Monthiversary there is no valuation date in the calendar month that coincides with the Policy
date, the Monthiversary is the next valuation date.
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net premium The part of your premium that we allocate to the fixed account or the
subaccounts. The net premium is equal to the premium you paid minus the
premium expense charges.
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net surrender The amount we will pay you if you surrender the Policy while it is in force.
value The net surrender value on the date you surrender is equal to: the cash value,
minus any surrender charge, minus any outstanding loan amount, plus any
interest you paid in advance on the loan for the period between the date of
surrender and the next Policy anniversary.
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no lapse period The first five Policy years during which the Policy will not lapse if certain
conditions are met.
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office Our administrative office and mailing address is P.O. Box 9054, Clearwater,
Florida 33758-9054. Our street address is 4 Manhattanville Road, Purchase,
New York 10577. Our phone number is 1-800-322-7353.
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planned periodic A premium payment you make in a level amount at a fixed interval over a
premium specified period of time.
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Policy date The date when our underwriting process is complete, full life insurance
coverage goes into effect, we begin to make the monthly deductions, and your
initial premium is allocated to the WRL J.P. Morgan Money Market
subaccount. The Policy date is shown on the schedule page of your Policy.
We measure Policy months, years, and anniversaries from the Policy date.
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portfolio One of the separate investment portfolios of the fund.
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premiums All payments you make under the Policy other than loan repayments.
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</TABLE>
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record date The date we record your Policy on our books as an in force Policy, and we
allocate your cash value from the WRL J.P. Morgan Money Market
subaccount to the accounts that you elected on your application.
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separate account The AUSA Series Life Account. It is a separate investment account that is
divided into subaccounts. We established the separate account to receive and
invest net premiums under the Policy and other variable life insurance
policies we issue.
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specified amount The minimum death benefit we will pay under the Policy provided the Policy
is in force. It is the amount shown on the Policy's schedule page, unless you
decrease the specified amount. In addition, we will reduce the specified
amount by the dollar amount of any cash withdrawal if you choose the
Option A death benefit.
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subaccount A subdivision of the separate account that invests exclusively in shares of one
investment portfolio of the fund.
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surrender charge If, during the first 15 Policy years, you fully surrender the Policy, we will
deduct a surrender charge from the cash value.
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termination When the insured's life is no longer insured under the Policy.
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valuation date Each day the New York Stock Exchange is open for trading. Western Reserve
is open whenever the New York Stock Exchange is open.
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valuation period The period beginning at the close of business of the New York Stock
Exchange on one valuation date and continuing to the close of business of the
New York Stock Exchange on the next valuation date.
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we, us, our AUSA Life Insurance Company, Inc.
(AUSA Life)
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written notice The written notice you must sign and send us to request or exercise your
rights as owner under the Policy. To be complete, it must: (1) be in a form
we accept, (2) contain the information and documentation that we determine
we need to take the action you request, and (3) be received at our office.
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you, your The person entitled to exercise all rights as owner under the Policy.
(owner or
policyowner)
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</TABLE>
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POLICY SUMMARY AUSA FINANCIAL FREEDOM BUILDER(SM)
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The sections in this summary correspond to sections in this prospectus,
which discuss the topics in more detail.
THE POLICY IN GENERAL
The AUSA Financial Freedom Builder(SM) is an individual flexible premium
variable life insurance policy.
The Policy is designed to be long-term in nature in order to provide
significant life insurance benefits for you. However, purchasing this Policy
involves certain risks. (See Risk Summary.) You should consider the Policy in
conjunction with other insurance you own. The Policy is not suitable as a
short-term savings vehicle.
PREMIUMS
o You select a payment plan but are not required to pay premiums
according to the plan. You can vary the frequency and amount, within
limits, and can skip premium payments.
o Unplanned premiums may be made, within limits.
o Premium payments must be at least $50.
o Under certain circumstances, extra premiums may be required to
prevent lapse.
o Once we issue your Policy, the FREE LOOK PERIOD begins. You may
return the Policy during this period and receive a refund.
DEDUCTIONS FROM PREMIUM BEFORE WE PLACE IT IN SUBACCOUNT AND/OR FIXED ACCOUNT
o For the first ten Policy years: 6.0% premium expense charge.
o After the tenth year: 2.5% premium expense charge.
o A premium collection charge of $3.00 from each premium payment.
INVESTMENT OPTIONS
SUBACCOUNTS. You may direct the money in your Policy to any of the
subaccounts of the AUSA Series Life Account, a separate account. Each
subaccount invests exclusively in one investment portfolio of the WRL Series
Fund, Inc. (the "fund"). THE MONEY YOU PLACE IN THE SUBACCOUNTS IS NOT
GUARANTEED. THE VALUE OF EACH SUBACCOUNT WILL INCREASE OR DECREASE, DEPENDING
ON INVESTMENT PERFORMANCE OF THE CORRESPONDING PORTFOLIO. YOU COULD LOSE SOME
OR ALL OF YOUR MONEY.
4
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The portfolios available to you are:
<TABLE>
<S> <C>
[ ] WRL Alger Aggressive Growth [ ] WRL AEGON Balanced
[ ] WRL VKAM Emerging Growth [ ] WRL NWQ Value Equity
[ ] WRL Janus Growth [ ] WRL C.A.S.E. Growth
[ ] WRL Janus Global [ ] WRL GE/Scottish Equitable International Equity
[ ] WRL AEGON Bond [ ] WRL Goldman Sachs Growth*
[ ] WRL LKCM Strategic Total Return [ ] WRL Goldman Sachs Small Cap*
[ ] WRL Federated Growth & Income [ ] WRL T. Rowe Price Dividend Growth*
[ ] WRL J.P. Morgan Real Estate Securities [ ] WRL T. Rowe Price Small Cap*
[ ] WRL Dean Asset Allocation [ ] WRL Salomon All Cap*
[ ] WRL GE U.S. Equity [ ] WRL Pilgrim Baxter Mid Cap Growth*
[ ] WRL Third Avenue Value [ ] WRL Dreyfus Mid Cap*
[ ] WRL J.P. Morgan Money Market
</TABLE>
* THESE PORTFOLIOS WILL NOT BE AVAILABLE FOR ALLOCATIONS OF NET PREMIUMS AND
CASH VALUE UNTIL ON OR ABOUT JULY 1, 1999. PLEASE CONTACT YOUR AGENT FOR
INFORMATION REGARDING AVAILABILITY.
FIXED ACCOUNT. You may also direct the money in your Policy to the fixed
account. Money you place in the fixed account is guaranteed, and will earn
interest at a current interest rate declared from time to time. The annual
interest rate will equal at least 4.0%.
CASH VALUE
o Cash value equals the sum of your Policy's value in the subaccounts
and the fixed account. If there is a loan outstanding, the cash value
includes any amounts held in our general account to secure the Policy
loan.
o Cash value varies from day to day, depending on the investment
experience of the subaccounts you choose, the interest credited to
the fixed account, the charges deducted and any other Policy
transactions (such as additional premium payments, transfers,
withdrawals, and Policy loans).
o Cash value is the starting point for calculating important values
under the Policy, such as net surrender value and the death benefit.
o There is no guaranteed minimum cash value. The Policy may lapse if
you do not have sufficient cash value in the Policy to pay the
monthly deductions, the surrender charge and/or any outstanding loan
amount (including interest you owe on any Policy loan(s)).
o The Policy will not lapse during the no lapse period so long as you
have paid sufficient premiums.
TRANSFERS
o You can transfer cash value among the subaccounts and the fixed
account. We charge a $25 transfer processing fee for each transfer
after the first 12 transfers in a Policy year.
o You may make transfers by telephone or by fax.
o Policy loans reduce the amount of cash value available for transfers.
o Dollar cost averaging and asset rebalancing programs are available.
o We must receive your request to transfer from the fixed account
within 30 days after a Policy anniversary unless you select dollar
cost averaging from the fixed account. The amount of your transfer
cannot be more than:
-- > 25% of your value in the fixed account; or
-- > the amount you transferred from the fixed account in the prior
Policy year.
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CHARGES AND DEDUCTIONS
o Premium expense charge: We deduct 6.0% from each premium payment
during the first ten Policy years. After the tenth year we reduce the
charge to 2.5%.
o Premium collection charge: We deduct $3.00 from each premium payment
to compensate us for billing and collection costs.
o Monthly Policy charge: We deduct $5.00 from your cash value each
month.
o Cost of insurance charges: Deducted monthly from your cash value.
Your charges vary each month with the insured's age, the specified
amount, the death benefit option you choose, and the investment
experience of the portfolios in which you invest.
o Mortality and expense risk charge: Deducted daily from each
subaccount at an annual rate of 0.90% of the average daily net assets
of each subaccount.
o Surrender charge: Deducted when a full surrender occurs during the
first 15 Policy years. It is calculated by multiplying the specified
amount as of the Policy date by the surrender charge per thousand of
specified amount for the Policy year in which a surrender occurs. We
reduce total surrender charges at the rate of 10% per year, beginning
in Policy year 6, until they reach zero at the end of the 15th
Policy year. This charge may be significant. You may have no net
surrender value if you surrender your Policy in the first few Policy
years.
o Pro rata decrease charge: If you decrease the specified amount during
the first 15 Policy years, we will deduct a decrease charge equal to
a pro rata portion of the surrender charge.
o Transfer fee: We deduct a $25 transfer fee for each transfer in
excess of 12 per Policy year.
o Rider charges: We deduct charges each month for optional insurance
benefits (riders).
o Cash withdrawal fee: We deduct a processing fee for cash withdrawals
equal to the lesser of $25 or 2% of the withdrawal.
o Portfolio expenses: The portfolios deduct investment charges from the
amounts you have invested in the portfolios. These charges range from
0.40% to 1.50% annually, depending on the portfolios. See Portfolio
Annual Expense Table p. 12. See also the fund prospectus.
LOANS
o After the first Policy year (as long as your Policy is in force), you
may take a loan against the Policy up to 90% of the cash value, less
any surrender charges and any already outstanding loan amount.
o The minimum loan amount is generally $500.
o You may request a loan by calling us or by writing or faxing us
written instructions.
o We currently charge 5.66% interest annually. You will be charged the
interest in advance each year on any outstanding loan amount.
o To secure the loan, we transfer a portion of your cash value to a
loan reserve account. The amount we transfer is equal to the loan
plus interest in advance until the next Policy anniversary. The loan
reserve account is part of the fixed account. You will earn at least
4.0% interest on amounts in the loan reserve account.
o Federal income taxes and a penalty tax may apply to loans you take
against the Policy.
o There are risks involved in taking a Policy loan. See the Risk
Summary p. 8.
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DEATH BENEFIT
o You must choose one of three death benefit options. We offer the
following:
o Option A is the greater of:
-- > the current specified amount, or
-- > a specified percentage, multiplied by the Policy's cash
value on the date of the insured's death.
o Option B is the greater of:
-- > the current specified amount, plus the Policy's cash value
on the date of the insured's death, or
-- > a specified percentage, multiplied by the Policy's cash
value on the date of the insured's death.
o Option C is the greater of:
-- > the amount payable under Option A, or
-- > the current specified amount, multiplied by an age-based
"factor," plus the Policy's cash value on the date of the
insured's death.
o So long as the Policy does not lapse, the minimum death benefit we
pay under any option will be the current specified amount.
o The minimum specified amount for a Policy for issue ages 0-45 is
$50,000. It declines to $25,000 for issue ages 46-80. We will state
the minimum specified amount in your Policy. You cannot decrease the
specified amount below this minimum.
o We will reduce the death benefit proceeds by the amount of any
outstanding Policy loan, and any due and unpaid charges.
o We will increase the death benefit proceeds by any additional
insurance benefits you add by rider, and any interest you paid in
advance on any loan for the period between the date of death and the
next Policy anniversary.
o After the third Policy year, you may change the death benefit option
or decrease the specified amount (but not both) once each Policy
year.
o The death benefit should be income tax free to the beneficiary.
o The death benefit is available in a lump sum or a variety of payout
options.
CASH WITHDRAWALS AND SURRENDERS
o You can take one withdrawal of cash value every 12 months after the
first Policy year.
o The amount of the withdrawal must be:
o At least $500; and
o No more than 10% of the net surrender value.
o We will deduct a processing fee equal to $25 or 2% of the amount you
withdraw (whichever is less) from the withdrawal, and we will pay you
the balance.
o There is no surrender charge assessed when you take a cash
withdrawal.
o A cash withdrawal will reduce the death benefit by at least the
amount of the withdrawal.
o If you choose death benefit Option A, we will reduce the current
specified amount by the dollar amount of the withdrawal. We will not
impose a pro rata decrease charge when the specified amount is
decreased as a result of taking a cash withdrawal.
o Federal income taxes and a penalty tax may apply to cash withdrawals
and surrenders.
o You may fully surrender the Policy at any time before the insured's
death or the maturity date. You will receive the net surrender value.
The surrender charge will apply during the first 15 Policy years.
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RISK SUMMARY
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INVESTMENT If you direct us to invest your cash value in
RISK one or more subaccounts, you will be subject to the risk
that investment performance will be unfavorable and
that the cash value of your Policy will decrease. If
you select the fixed account, you are credited with a
declared rate of interest, but you assume a risk that
the rate may decrease, although it will never be lower
than a guaranteed minimum annual effective rate of 4.0%.
Because charges continue to be deducted from cash value,
if withdrawals, loans and monthly deduc- tions have
reduced your net surrender value to too low an amount,
and/or if investment experience of your selected
subaccounts is not sufficiently favorable, and/or
interest rates credited to the fixed account are too
low, and/or you stop making premium payments or you make
payments near or below the minimum requirements, the net
surrender value of your Policy may fall to zero. In that
case, if the no lapse period has expired or is no longer
in effect, the Policy will lapse without value and
insurance coverage will no longer be in effect after 61
days, unless you make an additional payment sufficient
to prevent a lapse. On the other hand, if investment
experience is sufficiently favorable and you have kept
the Policy in force for a substantial time, you may be
able to draw upon cash value, through withdrawals and
Policy loans.
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RISK OF LAPSE Certain circumstances will cause your Policy to enter a
60-day grace period, during which you must make a
sufficient payment to keep your Policy in force. If the
net surrender value of your Policy (that is, the cash
value, minus surrender charges and minus outstanding
loan amounts) is too low to pay the monthly deductions,
any loan charges and any rider fees when due, and if the
no lapse period has expired or is no longer in effect,
the Policy will be in default and a grace period will
begin. There is a risk that if withdrawals, loans and
monthly deductions reduce your net surrender value to
too low an amount and/or if the investment experience of
your selected subaccounts is not sufficiently favorable,
and/or if interest rates credited to the fixed account
are too low, and/or you stop making premium payments or
you make payments near or below the minimum
requirements, the net surrender value of your Policy may
fall to zero and the Policy could lapse. In that case,
you will have a 61-day grace period to make a sufficient
payment. If we do not receive a sufficient payment
before the grace period ends, your Policy will end
without value, insurance coverage will no longer be in
effect, and you will receive no benefits. Adverse tax
consequences may result.
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Your Policy contains a no lapse period. Your Policy will
not lapse before the no lapse date stated in your
Policy, as long as you pay enough premiums. If you do
not pay enough premiums, you will automatically lose the
no lapse guarantee and you will increase the risk that
your Policy will lapse. In addition, if you take a
withdrawal, or take a Policy loan, or if you decrease
your specified amount, you will increase the risk of
losing the no lapse guarantee. We deduct the total
amount of your withdrawals, any loans and any pro rata
decrease charge from your premiums paid when we
determine whether your premiums are high enough to keep
the no lapse period in effect.
You will lessen the risk of Policy lapse if you keep the
no lapse period in effect. Before you take a cash
withdrawal or loan or decrease the specified amount, you
should consider carefully the effect it will have on the
no lapse guarantee.
You may reinstate this Policy within five years after it
has lapsed if the insured meets the insurability
requirements and you pay the amount we require.
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TAX RISKS We expect that the Policy will be deemed a life
(INCOME TAX insurance contract under federal tax law, so that the
AND MEC) death benefit paid to the beneficiary will not be
subject to federal income tax. However, due
to lack of guidance, there is uncertainty in
this regard with respect to Policies issued on a
substandard basis. Depending on the total amount of
premiums you pay, the Policy may be treated as a
modified endowment contract ("MEC") under federal tax
laws. If a Policy is treated as a MEC, partial
withdrawals, surrenders and loans will be taxable as
ordinary income to the extent there are earnings in the
Policy. In addition, a 10% penalty tax may be imposed on
partial withdrawals, surrenders and loans taken before
you reach age 591/2. If a Policy is not treated as a
MEC, partial surrenders and withdrawals will not be
subject to tax to the extent of your investment in the
Policy, and amounts in excess of your investment in the
Policy, while subject to tax as ordinary income, will
not be subject to a 10% penalty tax. You should consult
a qualified tax advisor for assistance in all tax
matters involving your Policy.
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LIMITS ON CASH The Policy permits you to take only one partial
WITHDRAWALS withdrawal in any 12-month period, after the first
Policy year has been completed. The amount you may
withdraw is limited to 10% of the net
surrender value.
A cash withdrawal will reduce cash value, so it will
increase the risk that the Policy will lapse. A cash
withdrawal may also increase the risk that the no lapse
period will end.
</TABLE>
9
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<TABLE>
<S> <C>
A cash withdrawal will reduce the death benefit. If you
select death benefit Option A, a cash withdrawal will
permanently reduce the specified amount of the Policy. A
cash withdrawal also reduces the death benefit under
Options B and C because the cash value is reduced. In
some circumstances, a withdrawal may reduce the death
benefit by more than the dollar amount of the
withdrawal.
Federal income taxes and a penalty tax may apply to
partial withdrawals and surrenders.
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LOAN RISKS A Policy loan, whether or not repaid, will affect cash
value over time because we subtract the amount of the
loan from the subaccounts and the fixed account and
place that amount in the loan reserve as collateral. We
then credit a fixed interest rate of not less than 4.0%
to the loan collateral. We currently credit interest at
4.75% annually, but we are not obligated to do so in the
future. As a result, the loan collateral does not
participate in the investment results of the
subaccountsand may not continue to receive the current
interest rates credited. The longer the loan is
outstanding, the greater the effect is likely to be.
Depending on the investment results of the subaccounts
and the interest rates credited to the fixed account,
the effect could be favorable or unfavorable.
We also charge interest on Policy loans at a rate of
5.66% to be paid in advance. Interest is added to the
amount of the loan to be repaid.
A Policy loan affects the death benefit because a loan
reduces the death benefit proceeds and net surrender
value by the amount of the outstanding loan.
A Policy loan could make it more likely that a Policy
would lapse. A Policy loan will increase the risk that
the no lapse period will end. There is also a risk if
the loan reduces your net surrender value to too low
an amount and investment experience is unfavorable, and
the no lapse period is no longer in effect, and
insufficient premiums are paid, that the Policy will
lapse.
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EFFECTS OF THE The surrender charge under this Policy is significant,
SURRENDER especially in the early Policy years. It is likely that
CHARGE you will receive no net surrender value if you
surrender your Policy in the first few Policy years. You
should purchase this Policy only if you have the
financial ability to keep it in force at the initial
specified amount for a substantial period of time.
Even if you do not ask to surrender your Policy, the
surrender charge plays a role in determining whether
your Policy will lapse. Net surrender value (that is,
cash value minus the surrender charge and outstanding
loans) is the measure we use each month when the no
lapse period ends to determine whether your Policy will
remain in force or will lapse.
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</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
COMPARISON Like fixed benefit life insurance, the Policy
WITH OTHER offers a death benefit and provides a cash value, loan
INSURANCE privileges and a value on surrender. However, the
POLICIES Policy differs from a fixed benefit policy because it
allows you to place your premiums in investment
subaccounts. The amount and duration of life insurance
protection and of the Policy's cash value will vary with
the investment performance of the amounts you place in
the subaccounts. In addition, the cash value and net
surrender values will always vary with the investment
results of your selected subaccounts.
As you consider purchasing this Policy, keep in mind
that it may not be to your advantage to replace existing
insurance with the Policy.
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ILLUSTRATIONS The hypothetical illustrations in this prospectus or
used in connection with the purchase of a Policy are
based on hypothetical rates of return. These rates are
not guaranteed, and are provided only to illustrate how
the specified amount, Policy charges and hypothetical
rates of return affect death benefit levels, cash value
and net surrender value of the Policy. We may also
illustrate Policy values based on the adjusted
historical performance of the portfolios since the
portfolios' inception, reduced by Policy and subaccount
charges. The hypothetical and adjusted historic
portfolio rates illustrated should not be considered to
represent past or future performance. There is the risk
that actual rates of return may be higher or lower than
those illustrated, so that the values under your Policy
will be different from those in the illustrations.
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</TABLE>
11
<PAGE>
PORTFOLIO ANNUAL EXPENSE TABLE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This table shows the fees and expenses charged by each portfolio. More
detail concerning each portfolio's fees and expenses is contained in the fund
prospectus.
ANNUAL PORTFOLIO OPERATING EXPENSES(1)
(As a percentage of average portfolio assets after fee waivers and expense
reimbursements)
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER EXPENSES ANNUAL
PORTFOLIOS FEES (AFTER REIMBURSEMENT) EXPENSES
<S> <C> <C> <C>
WRL Alger Aggressive Growth 0.80% 0.11% 0.91%
WRL VKAM Emerging Growth 0.80% 0.09% 0.89%
WRL Janus Growth(2) 0.78% 0.05% 0.83%
WRL Janus Global(3) 0.80% 0.15% 0.95%
WRL AEGON Bond 0.45% 0.09% 0.54%
WRL LKCM Strategic Total Return 0.80% 0.06% 0.86%
WRL Federated Growth & Income 0.75% 0.15% 0.90%
WRL J.P. Morgan Money Market 0.40% 0.06% 0.46%
WRL Dean Asset Allocation 0.80% 0.06% 0.86%
WRL GE U.S. Equity 0.80% 0.25% 1.05%
WRL Third Avenue Value 0.80% 0.20% 1.00%
WRL J.P. Morgan Real Estate Securities(4) 0.80% 0.20% 1.00%
WRL AEGON Balanced 0.80% 0.11% 0.91%
WRL NWQ Value Equity 0.80% 0.09% 0.89%
WRL C.A.S.E. Growth 0.80% 0.20% 1.00%
WRL GE/Scottish Equitable International Equity 1.00% 0.50% 1.50%
WRL Goldman Sachs Growth(3)(5) 0.90% 0.10% 1.00%
WRL Goldman Sachs Small Cap(5) 0.90% 0.10% 1.00%
WRL T. Rowe Price Dividend Growth(3)(5) 0.90% 0.10% 1.00%
WRL T. Rowe Price Small Cap(5) 0.75% 0.25% 1.00%
WRL Salomon All Cap(3)(5) 0.90% 0.10% 1.00%
WRL Pilgrim Baxter Mid Cap Growth(3)(5) 0.90% 0.10% 1.00%
WRL Dreyfus Mid Cap(3)(5) 0.85% 0.15% 1.00%
</TABLE>
(1) Effective January 1, 1997, the fund's Board authorized the fund to charge
each portfolio of the fund an annual 12b-1 fee of up to 0.15% of each
portfolio's average daily net assets. However, the fund will not deduct
the fee from any portfolio before April 30, 2000. You will receive advance
written notice if a Rule 12b-1 fee is deducted. See the fund prospectus
for more detail.
(2) WRL Janus Growth's management fee was 0.80% of the average daily net assets
for the period prior to May 1, 1998, 0.775% of the first $3 billion of
average daily net assets and 0.75% of the average daily net assets in
excess of $3 billion for the period May 1, 1998 to December 31, 1998.
(3) As compensation for its services to the portfolios, the investment adviser
receives monthly compensation at an annual rate of a percentage of the
average daily net assets of each portfolio. The management fees for each
portfolio are: WRL Janus Global - 0.80% up to $2 billion and 0.775% over
$2 billion; WRL Goldman Sachs Growth - 0.90% up to $100 million and 0.80%
over $100 million; WRL T. Rowe Price Dividend Growth - 0.90% up to $100
million and 0.80% over $100 million; WRL Salomon All Cap - 0.90% up to
$100 million and 0.80% over $100 million; WRL Pilgrim Baxter Mid Cap
Growth - 0.90% up to $100 million and 0.80% over $100 million; and WRL
Dreyfus Mid Cap - 0.85% up to $100 million and 0.80% over $100 million.
(4) Because the WRL J.P. Morgan Real Estate Securities portfolio commenced
operations on May 1, 1998, the percentages set forth as "Other Expenses"
and "Total Annual Expenses" are annualized.
(5) Because these portfolios did not commence operations until May 1, 1999, the
percentages set forth as "Other Expenses" and "Total Annual Expenses"
reflect estimates of "Other Expenses" for the first year of operations.
THESE PORTFOLIOS WILL NOT BE AVAILABLE FOR ALLOCATIONS OF NET PREMIUMS AND
CASH VALUE UNTIL ON OR ABOUT JULY 1, 1999. PLEASE CONTACT YOUR AGENT FOR
INFORMATION REGARDING AVAILABILITY.
12
<PAGE>
The purpose of the preceding table is to help you understand the various
costs and expenses that you will bear directly and indirectly. The table
reflects charges and expenses of the portfolios of the fund for the fiscal year
ended December 31, 1998. Expenses of the fund may be higher or lower in the
future. For more information on the charges described in this table, see the
fund prospectus which accompanies this prospectus.
WRL Investment Management, Inc. ("WRL Management"), the investment adviser
of the fund, has undertaken, until at least April 30, 2000, to pay expenses on
behalf of the portfolios of the fund to the extent normal operating expenses of
a portfolio exceed a stated percentage of each portfolio's average daily net
assets. The expense limitation for WRL Alger Aggressive Growth, WRL VKAM
Emerging Growth, WRL Janus Growth, WRL Janus Global, WRL LKCM Strategic Total
Return, WRL Federated Growth & Income, WRL Dean Asset Allocation, WRL Third
Avenue Value, WRL J.P. Morgan Real Estate Securities, WRL AEGON Balanced, WRL
NWQ Value Equity, WRL C.A.S.E. Growth, WRL Goldman Sachs Growth, WRL Goldman
Sachs Small Cap, WRL T. Rowe Price Dividend Growth, WRL T. Rowe Price Small
Cap, WRL Salomon All Cap, WRL Pilgrim Baxter Mid Cap Growth and WRL Dreyfus Mid
Cap is 1.00% of the average daily net assets; 0.70% of the average daily net
assets for the WRL AEGON Bond and WRL J.P. Morgan Money Market; 1.50% of the
average daily net assets for WRL GE/Scottish Equitable International Equity;
and 1.30% of the average daily net assets of WRL GE U.S. Equity. In 1998, WRL
Management reimbursed WRL GE/Scottish Equitable International Equity in the
amount of $127,763, WRL Third Avenue Value in the amount of $14,229, and WRL
J.P. Morgan Real Estate Securities in the amount of $28,275. Without such
reimbursement, the total fund expenses during 1998 for WRL GE/Scottish
Equitable International Equity, WRL Third Avenue Value, and WRL J.P. Morgan
Real Estate Securities would have been 1.96%, 1.13%, and 3.34%, respectively.
See the fund prospectus for a description of the expense limitation applicable
to each portfolio.
AUSA LIFE AND THE FIXED ACCOUNT
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AUSA LIFE
AUSA Life Insurance Company, Inc. is the insurance company issuing the
Policy. AUSA Life was incorporated under the name Zurich Life Insurance Company
on October 3, 1947. The name was changed to Dreyfus Life Insurance Company and
then to AUSA Life Insurance Company, Inc. on September 24, 1993. AUSA Life
merged with International Life Investors Insurance Company on July 1, 1996,
with AUSA Life being the surviving entity. We have established the separate
account to support the investment options under this Policy and under other
variable life insurance policies we issue. Our general account supports the
fixed account under the Policy. AUSA Life intends to sell this Policy only in
the State of New York.
