PROSPECTUS
SECURITY EQUITY LIFE INSURANCE COMPANY
SECURITY EQUITY SEPARATE ACCOUNTS 26 & 27
PROSPECTUS
FOR THE
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
This prospectus describes individual variable annuity contracts offered by
Security Equity Life Insurance Company (we, us, our). The Contracts are deferred
variable annuities. These Contracts provide for accumulation of Contract values
on a variable basis. These Contracts provide for annuity payments on a fixed
basis, a variable basis, or a combination fixed and variable basis. The
Contracts are no longer offered for sale. Existing Contract owners may continue
to make additional purchase payments to their Contracts.
The Contracts have a number of current investment choices (7 Investment Funds).
The seven Investment Funds available are portfolios of AIM Variable Insurance
Funds, Inc. which are listed below. You can put your money in any of these
Investment