THE FIXED ACCOUNT
The fixed account is part of AUSA Life's general account. We use general
account assets to support our insurance and annuity obligations other than
those funded by separate accounts. Subject to applicable law, AUSA Life has
sole discretion over the investment of the fixed account's assets. AUSA Life
bears the full investment risk for all amounts contributed to the fixed
account. AUSA Life guarantees that the amounts allocated to the
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<PAGE>
fixed account will be credited interest daily at a net effective interest rate
of at least 4.0%. We will determine any interest rate credited in excess of the
guaranteed rate at our sole discretion. We have no specific formula for
determining interest rates.
Money you place in the fixed account will earn interest compounded daily
at a current interest rate in effect at the time of your allocation. We may
declare current interest rates from time to time. We may declare more than one
interest rate for different money based upon the date of allocation or transfer
to the standard fixed account. When we declare a higher current interest rate
on amounts allocated to the fixed account, we guarantee the higher rate on
those amounts for at least one year (the "guarantee period") unless those
amounts are transferred to the loan reserve. At the end of the guarantee period
we may declare a new current interest rate on those amounts and any accrued
interest thereon. We will guarantee this new current interest rate for another
guarantee period. We credit interest greater than 4.0% during any guarantee
period at our sole discretion. You bear the risk that interest we credit will
not exceed 4.0%.
We allocate amounts from the fixed account for cash withdrawals, transfers
to the subaccounts, or monthly deduction charges on a last in, first out basis
("LIFO") for the purpose of crediting interest.
THE FIXED ACCOUNT HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION AND THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE FIXED ACCOUNT.
THE SEPARATE ACCOUNT AND THE PORTFOLIOS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT
The separate account is divided into subaccounts, each of which invests in
shares of a specific portfolio of the fund. These subaccounts buy and sell
portfolio shares at net asset value without any sales charge. Any dividends and
distributions from a portfolio are reinvested at net asset value in shares of
that portfolio.
Income, gains, and losses credited to, or charged against, a subaccount of
the separate account reflect the subaccount's own investment experience and not
the investment experience of our other assets. The separate account's assets
may not be used to pay any of our liabilities other than those arising from the
Policies. If the separate account's assets exceed the required reserves and
other liabilities, we may transfer the excess to our general account.
The separate account may include other subaccounts that are not available
under the Policies and are not discussed in this prospectus. We may substitute
another subaccount, portfolio or insurance company separate account under the
Policies if, in our judgment, investment in a subaccount or portfolio would no
longer be possible or becomes inappropriate to the purposes of the Policies, or
if investment in another subaccount or insurance company separate account is in
the best interest of owners. No substitution shall
14
<PAGE>
take place without notice to owners and prior approval of the Securities and
Exchange Commission (SEC) and insurance company regulators, to the extent
required by the Investment Company Act of 1940, as amended (the "1940 Act") and
applicable law.
THE FUND
The separate account invests in shares of the fund, a series mutual fund
that is registered with the SEC as an open-ended management investment company.
Such registration does not involve supervision of the management or investment
practices or policies of the fund by the SEC.
Currently, the portfolios of the fund corresponding to the subaccounts of
the separate account are: WRL Alger Aggressive Growth, WRL VKAM Emerging Growth,
WRL Janus Growth, WRL Janus Global, WRL AEGON Bond, WRL LKCM Strategic Total
Return, WRL Federated Growth & Income, WRL J.P. Morgan Money Market, WRL Dean
Asset Allocation, WRL GE U.S. Equity, WRL Third Avenue Value, WRL J.P. Morgan
Real Estate Securities, WRL AEGON Balanced, WRL NWQ Value Equity, WRL C.A.S.E.
Growth, WRL GE/Scottish Equitable International Equity, WRL Goldman Sachs
Growth, WRL Goldman Sachs Small Cap, WRL T. Rowe Price Dividend Growth, WRL T.
Rowe Price Small Cap, WRL Salomon All Cap, WRL Pilgrim Baxter Mid Cap Growth and
WRL Dreyfus Mid Cap. Each portfolio's assets are held separate from the assets
of the other portfolios, and each portfolio has investment objectives and
policies that are different from those of the other portfolios. Thus, each
portfolio operates as a separate investment fund, and the income or losses of
one portfolio has no effect on the investment performance of any other
portfolio. Pending any prior approval by a state insurance regulatory authority,
certain subaccounts and corresponding portfolios may not be available to
residents of some states.
Each portfolio's investment objective(s) and policies are summarized
below. THERE IS NO ASSURANCE THAT ANY OF THE PORTFOLIOS WILL ACHIEVE ITS STATED
OBJECTIVE(S). Certain portfolios may have investment objectives and policies
similar to other portfolios that are managed by the same investment adviser or
manager. The investment results of the portfolios, however, may be higher or
lower than those of such other portfolios. We do not guarantee or make any
representation that the investment results of the portfolios will be comparable
to any other portfolio, even those with the same investment adviser or manager.
You can find more detailed information about the portfolios, including a
description of risks, in the fund prospectus. You should read the fund
prospectus carefully.
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISER INVESTMENT OBJECTIVE
- ------------ ------------------ ------------------------
<S> <C> <C> <C> <C>
WRL ALGER -- > Fred Alger -- > Seeks long-term capital
AGGRESSIVE Management, Inc. appreciation.
GROWTH
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISER INVESTMENT OBJECTIVE
- ----------------- ------------------------ -----------------------------------
<S> <C> <C> <C> <C>
WRL VKAM -- > Van Kampen -- > Seeks capital appreciation by
EMERGING Asset Management Inc. investing primarily in common
GROWTH stocks of small and medium sized
companies.
WRL JANUS -- > Janus Capital -- > Seeks growth of capital.
GROWTH Corporation
WRL JANUS -- > Janus Capital -- > Seeks long-term growth of capital
GLOBAL Corporation in a manner consistent with
preservation of capital.
WRL AEGON -- > AEGON USA -- > Seeks the highest possible current
BOND Investment income within the confines of the
Management, Inc. primary goal of insuring the
protection of capital.
WRL LKCM -- > Luther King Capital -- > Seeks to provide current income,
STRATEGIC Management long-term growth of income and
TOTAL RETURN Corporation capital appreciation.
WRL FEDERATED -- > Federated Investment -- > Seeks total return by investing in
GROWTH & INCOME Counseling securities that have defensive
characteristics.
WRL J.P. MORGAN -- > J.P. Morgan Investment -- > Seeks to obtain maximum current
MONEY MARKET Management Inc. income consistent with preserva-
tion of principal and maintenance
of liquidity.
WRL DEAN ASSET -- > Dean Investment -- > Seeks preservation of capital and
ALLOCATION Associates competitive investment returns.
WRL GE U.S. -- > GE Investment -- > Seeks long-term growth of capital.
EQUITY Management
Incorporated
WRL THIRD -- > EQSF Advisers, Inc. -- > Seeks long-term capital
AVENUE VALUE appreciation.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISER INVESTMENT OBJECTIVE
- ----------------- ------------------------ -------------------------------------
<S> <C> <C> <C> <C>
WRL J.P. MORGAN -- > J.P. Morgan Investment -- > Seeks long-term total return from
REAL ESTATE Management Inc. investments primarily in equity
SECURITIES securities of real estate companies.
Total return will consist of
realized and unrealized capital
gains and losses plus income.
WRL AEGON -- > AEGON USA -- > Seeks preservation of capital,
BALANCED Investment reduced volatility, and superior
Management, Inc. long-term risk adjusted returns.
WRL NWQ VALUE -- > NWQ Investment -- > Seeks to achieve maximum,
EQUITY Management consistent total return with
Company, Inc. minimum risk to principal.
WRL C.A.S.E. -- > C.A.S.E. -- > Seeks annual growth of capital
GROWTH Management, Inc. through investment companies
whose management, financial
resources and fundamentals appear
attractive on a scale measured
against each company's present
value.
WRL GE/SCOTTISH -- > Scottish Equitable -- > Seeks long-term growth of capital.
EQUITABLE Investment Management
INTERNATIONAL Limited and GE
EQUITY Investment Management
Incorporated
WRL GOLDMAN -- > Goldman Sachs Asset -- > Seeks long-term growth of capital.
SACHS GROWTH* Management, Inc.
WRL GOLDMAN -- > Goldman Sachs Asset -- > Seeks long-term growth of capital.
SACHS SMALL CAP* Management, Inc.
WRL T. ROWE -- > T. Rowe Price -- > Seeks to provide an increasing
PRICE DIVIDEND Associates, Inc. level of dividend income,
GROWTH* long-term capital appreciation and
reasonable current income through
investments primarily in dividend
paying stocks.
WRL T. ROWE -- > T. Rowe Price -- > Seeks long-term growth of capital
PRICE SMALL CAP* Associates, Inc. by investing primarily in common
stocks of small growth companies.
WRL SALOMON ALL -- > Salomon Brothers Asset -- > Seeks capital appreciation.
CAP* Management, Inc.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISER INVESTMENT OBJECTIVE
- ---------------- ------------------ -----------------------------------
<S> <C> <C> <C> <C>
WRL PILGRIM -- > Pilgrim Baxter & -- > Seeks capital appreciation.
BAXTER MID CAP Associates, Ltd.
GROWTH*
WRL DREYFUS -- > The Dreyfus -- > Seeks total investment returns,
MID CAP* Corporation including capital appreciation and
income, which consistently
outperform the S&P 400 Mid Cap
Index.
* THESE PORTFOLIOS WILL NOT BE AVAILABLE FOR ALLOCATIONS OF NET PREMIUMS AND
CASH VALUE UNTIL ON OR ABOUT JULY 1, 1999. PLEASE CONTACT YOUR AGENT FOR
INFORMATION REGARDING AVAILABILITY.
</TABLE>
WRL Management, located at 570 Carillon Parkway, St. Petersburg, Florida
33716, a wholly-owned subsidiary of Western Reserve Life Assurance Co. of Ohio
("Western Reserve"), serves as investment adviser to the fund and manages the
fund in accordance with policies and guidelines established by the fund's Board
of Directors. AUSA Life, WRL Management and Western Reserve are affiliates. For
certain portfolios, WRL Management has engaged investment sub-advisers to
provide portfolio management services. WRL Management and each investment
sub-adviser are registered investment advisers under the Investment Advisers
Act of 1940, as amended. See the fund prospectus for more information regarding
WRL Management and the investment sub-advisers.
In addition to the separate account, shares of the fund are also sold to
other separate accounts that we (or our affiliates) establish to support
variable annuity contracts and variable life insurance policies. It is possible
that, in the future, it may become disadvantageous for variable life insurance
separate accounts and variable annuity separate accounts to invest in the fund
simultaneously. Neither we nor the fund currently foresee any such
disadvantages, either to variable life insurance policyowners or to variable
annuity contract owners. However, the fund's Board of Directors will monitor
events in order to identify any material conflicts between the interests of
such variable life insurance policyowners and variable annuity contract owners,
and will determine what action, if any, it should take. Such action could
include the sale of the fund's shares by one or more of the separate accounts,
which could have adverse consequences. Material conflicts could result from,
for example, (1) changes in state insurance laws, (2) changes in federal income
tax laws, or (3) differences in voting instructions between those given by
variable life insurance policyowners and those given by variable annuity
contract owners.
If the fund's Board of Directors were to conclude that separate funds
should be established for variable life insurance and variable annuity separate
accounts, AUSA Life will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contract owners would no longer
have the economies of scale resulting from a larger combined fund.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
We reserve the right to transfer separate account assets to another
separate account that we determine to be associated with the class of contracts
to which the Policy belongs.
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<PAGE>
We also reserve the right, subject to compliance with applicable law, to add
to, delete from, or substitute the investments that are held by any subaccount,
or that any subaccount may purchase. We will only add, delete or substitute
shares of another portfolio of the fund (or of another open-end, registered
investment company) if the shares of a portfolio are no longer available for
investment, or if in our judgement further investment in any portfolio would
become inappropriate in view of the purposes of the separate account. We will
not add, delete or substitute any shares attributable to your interest in a
subaccount without notice to and prior approval of the SEC, to the extent
required by the 1940 Act or other applicable law. We may also decide to
purchase for the separate account securities from other portfolios.
We also reserve the right to establish additional subaccounts of the
separate account, each of which would invest in a new portfolio of the fund, or
in shares of another investment company, with a specified investment
objectives. We may establish new subaccounts when, in our sole discretion,
marketing, tax or investment conditions warrant. We will make any new
subaccounts available to existing owners on a basis we determine. We may also
eliminate one or more subaccounts for the same reasons as stated above.
In the event of any such substitution or change, we may make such changes
in this and other policies as may be necessary or appropriate to reflect such
substitution or change. If we deem it to be in the best interests of persons
having voting rights under the Policies, and when permitted by law, the
separate account may be (1) operated as a management company under the 1940
Act, (2) deregistered under the 1940 Act in the event such registration is no
longer required, (3) managed under the direction of a committee, or (4)
combined with one or more other separate accounts, or subaccounts.
PLEASE READ THE ATTACHED FUND PROSPECTUS TO OBTAIN MORE COMPLETE INFORMATION
REGARDING THE PORTFOLIOS.
YOUR RIGHT TO VOTE PORTFOLIO SHARES
Even though we are the legal owner of the portfolio shares held in the
subaccounts, and have the right to vote on all matters submitted to
shareholders of the portfolios, we will vote our shares only as policyowners
instruct, so long as such action is required by law.
Before a vote of a portfolio's shareholders occurs, you will receive
voting materials from us. We will ask you to instruct us on how to vote and to
return your proxy to us in a timely manner. You will have the right to instruct
us on the number of portfolio shares that corresponds to the amount of cash
value you have in that portfolio (as of a date set by the portfolio).
If we do not receive voting instructions on time from some policyowners,
we will vote those shares in the same proportion as the timely voting
instructions we receive. Should federal securities laws, regulations and
interpretations change, we may elect to vote portfolio shares in our own right.
If required by state insurance officials, or if permitted under federal
regulation, we may disregard certain owner voting instructions. If we ever
disregard voting
19
<PAGE>
instructions, we will send you a summary in the next annual report to
policyowners advising you of the action and the reasons we took such action.
THE POLICY
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PURCHASING A POLICY
To purchase a Policy, you must submit a completed application and an
initial premium to us. You may also send the application and initial premium to
us through any licensed life insurance agent who is also a registered
representative of a broker-dealer having a selling agreement with AFSG
Securities Corporation, the principal underwriter for the Policy.
Please submit your applications to:
AUSA Life
P.O. Box 9054
Clearwater, Florida 33758-9054
You determine the specified amount for a Policy based on your initial
premium paid and other characteristics of the proposed insured(s), such as age,
gender and rate class. Our current minimum specified amount for a Policy for
issue ages 0-45 is generally $50,000. It declines to $25,000 for issue ages
46-80. We will generally only issue a Policy to you if you provide sufficient
evidence that the insured meets our insurability standards. Your application is
subject to our underwriting rules, and we may reject any application for any
reason permitted by law. We will not issue a Policy to you if the insured is
over age 80. The insured must be insurable and acceptable to us under our
underwriting rules on the
later of:
o the date of your application; or
o the date the insured completes all of the medical tests and
examinations that we require.
UNDERWRITING STANDARDS
This Policy uses mortality tables that distinguish between men and women.
As a result, the Policy pays different benefits to men and women of the same
age.
Your cost of insurance charge will also depend on the insured's rate
class. We currently place insureds into the following standard rate classes:
o ultimate select, non-tobacco use;
o select, non-tobacco use;
o ultimate standard, tobacco use; and
o standard, tobacco use.
We also place insureds in various sub-standard rate classes, which involve
a higher mortality risk and higher charges. We generally charge higher rates
for insureds who use
20
<PAGE>
tobacco. We charge lower cost of insurance rates for insureds who are in an
"ultimate class." An ultimate class is only available if our underwriting
guidelines require you to take a blood test at your proposed age.
WHEN INSURANCE COVERAGE TAKES EFFECT
Full insurance coverage under the Policy will take effect only if the
insured(s) is alive and in the same condition of health as described in the
application when the Policy is delivered to the owner, and if the initial
premium is paid.
CONDITIONAL INSURANCE COVERAGE. If you pay the full initial premium listed
in the conditional receipt attached to the application, and we deliver the
conditional receipt to you, you will have conditional insurance coverage under
the terms of the conditional receipt. Conditional insurance coverage is void if
the check or draft you gave us to pay the initial premium is not honored when
we first present it for payment.
<TABLE>
<S> <C>
THE AMOUNT OF o the specified amount applied for; or
CONDITIONAL INSURANCE o $300,000
reduced by all amounts payable under all other
life insurance or accidental death benefits that
the insured has in force or pending with us.
</TABLE>
<TABLE>
<S> <C>
CONDITIONAL LIFE INSURANCE o the date of your application; or
COVERAGE BEGINS ON THE o the date the insured completes all of the medical tests and
LATER OF: examinations that we initially require.
</TABLE>
<TABLE>
<S> <C>
CONDITIONAL LIFE INSURANCE o the date we determine the insured has satisfied our
COVERAGE TERMINATES underwriting requirements (the Policy date); or
AUTOMATICALLY, AND o 10 days following our offer of insurance, on any person
WITHOUT NOTICE, ON THE proposed, under a different plan or at an increased
EARLIEST OF: premium or different rate class; or
o at the end of the fraction of a year which the payment
bears to the premium required to provide one month of
insurance in the amount as described above; or
o 60 days from the beginning of conditional insurance
coverage.
</TABLE>
Conditional life insurance coverage is void if the application contains any
material misrepresentation. Benefits will also be denied if any proposed
insured commits suicide.
FULL INSURANCE COVERAGE AND ALLOCATION OF NET PREMIUMS. Once we determine
that the insured meets our underwriting requirements, full insurance coverage
will begin and we will begin to make the monthly deductions from your net
premium. This date is the Policy date. On the Policy date, we will allocate
your initial net premium, less the monthly deductions, to the WRL J.P. Morgan
Money Market subaccount. On the record date, which is the date
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we record your Policy on our books as an in force Policy, we will allocate your
cash value from the WRL J.P. Morgan Money Market subaccount to the accounts you
elect on your application.
On any day we credit net premiums or transfer cash value to a subaccount,
we will convert the dollar amount of the net premium (or transfer) into
subaccount units at the unit value for that subaccount, determined at the end
of the day. We will credit amounts to the subaccounts only on a valuation date,
that is, on a date the New York Stock Exchange ("NYSE") is open for trading.
See Policy Values p. 26.
OWNERSHIP RIGHTS
The Policy belongs to the owner named in the application. The owner may
exercise all of the rights and options described in the Policy. The owner is
the insured unless the application specifies a different person as the insured.
If the owner dies before the insured and no contingent owner is named, then
ownership of the Policy will pass to the owner's estate. The owner may exercise
certain rights described below.
<TABLE>
<S> <C>
CHANGING THE o Change the owner by providing written notice to us at any
OWNER time while the insured is alive and the Policy is in force.
o Change is effective as of the date that the written notice is
signed.
o Changing the owner does not automatically change the
beneficiary.
o Changing the owner may have tax consequences. You
should consult a tax advisor before changing the owner.
o We are not liable for payments we made before we
received the written notice.
</TABLE>
<TABLE>
<S> <C>
CHOOSING THE o The owner designates the beneficiary (the person to
BENEFICIARY receive the death benefit when the insured dies) in the
application.
o If the owner designates more than one beneficiary, then
each beneficiary shares equally in any death benefit
proceeds unless the beneficiary designation states
otherwise.
o If the beneficiary dies before the insured, then any
contingent beneficiary becomes the beneficiary.
o If both the beneficiary and contingent beneficiary die
before the insured, then the death benefit will be paid to
the owner or the owner's estate upon the insured's death.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
CHANGING THE o The owner changes the beneficiary by providing us with a
BENEFICIARY written notice.
o Change is effective as of the date the owner signs the
written notice.
o We are not liable for any payments we made before we
received the written notice.
</TABLE>
<TABLE>
<S> <C>
ASSIGNING THE o The owner may assign Policy rights while the insured is
POLICY alive.
o The owner retains any ownership rights that are not
assigned.
o Assignee may not change the owner or the beneficiary, and
may not elect or change an optional method of payment.
Any amount payable to the assignee will be paid in a
lump sum.
o Claims under any assignment are subject to proof of
interest and the extent of the assignment.
o We are not:
-- > bound by any assignment unless we receive a
written notice of the assignment
-- > responsible for the validity of any assignment
-- > liable for any payment we made before we
received written notice of the assignment
-- > bound by any assignment which results in adverse
tax consequences to the owner, insured(s) or
beneficiary(ies).
o Assigning the Policy may have tax consequences. You
should consult a tax advisor before assigning the Policy.
</TABLE>
CANCELING A POLICY
You may cancel a Policy for a refund during the "free-look period" by
returning it to our office, to one of our branch offices or to the agent who
sold you the Policy. The free-look period expires 10 days after you receive the
Policy. If you decide to cancel the Policy during the free-look period, we will
treat the Policy as if it had never been issued. We will pay the refund within
seven days after we receive the returned Policy. The amount of the refund will
be the total of all premiums you paid under the Policy.
PREMIUMS
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PREMIUM FLEXIBILITY
You generally have flexibility to determine the frequency and the amount
of the premiums you pay. Unlike conventional insurance policies, you do not
have to pay your premiums according to a rigid and inflexible premium schedule.
Before we issue the Policy
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to you, we may require you to pay a premium at least equal to a minimum monthly
guarantee premium set forth in your Policy. Thereafter (subject to the
limitations described below), you may make unscheduled premium payments at any
time and in any amount. Under some circumstances, you may be required to pay
extra premiums to prevent a lapse. Your minimum monthly guarantee premium may
change if you request a change in your Policy. If this happens, we will notify
you of the new minimum monthly guarantee premium.
PLANNED PERIODIC PAYMENTS
You will determine a planned periodic payment schedule which allows you to
pay level premiums at fixed intervals over a specified period of time. You are
not required to pay premiums according to this schedule. You may change the
amount, frequency, and the time period over which you make your planned
periodic payments.
Even if you make your planned periodic payments on schedule, your Policy
may still lapse. The duration of your Policy depends on the Policy's net
surrender value. If the net surrender value is not high enough to pay the
monthly deduction (and your no lapse period expired) then your Policy will
lapse (unless you make the payment we specify during the 61-day grace period).
See Policy Lapse and Reinstatement p. 44.
NO LAPSE PERIOD
During the first five Policy years, your Policy will remain in force and
no grace period will begin, even if your net surrender value is too low to pay
the monthly deduction, so long as:
o the total amount of the premiums you paid (minus any withdrawals,
outstanding loans, and any pro rata decrease charge) is equal to
or exceeds:
-- > the minimum monthly guarantee premium stated in your Policy,
MULTIPLIED BY
-- > the number of months since the Policy date, including the
current month.
PREMIUM LIMITATIONS
Premium payments must be at least $50 ($1,000 if by wire). We may return
premiums less than $50. We will not allow you to make any premium payments that
would cause the total amount of the premiums you pay to exceed the current
maximum premium limitations which qualify the Policy as life insurance
according to federal tax laws. This maximum is set forth in your Policy. If you
make a payment that would cause your total premiums to be greater than the
maximum premium limitations, we will return the excess portion of the premium
payment. We will not allow you to make additional premium payments until they
are allowed by the maximum premium limitations.
MAKING PREMIUM PAYMENTS
We will deduct certain charges from your premium payments (see Premium
Charges p. 32). We will accept premium payments by wire transfer. If you wish
to make payments
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by wire transfer, you should instruct your bank to wire federal funds to us.
Please contact us at 1-800-322-7353 for complete wire instructions.
TAX-FREE EXCHANGES ("1035 Exchanges"). We will accept as part of your
initial premium money from one contract that qualifies for a tax-free exchange
under Section 1035 of the Internal Revenue Code. If you contemplate such an
exchange, you should consult a competent tax advisor to learn the potential tax
effects of such a transaction.
Subject to our underwriting requirements, we will permit you to make one
additional cash payment within three business days of our receipt of the
proceeds from the 1035 Exchange before we determine your Policy's specified
amount.
ALLOCATING PREMIUMS
You must instruct us on how to allocate your net premium among the
subaccounts and the fixed account. You must follow these guidelines:
o Allocation percentages must be in whole numbers;
o If you select dollar cost averaging, you must have at least
$5,000 in each subaccount from which we will make transfers and
you must transfer at least a total of $1,000 monthly; and
o If you select asset rebalancing, the cash value of your Policy,
if an existing Policy, or your minimum initial premium, if a new
Policy, must be at least $5,000.
You may change the allocation instructions for additional premium payments
without charge at any time by writing us or calling us at 1-800-322-7353. Upon
instructions from you, the registered representative/agent of record for your
Policy may also change your allocation instructions for you. In the future, we
may decide that the minimum amount you can allocate to a particular subaccount
is 10% of a net premium payment (currently not required). We reserve the right
to limit the number of premium allocation changes you make to one per calendar
quarter.
Whenever you direct money into a subaccount, we will credit your Policy
with the number of units for that subaccount that can be bought for the dollar
payment. We price each subaccount unit using the unit value determined at the
end of the day after the closing of the NYSE (usually at 4:00 p.m. Eastern
time). We will credit amounts to the subaccounts only on a valuation date, that
is, on a date the NYSE is open for trading. See Policy Values below. Your cash
value will vary with the investment experience of the subaccounts in which you
invest. YOU BEAR THE INVESTMENT RISK FOR AMOUNTS YOU ALLOCATE TO THE
SUBACCOUNTS.
You should review periodically how your cash value is allocated among the
subaccounts and the fixed account because market conditions and your overall
financial objectives may change.
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POLICY VALUES
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<TABLE>
<S> <C>
CASH VALUE o serves as the starting point for calculating values under a
Policy.
o equals the sum of all values in each subaccount and the
fixed account.
o is determined on the Policy date and on each valuation
date.
o has no guaranteed minimum amount and may be more or
less than premiums paid.
</TABLE>
NET SURRENDER VALUE
The net surrender value is the amount we pay when you surrender your
Policy. We determine the net surrender value at the end of the valuation period
when we receive your written surrender request.
<TABLE>
<S> <C>
NET SURRENDER o the cash value as of such date; MINUS
VALUE ON ANY o any surrender charges as of such date; MINUS
VALUATION DATE o any outstanding Policy loan(s); PLUS
EQUALS: o any interest you paid in advance on the loan(s) for the
period between the date of the surrender and the next
Policy anniversary.
</TABLE>
SUBACCOUNT VALUE
Each subaccount's value is the cash value in that subaccount. At the end
of any valuation period, the subaccount's value is equal to the number of units
that the Policy has in the subaccount, multiplied by the unit value of that
subaccount.
<TABLE>
<S> <C>
THE NUMBER OF o the initial units purchased at unit value on the Policy date;
UNITS IN ANY PLUS
SUBACCOUNT ON o units purchased with additional net premium(s); PLUS
ANY VALUATION o units purchased via transfers from another subaccount or
DATE EQUALS: the fixed account; MINUS
o units redeemed to pay for monthly deductions; MINUS
o units redeemed to pay for partial withdrawals; MINUS
o units redeemed as part of a transfer to another subaccount
or the fixed account; MINUS
o units redeemed to pay any pro rata decrease charge.
</TABLE>
Every time you allocate, transfer or withdraw money to or from a
subaccount, we convert that dollar amount into units. We determine the number
of units we credit to, or subtract from, your Policy by dividing the dollar
amount of the allocation, transfer or cash withdrawal by the unit value for
that subaccount at the end of the valuation period.
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<PAGE>
SUBACCOUNT UNIT VALUE
The value (or price) of each subaccount unit will reflect the investment
performance of the portfolio in which the subaccount invests. Unit values will
vary among subaccounts. The unit value of each subaccount was originally
established at $10 per unit. The unit value will increase or decrease from one
valuation period to the next.
<TABLE>
<S> <C>
THE UNIT VALUE o the total value of the portfolio shares held in the
OF ANY subaccount, determined by multiplying the number of
SUBACCOUNT AT portfolio shares owned by the subaccount times the
THE END OF A portfolio's net asset value per share determined at the end
VALUATION of the valuation period; MINUS
PERIOD o a deduction for the mortality and expense risk charge;
IS CALCULATED AS: MINUS
o the accrued amount of reserve for any taxes or other
economic burden resulting from applying tax laws that we
determine to be properly attributable to the subaccount;
AND THE RESULT DIVIDED BY
o the number of outstanding units in the subaccount.
</TABLE>
The portfolio in which any subaccount invests will determine its net asset
value per share once daily, as of the close of the regular business session of
the NYSE (usually 4:00 p.m. Eastern time), which coincides with the end of each
valuation period.
FIXED ACCOUNT VALUE
On the record date, the fixed account value is equal to the cash value
allocated to the fixed account from the WRL J.P. Morgan Money Market
subaccount.
<TABLE>
<S> <C>
THE FIXED ACCOUNT o the sum of net premium(s) allocated to the fixed account;
VALUE AT THE END OF PLUS
ANY VALUATION o any amounts transferred to the fixed account; PLUS
PERIOD IS EQUAL TO: o total interest credited to the fixed account; MINUS
o amounts charged to pay for monthly deductions; MINUS
o amounts withdrawn or surrendered from the fixed account;
MINUS
o amounts transferred from the fixed account to a
subaccount; MINUS
o amounts withdrawn from the fixed account to pay any pro
rata decrease charge incurred due to a decrease in specified
amount.
</TABLE>
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TRANSFERS
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GENERAL
You or your agent/registered representative of record may make transfers
among the subaccounts or from the subaccounts to the fixed account. We
determine the amount you have available for transfers at the end of the
valuation period when we receive your transfer request. WE MAY MODIFY OR REVOKE
THE TRANSFER PRIVILEGE AT ANY TIME. The following features apply to transfers
under the Policy:
/checkmark/ You may make an unlimited number of transfers in a Policy year
among the subaccounts.
/checkmark/ You may make one transfer from the fixed account in a Policy
year.
/checkmark/ You may request transfers in writing (in a form we accept), by
fax or by telephone.
/checkmark/ There is no minimum amount that must be transferred.
/checkmark/ There is no minimum amount that must remain in a subaccount
after a transfer.
/checkmark/ We deduct a $25 charge from the amount transferred for each
transfer in excess of 12 transfers in a Policy year.
/checkmark/ We consider all transfers made in any one day to be a single
transfer.
/checkmark/ Transfers resulting from loans, conversion rights,
reallocation of cash value immediately after the record date,
and transfers from the fixed account are NOT treated as
transfers for the purpose of the transfer charge.
/checkmark/ Transfers under dollar cost averaging and asset rebalancing
are treated as transfers for purposes of the transfer charge.
The Policy's transfer privilege is not intended to afford policyowners a
way to speculate on short-term movements in the market. Excessive use of the
transfer privilege can disrupt the management of the portfolios and increase
transaction costs. Accordingly, we have established a policy of limiting
excessive transfer activity. We will limit transfer activity to two substantive
transfers (at least 30 days apart) from each portfolio, except from WRL J.P.
Morgan Money Market. We interpret "substantive" to mean either a dollar amount
large enough to have a negative impact on a portfolio's operations or a series
of movements between portfolios. We will not limit non-substantive transfers.
Your Policy, as applied for and issued, will automatically receive
telephone transfer privileges unless you provide other instructions. The
telephone transfer privileges allow you to give authority to the registered
representative or agent of record for your Policy to make telephone transfers
and to change the allocation of future payments among the subaccounts and the
fixed account on your behalf according to your instructions. To make a
telephone transfer, you may call 1-800-322-7353 or fax your instructions to
800-322-7361.
Please note the following regarding telephone or fax transfers:
-- > We are not liable for any loss, damage, cost or expense from
complying with telephone instructions we reasonably believe to be
authentic. You bear the risk of any such loss.
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-- > We will employ reasonable procedures to confirm that telephone
instructions are genuine.
-- > Such procedures may include requiring forms of personal
identification prior to acting upon telephone instructions,
providing written confirmation of transactions to owners, and/or
tape recording telephone instructions received from owners.
-- > We may also require written confirmation of your request.
-- > If we do not employ reasonable confirmation procedures, we may be
liable for losses due to unauthorized or fraudulent instructions.
-- > If you do not want the ability to make telephone transfers, you
should notify us in writing.
-- > Telephone or fax requests must be received before 4:00 p.m. Eastern
time to assure same-day pricing of the transaction.
-- > We will not be responsible for any transmittal problems when you fax
us your request unless you report it to us within five business days
and send us proof of your fax transmittal.
-- > We may discontinue this option at any time.
We will process any transfer request we receive before the NYSE closes
(usually 4:00 p.m Eastern time) using the subaccount unit value determined at
the end of that session of the NYSE. If we receive the transfer request after
the NYSE closes, we will process the request using the subaccount unit value
determined at the close of the next regular business session of the NYSE.
FIXED ACCOUNT TRANSFERS
You may make one transfer per Policy year from the fixed account unless
you select dollar cost averaging from the fixed account. We reserve the right
to require that you make the transfer request in writing. We must receive the
transfer request no later than 30 days after a Policy anniversary. We will make
the transfer on the date we receive the written request. The maximum amount you
may transfer is the greater of:
-- > 25% of the amount in the fixed account, or
-- > the amount you transferred from the fixed account in the immediately
prior Policy year.
CONVERSION RIGHTS
If within 24 months of your Policy date, you transfer all of your
subaccount values to the fixed account, then we will not charge you a transfer
fee, even if applicable. You must make your request in writing.
DOLLAR COST AVERAGING
Dollar cost averaging is an investment strategy designed to reduce the
investment risks associated with market fluctuations. The strategy spreads the
allocation of your premium into the subaccounts over a period of time. This
potentially allows you to reduce the risk of investing most of your premium
into the subaccounts at a time when prices are high. The
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success of this strategy is not assured and depends on market trends. You
should carefully consider your financial ability to continue the program over a
long enough period of time to purchase units when their value is low as well as
when it is high. We make no guarantee that dollar cost averaging will result in
a profit or protect you against loss.
Under dollar cost averaging, we automatically transfer a set dollar amount
from the WRL J.P. Morgan Money Market subaccount, the WRL AEGON Bond
subaccount, the fixed account, or any combination of these to a subaccount that
you choose. We will make the transfers monthly as of the end of the valuation
date. We will make the first transfer in the month after we receive your
request, provided that we receive the form by the 25th day of the month.
TO START DOLLAR COST -- > you must submit a completed form to us
AVERAGING: requesting dollar cost averaging;
-- > you must have at least $5,000 in each account
from which we will make transfers;
-- > your total transfers each month under dollar
cost averaging must be at least $1,000; and
-- > each month, you may not transfer more than
one-tenth of the amount that was in your fixed
account at the beginning of dollar cost
averaging.
There is no charge for dollar cost averaging. However, each transfer under
dollar cost averaging counts towards your 12 free transfers each year.
DOLLAR -- > we receive your request to cancel your
COST AVERAGING participation;
WILL TERMINATE IF: -- > the value in the accounts from which we make the
transfers is depleted;
-- > you elect to participate in the asset rebalancing
program; OR
-- > you elect to participate in any asset allocation
services provided by a third party.
We may modify, suspend, or discontinue dollar cost averaging at any time.
ASSET REBALANCING PROGRAM
We also offer an asset rebalancing program under which you may transfer
amounts periodically to maintain a particular percentage allocation among the
subaccounts. Cash value allocated to each subaccount will grow or decline in
value at different rates. The asset rebalancing program automatically
reallocates the cash value in the subaccounts at the end of each period to
match your Policy's currently effective premium allocation schedule. Cash value
in the fixed account and the dollar cost averaging program is not available for
this program. This program does not guarantee gains. A subaccount may still
have losses.
You may elect asset rebalancing to occur on each quarterly, semi-annual or
annual anniversary of the Policy date. Once we receive the asset rebalancing
request form, we will
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effect the initial rebalancing of cash value on the next such anniversary, in
accordance with the Policy's current premium allocation schedule. We will
credit the amounts transferred at the unit value next determined on the dates
the transfers are made. If a day on which rebalancing would ordinarily occur
falls on a day on which the NYSE is closed, rebalancing will occur on the next
day the NYSE is open.
TO START -- > you must submit a completed asset rebalancing
ASSET REBALANCING: request form to us before the maturity date; and
-- > you must have a minimum cash value of $5,000 or
make a $5,000 initial premium payment.
There is no charge for the asset rebalancing program. However, each
reallocation we make under the program counts towards your 12 free transfers
each year.
ASSET REBALANCING -- > you elect to participate in the dollar cost
WILL CEASE IF: averaging program;
-- > we receive your request to discontinue
participation;
-- > you make ANY transfer to or from any subaccount
other than under a scheduled rebalancing; OR
-- > you elect to participate in any asset allocation
services provided by a third party.
You may start and stop participating in the asset rebalancing program at
any time; but we may restrict your right to re-enter the program to once each
Policy year. If you wish to resume the asset rebalancing program, you must
complete a new request form. We may modify, suspend, or discontinue the asset
rebalancing program at any time.
THIRD PARTY ASSET ALLOCATION SERVICES
We may provide administrative or other support services to independent
third parties you authorize to conduct transfers on your behalf, or who provide
recommendations as to how your subaccount values should be allocated. This
includes, but is not limited to, transferring subaccount values among
subaccounts in accordance with various investment allocation strategies that
these third parties employ. These independent third parties may or may not be
appointed AUSA Life agents for the sale of Policies. AUSA LIFE DOES NOT ENGAGE
ANY THIRD PARTIES TO OFFER INVESTMENT ALLOCATION SERVICES OF ANY TYPE, SO THAT
PERSONS OR FIRMS OFFERING SUCH SERVICES DO SO INDEPENDENT FROM ANY AGENCY
RELATIONSHIP THEY MAY HAVE WITH AUSA LIFE FOR THE SALE OF POLICIES. AUSA LIFE
THEREFORE TAKES NO RESPONSIBILITY FOR THE INVESTMENT ALLOCATIONS AND TRANSFERS
TRANSACTED ON YOUR BEHALF BY SUCH THIRD PARTIES OR ANY INVESTMENT ALLOCATION
RECOMMENDATIONS MADE BY SUCH PARTIES. AUSA Life does not currently charge you
any additional fees for providing these support services. AUSA Life reserves
the right to discontinue providing administrative and support services to
owners utilizing independent third parties who provide investment allocation
and transfer recommendations.
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CHARGES AND DEDUCTIONS
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This section describes the charges and deductions that we make under the
Policy to compensate for: (1) the services and benefits we provide; (2) the
costs and expenses we incur; and (3) the risks we assume.
SERVICES AND BENEFITS WE o the death benefit, cash and loan benefits;
PROVIDE UNDER THE POLICY: o investment options, including premium
allocations;
o administration of elective options; and
o the distribution of reports to owners.
COSTS AND EXPENSES o costs associated with processing and
WE INCUR: underwriting applications;
o expenses of issuing and administering the
Policy (including any Policy riders);
o overhead and other expenses for providing
services and benefits, sales commissions and
marketing expenses; and
o other costs of doing business, such as
collecting premiums, maintaining records,
processing claims, effecting transactions, and
paying federal, state and local premium and
other taxes and fees.
RISKS WE ASSUME: o that the charges we may deduct may be
insufficient to meet our actual claims because
insureds die sooner than we estimate; and
o that the costs of providing the services and
benefits under the Policies may exceed the
charges we are allowed to deduct.
PREMIUM CHARGES
Before we allocate the net premiums you make, we will deduct the following
charges.
PREMIUM EXPENSE CHARGE o This charge equals:
-- > 6.0% of premiums during the first ten
Policy years; and
-- > 2.5% of premiums thereafter.
o This charge compensates us for distribution
expenses and state premium taxes.
PREMIUM COLLECTION o This charge equals $3.00 per premium payment.
CHARGE o This charge compensates us for premium billing
and collection costs.
o We will not increase this charge.
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MONTHLY DEDUCTION
We take a monthly deduction from the cash value on the Policy date and on
each monthly anniversary. We deduct this charge from each subaccount and the
fixed account in accordance with the current premium allocation instructions.
If the value of any account is insufficient to pay that account's portion of
the monthly deduction, we will take the monthly deduction on a pro rata basis
from all accounts (i.e., in the same proportion that the value in each
subaccount and the fixed account bears to the total cash value on the
Monthiversary). Because portions of the monthly deduction (such as cost of
insurance) can vary monthly, the monthly deduction will also vary.
MONTHLY DEDUCTION The total we deduct each month is equal to:
o the monthly policy charge; PLUS
o the monthly cost of insurance charge; PLUS
o the monthly charge for any riders attached to
the Policy.
MONTHLY POLICY CHARGE o This charge equals $5.00 each Policy month.
o We guarantee this charge will never be more than
$7.50 per month.
o We may waive this charge if you purchase
additional policies.
o This charge compensates us for administrative
expenses such as recordkeeping, processing death
benefit claims and Policy changes, and overhead
costs.
COST OF INSURANCE CHARGE We deduct this charge each month. It varies each
month and is equal to:
o the cost of insurance rates; MULTIPLIED BY
o the net amount at risk for your Policy on the
Monthiversary.
The net amount at risk is equal to:
o the death benefit at the beginning of the
month; DIVIDED BY
o 1.0032737 (this factor reduces the net amount
at risk, for purposes of computing the cost of
insurance, by taking into account assumed
monthly earnings at an annual rate of 4%);
MINUS
o the cash value at the beginning of the month.
We base the cost of insurance rates on the insured's attained age, gender,
and rate class, and the length of time that the Policy has been in force. The
actual monthly cost of insurance rates are based on our expectations as to
future mortality experience. The rates will never be greater than the
guaranteed amount stated in your Policy. These guaranteed
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rates are based on the 1980 Commissioners Standard Ordinary (C.S.O.) Mortality
Tables and the insured's attained age and rate class. For standard rate
classes, these guaranteed rates will never be greater than the rates in the
C.S.O. tables. We may also guarantee a rate for a specific period of time (E.G.
one year). For a listing of rate classes, see Underwriting Standards p. 20.
OPTIONAL INSURANCE RIDERS The monthly deduction will include charges for
any optional insurance benefits you add to your
Policy by rider (see Supplemental Benefits, p. 52).
MORTALITY AND EXPENSE We deduct a daily charge from your cash value in
RISK CHARGE each subaccount to compensate us for certain
mortality and expense risks we assume. This charge
is equal to:
o your Policy's cash value in each subaccount
MULTIPLIED BY
o the daily pro rata portion of the annual
mortality and expense risk charge rate of 0.90%
(this annual rate is equal to 0.90% of the
average daily net assets of each subaccount).
o We will not increase this charge.
The mortality risk is that an insured will live for a shorter time than we
project. The expense risk is that the expenses that we incur will exceed the
administrative charge limits we set in the Policy.
If this charge does not cover our actual costs, we absorb the loss.
Conversely, if the charge more than covers actual costs, the excess is added to
our surplus. We expect to profit from this charge. We may use any profits to
cover distribution costs.
SURRENDER CHARGE
If you totally surrender your Policy during the first 15 years, we deduct
a surrender charge from your cash value and pay the remaining cash value (less
any outstanding loan amounts) to you. The payment you receive is called the net
surrender value. We reduce the surrender charge at older ages in compliance
with state laws.
THE SURRENDER CHARGE MAY BE SIGNIFICANT. YOU SHOULD CALCULATE THIS CHARGE
CAREFULLY BEFORE YOU CONSIDER A SURRENDER. Under some circumstances the level
of surrender charges might result in no net surrender value available if you
surrender your Policy in the first few Policy years. This will depend on a
number of factors, but is more likely if:
o you pay premiums equal to or not much higher than the minimum
monthly guarantee premium shown in your Policy, and/or
o investment performance is too low.
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<TABLE>
<S> <C>
SURRENDER CHARGE The surrender charge is equal to:
o the SURRENDER CHARGE PER THOUSAND; multipled by
o the number of thousands in the Policy's specified
amount as it is stated in the Policy; multiplied by
o the SURRENDER CHARGE FACTOR.
</TABLE>
The SURRENDER CHARGE PER THOUSAND is calculated for each $1,000 of
specified amount stated in your Policy. It varies with the insured's issue age,
gender and rate classifications. See the surrender charge table, found at
Appendix C.
The SURRENDER CHARGE FACTOR varies with the insured's age and the number of
years the Policy has been in force. For insureds ages 0-39, the surrender charge
factor is equal to 1.00 during Policy years 1-5. It decreases by 0.10 each year
until the fifteenth Policy year when it is zero. If you are older than 39 when
we issue your Policy, the factor is less than 1.00 at the end of the first
Policy year and decreases to zero at the fifteenth Policy year. We always
determine the surrender charge factor from the Policy date to the surrender
date, regardless of whether there were any prior lapses and reinstatements.
SURRENDER CHARGE FACTORS
ISSUE AGES 0 - 39
END OF POLICY YEAR* FACTOR
------------------- ------
At Issue ........... 1.00
1-5 ................ 1.00
6 .................. .90
7 .................. .80
8 .................. .70
9 .................. .60
10 ................. .50
11 ................. .40
12 ................. .30
13 ................. .20
14 ................. .10
15 ................. 0
16+ ................ 0
* The factor on any date other than an anniversary will be interpolated
between the two end of year
factors.
o SURRENDER CHARGE EXAMPLE: Assume a male tobacco user purchases the
Policy at issue age 35 with a specified amount of $100,000. The Policy
is surrendered in Policy year 5. The surrender charge per thousand is
$16.48. This is multiplied by the surrender charge factor of 1.00
The surrender charge = the surrender charge per thousand ($16.48) X the
number of thousands of initial specified
amount (100) X the surrender charge factor (1.0)
= $1,648.
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PRO RATA DECREASE CHARGE
If you decrease the specified amount during the first 15 Policy years, we
will deduct a pro rata decrease charge from the cash value.
PRO RATA This charge is equal to:
DECREASE CHARGE o the amount of the decrease in specified amount that you
request; MULTIPLIED BY
o the surrender charge per thousand of specified amount as
of the date of the decrease using your Policy's
specified amount on the Policy date. (See Appendix C.)
We will NOT deduct the pro rata decrease charge from the cash value when a
specified amount decrease results from:
o a change in the death benefit option, or
o a withdrawal (when you select death benefit Option A).
We will determine the pro rata decrease charge from the Policy date to the
date of the decrease using the above formula, regardless of whether your Policy
has lapsed and been reinstated, or you have previously decreased your specified
amount.
If we deduct a pro rata decrease charge due to a decrease in specified
amount, we will reduce proportionately any future surrender charges incurred
during the first 15 Policy years. This means that when we calculate the
surrender charge, we will reduce it by an amount equal to the surrender charge
multiplied by the ratio of any prior decreases in the specified amount to the
initial full specified amount. A decrease in specified amount will generally
decrease the insurance protection of the Policy.
TRANSFER CHARGE o We currently allow you to make 12 transfers each year
free from charge.
o We charge $25 for each additional transfer.
o For the purposes of assessing the transfer charge, all
transfers made in one day, regardless of the number of
subaccounts affected by the transfer, is considered a
single transfer.
o We deduct the transfer charge from the amount being
transferred.
o Transfers due to loans, exercise of conversion rights,
or from the fixed account do not count as transfers for
the purpose of assessing this charge.
o Transfers under dollar cost averaging and asset
rebalancing are transfers for purposes of this charge.
o We will not increase this charge.
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CASH WITHDRAWAL o When you make a cash withdrawal, we charge a processing
CHARGE fee of $25 or 2% of the amount you withdraw, whichever
is less.
o We deduct this amount from the withdrawal, and we pay
you the balance.
o We will not increase this fee.
TAXES
We currently do not make any deductions for taxes from the separate
account. We may do so in the future if such taxes are imposed by federal or
state agencies.
PORTFOLIO EXPENSES
The portfolios deduct investment charges from the amounts you have
invested in the portfolios. These charges range from 0.40% to 1.50%. See the
Portfolio Annual Expense Table in this prospectus, and the fund prospectus.
DEATH BENEFIT
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DEATH BENEFIT PROCEEDS
As long as the Policy is in force, we will pay the death benefit proceeds
on an individual Policy once we receive satisfactory proof of the insured's
death. We may require return of the Policy. We will pay the death benefit
proceeds to the primary beneficiary(ies), if living, or to a contingent
beneficiary. If each beneficiary dies before the insured and there is no
contingent beneficiary, we will pay the death benefit proceeds to the owner or
the owner's estate. We will pay the death benefit proceeds in a lump sum or
under a payment option. See Payment Options, p. 41.
DEATH BENEFIT o the death benefit (described below); MINUS
PROCEEDS EQUAL: o any past due charges; MINUS
o any outstanding Policy loan amount; PLUS
o any additional insurance in force provided by rider;
PLUS
o any interest you paid in advance on the loan(s) for the
period between the date of death and the next Policy
anniversary.
We may further adjust the amount of the death benefit proceeds if we
contest the Policy or if you misstate the insured's age or gender. See Our
Right to Contest the Policy; and Misstatement of Age or Gender.
DEATH BENEFIT
The Policy provides a death benefit. The death benefit is determined at
the end of the valuation period in which the insured dies. You must select one
of the three death benefit
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options we offer in your application. No matter which death benefit option you
choose, we guarantee that, so long as the Policy does not lapse, the death
benefit will never be less than the specified amount on the date of the
insured's death.
DEATH BENEFIT o the current specified amount; OR
OPTION A EQUALS THE o a specified percentage called the "limitation
GREATER OF: percentage," MULTIPLIED BY
-- > the cash value on the insured's date of death.
Under Option A, your death benefit remains level unless the limitation
percentage multiplied by the cash value is greater than the specified amount;
then the death benefit will vary as the cash value varies.
The limitation percentage is the minimum percentage of cash value we must
pay as the death benefit under federal tax requirements. It is based on the age
of the insured at the beginning of each Policy year. The following table
indicates the limitation percentages for different ages:
AGE LIMITATION PERCENTAGE
40 and under 250%
41 to 45 250% of cash value minus 7% for each age over age 40
46 to 50 215% of cash value minus 6% for each age over age 45
51 to 55 185% of cash value minus 7% for each age over age 50
56 to 60 150% of cash value minus 4% for each age over age 55
61 to 65 130% of cash value minus 2% for each age over age 60
66 to 70 120% of cash value minus 1% for each age over age 65
71 to 75 115% of cash value minus 2% for each age over age 70
76 to 90 105%
91 to 95 105% of cash value minus 1% for each age over age 90
If the federal tax code requires us to determine the death benefit by
reference to these limitation percentages, the Policy is described as "in the
corridor." An increase in the cash value will increase our risk, and we will
increase the cost of insurance we deduct from the cash value.
OPTION A ILLUSTRATION. Assume that the insured's attained age is under 40,
there have been no withdrawals or decreases in specified amount, and that there
is no outstanding indebtedness. Under Option A, a Policy with a $50,000
specified amount will generally pay $50,000 in death benefits. However, because
the death benefit must be equal to or be greater than 250% of cash value, any
time the cash value of the Policy exceeds $20,000, the death benefit will
exceed the $50,000 specified amount. Each additional dollar added to the cash
value above $20,000 will increase the death benefit by $2.50.
Similarly, so long as the cash value exceeds $20,000, each dollar taken
out of the cash value will reduce the death benefit by $2.50. If at any time
the cash value multiplied by the limitation percentage is less than the
specified amount, the death benefit will equal the specified amount of the
Policy reduced by the dollar value of any cash withdrawals.
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DEATH BENEFIT o the current specified amount; PLUS
OPTION B EQUALS THE -- > the cash value on the insured's date of death;
GREATER OF: OR
o the limitation percentage, MULTIPLIED BY
-- > the cash value on the insured's date of death.
Under Option B, the death benefit always varies as the cash value varies.
OPTION B ILLUSTRATION. Assume that the insured's attained age is under 40
and that there is no outstanding indebtedness. Under Option B, a Policy with a
specified amount of $50,000 will generally pay a death benefit of $50,000 plus
cash value. Thus, a Policy with a cash value of $10,000 will have a death
benefit of $60,000 ($50,000 + $10,000). The death benefit, however, must be at
least 250% of cash value. As a result, if the cash value of the Policy exceeds
$33,333, the death benefit will be greater than the specified amount plus cash
value. Each additional dollar of cash value above $33,333 will increase the
death benefit by $2.50.
Similarly, any time cash value exceeds $33,333, each dollar taken out of
cash value will reduce the death benefit by $2.50. If at any time, cash value
multiplied by the limitation percentage is less than the specified amount plus
the cash value, then the death benefit will be the specified amount plus the
cash value of the Policy.
DEATH BENEFIT o death benefit Option A; OR
OPTION C EQUALS THE o the current specified amount, MULTIPLIED BY
GREATER OF: -- > a "factor" equal to the lesser of:
o 1.0 or
o 0.04 TIMES (95 - insured's age at death);
PLUS
-- > the cash value on the insured's date of death.
Under Option C, the death benefit varies as the cash value and the
insured's attained age varies.
OPTION C -- THREE ILLUSTRATIONS.
1. Assume that the insured is under age 40 and that there is no
outstanding indebtedness. Under Option C, a Policy with a specified amount of
$50,000 and with a cash value of $10,000 will have a death benefit of $60,000
($50,000 x the minimum of (1.0 and (0.04 x (95 - 40))) + $10,000). So long as
the insured is under age 71, this benefit is the same as the Option B benefit.
2. Assume that the insured is attained age 75 and that there is no
outstanding indebtedness. Under Option C, a Policy with a specified amount of
$50,000 and with a cash value of $12,000 will have a death benefit of $52,000
($50,000 x the minimum of (1.0 and (0.04 x (95 - 75))) + $12,000). The death
benefit, however, must be at least 105% of cash value as shown in the
limitation percentage table above.
3. Assume that the insured is attained age 75 and that there is no
outstanding indebtedness. Under Option C, a Policy with a specified amount of
$50,000 and with a cash
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value of $9,000 will have a death benefit equal to the specified amount of
$50,000, since the calculation of $50,000 times the minimum of (1.0 and (0.04 x
(95 - 75))) plus $9,000 is less than the specified amount.
EFFECTS OF CASH WITHDRAWALS ON THE DEATH BENEFIT
If you choose Option A, a cash withdrawal will reduce the specified amount
by an amount equal to the amount of the cash withdrawal. We will not impose a
decrease charge when the specified amount is decreased as a result of taking a
cash withdrawal. Regardless of the death benefit option you choose, a cash
withdrawal will reduce the death benefit by at least the amount of the
withdrawal.
CHOOSING DEATH BENEFIT OPTIONS
You must choose one death benefit option on your application. This is an
important decision. The death benefit option you choose will have an impact on
the dollar value of the death benefit, on your cash value, and on the amount of
cost of insurance charges you pay.
You may find Option A more suitable for you if your goal is to increase
your cash value through positive investment experience. You may find Option B
more suitable if your goal is to increase your total death benefit. You may
find Option C more suitable if your goal is to increase your total death
benefit before you reach attained age 70, and to increase your cash value
through positive investment experience thereafter.
CHANGING THE DEATH BENEFIT OPTION
After the third Policy year, you may change your death benefit option once
each Policy year if you have not decreased the specified amount that year. We
will notify you of the new specified amount.
o You must make your request in writing.
o The effective date of the change will be the monthly anniversary on or
following the date when we receive your request for a change.
o You may not make a change that would decrease the specified amount below
the minimum specified amount stated in your Policy.
o There may be adverse federal tax consequences. You should consult a tax
advisor before changing your Policy's death benefit option.
DECREASING THE SPECIFIED AMOUNT
After the Policy has been in force for three years, you may decrease the
specified amount once each Policy year if you have not changed the death
benefit option that year. A decrease in the specified amount may affect your
cost of insurance charge and may have adverse federal tax consequences. You
should consult a tax advisor before decreasing your Policy's specified amount.
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CONDITIONS FOR o you may not change your death benefit option in
DECREASING THE SPECIFIED the same Policy year that you decrease your
AMOUNT: specified amount;
o you may not decrease your specified amount
lower than the minimum specified amount stated
in your Policy;
o you may not decrease your specified amount if
it would disqualify your Policy as life
insurance under the Internal Revenue Code;
o we may limit the amount of the decrease to no
more than 20% of the specified amount;
o a decrease in specified amount will take effect
on the monthly anniversary on or after we
receive your written request; and
o we will assess a pro rata decrease charge
against the cash value if you decrease your
specified amount within the first 15 Policy
years.
PAYMENT OPTIONS
There are several ways of receiving proceeds under the death benefit and
surrender provisions of the Policy, other than in a lump sum. See Settlement
Options p. 50 for information concerning these settlement options.
SURRENDERS AND CASH WITHDRAWALS
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SURRENDERS
You may make a written request to surrender your Policy for its net
surrender value as calculated at the end of the valuation date on which we
receive your request. The insured must be alive and the Policy must be in force
when you make your written request. A surrender is effective as of the date
when we receive your written request. You will incur a surrender charge if you
surrender the Policy during the first 15 Policy years (see Charges and
Deductions - Surrender Charge p. 34). Once you surrender your Policy, all
coverage and other benefits under it cease and cannot be reinstated. We will
normally pay you the net surrender value in a lump sum within seven days or
under a settlement option. A surrender may have tax consequences. See Federal
Income Tax Considerations p. 46.
CASH WITHDRAWALS
After the first Policy year, you may request a cash withdrawal of a
portion of your cash value subject to certain conditions.
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CASH o You must make your cash withdrawal request to us in
WITHDRAWAL writing.
CONDITIONS: o We only allow one cash withdrawal during a 12-month
period.
o We may limit the amount you can withdraw to at least
$500, and to no more than 10% of the net surrender value.
o You can specify the subaccount(s) and the fixed account
from which to make the withdrawal. Otherwise we will
deduct the amount from the subaccounts and the fixed
account in accordance with the current allocation
instructions. We generally will pay a cash withdrawal
request within seven days following the valuation date we
receive the request.
o We will deduct a processing fee equal to $25 or 2% of the
amount you withdraw, whichever is less. We deduct this
amount from the withdrawal, and we pay you the balance.
o You may not take a cash withdrawal that would disqualify
your Policy as life insurance under the Internal Revenue
Code.
A cash withdrawal will reduce the cash value by the amount of the cash
withdrawal, and reduce the death benefit by at least the amount of the cash
withdrawal. When death benefit Option A is in effect, a cash withdrawal will
reduce the specified amount by an amount equal to the amount of the cash
withdrawal. We will not impose a pro rata decrease charge when the specified
amount is decreased as a result of taking a cash withdrawal.
In no event will we permit any withdrawal to reduce the specified amount
below the minimum specified amount set forth in the Policy.
A cash withdrawal may have tax consequences (see Federal Income Tax
Considerations p. 46).
LOANS
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GENERAL
After the first Policy year (as long as the Policy is in force) you may
borrow money from us using the Policy as the only security for the loan. We may
permit a loan prior to the first anniversary for Policies issued pursuant to
1035 Exchanges. A loan that is taken from, or secured by, a Policy may have tax
consequences. See Federal Income Tax Considerations p. 46.
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POLICY LOANS ARE o we may require you to borrow at least $500; and
SUBJECT TO CERTAIN o the maximum amount you may borrow is 90% of the cash
CONDITIONS: value, less any surrender charge and any outstanding
loan amount.
When you take a loan, we will withdraw an amount equal to the requested
loan plus interest in advance until the next Policy anniversary from each of
the subaccounts and the fixed account based on your current premium allocation
instructions (unless you specify otherwise). We will transfer that amount to
the loan reserve. The loan reserve is the portion of the fixed account used as
collateral for a Policy loan.
We normally pay the amount of the loan within seven days after we receive
a proper loan request. We may postpone payment of loans under certain
conditions. See Payments We Make p. 50.
You may request a loan by telephone by calling us at 1-800-322-7353. If
the loan amount you request exceeds $50,000 or if the address of record has
been changed within the past 10 days, we may reject your request. If you do not
want the ability to request a loan by telephone, you should notify us in
writing. You will be required to provide certain information for identification
purposes when you request a loan by telephone. We may ask you to provide us
with written confirmation of your request. We will not be liable for processing
a loan request if we believe the request is genuine.
You may also fax your loan request to us at 1-800-322-7361. We will not be
responsible for any transmittal problems when you fax your request unless you
report it to us within five business days and send us proof of your fax
transmittal.
You can repay a loan at any time while the Policy is in force.
At each Policy anniversary, we will compare the amount of the outstanding
loan to the amount in the loan reserve. We will also make this comparison any
time you repay all or part of the loan, or make a request to borrow an
additional amount. At each such time, if the amount of the outstanding loan
exceeds the amount in the loan reserve, we will withdraw the difference from
the subaccounts and the fixed account and transfer it to the loan reserve, in
the same manner as when a loan is made. If the amount in the loan reserve
exceeds the amount of the outstanding loan, we will withdraw the difference
from the loan reserve and transfer it to the subaccounts and the fixed account
in the same manner as current premiums are allocated. No charge will be imposed
for these transfers, and these transfers are not treated as transfers in
calculating the transfer charge. We reserve the right to require a transfer to
the fixed account if the loans were originally transferred from the fixed
account.
INTEREST RATE CHARGED
We will charge you an annual interest rate on a Policy loan that is equal
to 5.66% and is payable annually in advance (equivalent to an effective annual
rate of 6.0%). Loan interest that is unpaid when due will be added to the
amount of the loan on each Policy anniversary and will bear interest at the
same rate.
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LOAN RESERVE INTEREST RATE CREDITED
We will credit the amount in the loan reserve with interest at an
effective annual rate of at least 4.0%. We may credit a higher rate, but we are
not obligated to do so.
o We currently credit interest at an effective annual rate of
4.75% on amounts you borrow during the first ten Policy years.
o After the tenth Policy year, on all amounts that you have borrowed, we
currently credit interest to part of the cash value in excess of the
premiums paid less withdrawals at an interest rate equal to the interest
rate we charge on the total loan. The remaining portion, equal to the
cost basis, is currently credited 4.75%.
EFFECT OF POLICY LOANS
A Policy loan affects the Policy because we reduce the death benefit
proceeds and net surrender value under the Policy by the amount of any
outstanding loan. Repaying the loan causes the death benefit proceeds and net
surrender value to increase by the amount of the repayment. As long as a loan
is outstanding, we hold an amount equal to the loan plus interest in advance
until the next Policy anniversary in the loan reserve. This amount is not
affected by the separate account's investment performance and may not be
credited with the interest rates accruing on the fixed account. Amounts
transferred from the separate account to the loan reserve will affect the value
in the separate account because we credit such amounts with an interest rate
declared by us rather than a rate of return reflecting the investment
performance of the separate account.
There are risks involved in taking a Policy loan, a few of which include
the potential for a Policy to lapse if projected earnings, taking into account
outstanding loans, are not achieved. A Policy loan may also have possible
adverse tax consequences (see Federal Income Tax Considerations p. 46). You
should consult a tax advisor before taking out a Policy loan.
We will notify you (and any assignee of record) if the sum of your loans
plus any interest you owe on the loans is more than the net surrender value. If
you do not submit a sufficient payment within 61 days from the date of the
notice, your Policy may lapse.
POLICY LAPSE AND REINSTATEMENT
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LAPSE
Your Policy may not necessarily lapse if you fail to make a planned
periodic payment. However, even if you make all your planned periodic payments,
there is no guarantee that your Policy will not lapse. This Policy provides a
no lapse period. See below. Once your no lapse period ends, your Policy may
lapse (terminate without value) if the net surrender value on any Monthiversary
is less than the monthly deductions due on that day. Such lapse might occur if
poor investment experience causes a decrease in the net surrender value, or you
have not paid enough premiums to offset the monthly charges.
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If the net surrender value is not enough to pay the monthly deductions, we
will mail a notice to your last known address and any assignee of record. The
notice will specify the minimum payment you must pay and the final date by
which we must receive the payment to prevent a lapse. We generally require that
you make the payment within 61 days after the date of the notice. This 61-day
period is called the GRACE PERIOD. If we do not receive the specified minimum
payment by the end of the grace period, all coverage under the Policy will
terminate without value.
NO LAPSE PERIOD
This Policy provides a no lapse period for the first five Policy years. As
long as the no lapse period is in effect, your Policy will not lapse and no
grace period will begin. Even if your net surrender value is not enough to pay
your monthly deduction, the Policy will not lapse so long as the no lapse
period is in effect. The no lapse period will not extend beyond the no lapse
date stated in your Policy. Each month we determine whether the no lapse period
is still in effect.
EARLY TERMINATION OF THE o The no lapse period will end IMMEDIATELY if you
NO LAPSE PERIOD do not pay sufficient premiums.
o You must pay total premiums (minus withdrawals,
loans, and any pro rata decrease charge) that
equal at least:
-- > your minimum monthly guarantee premium
(shown in your Policy), MULTIPLIED BY
-- > the number of months since the Policy
date (including the current month).
You will lessen the risk of Policy lapse if you keep the no lapse period
in effect. Before you take a cash withdrawal or a loan or decrease the
specified amount, you should consider carefully the effect it will have on the
no lapse period guarantee.
REINSTATEMENT
We will reinstate a lapsed Policy for five years after the lapse (and
prior to the maturity date). To reinstate the Policy you must:
o submit a written application for reinstatement;
o provide evidence of insurability satisfactory to us;
o make a premium payment that is large enough to cover:
-- > one monthly deduction at the time of termination;
-- > the next two monthly deductions which become due after
reinstatement; and
-- > any surrender charge calculated from the Policy date to the date
of reinstatement.
We will not reinstate any indebtedness. The cash value of the loan reserve on
the reinstatement date will be zero. Your net surrender value on the
reinstatement date will equal the net premiums you pay at reinstatement, MINUS
one monthly deduction and any surrender
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charge. The reinstatement date for your Policy will be the monthly anniversary
on or following the day we approve your application for reinstatement. We may
decline a request for reinstatement.
FEDERAL INCOME TAX CONSIDERATIONS
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The following summary provides a general description of the federal income
tax considerations associated with a Policy and does not purport to be complete
or to cover all situations. THIS DISCUSSION IS NOT INTENDED AS TAX ADVICE.
Please consult counsel or other qualified tax advisors for more complete
information. We base this discussion on our understanding of the present
federal income tax laws as they are currently interpreted by the Internal
Revenue Service (the "IRS"). Federal income tax laws and the current
interpretations by the IRS may change.
TAX STATUS OF THE POLICY
A Policy must satisfy certain requirements set forth in the Internal
Revenue Code (the "Code") in order to qualify as a life insurance policy for
federal income tax purposes and to receive the tax treatment normally accorded
life insurance policies under federal tax law. Guidance as to how these
requirements are to be applied is limited. Nevertheless, we believe that a
Policy issued on the basis of a standard rate class should satisfy the
applicable Code requirements. Because of the absence of pertinent
interpretations of the Code requirements, there is, however, less uncertainty
about the application of such requirements to a Policy issued on a substandard
basis. If it is subsequently determined that a Policy does not satisfy the
applicable requirements, we may take appropriate steps to bring the Policy into
compliance with such requirements and we reserve the right to restrict Policy
transactions in order to do so.
In certain circumstances, owners of variable life insurance policies have
been considered for federal income tax purposes to be the owners of the assets
of the separate account supporting their policies due to their ability to
exercise investment control over those assets. Where this is the case, the
policyowners have been currently taxed on income and gains attributable to the
separate account assets. There is little guidance in this area, and some
features of the Policies, such as your flexibility to allocate premiums and
cash values, have not been explicitly addressed in published rulings. While we
believe that the Policy does not give you investment control over separate
account assets, we reserve the right to modify the Policy as necessary to
prevent you from being treated as the owner of the separate account assets
supporting the Policy.
In addition, the Code requires that the investments of the separate
account be "adequately diversified" in order to treat the Policy as a life
insurance policy for federal income tax purposes. We intend that the separate
account, through the portfolios, will satisfy these diversification
requirements.
The following discussion assumes that the Policy will qualify as a life
insurance policy for federal income tax purposes.
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TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. We believe that the death benefit under a Policy should be
excludible from the beneficiary's gross income. Federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy proceeds
depend on your circumstances and the beneficiary's circumstances. A tax advisor
should be consulted on these consequences.
Generally, you will not be deemed to be in constructive receipt of the
cash value until there is a distribution. When distributions from a Policy
occur, or when loans are taken out from or secured by (e.g., by assignment), a
Policy, the tax consequences depend on whether the Policy is classified as a
"Modified Endowment Contract."
MODIFIED ENDOWMENT CONTRACTS. Under the Code, certain life insurance
policies are classified as "Modified Endowment Contracts" ("MECs") and receive
less favorable tax treatment than other life insurance policies. Due to the
Policy's flexibility, each Policy's circumstances will determine whether the
Policy is classified as a MEC. Among other things, a reduction in benefits at
any time could cause a Policy to become a MEC. If you do not want your Policy
to be classified as a MEC, you should consult a tax advisor to determine the
circumstances, if any, under which your Policy would not be classified as a
MEC.
Upon issue of your Policy, we will notify you as to whether or not your
Policy is classified as a MEC based on the initial premium we receive. You will
also be notified of the amount of the maximum annual premium you can pay
without causing your Policy to be classified as a MEC. If a payment would cause
your Policy to become a MEC, you and your agent will be notified. At that time,
you will need to notify us if you want to continue your Policy as a MEC.
DISTRIBUTIONS FROM MODIFIED ENDOWMENT CONTRACTS. Policies classified as
MECs are subject to the following tax rules:
o All distributions other than death benefits from a MEC, including
distributions upon surrender and withdrawals, will be treated first as
distributions of gain taxable as ordinary income. They will be treated
as tax-free recovery of the owner's investment in the Policy only
after all gain has been distributed. Your investment in the Policy is
generally your total premium payments. When a distribution is taken
from the Policy, your investment in the Policy is reduced by the
amount of the distribution that is tax-free.
o Loans taken from or secured by (e.g., by assignment) such a Policy are
treated as distributions and taxed accordingly.
o A 10% additional federal income tax is imposed on the amount included
in income except where the distribution or loan is made when you have
attained age 591/2 or are disabled, or where the distribution is part
of a series of substantially equal periodic payments for your life (or
life expectancy) or the joint lives (or joint life expectancies) of
you and your beneficiary.
DISTRIBUTIONS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS.
Distributions from a Policy that is not a MEC are generally treated first as a
recovery of your investment
47
<PAGE>
in the Policy, and as taxable income after the recovery of all investment in
the Policy. However, certain distributions which must be made in order to
enable the Policy to continue to qualify as a life insurance policy for federal
income tax purposes if Policy benefits are reduced during the first 15 Policy
years may be treated in whole or in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not a MEC are generally not
treated as distributions. Instead, such loans are treated as indebtedness.
However, the tax consequences associated with Policy loans that are outstanding
after the first 10 Policy years are less clear and a tax advisor should be
consulted about such loans.
Finally, neither distributions from nor loans from or secured by a Policy
that is not a MEC are subject to the 10% additional tax.
MULTIPLE POLICIES. All MECs that we issue (or that our affiliates issue)
to the same owner during any calendar year are treated as one MEC for purposes
of determining the amount includible in the owner's income when a taxable
distribution occurs.
INVESTMENT IN THE POLICY. Your investment in the Policy is generally the
sum of the premium payments you made. When a distribution from the Policy
occurs, your investment in the Policy is reduced by the amount of the
distribution that is tax-free.
DEDUCTIBILITY OF POLICY LOAN INTEREST. In general, interest you pay on a
loan from a Policy will not be deductible. Before taking out a Policy loan, you
should consult a tax advisor as to the tax consequences.
BUSINESS USES OF THE POLICY. The Policy may be used in various
arrangements, including nonqualified deferred compensation or salary
continuance plans, split dollar insurance plans, executive bonus plans, retiree
medical benefit plans and others. The tax consequences of such plans and
business uses of the Policy may vary depending on the particular facts and
circumstances of each individual arrangement and business uses of the Policy.
Therefore, if you are contemplating using the Policy in any arrangement the
value of which depends in part on its tax consequences, you should be sure to
consult a tax advisor as to tax attributes of the arrangement. In recent years,
moreover, Congress has adopted new rules relating to life insurance owned by
businesses. Any business contemplating the purchase of a new Policy or a change
in an existing Policy should consult a tax advisor.
TERMINAL ILLNESS ACCELERATED DEATH BENEFIT RIDER. We believe that the
single-sum payment we make under this rider should be fully excludable from the
gross income of the beneficiary, as long as the beneficiary is an insured under
the Policy. You should consult a tax advisor about the consequences of adding
this rider to your Policy, or requesting a single-sum payment.
POSSIBLE TAX LAW CHANGES. Although the likelihood of legislative changes
is uncertain, there is always a possibility that the tax treatment of the
Policies could change by legislation or otherwise. You should consult a tax
advisor with respect to legislative developments and their effect on the
Policy.
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<PAGE>
OTHER POLICY INFORMATION
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OUR RIGHT TO CONTEST THE POLICY
In issuing this Policy, we rely on all statements made by or for the
insured in the application or in a supplemental application. Therefore, if you
make any material misrepresentation of a fact in the application (or any
supplemental application), then we may contest the Policy's validity or may
resist a claim under the Policy.
In the absence of fraud, we cannot bring any legal action to contest the
validity of the Policy after the Policy has been in force during the insured's
lifetime for two years from the Policy date, or if reinstated, for two years
from the date of reinstatement.
SUICIDE EXCLUSION
If the insured commits suicide within two years of the Policy date, the
Policy will terminate and our liability is limited to an amount equal to the
premiums paid, less any outstanding indebtedness, and less any cash withdrawals
paid. We will pay this amount to the beneficiary in one sum.
MISSTATEMENT OF AGE OR GENDER
If the age or gender of the insured was stated incorrectly in the
application or any supplemental application, the death benefit will be adjusted
based on what the initial premium would have purchased based on the insured's
correct age and gender.
MODIFYING THE POLICY
Only our President or Secretary may modify this Policy or waive any of our
rights or requirements under this Policy. Any modification or waiver must be in
writing. No agent may bind us by making any promise not contained in this
Policy.
If we modify the Policy, we will provide you notice and we will make
appropriate endorsements to the Policy.
BENEFITS AT MATURITY
If the insured is living and the Policy is in force, the Policy will
mature on the Policy anniversary nearest the insured's 95th birthday. This is
the maturity date. On the maturity date we will pay you the net surrender value
of your Policy.
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<PAGE>
PAYMENTS WE MAKE
We usually pay the amounts of any surrender, cash withdrawal, death
benefit proceeds, or settlement options within seven business days after we
receive all applicable written notices and/or due proofs of death. However, we
can postpone such payments if:
o the NYSE is closed, other than customary weekend and holiday closing,
or trading on the NYSE is restricted as determined by the SEC; OR
o the SEC determines that an emergency exists that would make the
disposal of securities held in the separate account or the
determination of their value not reasonably practicable.
If you have submitted a recent check or draft, we have the right to defer
payment of surrenders, cash withdrawals, death benefit proceeds, or payments
under a settlement option until such check or draft has been honored. We also
reserve the right to defer payment of transfers, cash withdrawals, or
surrenders from the fixed account for up to six months.
SETTLEMENT OPTIONS
If you surrender the Policy, or if the Policy matures, you may elect to
receive the net surrender value in either a lump sum or as a series of regular
income payments under one of the three settlement options described below. In
either event, life insurance coverage ends. Also, when the insured dies, the
beneficiary may apply the lump sum death benefit proceeds to one of the same
settlement options. If the regular payment under a settlement option would be
less than $100, we will instead pay the proceeds in one lump sum. We may make
other settlement options available in the future.
Once we begin making payments under a settlement option, you or the
beneficiary will no longer have any value in the subaccounts or the fixed
account. Instead, the only entitlement will be the amount of the regular
payment for the period selected under the terms of the settlement option
chosen. Depending upon the circumstances, the effective date of a settlement
option is the surrender date, the maturity date or the insured's date of death.
Under any settlement option, the dollar amount of each payment will depend
on three things:
o the amount of the surrender or death benefit proceeds on the surrender
date, maturity date or insured's date of death;
o the interest rate we credit on those amounts (we guarantee a minimum
annual interest rate of 3%); and
o the specific payment option(s) you choose.
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<PAGE>
OPTION 1 - EQUAL o We will pay the proceeds, plus interest, in equal
MONTHLY INSTALLMENTS monthly installments for a fixed period of your
FOR A FIXED PERIOD choice, but not longer than 240 months.
o We will stop making payments once we have made all
the payments for the period selected.
OPTION 2 - EQUAL At your or the beneficiary's direction, we will make
MONTHLY INSTALLMENTS equal monthly installments:
FOR LIFE (LIFE INCOME) o only for the life of the payee, at the end of which
payments will end; or
o for the longer of the payee's life, or 10 years if
the payee dies before the end of the first 10 years
of payments; or
o until the total amount of all payments we have made
equals the proceeds that were applied to the
settlement option.
OPTION 3 - EQUAL o We will make equal monthly payments during the
MONTHLY INSTALLMENTS joint lifetimes of two persons, first to a chosen
FOR THE LIFE OF THE payee, and then to a co-payee, if living, upon the
PAYEE AND THEN TO A death of the payee.
DESIGNATED SURVIVOR o Payments to the co-payee, if living, upon the
(JOINT AND SURVIVOR) payee's death will equal either:
-- > the full amount made to the payee before the
payee's death; or
-- > one-third of the amount paid to the payee
before the payee's death. All payments will
cease upon the death of the co-payee.
REPORTS TO OWNERS
At least once each year, or more often as required by law, we will mail to
policyowners at their last known address a report showing the following
information as of the end of the report period:
<TABLE>
<S> <C> <C> <C>
/checkmark/ the current cash value /checkmark/ any activity since the last report
/checkmark/ the current net surrender value /checkmark/ projected values
/checkmark/ the current death benefit /checkmark/ investment experience of each subaccount
/checkmark/ any outstanding loans /checkmark/ any other information required by law
</TABLE>
You may request additional copies of reports, but we may charge a fee for
such additional copies. In addition, we will send written confirmations of any
premium payments and other financial transactions you request. We also will
send copies of the annual and semi-annual report to shareholders for each
portfolio in which you are indirectly invested.
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<PAGE>
RECORDS
We will maintain all records relating to the separate account and the
fixed account.
POLICY TERMINATION
Your Policy will terminate on the earliest of:
o the maturity date; o the end of the grace period; or
o the date the insured dies; o the date the Policy is surrendered.
SUPPLEMENTAL BENEFITS (RIDERS)
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The following supplemental benefits (riders) are available and may be
added to a Policy. Monthly charges for these riders are deducted from cash
value as part of the monthly deduction. The riders available with the Policies
provide fixed benefits that do not vary with the investment experience of the
separate account. For purposes of the riders, the primary insured is the person
insured under the Policy, and the face amount is the level term insurance
amount we pay at death.
CHILDREN'S INSURANCE RIDER
This rider provides a face amount on the primary insured's children. We
will pay a death benefit once we receive proof that the insured child died
while both the rider and coverage were in force for that child. If the primary
insured dies while the rider is in force, we will terminate the rider 31 days
after the death, and we will offer a separate life insurance policy to each
insured child.
ACCIDENTAL DEATH BENEFIT RIDER
Subject to certain limitations, we will pay a face amount if the primary
insured's death results solely from accidental bodily injury where:
o the death is caused by external, violent, and accidental means;
o the death occurs within 90 days of the accident; and
o the death occurs while the rider is in force.
The rider will terminate on the earliest of:
o the Policy anniversary nearest the primary insured's 70th birthday;
o the date the Policy terminates; or
o the monthly anniversary when the rider terminates at the primary
insured's request.
OTHER INSURED RIDER
We will pay the rider's face amount when we receive proof of the other
insured's death. On any monthly anniversary while the rider is in force, you
may replace it with a new Policy on the other insured's life (without evidence
of insurability).
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<PAGE>
CONDITIONS TO o your request must be in writing;
REPLACE THE o the rider has not reached the anniversary nearest to the
RIDER: other insured's 70th birthday;
o the new policy is any permanent insurance plan that we
currently offer;
o subject to the minimum specified amount required for the
new Policy, the amount of the insurance under the new
Policy will equal the face amount in force under the
rider; and
o we will base your premium on the other insured's rate
class under the rider.
PRIMARY INSURED RIDER ("PIR")
Under the PIR, we provide term insurance coverage on a different basis
from the coverage in your Policy. You may purchase the PIR anytime.
FEATURES OF o the rider increases the Policy's death benefit by the
PIR: rider's face amount;
o the rider terminates when you turn 90;
o we do not assess any additional surrender charge for the
PIR;
o generally PIR coverage costs less than the insurance
coverage under the Policy, but has no cash value;
o you may cancel or reduce your rider coverage without
decreasing your Policy's specified amount; and
o you may generally decrease your specified amount without
reducing your rider coverage.
It may cost you less to reduce your PIR coverage than to decrease your
specified amount, because we do not deduct a surrender charge in connection
with your PIR rider. However, it may cost you more to keep a higher specified
amount, because the specified amount may have a cost of insurance that is
higher than the cost of the same amount of coverage under your PIR.
You should consult your registered representative to determine if you
would benefit from PIR. We may discontinue offering PIR at any time. We may
also modify the terms of these riders for new Policies.
TERMINAL ILLNESS ACCELERATED DEATH BENEFIT RIDER
This rider allows us to pay all or a portion of the death benefit once we
receive satisfactory proof that the insured is ill and has a life expectancy of
one year or less. A doctor must certify the insured's life expectancy.
We will pay a "single-sum benefit" equal to:
o the death benefit on the date we pay the single-sum benefit;
MULTIPLIED BY
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<PAGE>
o the election percentage of the death benefit you elect to receive;
DIVIDED BY
o 1 + i ("i" equals the interest rate determined by the Code or the
Policy loan interest rate, whichever is greater); MINUS
o any indebtedness at the time we pay the single-sum benefit, multiplied
by the election percentage.
The maximum terminal illness death benefit we will pay is equal to:
o the death benefit available under the Policy at the insured's death;
PLUS
o the benefit available under any PIR rider in force.
o a single-sum benefit may not be greater than $500,000.
The election percentage is a percentage that you select. It may not be
greater than 100% of your Policy's death benefit under the rider.
We will not pay a benefit under the rider if the insured's terminal
condition results from self-inflicted injuries which occur during the period
specified in your Policy's suicide provision.
The rider terminates at the earliest of:
o the date the Policy terminates;
o the date a settlement option takes effect;
o the date we pay a single-sum benefit; or
o the date you terminate the rider.
We do not charge for this rider.
IMSA
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We are a charter member of the Insurance Marketplace Standards Association
("IMSA"). IMSA is an independent, voluntary organization of life insurance
companies. It promotes high ethical standards in the sales, advertising and
servicing of individual life insurance and annuity products. Companies must
undergo a rigorous self and independent assessment of their practices to become
a member of IMSA. The IMSA logo in our sales literature shows our ongoing
commitment to these standards.
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<PAGE>
PERFORMANCE DATA
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RATES OF RETURN
This section shows the historical investment experience of the portfolios
based on the portfolios' historical investment experience. This information
does not represent or project future investment performance.
We base the rates of return that we show below on each portfolio's actual
investment performance. We deduct investment management fees and direct fund
expenses. The rates are average annual compounded rates of return for the
periods ended on December 31, 1998.
These rates of return do not reflect the annual mortality and expense risk
charge, charges deducted from premiums, monthly deductions from cash value, or
surrender charges. These rates are not an estimate, projection or guarantee of
future performance.
We also show below comparable figures for the unmanaged Standard & Poor's
Index of 500 Common Stocks ("S&P 500"), a widely used measure of stock market
performance. The S&P 500 does not reflect any deduction for the expenses of
operating and managing an investment portfolio.
AVERAGE ANNUAL COMPOUNDED RATES OF RETURN
FOR THE PERIODS ENDED ON DECEMBER 31, 1998
<TABLE>
<CAPTION>
INCEPTION
FUND PORTFOLIO INCEPTION 10 YEARS 5 YEARS 3 YEARS 1 YEAR DATE
- ------------------------------------------------ ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Alger Aggressive Growth .................... 23.54% N/A N/A 26.83% 48.69% 3/1/94
WRL VKAM Emerging Growth ....................... 23.09% N/A 21.95% 25.63% 37.33% 3/1/93
WRL Janus Growth ............................... 20.91% 22.61% 25.20% 31.63% 64.47% 10/2/86
WRL Janus Global ............................... 21.94% N/A 19.46% 25.40% 30.01% 12/3/92
WRL AEGON Bond ................................. 7.89% 9.14% 6.46% 6.12% 9.32% 10/2/86
WRL LKCM Strategic Total Return ................ 14.12% N/A 13.76% 15.39% 9.64% 3/1/93
WRL Federated Growth & Income .................. 11.78% N/A N/A 12.77% 3.05% 3/1/94
WRL J.P. Morgan Money Market ................... 5.03% 5.01% 4.87% 5.18% 5.26% 10/2/86
WRL Dean Asset Allocation ...................... 14.80% N/A N/A 13.06% 8.33% 1/3/95
WRL GE U.S. Equity ............................. 25.00% N/A N/A N/A 22.87% 1/2/97
WRL Third Avenue Value ......................... -6.84% N/A N/A N/A -6.84% 1/2/98
WRL J.P. Morgan Real Estate Securities ......... -14.93% N/A N/A N/A N/A 5/1/98
WRL AEGON Balanced ............................. 9.71% N/A N/A 11.51% 6.93% 3/1/94
WRL NWQ Value Equity ........................... 11.83% N/A N/A N/A -4.78% 5/1/96
WRL C.A.S.E. Growth ............................ 15.01% N/A N/A 11.47% 2.47% 5/1/95
WRL GE/Scottish Equitable
International Equity .......................... 10.17% N/A N/A N/A 12.85% 1/2/97
S&P 500 ........................................ 17.86% 19.21% 24.06% 28.23% 28.58% 10/2/86
</TABLE>
Because WRL Goldman Sachs Growth, WRL Goldman Sachs Small Cap, WRL T. Rowe
Price Dividend Growth, WRL T. Rowe Price Small Cap, WRL Salomon All Cap,
55
<PAGE>
WRL Pilgrim Baxter Mid Cap Growth and WRL Dreyfus Mid Cap had not commenced
operations as of December 31, 1998, the above chart does not reflect rates of
return for these portfolios.
Additional information regarding the investment performance of the
portfolios appears in the attached fund prospectus.
HYPOTHETICAL ILLUSTRATIONS BASED ON ADJUSTED PORTFOLIO PERFORMANCE
This section contains hypothetical illustrations of Policy values based on
the adjusted historical experience of the portfolios. We started selling the
Policies in 1999. The separate account was established on October 24, 1994 and
will commence operations in June 1999. The fund commenced operations on October
2, 1986. The rates of return below show the adjusted actual investment
experience of each portfolio for the periods shown. The illustrations of cash
values and net surrender values below depict these Policy features as if you had
purchased it on the last valuation date prior to January 1, 1987 and had elected
death benefit Option A. The illustrations are based on the historical investment
experience of the portfolio indicated as of the last valuation date prior to
January 1 of the year after the portfolio began operations. We assumed the rate
of return for each portfolio in each calendar year to be uniformly earned
throughout the year; however, the portfolio's actual performance did and will
vary throughout the year.
In order to demonstrate how the actual investment experience of the
portfolios could have affected the cash value and net surrender value of the
Policy, we provide hypothetical illustrations using the actual investment
experience of each portfolio. THESE HYPOTHETICAL ILLUSTRATIONS ARE DESIGNED TO
SHOW THE PERFORMANCE THAT COULD HAVE RESULTED IF THE HYPOTHETICAL OWNER COULD
HAVE HELD THE POLICY DURING THE PERIOD ILLUSTRATED. These illustrations do not
represent what may happen in the future.
The amounts we show for cash values and net surrender values take into
account all charges and deductions from the Policy, the separate account, and
the fund. For each subaccount, we base one illustration on the guaranteed cost
of insurance rates and one on the current cost of insurance rates for a
hypothetical male insured age 35. The insured's age, gender and rate class,
amount and timing of premium payments, withdrawals, and loans would affect
individual Policy benefits.
For each portfolio, the illustrations below show death benefit Option A
based on an annual premium of $2,000 and a specified amount of $165,000 for a
male age 35, non-tobacco use, ultimate select rate class.
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<PAGE>
The following example shows how the hypothetical net return of the WRL Alger
Aggressive Growth portfolio would have affected benefits for a Policy dated on
the last valuation date prior to January 1, 1995. This example assumes that net
premiums and cash values were invested in the portfolio for the entire period
and that the values were determined on each Policy anniversary thereafter.
WRL ALGER AGGRESSIVE GROWTH
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 .................................... $ 2,196 $ 2,196 $ 0 $ 0
1997* ................................... 4,128 4,097 1,567 1,537
1998* ................................... 7,034 6,956 4,473 4,395
1999* ................................... 12,731 12,558 10,170 9,997
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the WRL VKAM
Emerging Growth portfolio would have affected benefits for a Policy dated on the
last valuation date prior to January 1, 1994. This example assumes that net
premiums and cash values were invested in the portfolio for the entire period
and that the values were determined on each Policy anniversary thereafter.
WRL VKAM EMERGING GROWTH
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1995 .................................... $ 1,425 $ 1,425 $ 0 $ 0
1996* ................................... 4,415 4,379 1,854 1,818
1997* ................................... 7,061 6,980 4,501 4,419
1998* ................................... 10,400 10,250 7,840 7,689
1999* ................................... 16,312 16,050 13,751 13,489
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
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<PAGE>
The following example shows how the hypothetical net return of the WRL Janus
Growth portfolio would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1987. This example assumes that net premiums
and cash values were invested in the portfolio for the entire period and that
the values were determined on each Policy anniversary thereafter.
WRL JANUS GROWTH
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1988 .................................... $ 1,734 $ 1,734 $ 0 $ 0
1989* ................................... 3,900 3,869 1,339 1,308
1990* ................................... 8,023 7,932 5,462 5,372
1991* ................................... 9,468 9,332 6,907 6,771
1992* ................................... 17,533 17,254 14,972 14,693
1993* ................................... 19,342 19,008 17,037 16,704
1994* ................................... 21,495 21,097 19,446 19,048
1995* ................................... 20,875 20,458 19,082 18,666
1996* ................................... 32,665 32,003 31,128 30,466
1997* ................................... 39,926 39,111 38,646 37,830
1998* ................................... 48,299 47,323 47,275 46,299
1999* ................................... 81,362 79,737 80,594 78,969
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the WRL Janus
Global portfolio would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1993. This example assumes that net premiums
and cash values were invested in the portfolio for the entire period and that
the values were determined on each Policy anniversary thereafter.
WRL JANUS GLOBAL
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1994 .................................... $ 2,146 $ 2,146 $ 0 $ 0
1995* ................................... 3,682 3,653 1,121 1,093
1996* ................................... 6,421 6,345 3,860 3,784
1997* ................................... 10,135 9,985 7,574 7,425
1998* ................................... 13,768 13,539 11,207 10,978
1999* ................................... 19,758 19,404 17,454 17,100
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
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<PAGE>
The following example shows how the hypothetical net return of the WRL AEGON
Bond portfolio would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1987. This example assumes that net premiums
and cash values were invested in the portfolio for the entire period and that
the values were determined on each Policy anniversary thereafter.
WRL AEGON BOND
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1988 .................................... $ 1,454 $ 1,454 $ 0 $ 0
1989* ................................... 3,228 3,198 667 637
1990* ................................... 5,454 5,381 2,893 2,820
1991* ................................... 7,380 7,254 4,819 4,693
1992* ................................... 10,529 10,326 7,968 7,765
1993* ................................... 12,762 12,494 10,457 10,189
1994* ................................... 16,051 15,689 14,002 13,641
1995* ................................... 16,158 15,767 14,365 13,975
1996* ................................... 21,502 20,974 19,965 19,438
1997* ................................... 22,749 22,184 21,468 20,904
1998* ................................... 26,197 25,558 25,173 24,534
1999* ................................... 29,950 29,226 29,182 28,457
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the WRL LKCM
Strategic Total Return portfolio would have affected benefits for a Policy dated
on the last valuation date prior to January 1, 1994. This example assumes that
net premiums and cash values were invested in the portfolio for the entire
period and that the values were determined on each Policy anniversary
thereafter.
WRL LKCM STRATEGIC TOTAL RETURN
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1995 .................................... $ 1,540 $ 1,540 $ 0 $ 0
1996* ................................... 3,867 3,834 1,306 1,274
1997* ................................... 6,201 6,125 3,640 3,564
1998* ................................... 9,394 9,250 6,833 6,689
1999* ................................... 11,892 11,683 9,331 9,123
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
59
<PAGE>
The following example shows how the hypothetical net return of the WRL Federated
Growth & Income portfolio would have affected benefits for a Policy dated on the
last valuation date prior to January 1, 1995. This example assumes that net
premiums and cash values were invested in the portfolio for the entire period
and that the values were determined on each Policy anniversary thereafter.
WRL FEDERATED GROWTH & INCOME
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 .................................... $1,978 $1,978 $ 0 $ 0
1997* ................................... 3,932 3,902 1,372 1,341
1998* ................................... 6,816 6,737 4,255 4,176
1999* ................................... 8,548 8,420 5,987 5,859
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the WRL J.P.
Morgan Money Market portfolio would have affected benefits for a Policy dated on
the last valuation date prior to January 1, 1987. This example assumes that net
premiums and cash values were invested in the portfolio for the entire period
and that the values were determined on each Policy anniversary thereafter.
WRL J.P. MORGAN MONEY MARKET
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1988 .................................... $ 1,627 $ 1,627 $ 0 $ 0
1989* ................................... 3,348 3,319 788 758
1990* ................................... 5,262 5,192 2,702 2,632
1991* ................................... 7,239 7,116 4,678 4,555
1992* ................................... 9,157 8,977 6,596 6,417
1993* ................................... 10,902 10,666 8,598 8,361
1994* ................................... 12,593 12,296 10,544 10,247
1995* ................................... 14,430 14,064 12,638 12,271
1996* ................................... 16,585 16,154 15,049 14,617
1997* ................................... 18,738 18,246 17,458 16,966
1998* ................................... 21,050 20,508 20,025 19,484
1999* ................................... 23,438 22,841 22,670 22,073
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
60
<PAGE>
The following example shows how the hypothetical net return of the WRL Dean
Asset Allocation portfolio would have affected benefits for a Policy dated on
the last valuation date prior to January 1, 1995. This example assumes that net
premiums and cash values were invested in the portfolio for the entire period
and that the values were determined on each Policy anniversary thereafter.
WRL DEAN ASSET ALLOCATION
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 .................................... $1,891 $1,891 $ 0 $ 0
1997* ................................... 3,934 3,903 1,373 1,342
1998* ................................... 6,366 6,291 3,806 3,730
1999* ................................... 8,512 8,382 5,951 5,821
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the WRL GE U.S.
Equity portfolio would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1997. This example assumes that net premiums
and cash values were invested in the portfolio for the entire period and that
the values were determined on each Policy anniversary thereafter.
WRL GE U.S. EQUITY
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1998 .................................... $2,008 $2,008 $ 0 $ 0
1999* ................................... 4,380 4,348 1,819 1,787
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
61
<PAGE>
The following example shows how the hypothetical net return of the WRL Third
Avenue Value portfolio would have affected benefits for a Policy dated on the
last valuation date prior to January 1, 1998. This example assumes that net
premiums and cash values were invested in the portfolio for the entire period
and that the values were determined on each Policy anniversary thereafter.
WRL THIRD AVENUE VALUE
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1999 .................................... $1,434 $1,434 $0 $0
</TABLE>
The following example shows how the hypothetical net return of the WRL AEGON
Balanced portfolio would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1995. This example assumes that net premiums
and cash values were invested in the portfolio for the entire period and that
the values were determined on each Policy anniversary thereafter.
WRL AEGON BALANCED
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 .................................... $1,886 $1,886 $ 0 $ 0
1997* ................................... 3,796 3,766 1,236 1,205
1998* ................................... 6,235 6,160 3,674 3,599
1999* ................................... 8,260 8,132 5,699 5,571
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
62
<PAGE>
The following example shows how the hypothetical net return of the WRL NWQ Value
Equity portfolio would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1997. This example assumes that net premiums
and cash values were invested in the portfolio for the entire period and that
the values were determined on each Policy anniversary thereafter.
WRL NWQ VALUE EQUITY
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1998 .................................... $1,975 $1,975 $ 0 $ 0
1999* ................................... 3,328 3,300 768 740
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the WRL C.A.S.E.
Growth portfolio would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1996. This example assumes that net premiums
and cash values were invested in the portfolio for the entire period and that
the values were determined on each Policy anniversary thereafter.
WRL C.A.S.E. GROWTH
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1997 .................................... $1,846 $1,846 $ 0 $ 0
1998* ................................... 3,905 3,874 1,345 1,314
1999* ................................... 5,547 5,479 2,987 2,918
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
63
<PAGE>
The following example shows how the hypothetical net return of the WRL
GE/Scottish Equitable International Equity portfolio would have affected
benefits for a Policy dated on the last valuation date prior to January 1, 1997.
This example assumes that net premiums and cash values were invested in the
portfolio for the entire period and that the values were determined on each
Policy anniversary thereafter.
WRL GE/SCOTTISH EQUITABLE INTERNATIONAL EQUITY
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1998 .................................... $1,676 $1,676 $ 0 $ 0
1999* ................................... 3,638 3,607 1,077 1,047
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
Because the WRL J.P. Morgan Real Estate Securities portfolio did not
commence operations until May 1, 1998 and the WRL Goldman Sachs Growth, WRL
Goldman Sachs Small Cap, WRL T. Rowe Price Dividend Growth, WRL T. Rowe Price
Small Cap, WRL Salomon All Cap, WRL Pilgrim Baxter Mid Cap Growth, and WRL
Dreyfus Mid Cap portfolios did not commence operations until May 1, 1999,
there are no hypothetical illustrations for these portfolios.
OTHER PERFORMANCE DATA IN ADVERTISING SALES LITERATURE
We may compare each subaccount's performance to the performance of:
o other variable life issuers in general;
o variable life insurance policies which invest in mutual funds with
similar investment objectives and policies, as reported by Lipper
Analytical Services, Inc. ("Lipper") and Morningstar, Inc.
("Morningstar"); and other services, companies, individuals, or industry
or financial publications (E.G. FORBES, MONEY, THE WALL STREET JOURNAL,
BUSINESS WEEK, BARRON'S, KIPLINGER'S PERSONAL FINANCE, and FORTUNE);
-- > Lipper and Morningstar rank variable annuity contracts and
variable life policies. Their performance analysis ranks such
policies and contracts on the basis of total return, and assumes
reinvestment of distributions; but it does not show sales charges,
redemption fees or certain expense deductions at the separate
account level.
o the Standard & Poor's Index of 500 Common Stocks, or other widely
recognized indices;
-- > unmanaged indices may assume the reinvestment of dividends, but
usually do not reflect deductions for the expenses of operating or
managing an investment portfolio; or
o other types of investments, such as:
-- > certificates of deposit;
64
<PAGE>
-- > savings accounts and U.S. Treasuries;
-- > certain interest rate and inflation indices (E.G. the Consumer
Price Index); or
-- > indices measuring the performance of a defined group of securities
recognized by investors as representing a particular segment of the
securities markets (E.G. Donoghue Money Market Institutional
Average, Lehman Brothers Corporate Bond Index, or Lehman Brothers
Government Bond Index).
AUSA LIFE'S PUBLISHED RATINGS
We may publish in advertisements, sales literature, or reports we send to
you the ratings and other information that an independent ratings organization
assigns to us. These organizations include: A.M. Best Company, Moody's
Investors Service, Inc., Standard & Poor's Insurance Rating Services, and Duff
& Phelps Credit Rating Co. These ratings are opinions regarding an operating
insurance company's financial capacity to meet the obligations of its insurance
policies in accordance with their terms. These ratings do not apply to the
separate account, the subaccounts, the fund or their portfolios, or to their
performance.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SALE OF THE POLICIES
The Policy will be sold by individuals who are licensed as our life
insurance agents and who are also registered representatives of broker-dealers
having written sales agreements for the Policy with AFSG Securities Corporation
("AFSG"), the principal underwriter of the Policy. AFSG is located at 4333
Edgewood Road, N.E., Cedar Rapids, Iowa 52499. AFSG is registered with the SEC
under the Securities Exchange Act of 1934 as a broker-dealer, and is a member
of the National Association of Securities Dealers, Inc. The sales commission
payable to AUSA Life agents or other registered representatives may vary with
the sales agreement, but it is not expected to be greater than:
o 65% of all premiums you make during the first Policy year, PLUS
o 2.50% of all premiums you make during Policy years 2 through 10.
We will pay an additional sales commission of up to 0.15% of the Policy's cash
value on the fifth Policy anniversary and each anniversary thereafter where the
cash value (minus amounts attributable to loans) equals at least $5,000. In
addition, certain production, persistency and managerial bonuses may be paid.
LEGAL MATTERS
Sutherland Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain matters relating to the federal securities laws. All matters of New
York law pertaining to the Policy have been passed upon by Robert F. Colby,
Esq., Vice President, Assistant Secretary and Associate General Counsel of AUSA
Life.
65
<PAGE>
LEGAL PROCEEDINGS
Like other life insurance companies, we are involved in lawsuits. We are
not aware of any class action lawsuits naming us as a defendant or involving
the separate account. In some lawsuits involving other insurers, substantial
damages have been sought and/or material settlement payments have been made.
Although the outcome of any litigation cannot be predicted with certainty, we
believe that at the present time there are no pending or threatened lawsuits
that are reasonably likely to have a material adverse impact on us, or AFSG, or
the separate account.
YEAR 2000 READINESS DISCLOSURE
In May 1996, AUSA Life adopted and presently has in place a Year 2000
Project Plan (the "Plan") to review and analyze existing hardware and software
systems, as well as voice and data communications systems, to determine if they
are Year 2000 compliant. As of March 1, 1999, substantially all of AUSA Life's
mission-critical systems are Year 2000 compliant. The Plan remains on track as
we continue with the validation of our mission-critical and
non-mission-critical systems, including revalidation testing in 1999. In
addition, we have undertaken aggressive initiatives to test all systems that
interface with any third parties and other business partners. All of these
steps are aimed at allowing current operations to remain unaffected by the Year
2000 date change.
As of the date of this prospectus, AUSA Life has identified and made
available what it believes are the appropriate resources of hardware, people,
and dollars, including the engagement of outside third parties, to ensure that
the Plan will be completed.
The actions taken by management under the Plan are intended to reduce
significantly AUSA Life's risk of a material business interruption based on the
Year 2000 issues. It should be noted that the Year 2000 computer problem, and
its resolution, is complex and multifaceted, and any company's success cannot
be conclusively known until the Year 2000 is reached. In spite of its efforts
or results, our ability to function unaffected to and through the Year 2000 may
be adversely affected by actions, or failure to act, of third parties beyond
our knowledge or control.
This statement is a Year 2000 Readiness Disclosure pursuant to Section
3(9) of the YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT, 15 U.S.C.
Section 1 (1998).
EXPERTS
There are no financial statements of AUSA Series Life Account since the
separate account has not commenced operations as of the date of this
prospectus.
The statutory basis financial statements of AUSA Life at December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998,
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein. The financial statements referred to above are
included in reliance upon such report given upon the authority of such firm as
an expert in accounting and auditing.
66
<PAGE>
Actuarial matters included in this prospectus and registration statement
have been examined by Alan Yaeger as stated in the opinion filed as an exhibit
to the registration statement.
FINANCIAL STATEMENTS
Our financial statements appear on the following pages. You should
consider our financial statements only as bearing upon our ability to meet our
obligations under the Policies. You should not consider our financial
statements as bearing upon the investment performance of the assets held in the
separate account.
Our financial statements for the years ended December 31, 1998 and 1997
and for each of the three years in the period ended December 31, 1998 have been
prepared on the basis of statutory accounting principles rather than generally
accepted accounting principles.
ADDITIONAL INFORMATION ABOUT AUSA LIFE
AUSA Life is a stock life insurance company that is wholly owned by First
AUSA Life Insurance Company, which, in turn, is wholly owned by AEGON USA, Inc.
AUSA Life's office is located at 4 Manhattanville Road, Purchase, New York
10577 and the mailing address is P.O. Box 9054, Clearwater, Florida 33758-9054.
AUSA Life was incorporated under the name Zurich Life Insurance Company in
1947 under the laws of New York and is subject to regulation by the
Superintendent of Insurance of the State of New York, as well as by the
insurance departments of all other states and jurisdictions in which it does
business. AUSA Life is licensed to sell insurance in 49 states (including New
York) and in the District of Columbia. AUSA Life submits annual statements on
its operations and finances to insurance officials in all states and
jurisdictions in which it does business. The Policy described in this
prospectus has been filed with, and where required, approved by, insurance
officials in those jurisdictions in which it is sold.
67
<PAGE>
AUSA LIFE'S DIRECTORS AND OFFICERS
We are governed by a board of directors. The following table sets forth
the name, address and principal occupation during the past five years of each
of our directors.
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH AUSA LIFE DURING PAST 5 YEARS
<S> <C> <C>
Larry G. Brown Chairman of the Board Senior Vice President, Group General
570 Carillon Parkway Counsel (Asset Accumulation Group)
St. Petersburg, Florida 33716 (1995 - present), Western Reserve Life
Assurance Co. of Ohio; Senior Vice
President, General Counsel and
Secretary (1989 - 1995), AEGON USA,
Inc.
William Brown, Jr. Director Management Consultant (1992 -
14 Windward Avenue present), Brownstone Management
White Plains, New York 10615 Consultants, Inc., White Plains, New
York; Vice President (1987 - 1992),
Mutual of New York, Purchase, New
York.
William L. Busler Director President, Annuity Division (1980 -
4333 Edgewood Rd., N.E. present), AEGON USA, Inc.
Cedar Rapids, Iowa 52499
Jack R. Dykhouse Director Executive Vice President (1996 -
Suite 302, Brown Trail present), AEGON Insurance Group;
Bedford, TX 76201 Senior Vice President (1976 - 1996),
AEGON USA, Inc.
Steven E. Frushtick Director Partner (1961 - present) Wiener,
500 Fifth Avenue Frushtick & Straub, New York, New
New York, New York 10110 York.
Vice Admiral Carl T. Hanson Director Retired (1993 - present), Director (1982
900 Birdseye Road - present), President and Chief Execu-
Orient, New York 11957 tive Officer (1982 - 1993), National
Multiple Sclerosis Society, Orient, New
York.
B. Larry Jenkins Director Chairman and President ( 1982 -
2 East Chase Street present), Monumental Life Insurance
Baltimore, Maryland 21202 Company, Baltimore, Maryland.
Vera F. Mihaic Director and Vice President and Director (1996 -
666 Fifth Avenue Vice President present), AUSA Life; Vice President and
New York, New York 10103-0001 Director (1987 - 1996), International
Life Investors Insurance Company, New
York, New York.
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH AUSA LIFE DURING PAST 5 YEARS
<S> <C> <C>
Peter P. Post Director Owner and President (1992 - present),
425 Madison Avenue Emmerling Post, Inc., New York, New
New York, New York 10017 York; President and Director (1989 -
1992), Lintas: Marketing Communica-
tions, New York, New York.
Tom A. Schlossberg Director and President President (1993 - present), Diversified
4 Manhattanville Road Investment Advisors, Purchase, New
Purchase, New York 10577 York; Executive Vice President (1983 -
1993), Mutual of New York, Purchase,
New York.
Colette F. Vargas Director and Actuary (1993 - present), Diversified
4 Manhattanville Road Chief Actuary Investment Advisors, Purchase, New
Purchase, New York 10577 York; Actuary (1982 - 1993), Mutual of
New York, Purchase, New York.
Cor H. Verhagen Director President and Director (1990 - present),
51 JFK Parkway CORPA Reinsurance Co. of America,
Short Hills, New Jersey 07078 Short Hills, New Jersey; President
(1990 - 1996), International Life
Investors Insurance Company, New
York, New York; Vice President (1993 -
present), AEGON USA, Inc.; Vice
President (July 1985 - present), AEGON
US Holding Company, Short Hills, New
Jersey.
E. Kirby Warren Director Professor (1961 - present), Columbia
116th Street and Broadway University School of Business, New
New York, New York 10025 York, New York.
</TABLE>
69
<PAGE>
The following table gives the name, address and principal occupation during the
past five years of the principal officers of AUSA Life (other than officers
listed above as directors).
PRINCIPAL OFFICERS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH AUSA LIFE DURING PAST 5 YEARS
<S> <C> <C>
Patrick S. Baird Vice President and Executive Vice President (1995 -
4333 Edgewood Road, N.E. Chief Financial present), Chief Operating Officer (1996
Cedar Rapids, Iowa 52499 Officer - present), Chief Financial Officer (1992
- 1995), Vice President and Chief Tax
Officer (1984 - 1995) of AEGON USA,
Inc.
Brenda Clancy Treasurer Senior Vice President and Treasurer
4333 Edgewood Road, N.E. (1997 - present), AEGON USA, Inc.;
Cedar Rapids, Iowa 52499 Vice President and Controller 1992 -
1997), AEGON USA, Inc.
Robert J. Kontz Controller Vice President and Controller (1990 -
4333 Edgewood Road, N.E. present), AEGON USA, Inc.; Vice
Cedar Rapids, Iowa 52499 President - Corporate Accounting (1982
- 1989), Life Investors Insurance
Company of America, Cedar Rapids,
Iowa.
Craig D. Vermie Secretary Vice President and General Counsel
4333 Edgewood Road, N.E. (1986 - present), AEGON USA, Inc.
Cedar Rapids, Iowa 52499
</TABLE>
AUSA Life holds the assets of the separate account physically segregated
and apart from the general account. AUSA Life maintains records of all
purchases and sales of portfolio shares by each of the subaccounts. A blanket
bond was issued to AEGON U.S. Holding Corporation ("AEGON U.S.") in the amount
of $5 million (subject to a $1 million deductible), covering all of the
employees of AEGON U.S. and its affiliates, including AUSA Life. A Stockbrokers
Blanket Bond, issued to AEGON U.S.A. Securities, Inc. providing fidelity
coverage, covers the activities of registered representative of AFSG Securities
Corporation to a limit of $12 million.
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT
AUSA Life established the separate account as a separate investment
account under New York law in 1994. We own the assets in the separate account
and are obligated to pay all benefits under the Policies. The separate account
is used to support other life insurance policies of AUSA Life, as well as for
other purposes permitted by law. The separate account is registered with the
SEC as an unit investment trust under the 1940 Act and qualifies as a "separate
account" within the meaning of the federal securities laws.
70
<PAGE>
APPENDIX A
ILLUSTRATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following illustrations show how certain values under a sample Policy
would change with different rates of fictional investment performance over an
extended period of time. In particular, the illustrations show how the death
benefit, cash value, and net surrender value under a Policy issued to an
insured of a given age, would change over time if the premiums indicated were
paid and the return on the assets in the subaccounts were a uniform gross
annual rate (before any expenses) of 0%, 6% or 12%. The tables illustrate
Policy values that would result based on assumptions that you pay the premiums
indicated, you do not change your specified amount, and you do not take any
cash withdrawals or Policy loans. The values under the Policy will be different
from those shown even if the returns averaged 0%, 6% or 12%, but fluctuated
over and under those averages throughout the years shown.
We based the illustration on page 73 on a Policy for an insured who is a
35 year old male in the ultimate select, non-tobacco use, rate class, annual
premiums of $2,000, a $165,000 specified amount and death benefit Option A. The
illustration on that page also assumes cost of insurance charges based on our
CURRENT cost of insurance rates.
The illustration on page 74 is based on the same factors as those on page
73, except that cost of insurance rates are based on the GUARANTEED cost of
insurance rates (based on the 1980 Commissioners Standard Ordinary Mortality
Table).
The amounts we show for the death benefits, cash values and net surrender
values take into account (1) the daily charge for assuming mortality and
expense risks assessed against each subaccount. This charge is equivalent to an
annual charge of 0.90% of the average net assets of the subaccounts during the
first 15 Policy years; (2) estimated daily expenses equivalent to an effective
average annual expense level of 0.94% of the portfolios' average daily net
assets; and (3) all applicable premium expense charges and cash value charges
using the current monthly Policy charge. The 0.94% average portfolio expense
level assumes an equal allocation of amounts among the 23 subaccounts. It is
based on an average 0.80% investment advisory fee and estimated 1998 average
normal operating expenses of 0.14% for each of the portfolios in operation
during 1998. We used annualized actual audited expenses incurred during 1998
for the following portfolios to calculate the average annual expense level: WRL
J.P. Morgan Money Market (0.46%), WRL AEGON Bond (0.54%), WRL Janus Growth
(0.83%), WRL LKCM Strategic Total Return (0.86%), WRL VKAM Emerging Growth
(0.89%), WRL Janus Global (0.95%), WRL Alger Aggressive Growth (0.91%), WRL
AEGON Balanced (0.91%), WRL Federated Growth & Income (0.90%), WRL C.A.S.E.
Growth (1.00%), WRL Dean Asset Allocation (0.86%), WRL NWQ Value Equity
(0.89%), WRL GE/Scottish Equitable International Equity (1.50%), WRL GE U.S.
Equity (1.05%), WRL Third Avenue Value (1.00%), and WRL J.P. Morgan Real Estate
Securities (1.00%). Because the portfolios of WRL Goldman Sachs Growth, WRL
Goldman Sachs Small Cap, WRL T. Rowe Price Dividend Growth, WRL T. Rowe Price
Small Cap, WRL Salomon All Cap, WRL Pilgrim Baxter Mid Cap Growth and WRL
71
<PAGE>
Dreyfus Mid Cap had not commenced operations as of December 31, 1998, the
estimated average annual portfolio expense level reflects estimated expenses
for each of these portfolios at 1.00% for 1999.
During 1998, WRL Management undertook to pay normal operating expenses of
certain portfolios that exceeded a certain stated percentage of those
portfolios' average daily net assets. WRL Management has undertaken until at
least April 30, 2000 to pay expenses to the extent normal operating expenses of
certain portfolios of the fund exceed a stated percentage of the portfolio's
average daily net assets. See the Portfolio Annual Expense Table p. 12. Taking
into account the assumed charges of 1.84%, the gross annual investment return
rates of 0%, 6% and 12% are equivalent to net annual investment return rates of
- -1.84%, 4.16%, and 10.16%.
The hypothetical returns shown in the tables are without any tax charges
that may be attributable to the separate account, because we are not currently
making such charges. In order to produce after tax returns of 0%, 6% or 12% if
such charges are made in the future, the separate account would have to earn a
sufficient amount in excess of 0%, 6% or 12% to cover any tax charges.
The "Premium Accumulated at 5%" column of each table shows the amount
which would accumulate if you invested an amount equal to the premium to earn
interest at 5% per year, compounded annually.
We will furnish, upon request, a comparable illustration reflecting the
proposed insured's age, gender, risk classification and desired plan features.
72
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
<TABLE>
<S> <C>
Specified Amount $165,000 Ultimate Select Class
Annual Premium $2,000 Option Type A
Using Current Cost of Insurance Rates
</TABLE>
<TABLE>
<CAPTION>
END OF PREMIUMS DEATH BENEFIT
POLICY ACCUMULATED ASSUMING HYPOTHETICAL GROSS AND NET
YEAR AT 5% ANNUAL INVESTMENT RETURN OF
0.00% (GROSS) 6.00% (GROSS) 12.00% (GROSS)
-1.84% (NET) 4.16% (NET) 10.16% (NET)
<S> <C> <C> <C> <C>
1 2,100 165,000 165,000 165,000
2 4,305 165,000 165,000 165,000
3 6,620 165,000 165,000 165,000
4 9,051 165,000 165,000 165,000
5 11,604 165,000 165,000 165,000
6 14,284 165,000 165,000 165,000
7 17,098 165,000 165,000 165,000
8 20,053 165,000 165,000 165,000
9 23,156 165,000 165,000 165,000
10 26,414 165,000 165,000 165,000
15 45,315 165,000 165,000 165,000
20 69,439 165,000 165,000 165,000
30 (AGE 65) 139,522 165,000 165,000 346,878
40 (AGE 75) 253,680 165,000 165,000 821,822
50 (AGE 85) 439,631 * 246,519 2,128,318
60 (AGE 95) 742,526 * 372,581 5,306,033
</TABLE>
<TABLE>
<CAPTION>
END OF CASH VALUE NET SURRENDER VALUE
POLICY ASSUMING HYPOTHETICAL GROSS AND NET ASSUMING HYPOTHETICAL GROSS AND NET
YEAR ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
0.00% (GROSS) 6.00% (GROSS) 12.00% (GROSS) 0.00% (GROSS) 6.00% (GROSS) 12.00% (GROSS)
-1.84% (NET) 4.16% (NET) 10.16% (NET) -1.84% (NET) 4.16% (NET) 10.16% (NET)
<S> <C> <C> <C> <C> <C> <C>
1 1,533 1,636 1,739 0 0 0
2 3,034 3,336 3,650 474 775 1,089
3 4,501 5,100 5,749 1,940 2,539 3,188
4 5,935 6,932 8,057 3,374 4,371 5,496
5 7,326 8,824 10,584 4,765 6,263 8,023
6 8,674 10,779 13,352 6,369 8,474 11,048
7 9,977 12,795 16,384 7,928 10,746 14,335
8 11,236 14,877 19,708 9,443 13,084 17,915
9 12,429 17,004 23,333 10,893 15,468 21,796
10 13,568 19,191 27,301 12,287 17,910 26,020
15 18,723 31,431 54,152 18,723 31,431 54,152
20 22,428 45,615 97,595 22,428 45,615 97,595
30 (AGE 65) 24,290 84,466 284,326 27,290 84,466 284,326
40 (AGE 75) 23,188 142,663 768,058 23,188 142,663 768,058
50 (AGE 85) * 234,780 2,026,969 * 234,780 2,026,969
60 (AGE 95) * 368,892 5,253,498 * 368,892 5,253,498
</TABLE>
* In the absence of an additional payment, the Policy would lapse.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future rates of return. Actual investment rates of return may be more
or less than those shown and will depend on a number of factors, including the
investment allocations by an owner and the different investment rates of return
for the fund. The death benefit, cash value and net surrender value for a
Policy would be different from those shown if the actual investment rates of
return averaged 0%, 6% and 12% over a period of years, but fluctuated above or
below that average for individual Policy years. No representation can be made
by AUSA Life or the fund that these hypothetical investment rates of return can
be achieved for any one year or sustained over any period of time. This
illustration must be preceded or accompanied by a current fund prospectus.
73
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
<TABLE>
<S> <C>
Specified Amount $165,000 Ultimate Select Class
Annual Premium $2,000 Option Type A
Using Guaranteed Cost of Insurance Rates
</TABLE>
<TABLE>
<CAPTION>
END OF PREMIUMS DEATH BENEFIT
POLICY ACCUMULATED ASSUMING HYPOTHETICAL GROSS AND NET
YEAR AT 5% ANNUAL INVESTMENT RETURN OF
0.00% (GROSS) 6.00% (GROSS) 12.00% (GROSS)
-1.84% (NET) 4.16% (NET) 10.16% (NET)
<S> <C> <C> <C> <C>
1 2,100 165,000 165,000 165,000
2 4,305 165,000 165,000 165,000
3 6,620 165,000 165,000 165,000
4 9,051 165,000 165,000 165,000
5 11,604 165,000 165,000 165,000
6 14,284 165,000 165,000 165,000
7 17,098 165,000 165,000 165,000
8 20,053 165,000 165,000 165,000
9 23,156 165,000 165,000 165,000
10 26,414 165,000 165,000 165,000
15 45,315 165,000 165,000 165,000
20 69,439 165,000 165,000 165,000
30 (AGE 65) 139,522 165,000 165,000 332,878
40 (AGE 75) 253,680 * 165,000 768,574
50 (AGE 85) 439,631 * 168,822 1,929,572
60 (AGE 95) 742,526 * 208,529 4,544,654
</TABLE>
<TABLE>
<CAPTION>
END OF CASH VALUE NET SURRENDER VALUE
POLICY ASSUMING HYPOTHETICAL GROSS AND NET ASSUMING HYPOTHETICAL GROSS AND NET
YEAR ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
0.00% (GROSS) 6.00% (GROSS) 12.00% (GROSS) 0.00% (GROSS) 6.00% (GROSS) 12.00% (GROSS)
-1.84% (NET) 4.16% (NET) 10.16% (NET) -1.84% (NET) 4.16% (NET) 10.16% (NET)
<S> <C> <C> <C> <C> <C> <C>
1 1,533 1,636 1,739 0 0 0
2 3,006 3,306 3,620 445 745 1,059
3 4,436 5,031 5,677 1,875 2,470 3,116
4 5,824 6,812 7,928 3,263 4,251 5,367
5 7,167 8,648 10,389 4,606 6,088 7,828
6 8,465 10,541 13,083 6,161 8,237 10,778
7 9,715 12,490 16,028 7,666 10,441 13,980
8 10,917 14,497 19,253 9,125 12,704 17,461
9 12,069 16,561 22,784 10,533 15,024 21,248
10 13,172 18,685 26,654 11,891 17,405 25,373
15 18,173 30,603 52,882 18,173 30,603 52,882
20 21,418 44,088 95,093 21,418 44,088 95,093
30 (AGE 65) 18,239 74,518 272,851 18,239 74,518 272,851
40 (AGE 75) * 106,143 718,293 * 106,143 718,293
50 (AGE 85) * 137,913 1,837,688 * 137,913 1,837,688
60 (AGE 95) * 206,464 4,499,658 * 206,464 4,499,658
</TABLE>
* In the absence of an additional payment, the Policy would lapse.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual investment rates of return
may be more or less than those shown and will depend on a number of factors,
including the investment allocations by an owner and the different investment
rates for the fund. The death benefit, cash value and net surrender value for a
Policy would be different from those shown if the actual investment rates of
return averaged 0%, 6% and 12% over a period of years, but fluctuated above or
below that average for individual Policy years. No representation can be made
by AUSA Life or the fund that these hypothetical investment rates of return can
be achieved for any one year or sustained over any period of time. This
illustration must be preceded or accompanied by a current fund prospectus.
74
<PAGE>
APPENDIX B
WEALTH INDICES OF INVESTMENTS IN THE U.S. CAPITAL MARKET
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The information below graphically depicts the growth of $1.00 invested in
large company stocks, small company stocks, long-term government bonds,
Treasury bills, and hypothetical asset returning the inflation rate over the
period from the end of 1925 to the end of 1998. All results assume reinvestment
of dividends on stocks or coupons on bonds and no taxes. Transaction costs are
not included, except in the small stock index starting in 1982.
Each of the cumulative index values is initialized at $1.00 at year-end
1925. The graph illustrates that large company stocks and small company stocks
have the best performance over the entire 73-year period: investments of $1.00
in these assets would have grown to $2,350.89 and $5,116.65, respectively, by
year-end 1998. This higher growth was earned by investments involving
substantial risk. In contrast, long-term government bonds (with an approximate
20-year maturity), which exposed the holder to much less risk, grew to only
$44.18.
The lowest-risk strategy over the past 73 years (for those with short-term
time horizons) was to buy U.S. Treasury bills. Since U.S. Treasury bills tended
to track inflation, the resulting real (inflation-adjusted) returns were near
zero for the entire 1926 - 1998 period.
75
<PAGE>
[GRAPH OMITTED]
COMPOUND ANNUAL RATES OF RETURN BY DECADE
<TABLE>
<CAPTION>
1920s* 1930s 1940s 1950s 1960s 1970s 1980s 1990s** 1989-98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Large Company ............ 19.2% -0.1% 9.2% 19.4% 7.8% 5.9% 17.5% 17.9% 19.2%
Small Company ............ -4.5 1.4 20.7 16.9 15.5 11.5 15.8 13.6 13.2
Long-Term Corp. .......... 5.2 6.9 2.7 1.0 1.7 6.2 13.0 10.3 10.9
Long-Term Govt. .......... 5.0 4.9 3.2 -0.1 1.4 5.5 12.6 11.0 11.7
Inter-Term Govt. ......... 4.2 4.6 1.8 1.3 3.5 7.0 11.9 8.3 8.7
Treasury Bills ........... 3.7 0.6 0.4 1.9 3.9 6.3 8.9 5.0 5.3
Inflation ................ -1.1 -2.0 5.4 2.2 2.5 7.4 5.1 3.0 3.1
</TABLE>
- ----------------
* Based on the period 1926-1929.
** Based on the period 1990-1998.
Used with permission. /copyright/1999 Ibbotson Associates, Inc. All rights
reserved. [Certain portions of this work were derived from copyrighted works of
Roger G. Ibbotson and Rex Sinquefield.]
76
<PAGE>
APPENDIX C
SURRENDER CHARGE PER THOUSAND
(BASED ON THE GENDER AND RATE CLASS OF THE INSURED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MALE MALE FEMALE FEMALE
ISSUE ULTIMATE SELECT/ ULTIMATE STANDARD/ ULTIMATE SELECT/ ULTIMATE STANDARD/
AGE SELECT STANDARD SELECT STANDARD
<S> <C> <C> <C> <C>
0 N/A 10.94 N/A 10.35
1 N/A 8.16 N/A 8.16
2 N/A 8.16 N/A 8.16
3 N/A 7.92 N/A 7.92
4 N/A 7.68 N/A 7.68
5 N/A 7.68 N/A 7.68
6 N/A 7.68 N/A 7.68
7 N/A 7.68 N/A 7.68
8 N/A 7.68 N/A 7.68
9 N/A 7.68 N/A 7.68
10 N/A 7.68 N/A 7.68
11 N/A 7.68 N/A 7.68
12 N/A 7.68 N/A 7.68
13 N/A 7.92 N/A 7.92
14 N/A 8.16 N/A 8.16
15 N/A 8.40 N/A 8.40
16 N/A 8.52 N/A 8.52
17 N/A 8.88 N/A 8.88
18 8.72 9.20 8.72 9.20
19 8.84 9.32 8.84 9.32
20 8.96 9.44 8.96 9.44
21 9.16 9.88 9.16 9.64
22 9.32 10.04 9.32 9.80
23 9.52 10.24 9.52 10.00
24 9.68 10.40 9.68 10.40
25 9.88 10.84 9.88 10.60
26 10.56 11.28 10.32 11.04
27 11.00 11.72 10.76 11.48
28 11.40 12.12 11.16 12.12
29 12.08 12.80 11.84 12.56
30 12.52 13.24 12.28 13.00
31 13.04 14.00 12.80 13.52
32 13.76 14.48 13.52 14.24
33 14.28 15.24 14.04 14.76
34 14.76 15.96 14.52 15.48
35 15.52 16.48 15.04 16.00
</TABLE>
77
<PAGE>
APPENDIX C -- (CONTINUED)
SURRENDER CHARGE PER THOUSAND
(BASED ON THE GENDER AND RATE CLASS OF THE INSURED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MALE MALE FEMALE FEMALE
ISSUE ULTIMATE SELECT/ ULTIMATE STANDARD/ ULTIMATE SELECT/ ULTIMATE STANDARD/
AGE SELECT STANDARD SELECT STANDARD
<S> <C> <C> <C> <C>
36 16.20 17.40 15.34 16.56
37 16.85 18.40 15.65 16.93
38 17.25 19.56 15.98 17.32
39 17.66 20.56 16.32 17.73
40 20.28 21.96 19.32 20.52
41 21.64 23.56 20.68 22.12
42 23.08 25.24 21.30 23.24
43 23.90 27.08 21.80 23.82
44 24.57 29.12 22.33 24.43
45 25.27 30.04 22.89 25.06
46 26.02 31.02 23.48 25.73
47 26.81 32.05 24.10 26.43
48 27.64 33.13 24.75 27.16
49 28.53 34.28 25.45 27.94
50 29.47 35.49 26.18 28.75
51 30.47 36.77 26.95 29.61
52 31.53 38.12 27.76 30.51
53 32.66 39.55 28.63 31.46
54 33.86 41.05 29.54 32.45
55 35.12 42.62 30.51 33.51
56 36.47 44.29 31.53 34.62
57 37.90 46.04 32.63 35.80
58 39.43 47.89 33.80 37.07
59 41.05 49.86 35.05 38.43
60 42.78 51.94 36.40 39.89
61 44.63 54.15 37.84 41.45
62 46.60 56.48 39.39 43.11
63 48.69 57.00 41.03 44.88
64 50.91 57.00 42.79 46.75
65 53.28 57.00 44.66 48.73
66 55.80 57.00 46.66 50.84
67 57.00 57.00 48.81 53.09
68 57.00 57.00 51.13 55.53
69 57.00 57.00 53.64 57.00
70 57.00 57.00 56.37 57.00
71 and over 57.00 57.00 57.00 57.00
</TABLE>
78
<PAGE>
Index to Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AUSA SERIES LIFE ACCOUNT
There are no financial statements for the separate account as of the date of
this prospectus.
AUSA LIFE INSURANCE COMPANY, INC.:
Report of Independent Auditors dated February 19, 1999
Statutory-Basis Balance Sheets at December 31, 1998 and 1997
Statutory-Basis Statements of Operations for the years ended December 31, 1998,
1997 and 1996
Statutory-Basis Statements of Changes in Capital and Surplus for the years
ended December 31, 1998, 1997 and 1996
Statutory-Basis Statements of Cash Flows for the years ended December 31, 1998,
1997, and 1996
Notes to Statutory-Basis Financial Statements
79
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
AUSA Life Insurance Company, Inc.
We have audited the accompanying statutory-basis balance sheets of AUSA
Life Insurance Company, Inc. as of December 31, 1998 and 1997 and the related
statutory-basis statements of operations, changes in capital and surplus, and
cash flows for each of the three years in the period ended December 31, 1998.
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.
As described in Note 1 to the financial statements, the Company presents
its financial statements in conformity with accounting practices prescribed or
permitted by the Department of Insurance of the State of New York, which
practices differ from generally accepted accounting principles. The variances
between such practices and generally accepted accounting principles also are
described in Note 1. The effects on the financial statements of these variances
are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of AUSA Life Insurance Company, Inc. at December 31, 1998
and 1997, or the results of its operations or its cash flows for each of the
three years in the period ended December 31, 1998.
However, in our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of AUSA Life
Insurance Company, Inc. at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with accounting practices prescribed or
permitted by the Department of Insurance of the State of New York.
ERNST & YOUNG LLP
Des Moines, Iowa
February 19, 1999
80
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
BALANCE SHEETS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments ................................. $ 61,065 $ 68,131
Bonds ........................................................... 4,151,780 3,988,635
Stocks:
Preferred ...................................................... 2,582 1,792
Common, at market (cost: $14 in 1998 and $118 in 1997) ......... 2 144
Mortgage loans on real estate ................................... 413,107 495,009
Real estate acquired in satisfaction of debt, at cost less
accumulated depreciation ($2,474 in 1998 and $1,816
in 1997) ...................................................... 33,986 45,695
Policy loans .................................................... 3,181 3,046
Other invested assets ........................................... 30,795 22,414
----------- -----------
Total cash and invested assets ................................... 4,696,498 4,624,866
Short-term note receivable from affiliate ........................ 10,400 8,800
Receivable from affiliates ....................................... 14,731 794
Premiums deferred and uncollected ................................ 6,408 6,316
Accrued investment income ........................................ 64,859 69,989
Federal income taxes recoverable ................................. 527 --
Other assets ..................................................... 12,567 7,609
Separate account assets .......................................... 6,517,152 5,630,093
----------- -----------
Total admitted assets ............................................ $11,323,142 $10,348,467
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
81
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
BALANCE SHEETS -- STATUTORY BASIS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life .................................................. $ 109,132 $ 103,370
Annuity ............................................... 868,294 911,075
Accident and health ................................... 16,416 16,547
Policy and contract claim reserves:
Life .................................................. 4,927 5,456
Accident and health ................................... 10,302 11,125
Other policyholders' funds ............................. 3,267,417 3,181,719
Remittances and items not allocated .................... 58,724 35,267
Asset valuation reserve ................................ 84,077 67,324
Interest maintenance reserve ........................... 37,253 25,882
Payable to affiliates .................................. -- 2,247
Deferred income ........................................ 5,230 13,421
Payable under assumption reinsurance agreement ......... 52,837 56,952
Other liabilities ...................................... 7,422 8,400
Federal income taxes payable ........................... -- 1,010
Separate account liabilities ........................... 6,497,865 5,608,364
----------- -----------
Total liabilities ....................................... 11,019,896 10,048,159
Commitments and contingencies
Capital and surplus:
Common stock, $125 par value, 20,000 shares authorized,
issued and outstanding ............................... 2,500 2,500
Paid-in surplus ........................................ 319,180 319,180
Special surplus funds .................................. 1,827 1,607
Unassigned surplus (deficit) ........................... (20,261) (22,979)
----------- -----------
Total capital and surplus ............................... 303,246 300,308
----------- -----------
Total liabilities and capital and surplus ............... $11,323,142 $10,348,467
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
82
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of reinsurance:
Life .................................................................. $ 22,664 $ 71,899 $ 21,120
Annuity ............................................................... 1,132,120 1,199,470 1,092,033
Accident and health ................................................... 32,869 39,999 52,831
Net investment income .................................................. 345,660 341,540 339,460
Amortization of interest maintenance reserve ........................... 6,116 3,392 2,326
Commissions and expense allowances on reinsurance ceded ................ 302 374 438
Other income ........................................................... -- 17,240 10,739
---------- ---------- ----------
1,539,731 1,673,914 1,518,947
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits ................................. 32,464 39,045 50,647
Surrender benefits .................................................... 1,117,653 1,175,051 864,643
Other benefits ........................................................ 20,886 14,316 11,699
Increase (decrease) in aggregate reserves for policies and
contracts:
Life .................................................................. 5,762 52,500 2,492
Annuity ............................................................... (42,781) 65,982 53,136
Accident and health ................................................... (131) (1,357) (1,063)
Other ................................................................. (67) 580 609
Increase in liability for premium and other deposit type funds ......... 85,461 92,280 93,893
---------- ---------- ----------
1,219,247 1,438,397 1,076,056
Insurance expenses:
Commissions ............................................................ 69,009 79,099 87,938
General insurance expenses ............................................. 95,169 92,613 83,885
Taxes, licenses and fees ............................................... 1,466 3,717 3,335
Net transfers to separate accounts ..................................... 130,910 42,490 255,672
Other expenses ......................................................... 978 181 145
---------- ---------- ----------
297,532 218,100 430,975
---------- ---------- ----------
1,516,779 1,656,497 1,507,031
---------- ---------- ----------
Gain from operations before federal income tax expense and net
realized capital gains (losses) on investments ........................ 22,952 17,417 11,916
Federal income tax expense .............................................. 4,021 5,247 5,719
---------- ---------- ----------
Gain from operations before net realized capital gains (losses) on
investments ........................................................... 18,931 12,170 6,197
Net realized capital gains (losses) on investments (net of related
federal income taxes and amounts transferred to interest
maintenance reserve) .................................................. 3,770 831 (12,107)
---------- ---------- ----------
Net income (loss) ....................................................... $ 22,701 $ 13,001 $ (5,910)
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
83
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
STATEMENTS OF CHANGES IN CAPITAL AND
SURPLUS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SPECIAL UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS SURPLUS CAPITAL AND
STOCK SURPLUS FUNDS (DEFICIT) SURPLUS
-------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ........................ $2,500 $319,180 $1,357 $ 5,217 $ 328,254
Net loss ......................................... -- -- -- (5,910) (5,910)
Change in net unrealized capital
gains (losses) ................................. -- -- -- (460) (460)
Change in non-admitted assets .................... -- -- -- 437 437
Change in special surplus funds .................. -- -- 116 -- 116
Change in liability for reinsurance in
unauthorized companies ......................... -- -- -- (42) (42)
Change in asset valuation reserve ................ -- -- -- (6,217) (6,217)
Seed money contributed to separate
account, net of redemptions .................... -- -- -- (12,500) (12,500)
Change in surplus in separate account ............ -- -- -- 14,783 14,783
Prior year federal income tax adjustment ......... -- -- -- 446 446
------ -------- ------ --------- ---------
Balance at December 31, 1996 ...................... 2,500 319,180 1,473 (4,246) 318,907
Net income ....................................... -- -- -- 13,001 13,001
Change in net unrealized capital
gains (losses) ................................. -- -- -- (2,710) (2,710)
Change in non-admitted assets .................... -- -- -- (8,617) (8,617)
Change in special surplus funds .................. -- -- 134 -- 134
Change in liability for reinsurance in
unauthorized companies ......................... -- -- -- 29 29
Change in asset valuation reserve ................ -- -- -- (20,446) (20,446)
Seed money withdrawn from separate
account, net of redemptions .................... -- -- -- 11,700 11,700
Change in surplus in separate account ............ -- -- -- (11,749) (11,749)
Prior year federal income tax adjustment ......... -- -- -- 59 59
------ -------- ------ --------- ---------
Balance at December 31, 1997 ...................... 2,500 319,180 1,607 (22,979) 300,308
Net income ....................................... -- -- -- 22,701 22,701
Change in net unrealized capital
gains (losses) ................................. -- -- -- 4,439 4,439
Change in non-admitted assets .................... -- -- -- (511) (511)
Change in special surplus funds .................. -- -- 220 -- 220
Change in liability for reinsurance in
unauthorized companies ......................... -- -- -- 18 18
Change in asset valuation reserve ................ -- -- -- (16,753) (16,753)
Seed money withdrawn from separate
account, net of redemptions .................... -- -- -- 1,818 1,818
Change in surplus in separate account ............ -- -- -- (994) (994)
Dividend to stockholder .......................... -- -- -- (8,000) (8,000)
------ -------- ------ --------- ---------
Balance at December 31, 1998 ...................... $2,500 $319,180 $1,827 $ (20,261) $ 303,246
====== ======== ====== ========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
84
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums and other considerations, net of
reinsurance ............................................ $ 1,191,035 $ 1,340,757 $ 1,177,613
Net investment income .................................. 353,054 340,150 345,153
Life and accident and health claims .................... (33,979) (40,151) (52,590)
Surrender benefits and other fund withdrawals .......... (1,117,653) (1,175,051) (864,643)
Other benefits to policyholders ........................ (20,876) (14,290) (11,697)
Commissions, other expenses and other taxes ............ (169,784) (184,457) (193,405)
Net transfers to separate account ...................... (130,976) (43,309) (257,467)
Federal income taxes paid .............................. (5,558) (4,704) (4,490)
Other, net ............................................. (3,806) (3,744) (14,431)
------------ ------------ ------------
Net cash provided by operating activities .............. 61,457 215,201 124,043
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks ............................ 1,381,784 968,184 777,107
Common stocks ......................................... 164 -- 5,288
Mortgage loans on real estate ......................... 138,723 179,810 165,460
Real estate ........................................... 22,067 25,104 --
Policy loans .......................................... -- 16 4
Other ................................................. (21) -- --
------------ ------------ ------------
1,542,717 1,173,114 947,859
Cost of investments acquired:
Bonds and preferred stocks ............................ (1,554,838) (1,260,122) (1,101,918)
Common stocks ......................................... -- (103) (589)
Mortgage loans on real estate ......................... (51,862) (60,722) (42,118)
Real estate ........................................... (561) -- (521)
Policy loans .......................................... (135) (146) (153)
Other ................................................. 5,756 (17,805) (2,695)
------------ ------------ ------------
(1,601,640) (1,338,898) (1,147,994)
------------ ------------ ------------
Net cash used in investing activities .................. (58,923) (165,784) (200,135)
FINANCING ACTIVITIES
Payment of intercompany notes, net ..................... (1,600) (9,400) (19,200)
Dividends to stockholders .............................. (8,000) -- --
------------ ------------ ------------
Net cash used in financing activities .................. (9,600) (9,400) (19,200)
------------ ------------ ------------
Increase (decrease) in cash and short-term invest-
ments .................................................. (7,066) 40,017 (95,292)
Cash and short-term investments at beginning of year 68,131 28,114 123,406
------------ ------------ ------------
Cash and short-term investments at end of year ......... $ 61,065 $ 68,131 $ 28,114
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
85
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
December 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
AUSA Life Insurance Company, Inc. ("the Company") is a stock life
insurance company and is 82 percent owned by First AUSA Life Insurance Company
("First AUSA"), a wholly-owned subsidiary of AEGON USA, Inc. ("AEGON"), and 18
percent owned by Veterans Life Insurance Company, an indirect wholly-owned
subsidiary of AEGON. AEGON is a wholly-owned subsidiary of AEGON N.V., a
holding company organized under the laws of The Netherlands. Effective
September 24, 1993, First AUSA purchased from The Dreyfus Corporation
("Dreyfus"), its entire interest in Dreyfus Life Insurance Company and
subsequently changed the name to AUSA Life Insurance Company, Inc. On December
31, 1993, the Company entered into an assumption reinsurance agreement with
Mutual of New York ("MONY") to transfer certain group pension business of MONY
to the Company.
In July 1996, the Company completed a merger with International Life
Investors Insurance Company ("ILI"), a wholly-owned subsidiary of Life
Investors Insurance Company of America, another wholly-owned subsidiary of
First AUSA, whereby ILI was merged directly into the Company. The Company
received assets of $688,233 and liabilities of $635,189. The difference between
assets and liabilities was transferred directly to capital and surplus. In
accordance with National Association of Insurance Commissioners ("NAIC")
statutory accounting principles, all prior period financial statements
presented have been restated as if the merger took place at the beginning of
such periods. Historical book values carried over from the separate companies
to the combined entity.
On October 1, 1998, the Company completed a merger with First Providian
Life and Health Insurance Company ("FPLH"), an indirect wholly-owned subsidiary
of Commonwealth General Corporation which, in turn, is an indirect wholly-owned
subsidiary of AEGON, whereby FPLH was merged directly into the Company. The
accompanying financial statements give retroactive effect as if the merger had
occurred on January 1, 1996 in conformity with the practices of the NAIC and
accounting practices prescribed or permitted by the Department of Insurance of
the State of New York. This merger was accounted for under the pooling of
interests method of accounting and, accordingly, the historical book values
carried over from the separate companies to the Company.
86
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Summarized financial information for the Company and FPLH prior to the
merger are as follows:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED DECEMBER 31
SEPTEMBER 30 -----------------------------
1998 1997 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
The Company ......... $1,155,265 $1,585,260 $1,454,207
FPLH ................ 75,929 88,654 64,740
---------- ---------- ----------
As restated .......... $1,231,194 $1,673,914 $1,518,947
========== ========== ==========
Net income (loss):
The Company ......... $ 3,944 $ 3,503 $ (13,714)
FPLH ................ 6,911 9,498 7,804
---------- ---------- ----------
As restated .......... $ 10,855 $ 13,001 $ (5,910)
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Assets:
The Company ......... $10,411,596 $ 9,951,625
FPLH ................ 445,873 396,842
----------- -----------
As restated .......... $10,857,469 $10,348,467
=========== ===========
Liabilities:
The Company ......... $10,208,203 $ 9,745,504
FPLH ................ 352,184 302,655
----------- -----------
As restated .......... $10,560,387 $10,048,159
=========== ===========
Capital and surplus:
The Company ......... $ 203,393 $ 206,121
FPLH ................ 93,689 94,187
----------- -----------
As restated .......... $ 297,082 $ 300,308
=========== ===========
</TABLE>
NATURE OF BUSINESS
The Company primarily sells group fixed and variable annuities and group
life coverages. The Company is licensed in 49 states and the District of
Columbia and is actively in the process of becoming licensed in all 50 states.
Sales of the Company's products are primarily through brokers.
87
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract reserves, guarantee fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and assumptions
utilized which could have a material impact on the financial statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Department of Insurance of
the State of New York ("Insurance Department"), which practices differ in some
respects from generally accepted accounting principles. The more significant of
these differences are as follows: (a) bonds are generally reported at amortized
cost rather than segregating the portfolio into held-to-maturity (reported at
amortized cost), available-for-sale (reported at fair value), and trading
(reported at fair value) classifications; (b) acquisition costs of acquiring
new business are charged to current operations as incurred rather than deferred
and amortized over the life of the policies; (c) policy reserves on traditional
life products are based on statutory mortality rates and interest which may
differ from reserves based on reasonable assumptions of expected mortality,
interest, and withdrawals which include a provision for possible unfavorable
deviation from such assumptions; (d) policy reserves on certain investment
products use discounting methodologies utilizing statutory interest rates
rather than full account values; (e) reinsurance amounts are netted against the
corresponding asset or liability rather than shown as gross amounts on the
balance sheet; (f) deferred income taxes are not provided for the difference
between the financial statement and income tax bases of assets and liabilities;
(g) net realized gains or losses attributed to changes in the level of interest
rates in the market are deferred and amortized over the remaining life of the
bond or mortgage loan, rather than recognized as gains or losses in the
statement of operations when the sale is completed; (h) declines in the
estimated realizable value of investments are provided for through the
establishment of a formula-determined statutory investment reserve (reported as
a liability), changes to which are charged directly to surplus, rather than
through recognition in the statement of operations for declines in value, when
such declines are judged to be other than temporary; (i) certain assets
designated as "non-admitted assets" have been charged to surplus rather than
being reported as assets; (j) revenues for universal life and investment
products consist of premiums received rather than policy charges for the cost
of insurance, policy
88
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
administration charges, amortization of policy initiation fees and surrender
charges assessed; (k) pension expense is recorded as amounts are paid; (l)
stock options settled in cash are recorded as an expense of the Company's
indirect parent rather than charged to current operations; (m) adjustments to
federal income taxes of prior years are charged or credited directly to
unassigned surplus, rather than reported as a component of expense in the
statement of operations; and (n) gains or losses on dispositions of business
are charged or credited directly to unassigned surplus rather than being
reported in the statement of operations. The effects of these variances have
not been determined by the Company.
In 1998, the National Association of Insurance Commissioners (NAIC)
adopted codified statutory accounting principles ("Codification"). Codification
will likely change, to some extent, prescribed statutory accounting practices
and may result in changes to the accounting practices that the Company uses to
prepare its statutory-basis financial statements. Codification will require
adoption by the various states before it becomes the prescribed statutory basis
of accounting for insurance companies domesticated within those states.
Accordingly, before Codification becomes effective for the Company, the State
of New York must adopt Codification as the prescribed basis of accounting on
which domestic insurers must report their statutory-basis results to the
Insurance Department. At this time, it is unclear whether the State of New York
will adopt Codification. However, based on current guidance, management
believes that the impact of Codification will not be material to the Company's
statutory-basis financial statements.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with remaining maturity of one year or less when
purchased to be cash equivalents.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation
office of the NAIC has ascribed a value), mortgage loans on real estate and
short-term investments are reported at cost adjusted for amortization of
premiums and accrual of discounts. Amortized costs for bonds and mortgage loans
on real estate that were acquired through the reinsurance agreement described
earlier were initially recorded at market value, consistent with the
aforementioned agreement and as prescribed by the Department of Insurance of
the State of New York. Amortization is computed using methods which result in a
level yield over the expected life of the security. The Company reviews its
prepayment assumptions on mortgage and other asset-backed securities at regular
89
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
intervals and adjusts amortization rates retrospectively when such assumptions
are changed due to experience and/or expected future patterns. Investments in
preferred stocks in good standing are reported at cost. Investments in
preferred stocks not in good standing are reported at the lower of cost or
market. Common stocks are carried at market. Real estate is reported at cost
less allowances for depreciation. Depreciation is computed principally by the
straight-line method. Policy loans are reported at unpaid principal. Other
invested assets consist principally of investments in various joint ventures
and are recorded at equity in underlying net assets. Other "admitted assets"
are valued, principally at cost, as required or permitted by New York Insurance
Laws.
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for
anticipated losses in the event of default by issuers of certain invested
assets. These amounts are determined using a formula prescribed by the NAIC and
are reported as a liability. The formula for the AVR provides for a
corresponding adjustment for realized gains and losses. Under a formula
prescribed by the NAIC, the Company defers, in the Interest Maintenance Reserve
(IMR), the portion of realized gains and losses on sales of fixed income
investments, principally bonds and mortgage loans, attributable to changes in
the general level of interest rates and amortizes those deferrals over the
remaining period to maturity of the security.
Interest income is recognized on an accrual basis. The Company does not
accrue income on bonds in default, mortgage loans on real estate in default
and/or foreclosure or which are delinquent more than twelve months, or real
estate where rent is in arrears for more than three months. Further, income is
not accrued when collection is uncertain. At December 31, 1998, 1997 and 1996,
the Company excluded investment income due and accrued of $216, $473 and $469,
respectively, with respect to such practices.
The Company uses interest rate swaps as part of its overall interest rate
risk management strategy for certain life insurance and annuity products. The
net interest effect of such swap transactions is reported as an adjustment of
interest income from the hedged items as incurred.
Deferred income for unrealized gains and losses on the securities valued
at market at the time of the assumption reinsurance agreement (described in
Note 4) are returned to MONY at the time of realization pursuant to the
agreement.
AGGREGATE POLICY RESERVES
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest
90
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
rates and valuation methods that will provide, in the aggregate, reserves that
are greater than or equal to the minimum required by law.
The aggregate policy reserves for life insurance policies are based
principally upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary
Mortality Tables. The reserves are calculated using interest rates ranging from
2.50 to 6.50 percent and are computed principally on the Net Level Premium
Valuation and the Commissioners' Reserve Valuation Method. Reserves for
universal life policies are based on account balances adjusted for the
Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 3.00 to 8.50 percent and mortality rates, where appropriate, from a
variety of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims
reported to the Company and claims incurred but not yet reported through the
statement date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of separate account contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. Income and gains and losses with respect to these assets
accrue to the benefit of the policyholders and, accordingly, the operations of
the separate accounts are not included in the accompanying financial
statements.
Certain separate account assets and liabilities reported in the
accompanying financial statements contain contractual guarantees. Guaranteed
separate accounts represent funds invested by the Company for the benefit of
individual contract holders
91
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
who are guaranteed certain returns as specified in the contracts. Separate
account asset performance different than guaranteed requirements is either
transferred to or received from the general account and reported in the
statements of operations. Guaranteed separate account assets and liabilities
are reported at estimated fair value except for certain government and
fixed-rate separate accounts, which are carried at amortized cost. The assets
and liabilities of the nonguaranteed separate accounts are carried at estimated
fair value.
STOCK OPTION PLAN
AEGON N.V. sponsors a stock option plan for eligible employees of the
Company. Under this plan, certain employees have indicated a preference to
immediately sell shares received as a result of their exercise of the stock
options; in these situations, AEGON N.V. has settled such options in cash
rather than issuing stock to these employees. These cash settlements are paid
by the Company, and AEGON N.V. subsequently reimburses the Company for such
payments. Under statutory accounting principles, the Company does not record
any expense related to this plan, as the expense is recognized by AEGON N.V.
However, the Company is allowed to record a deduction in the consolidated tax
return filed by the Company and certain affiliates.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statutory-basis balance sheet, for which it is practicable to estimate that
value. SFAS No. 119, DISCLOSURES ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND
FAIR VALUE OF FINANCIAL INSTRUMENTS, requires additional disclosures about
derivatives. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparisons to independent
markets and, in many cases, could not be realized in immediate settlement of
the instrument. SFAS No. 107 and No. 119 exclude certain financial instruments
and all nonfinancial instruments from their disclosure requirements and allow
companies to forego the disclosures when those estimates can only be made at
excessive cost. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
92
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS--(CONTINUED)
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
statutory-basis balance sheet for these instruments approximate their fair
values.
INVESTMENT SECURITIES: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing
services or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
The fair values for equity securities are based on quoted market prices.
MORTGAGE LOANS AND POLICY LOANS: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of
the loans. The fair value of policy loans is assumed to equal its carrying
value.
INVESTMENT CONTRACTS: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
INTEREST RATE SWAPS: Estimated fair value of interest rate swaps are based
upon the pricing differential for similar swap agreements.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under 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.
93
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS--(CONTINUED)
The following sets forth a comparison of the fair values and carrying
values of the Company's financial instruments subject to the provisions of SFAS
No. 107 and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------------
1998 1997
--------------------------- ---------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Cash and short-term
investments .................... $ 61,065 $ 61,065 $ 68,131 $ 68,131
Bonds ........................... 4,151,780 4,246,901 3,988,635 4,083,280
Preferred stock ................. 2,582 2,529 1,792 1,892
Common stock .................... 2 2 144 144
Mortgage loans on real
estate ......................... 413,107 429,716 495,009 504,947
Interest rate swap .............. -- -- 391
Policy loans .................... 3,181 3,181 3,046 3,046
Separate account assets ......... 6,517,152 6,527,180 5,630,093 5,640,386
LIABILITIES
Investment contract
liabilities .................... 4,134,507 4,057,004 4,091,938 4,011,465
Separate account
annuities ...................... 6,408,436 6,387,445 5,594,880 5,577,854
</TABLE>
94
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt
securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Bonds:
United States Government and
agencies ............................ $ 99,834 $ 1,776 $ 285 $ 101,325
State, municipal and other
government .......................... 38,387 1,427 1,625 38,189
Public utilities ..................... 355,719 10,239 825 365,133
Industrial and miscellaneous ......... 2,398,132 88,051 25,538 2,460,645
Mortgage-backed and asset-
backed securities ................... 1,259,708 27,387 5,486 1,281,609
---------- -------- ------- ----------
4,151,780 128,880 33,759 4,246,901
Preferred stocks ...................... 2,582 -- 53 2,529
---------- -------- ------- ----------
$4,154,362 $128,880 $33,812 $4,249,430
========== ======== ======= ==========
DECEMBER 31, 1997
Bonds:
United States Government and
agencies ............................ $ 102,628 $ 943 $ 255 $ 103,316
State, municipal and other
government .......................... 60,427 1,413 1,761 60,079
Public utilities ..................... 251,071 4,943 892 255,122
Industrial and miscellaneous ......... 2,324,342 66,883 6,424 2,384,801
Mortgage-backed and asset-
backed securities ................... 1,250,167 32,779 2,984 1,279,962
---------- -------- ------- ----------
3,988,635 106,961 12,316 4,083,280
Preferred stocks ...................... 1,792 100 -- 1,892
---------- -------- ------- ----------
$3,990,427 $107,061 $12,316 $4,085,172
========== ======== ======= ==========
</TABLE>
95
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS--(CONTINUED)
The carrying value and estimated fair value of bonds at December 31, 1998, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
------------ -------------
<S> <C> <C>
Due in one year or less ............................. $ 262,288 $ 263,578
Due after one year through five years ............... 1,553,746 1,582,380
Due after five years through ten years .............. 825,886 849,510
Due after ten years ................................. 250,152 269,824
---------- ----------
2,892,072 2,965,292
Mortgage-backed and asset-backed securities ......... 1,259,708 1,281,609
---------- ----------
$4,151,780 $4,246,901
========== ==========
</TABLE>
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest on bonds and notes ............. $290,967 $285,730 $267,510
Mortgage loans .......................... 46,027 57,659 83,511
Real estate ............................. 12,741 13,976 7,225
Dividends on equity investments ......... 254 223 220
Interest on policy loans ................ 317 168 154
Derivative instruments .................. (3,265) 100 --
Other investment gain (loss) ............ 9,568 1,543 (5,482)
-------- -------- --------
Gross investment income ................. 356,609 359,399 353,138
Investment expenses ..................... 10,949 17,859 13,678
-------- -------- --------
Net investment income ................... $345,660 $341,540 $339,460
======== ======== ========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
Proceeds ............................ $1,381,784 $ 968,184 $ 777,107
========== ========= =========
Gross realized gains ................ $ 19,871 $ 19,165 $ 9,697
Gross realized losses ............... (5,974) (11,997) (12,291)
---------- --------- ---------
Net realized gains (losses) ......... $ 13,897 $ 7,168 $ (2,594)
========== ========= =========
</TABLE>
96
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS--(CONTINUED)
At December 31, 1998, investments with an aggregate carrying value of
$4,378 were on deposit with regulatory authorities or were restrictively held
in bank custodial accounts for the benefit of such regulatory authorities as
required by statute.
Realized investment gains (losses) and changes in unrealized gains
(losses) for investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
------------------------------------------
YEAR ENDED DECEMBER 31
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Debt securities .................................. $ 13,897 $ 7,168 $ (2,594)
Common stock ..................................... 60 -- 244
Preferred stock .................................. 170 (7) (44)
Short-term investments ........................... (41) (6) (115)
Mortgage loans on real estate .................... 325 287 (12,415)
Real estate ...................................... 3,967 4,059 --
Other invested assets ............................ 2,859 5,035 6,872
--------- --------- ---------
21,237 16,536 (8,052)
Tax effect ....................................... 20 (747) 87
Transfer to interest maintenance reserve ......... (17,487) (14,958) (4,142)
--------- --------- ---------
Total realized gains (losses) .................... $ 3,770 $ 831 $ (12,107)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED
------------------------------------------
YEAR ENDED DECEMBER 31
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Debt securities .................................. $ 323 $ 56,129 $ (87,888)
Equity securities ................................ (38) 21 (190)
------------ ------------ ------------
Change in unrealized appreciation
(depreciation) .................................. $ 285 $ 56,150 $ (88,078)
------------ ------------ ------------
</TABLE>
Gross unrealized gains and gross unrealized losses on equity securities at
December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Unrealized gains ................................. $ -- $ 38 $ 16
Unrealized losses ................................ (12) (12) (11)
------------ ------------ ------------
Net unrealized gains (losses) .................... $ (12) $ 26 $ 5
============ ============ ============
</TABLE>
97
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS--(CONTINUED)
During 1998, the Company issued mortgage loans with interest rates ranging
from 6.55% to 8.49%. The maximum percentage of any one loan to the value of the
underlying real estate at origination was 79%. No mortgage loans were
non-income producing for the previous twelve months and, accordingly, no
accrued interest related to these mortgage loans was excluded from investment
income. The Company requires all mortgage loans to carry fire insurance equal
to the value of the underlying property.
During 1998, 1997 and 1996, there were $2,796, $4,427 and $28,929,
respectively, in foreclosed mortgage loans that were transferred to real
estate. At December 31, 1998 and 1997, the Company held a mortgage loan loss
reserve in the asset valuation reserve of $34,083 and $20,191, respectively.
The mortgage loan portfolio is diversified by geographic region and specific
collateral property type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION PROPERTY TYPE DISTRIBUTION
- ----------------------------------------- -------------------------------
DECEMBER 31 DECEMBER 31
--------------- --------------
1998 1997 1998 1997
------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
South Atlantic 22% 20% Office 37% 30%
Mid-Atlantic 20 16 Industrial 29 13
E. North Central 20 16 Retail 24 19
Pacific 9 20 Apartment 4 23
W. South Central 9 2 Agricultural 2 --
New England 8 7 Other 4 15
Mountain 7 15
E. South Central 3 2
W. North Central 2 2
</TABLE>
At December 31, 1998, the Company had no investments, excluding U. S.
Government guaranteed or insured issues, which individually represented more
than ten percent of capital and surplus and the asset valuation reserve.
The Company utilized an interest rate swap agreement as part of its
efforts to hedge and manage fluctuations in the market value of its investment
portfolio attributable to changes in general interest rate levels and to manage
duration mismatch of assets and liabilities. The contract or notional amounts
of those instruments reflect the extent of involvement in the various types of
financial instruments.
The Company's exposure to credit risk is the risk of loss from a
counterparty failing to perform according to the terms of the contract. That
exposure includes settlement risk (i.e., the risk that the counterparty
defaults after the Company has delivered funds or securities under terms of the
contract) that would result in an accounting loss and replacement cost risk
(i.e., the cost to replace the contract at current market rates should the
counterparty default prior to settlement date). Credit loss
98
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS--(CONTINUED)
exposure resulting from nonperformance by a counterparty for commitments to
extend credit is represented by the contractual amounts of the instruments.
At December 31, 1998, the Company held no derivative instruments. At
December 31, 1998 and 1997, the Company's outstanding financial instruments
with on and off-balance sheet risks, shown in notional amounts, are summarized
as follows:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Derivative securities:
Interest rate swaps:
Receive fixed -- pay floating ......... $74,588 $50,800
</TABLE>
4. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to
meet its obligation under the reinsurance treaty.
Premiums earned reflect the following reinsurance assumed and ceded
amounts for the year ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Direct premiums ............. $1,183,777 $1,309,731 $1,185,163
Reinsurance assumed ......... 6,415 6,905 9,962
Reinsurance ceded ........... (2,539) (5,268) (29,141)
---------- ---------- ----------
Net premiums earned ......... $1,187,653 $1,311,368 $1,165,984
========== ========== ==========
</TABLE>
The Company received reinsurance recoveries in the amounts of $2,493,
$1,992 and $1,758 during 1998, 1997 and 1996, respectively.
The aggregate reserves for policies and contracts were reduced for reserve
credits for reinsurance ceded at December 31, 1998 and 1997 of $143,819 and
$153,092, respectively.
On December 31, 1993, the Company and MONY entered into an assumption
reinsurance agreement whereby all of the general account liabilities were
novated to the Company from MONY as state approvals were received.
In accordance with the agreement, MONY will receive payments relating to
the performance of the assets and liabilities that exist at the date of closing
for a period of
99
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
4. REINSURANCE--(CONTINUED)
nine years. These payments will be reduced for certain administrative expenses
as defined in the agreement. The Company will recognize operating gains and
losses on renewal premiums received after December 31, 1993 of the business
in-force at December 31, 1993, and on all new business written after that date.
At the end of nine years from the date of closing, the Company will purchase
from MONY the remaining transferred business inforce based upon a formula
described in the agreement. At December 31, 1998 and 1997, the Company owed
MONY $52,837 and $56,952, respectively, which represents the amount earned by
MONY under the gain sharing calculation and certain fees for investment
management services for the respective years.
In connection with the transaction, MONY purchased $150,000 and $50,000 in
Series A and Series B notes, respectively, of AEGON. The proceeds were used to
enhance the surplus of the Company. Both the Series A and Series B notes bear a
market rate of interest and mature in nine years from the date of closing.
AEGON provides general and administrative services for the transferred
business under a related agreement with MONY. The agreement specifies
prescribed rates for expenses to administer the business up to certain levels.
In addition, AEGON also provides investment management services on the assets
underlying the new business written by the Company while MONY continues to
provide investment management services for assets supporting the remaining
policy liabilities which were transferred at December 31, 1993.
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax
return filing with certain affiliated companies. Under the terms of a
tax-sharing agreement between the Company and its affiliates, the Company
computes federal income tax expense as if it were filing a separate income tax
return, except that tax credits and net operating loss carryforwards are
determined on the basis of the consolidated group. Additionally, the
alternative minimum tax is computed for the consolidated group and the
resulting tax, if any, is allocated back to the separate companies on the basis
of the separate companies' alternative minimum taxable income.
Federal income tax expense differs from the amount computed by applying
the statutory federal income tax rate to gain from operations before federal
income tax expense and net realized capital gains (losses) on investments
primarily due to differences in the statutory and tax treatment of certain
investments, deferred policy acquisition costs, stock options exercised,
dividends received deduction, carryforward (utilization) of operating loss, IMR
amortization, and certain adjustments related to the agreement between MONY and
the Company. These adjustments caused the Company to calculate federal income
tax expense using alternative minimum tax requirements in 1998.
100
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. INCOME TAXES--(CONTINUED)
Federal income tax expense differs from the amount computed by applying
the statutory federal income tax rate to net realized capital gains (losses) on
investments due to the agreement between MONY and the Company, as discussed in
Note 4 to the financial statements. In accordance with this agreement, these
gains and losses are included in the net payments MONY will receive relating to
the performance of the assets that existed at the date of closing. Accordingly,
income taxes relating to gains and losses on such assets are not provided for
on the income tax return filed by the Company.
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($2,427 at December 31, 1998). To the extent dividends are paid from
the amount accumulated in the policyholders' surplus account, net earnings
would be reduced by the amount of tax required to be paid. Should the entire
amount in the policyholders' surplus account become taxable, the tax thereon
computed at current rates would amount to approximately $849.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $8,514 which expire through 2011.
In 1998, the Company reached a final settlement with the Internal Revenue
Service for years 1993 through 1995 resulting in no tax due or refunded.
101
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES
A portion of the Company's policy reserves and other policyholders' funds
relate to liabilities established on a variety of the Company's products that
are not subject to significant mortality or morbidity risk; however, there may
be certain restrictions placed upon the amount of funds that can be withdrawn
without penalty. The amount of reserves on these products, by withdrawal
characteristics, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------
1998 1997
---------------------------- ---------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Subject to discretionary
withdrawal with market
value adjustment ............ $ 912,692 9% $ 910,528 9%
Subject to discretionary
withdrawal at book
value less surrender
charge ...................... 1,013,495 10 1,045,807 11
Subject to discretionary
withdrawal at market
value ....................... 3,678,649 34 2,950,639 30
Subject to discretionary
withdrawal at book
value (minimal or no
charges or adjustments) ..... 2,666,670 25 2,616,308 27
Not subject to discretion-
ary withdrawal provision 2,416,602 22 2,317,823 23
----------- --- ---------- ---
10,688,108 100% 9,841,105 100%
=== ===
Less reinsurance ceded ....... 143,475 152,726
----------- ----------
Total policy reserves on
annuities and deposit
fund liabilities ............ $10,544,633 $9,688,379
=========== ==========
</TABLE>
102
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES--(CONTINUED)
Separate and variable account assets held by the Company represent
contracts where the benefit is determined by the performance of the investments
held in the separate account. Information regarding the separate accounts of
the Company as of and for the years ended December 31, 1998, 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
------------ --------------- -------------
<S> <C> <C> <C>
Premiums, deposits and other
considerations for the year
ended December 31, 1998 ......... $ 84,150 $ 767,676 $ 851,826
========== ========== ==========
Reserves for separate accounts
with assets as of December 31,
1998 at: ........................
Fair value ...................... $2,350,983 $3,461,715 $5,812,698
Amortized cost .................. 595,738 -- 595,738
---------- ---------- ----------
Total ............................ $2,946,721 $3,461,715 $6,408,436
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
------------ --------------- -------------
<S> <C> <C> <C>
Premiums, deposits and other
considerations for the year
ended December 31, 1997 ......... $ 147,638 $ 648,056 $ 795,694
========== ========== ==========
Reserves for separate accounts
with assets as of December 31,
1997 at:
Fair value ...................... $2,204,931 $2,767,245 $4,972,176
Amortized cost .................. 622,703 -- 622,703
---------- ---------- ----------
Total ............................ $2,827,634 $2,767,245 $5,594,879
========== ========== ==========
Premiums, deposits and other
considerations for the year
ended December 31, 1996 ......... $ -- $ 747,506 $ 747,506
Reserves for separate accounts
with assets as of December 31,
1996 at:
Fair value ...................... $2,022,843 $2,178,445 $4,201,288
Amortized cost .................. 613,565 -- 613,565
---------- ---------- ----------
Total ............................ $2,636,408 $2,178,445 $4,814,853
========== ========== ==========
</TABLE>
103
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES--(CONTINUED)
There may be certain restrictions placed upon the amount of funds that can
be withdrawn without penalty. The amount of separate account liabilities on
these products, by withdrawal characteristics, is summarized as follows:
<TABLE>
<CAPTION>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
------------ --------------- -------------
<S> <C> <C> <C>
DECEMBER 31, 1998
Subject to discretionary
withdrawal with market value
adjustment ......................... $ 345,379 $ -- $ 345,379
Subject to discretionary
withdrawal at book value less
surrender charge ................... 250,359 -- 250,359
Subject to discretionary
withdrawal at market value ......... 216,935 3,461,715 3,678,650
Not subject to discretionary
withdrawal ......................... 2,134,048 -- 2,134,048
---------- ---------- ----------
$2,946,721 $3,461,715 $6,408,436
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
------------ --------------- -------------
<S> <C> <C> <C>
DECEMBER 31, 1997
Subject to discretionary
withdrawal with market value
adjustment ......................... $ 358,061 $ -- $ 358,061
Subject to discretionary
withdrawal at book value less
surrender charge ................... 264,642 -- 264,642
Subject to discretionary
withdrawal at market value ......... 180,802 2,767,245 2,948,047
Not subject to discretionary
withdrawal ......................... 2,024,129 -- 2,024,129
---------- ---------- ----------
$2,827,634 $2,767,245 $5,594,879
========== ========== ==========
</TABLE>
104
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES--(CONTINUED)
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Transfers as reported in the summary of
operations of the separate accounts
annual statement: .........................
Transfers to separate accounts ............. $851,826 $795,663 $747,677
Transfers from separate accounts ........... 723,321 767,049 505,592
-------- -------- --------
Net transfers to separate accounts ......... 128,505 28,614 242,085
Reconciling adjustments - HUB level fees
not paid to AUSA general account .......... 1,317 13,756 13,520
Fees paid to external fund manager ......... -- 120 67
Assumption of liabilities via merger of
FPLH ....................................... 1,088 -- --
-------- -------- --------
Net adjustments ............................ 2,405 13,876 13,587
-------- -------- --------
Transfers as reported in the summary of
operations of the life, accident and
health annual statement ................... $130,910 $ 42,490 $255,672
======== ======== ========
</TABLE>
105
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES--(CONTINUED)
Reserves on the Company's traditional life products are computed using
mean reserving methodologies. These methodologies result in the establishment
of assets for the amount of the net valuation premiums that are anticipated to
be received between the policy's paid-through date to the policy's next
anniversary date. At December 31, 1998 and 1997, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
---------- --------- ----------
<S> <C> <C> <C>
DECEMBER 31, 1998
Ordinary direct first year business ......... $ 351 $ 339 $ 12
Ordinary direct renewal business ............ 6,760 1,087 5,673
Group life direct business .................. 851 482 369
Credit life ................................. 37 -- 37
Reinsurance ceded ........................... (6) -- (6)
------- ------ -------
7,993 1,908 6,085
Accident and health:
Direct ..................................... 363 -- 363
Reinsurance ceded .......................... (40) -- (40)
------ ------ ------
Total accident and health ................... 323 -- 323
------ ------ ------
$8,316 $1,908 $6,408
====== ====== ======
DECEMBER 31, 1997
Ordinary direct first year business ......... $ 460 $ 336 $ 124
Ordinary direct renewal business ............ 6,138 1,081 5,057
Group life direct business .................. 1,267 433 834
Credit life ................................. 41 -- 41
Reinsurance ceded ........................... (14) -- (14)
------ ------ ------
7,892 1,850 6,042
Accident and health:
Direct ..................................... 325 -- 325
Reinsurance ceded .......................... (51) -- (51)
------ ------ ------
Total accident and health ................... 274 -- 274
------ ------ ------
$8,166 $1,850 $6,316
====== ====== ======
</TABLE>
At December 31, 1998 and 1997, the Company had insurance in force
aggregating $474,471 and $597,855, respectively, in which the gross premiums
are less than the net premiums required by the valuation standards established
by the Department of Insurance of the State of New York. The Company
established policy reserves of $1,348 and $1,476 to cover these deficiencies at
December 31, 1998 and 1997, respectively.
106
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
7. DIVIDEND RESTRICTIONS
The Company is subject to certain limitations relative to statutory
surplus, imposed by the State of New York, on the payment of dividends to its
parent company.
The Company paid dividends to its parent of $8,000 in 1998. The Company is
not entitled to pay out any dividends in 1999 without prior approval.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the
FASB 87 expense as a percent of salaries. The benefits are based on years of
service and the employee's compensation during the highest five consecutive
years of employment. The Company was allocated $4, $0 and $13 of pension
expense for the years ended December 31, 1998, 1997 and 1996, respectively. The
plan is subject to the reporting and disclosure requirements of the Employee
Retirement Income Security Act of 1974.
The Company's employees also participate in a contributory defined
contribution plan sponsored by AEGON which is qualified under Section 401(k) of
the Internal Revenue Service Code. Employees of the Company who customarily
work at least 1,000 hours during each calendar year and meet the other
eligibility requirements are participants of the plan. Participants may elect
to contribute up to fifteen percent of their salary to the plan. The Company
will match an amount up to three percent of the participant's salary.
Participants may direct all of their contributions and plan balances to be
invested in a variety of investment options. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement Income
Security Act of 1974. The Company was allocated $9, $12 and $21 of expense for
the years ended December 31, 1998, 1997 and 1996, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's
senior management with benefits in excess of normal pension benefits. The plans
are noncontributory and benefits are based on years of service and the
employee's compensation level. The plans are unfunded and nonqualified under
the Internal Revenue Service Code. In addition, AEGON has established incentive
deferred compensation plans for certain key employees of the Company. AEGON
also sponsors an employee stock option plan for individuals employed at least
three years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been accrued
or funded as deemed appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans
sponsored by AEGON that provide postretirement medical, dental and life
insurance benefits to
107
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. RETIREMENT AND COMPENSATION PLANS--(CONTINUED)
employees meeting certain eligibility requirements. Portions of the medical and
dental plans are contributory. The expenses of the postretirement plans
calculated on the pay-as-you-go basis are charged to affiliates in accordance
with an intercompany cost sharing arrangement. The Company expensed $4, $2 and
$2 for the years ended December 31, 1998, 1997 and 1996, respectively.
9. RELATED PARTY TRANSACTIONS
In accordance with an agreement between AEGON and the Company, AEGON will
ensure the maintenance of certain minimum tangible net worth, operating
leverage and liquidity levels of the Company, as defined in the agreement,
through the contribution of additional capital by the Company's parent as
needed.
The Company shares certain officers, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1998,
1997 and 1996, the Company paid $5,650, $7,330 and $5,739, respectively, for
these services, which approximates their costs to the affiliates.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 4.95% at December 31, 1998. During 1998,
1997 and 1996, the Company paid net interest of $232, $142 and $29,
respectively, to affiliates.
10. COMMITMENTS AND CONTINGENCIES
The Company has issued Trust GIC contracts to plan sponsors totaling
$153,146 at December 31, 1998, pursuant to terms under which the plan sponsor
retains ownership of the assets related to these contracts. The Company
guarantees benefit responsiveness in the event that plan benefit requests and
other contractual commitments exceed plan cash flows. The plan sponsor agrees
to reimburse the Company for such benefit payments with interest, either at a
fixed or floating rate, from future plan and asset cash flows. In return for
this guarantee, the Company receives a premium which varies based on such
elements as benefit responsive exposure and contract size. The Company
underwrites the plans for the possibility of having to make benefit payments
and also must agree to the investment guidelines to ensure appropriate credit
quality and cash flow matching. The assets and liabilities relating to such
contracts are not recognized in the Company's statutory-basis financial
statements.
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive
108
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
10. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
damages, in addition to contract liability, it is management's opinion, after
consultation with counsel and a review of available facts, that damages arising
from such demands will not be material to the Company's financial position.
The Company is subject to insurance guaranty laws in the states in which
it writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. In accordance with the purchase
agreement, assessments related to periods prior to the purchase of the Company
will be paid by Dreyfus and assessments attributable to business reinsured from
MONY for premiums received prior to the date of the transaction will be paid by
MONY (see Note 1). The Company will be responsible for assessments, if any,
attributable to premium income after the date of purchase. Assessments are
charged to operations when received by the Company except where right of offset
against other taxes paid is allowed by law; amounts available for future
offsets are recorded as an asset on the Company's balance sheet. Potential
future obligations for unknown insolvencies are not determinable by the
Company. The future obligation has been based on the most recent information
available from the National Organization of Life and Health Insurance Guaranty
Associations. The guaranty fund expense was $126, $586 and $246 for the years
ended December 31, 1998, 1997 and 1996, respectively.
11. YEAR 2000 (UNAUDITED)
The term Year 2000 issue generally refers to the improper processing of
dates and incorrect date calculations that might occur in computer software and
hardware and embedded systems as the Year 2000 is approached. The use of
computer programs that rely on two-digit date fields to perform computations
and decision-making functions may cause systems to malfunction when processing
information involving dates after 1999. For example, any computer software that
has date-sensitive coding might recognize a code of 00 as the year 1900 rather
than the year 2000.
The Company has developed a Year 2000 Project Plan (the Plan) to address
the Year 2000 issue as it affects the Company's internal Information Technology
("IT") and non-IT systems, and to assess Year 2000 issues relating to third
parties with whom the Company has critical relationships.
The Plan for addressing internal systems generally includes an assessment
of internal IT and non-IT systems and equipment affected by the Year 2000
issue; definition of strategies to address affected systems and equipment;
remediation of identified systems and equipment; internal testing and
certification that each internal system is Year 2000 compliant; and a review of
existing and revised business
109
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
11. YEAR 2000 (UNAUDITED)--(CONTINUED)
resumption and contingency plans to address potential Year 2000 issues. The
Company has remediated and tested substantially all of its mission-critical
internal IT systems as of December 31, 1998. The Company continues to remediate
and test certain non-critical internal IT systems, internal non-IT systems and
will continue with a revalidation testing program throughout 1999.
The Company's Year 2000 issues are more complex because a number of its
systems interface with other systems not under the Company's control. The
Company's most significant interfaces and uses of third-party vendor systems
are in the bank, financial services and trust areas. The Company utilizes
various banks to handle numerous types of financial and sales transactions.
Several of these banks also provide trustee and custodial services for the
Company's investment holdings and transactions. These services are critical to
a financial services company such as the Company as its business centers around
cash receipts and disbursements to policyholders and the investment of
policyholder funds. The Company has received written confirmation from its
vendor banks regarding their status on Year 2000. The banks indicate their
dedication to resolving any Year 2000 issues related to their systems and
services prior to December 31, 1999. The Company anticipates that a
considerable effort will be necessary to ensure that its corrected or new
systems can properly interface with those business partners with whom it
transmits and receives data and other information (external systems). The
Company has undertaken specific testing regimes with these third-party business
partners and expects to continue working with its business partners on any
interfacing of systems. However, the timing of external system compliance
cannot currently be predicted with accuracy because the implementation of Year
2000 readiness will vary from one company to another.
The Company does have some exposure to date-sensitive embedded technology
such as micro-controllers, but the Company views this exposure as minimal.
Unlike other industries that may be equipment intensive, like manufacturing,
the Company is a life insurance and financial services organization providing
insurance, annuities and pension products to its customers. As such, the
primary equipment and electronic devices in use are computers and telephone
related equipment. This type of hardware can have date-sensitive embedded
technology which could have Year 2000 problems. Because of this exposure, the
Company has reviewed its computer hardware and telephone systems, with
assistance from the applicable vendors, and has upgraded, or replaced, or is in
the process of replacing any equipment that will not properly process
date-sensitive data in the Year 2000 or beyond.
For the Company, a reasonably likely worst case scenario might include one
or more of the Company's significant policyholder systems being non-compliant.
Such an event could result in a material disruption of the Company's
operations. Specifically, a
110
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
11. YEAR 2000 (UNAUDITED)--(CONTINUED)
number of the Company's operations could experience an interruption in the
ability to collect and process premiums or deposits, process claim payments,
accurately maintain policyholder information, accurately maintain accounting
records, and/or perform adequate customer service. Should the worst case
scenario occur, it could, dependent upon its duration, have a material impact
on the Company's business and financial condition. Simple failures can be
repaired and returned to production within a matter of hours with no material
impact. Unanticipated failures with a longer service disruption period could
have a more serious impact. For this reason, the Company is placing significant
emphasis on risk management and Year 2000 business resumption contingency
planning in 1999 by modifying its existing business resumption and disaster
recovery plans to address potential Year 2000 issues.
The actions taken by management under the Year 2000 Project Plans are
intended to significantly reduce the Company's risk of a material business
interruption based on the Year 2000 issues. It should be noted that the Year
2000 computer problem, and its resolution, is complex and multifaceted, and any
company's success cannot be conclusively known until the Year 2000 is reached.
In spite of its efforts or results, the Company's ability to function
unaffected to and through the Year 2000 may be adversely affected by actions
(or failure to act) of third parties beyond our knowledge or control. It is
anticipated that there may be problems that will have to be resolved in the
ordinary course of business on and after the Year 2000. However, the Company
does not believe that the problems will have a material adverse affect on the
Company's operations or financial condition.
111
<PAGE>
PART II.
OTHER INFORMATION
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that Section.
REPRESENTATION PURSUANT TO SECTION 26(e) (2) (A)
AUSA Life Insurance Company, Inc. ("AUSA Life") hereby represents that
the fees and charges deducted under the Contracts, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by AUSA Life.
STATEMENT WITH RESPECT TO INDEMNIFICATION
Provisions exist under the New York Code and the Amended and Restated
By-Laws of AUSA Life whereby AUSA Life may indemnify certain persons against
certain payments incurred by such persons. The following excerpts contain the
substance of these provisions.
NEW YORK BUSINESS CORPORATION LAW
SECTION 722. AUTHORIZATION FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) A corporation may indemnify any person made, or threatened to be made, a
party to an action or proceeding (other than one by or in the right of the
corporation to procure a judgment in its favor), whether civil or criminal,
including an action by or in the right of any other corporation of any type or
kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, which any director or officer of the
corporation served in any capacity at the request of the corporation, by reason
of the fact that he, his testator or intestate, was a director or officer of the
corporation, or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees actually and necessarily incurred as a result of such action or
proceeding, or any appeal therein, if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation and, in criminal actions or proceedings, in addition, had no
reasonable cause to believe that his conduct was unlawful.
(b) The termination of any such civil or criminal action or proceeding by
judgment, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not in itself create a presumption that any such director or
officer did not act, in good faith, for a purpose which he reasonably believed
to be in, or, in the case of service for any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
not opposed to, the best interests of the corporation or that he had reasonable
cause to believe that his conduct was unlawful.
(c) A corporation may indemnify any person made, or threatened to be made, a
party to an action by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he, this testator or intestate, is or
was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director or officer of any other corporation of
any type or kind, domestic or foreign, of any partnership, joint venture, trust,
employee benefit plan or other enterprise, against amounts paid in
II-1
<PAGE>
settlement and reasonable expenses, including attorneys' fees, actually and
necessarily incurred by him in connection with the defense or settlement of such
action, or in connection with an appeal therein, if such director or officer
acted in good faith, for a purpose which he reasonably believed to be in, or, in
the case of service for any other corporation or any partnership, joint venture,
trust, employee benefit plan or other enterprise, not opposed to, the best
interests of the corporation, except that no indemnification under this
paragraph shall be made in respect of (1) a threatened action, or a pending
action which is settled or otherwise disposed of, or (2) any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which the action
was brought, or, if no action was brought, any court of competent jurisdiction,
determines upon application that, in view of all the circumstances of the case,
the person is fairly and reasonably entitled to indemnify for such portion of
the settlement amount and expenses as the court deems proper.
(d) For the purpose of this section, a corporation shall be deemed to have
requested a person to serve an employee benefit plan where the performance by
such person of his duties to the corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan; excise taxes assessed on a person with respect to an
employee benefit plan pursuant to applicable law shall be considered fines; and
action taken or omitted by a person with respect to an employee benefit plan in
the performance of such person's duties for a purpose reasonably believed by
such person to be in the interest of the participants and beneficiaries of the
plan shall be deemed to be for a purpose which is not opposed to the best
interests of the corporation.
AMENDED AND RESTATED BYLAWS
ARTICLE II
DIRECTORS AND THEIR MEETINGS
SEC.7. Any person made a party to any action, suit, or proceeding by
reason of the fact that he, his testator or intestate, is or was a director,
officer, or employee of the Company or of any Company which he served as such at
the request of the Company, shall be indemnified by the Company against the
reasonable expenses, including attorney's fees, actually and necessarily
incurred by him in connection with the defense of such action, suit or
proceeding, or in connection with appeal therein, except in relation to matters
as to which it shall be adjudged in such action, suit or proceeding that such
officer, Director, or employee is liable for negligence or misconduct in the
performance of his duties. The Company may also reimburse to any Director,
officer, or employee the reasonable costs of settlement of any such action,
suit, or proceeding, if it shall be found by a majority of a committee composed
of the Directors not involved in the matter of controversy (whether or not a
quorum) that it was in the interest of the Company that such settlement be made
and that such Director, officer or employee was not guilty of negligence or
misconduct. The amount to be paid, in each instance, pursuant to action of the
Board of Directors, and the stockholders shall be given notice thereof in
accordance with applicable provisions of law. Such right of indemnification
shall not be deemed exclusive of any other rights to which such Director,
officer, or employee may be entitled.
RULE 484 UNDERTAKING
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel, the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
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<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
The facing sheet
The Prospectus, consisting of 111 pages
The undertaking to file reports
Representation pursuant to Section 26(e)(2)(A)
Statement with respect to indemnification
Rule 484 undertaking
The signatures
Written consent of the following persons:
(a) Sutherland Asbill & Brennan LLP
(b) Ernst & Young LLP
The following exhibits:
1. The following exhibits correspond to those required by paragraph A to the
instructions as to exhibits in Form N-8B-2:
A. (1) Resolution of the Board of Directors of AUSA Life establishing
the Series Account (1)
(2) Not Applicable
(3) Distribution of Policies:
(a) Form of Participation Agreement Among AUSA Life Insurance
Company, Inc., Western Reserve Life Assurance Co. of Ohio and
WRL Series Fund, Inc. (3)
(b) Master Service and Distribution Compliance Agreement (6)
(c) Amendment to Master Service and Distribution Compliance
Agreement (5)
(d) Form of Broker/Dealer Supervisory and Service Agreement (5)
(e) Principal Underwriting Agreement (5)
(f) First Amendment to Principal Underwriting Agreement (5)
(g) See Exhibit 1.A.(3)(b)(ii)
(4) Not Applicable
(5)(a) Specimen Flexible Premium Variable Life Insurance Policy (2)
(b) Children's Insurance Rider (2)
(c) Disability Waiver Rider (2)
(d) Accidental Death Benefit Rider (2)
(e) Primary Insured Rider (2)
(f) Other Insured Rider (2)
(g) Terminal Illness Accelerated Death Benefit Rider (2)
(h) Endorsement - Asset Rebalancing (2)
(i) Endorsement - Dollar Cost Averaging (2)
(6)(a) Certificate of Incorporation of AUSA Life (1)
(b) Amended and Restated By-Laws of AUSA Life (1)
(7) Not Applicable
(8) Not Applicable
(9) Not Applicable
(10) Application for Flexible Premium Variable Life Insurance
Policy (1)
(11) Memorandum describing issuance, transfer and redemption
procedures (4)
2. See Exhibit 1.A.
3. Opinion of Counsel as to the legality of the securities being registered (2)
II-3
<PAGE>
4. No financial statement will be omitted from the Prospectus pursuant to
Instruction 1(b) or (c) of Part I
5. Not Applicable
6. Opinion and consent of Alan Yaeger as to actuarial matters pertaining to the
securities being registered (4)
7. Consent of Robert F. Colby, Esq. (4)
8. Consent of Sutherland Asbill & Brennan LLP
9. Consent of Ernst & Young LLP
10. Powers of Attorney (1)
- ----------------------------------------
(1) This exhibit was previously filed on Pre-Effective Amendment No. 2 to Form
S-6 Registration Statement dated October 20, 1997 ( File No. 33-86696) and
is incorporated herein by reference.
(2) This exhibit was previously filed on initial Form S-6 Registration Statement
dated October 21, 1997 (File No. 333-38343) and is incorporated herein by
reference.
(3) This exhibit was previously filed on Pre-Effective Amendment No. 3 to Form
S-6 Registration Statement dated June 23, 1998 ( File No. 33-86696) and is
incorporated herein by reference.
(4) This exhibit was previously filed on Pre-Effective Amendment No. 1 to Form
S-6 Registration Statement dated June 24, 1998 ( File No. 333-38343) and is
incorporated herein by reference.
(5) This exhibit was previously filed on Post-Effective Amendment No. 4 to Form
S-6 Registration Statement dated April 21, 1999 (File No. 333-23359) and is
incorporated herein by reference.
(6) This exhibit was previously filed on Post-Effective Amendment No. 11 to Form
N-4 Registration Statement dated April 20, 1998 (File No. 33-49556) and is
incorporated herein by reference.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, AUSA Series Life Account, certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment No. 1 to the Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, and its seal to be hereunto affixed and
attested, all in the City of St. Petersburg, County of Pinellas, Florida on the
3rd day of May, 1999.
(SEAL) AUSA SERIES LIFE ACCOUNT
------------------------
Registrant
AUSA LIFE INSURANCE COMPANY, INC.
---------------------------------
Depositor
ATTEST:
/s/ THOMAS E. PIERPAN By: /s/ LARRY G. BROWN
- --------------------- -------------------------
Thomas E. Pierpan Larry G. Brown
Assistant Secretary Chairman of the Board
(SEAL) (SEAL)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE
------------------- ----
/s/ LARRY G. BROWN May 3, 1999
- --------------------------------
Larry G. Brown, Chairman of the
Board
/s/ WILLIAM BROWN, JR. May 3, 1999
- --------------------------------
William Brown, Jr., Director*
/s/ PATRICK S. BAIRD May 3, 1999
- --------------------------------
Patrick S. Baird, Vice President
and Chief Financial Officer*
/s/ WILLIAM L. BUSLER May 3, 1999
- --------------------------------
William L. Busler, Director*
<PAGE>
/s/ JACK R. DYKHOUSE May 3, 1999
- --------------------------------
Jack R. Dykhouse, Director*
/s/ STEVEN E. FRUSHTICK May 3, 1999
- --------------------------------
Steven E. Frushtick, Director*
/s/ CARL T. HANSON May 3, 1999
- --------------------------------
Carl T. Hanson, Director*
/s/ B. LARRY JENKINS May 3, 1999
- --------------------------------
B. Larry Jenkins, Director*
/s/ PETER P. POST May 3, 1999
- --------------------------------
Peter P. Post, Director*
/s/ COR H. VERHAGEN May 3, 1999
- --------------------------------
Cor H. Verhagen, Director*
/s/ E. KIRBY WARREN May 3, 1999
- --------------------------------
E. Kirby Warren, Director*
/s/ TOM A. SCHLOSSBERG May 3, 1999
- --------------------------------
Tom A. Schlossberg, Director
and President*
/s/ COLETTE F. VARGAS May 3, 1999
- --------------------------------
Colette F. Vargas, Director
and Chief Actuary*
/s/ VERA F. MIHAIC May 3, 1999
- --------------------------------
Vera F. Mihaic, Director
and Vice President*
/s/ BRENDA CLANCY May 3, 1999
- --------------------------------
Brenda Clancy, Treasurer*
* /s/ THOMAS E. PIERPAN
---------------------------
Signed by Thomas E. Pierpan
as Attorney-in-Fact
<PAGE>
Exhibit Index
EXHIBIT DESCRIPTION
NO. OF EXHIBIT
- ------- -----------
8. Consent of Sutherland Asbill & Brennan LLP
9. Consent of Ernst & Young LLP
Exhibit 8
Consent of Sutherland Asbill & Brennan LLP
0
<PAGE>
S.A.B. LETTERHEAD
May 4, 1999
Board of Directors
AUSA Life Insurance Company, Inc.
AUSA Series Life Account
4 Manhattanville Road
Purchase, New York 10577
RE: AUSA Series Life Account
File No. 333-38343
Gentlemen:
We hereby consent to the use of our name under the caption "Legal Matters"
in the Prospectus for the AUSA Financial Freedom Builder contained in
Post-Effective Amendment No. 1 to the Registration Statement on Form S-6 (File
No. 333-38343) of the AUSA Series Life Account filed by AUSA Life Insurance
Company, Inc. with the Securities and Exchange Commission. In giving this
consent, we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND ASBILL & BRENNAN LLP
By: /s/ STEPHEN E. ROTH
---------------
Stephen E. Roth
EXHIBIT 9
Consent of Ernst & Young LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 19, 1999, with respect to the statutory-basis
financial statements of AUSA Life Insurance Company, Inc. included in
Post-Effective Amendment No. 1 to the Registration Statement (Form S-6 No.
333-38343) and related Prospectus of AUSA Series Life Account.
ERNST & YOUNG LLP
Des Moines, Iowa
April 29, 1999
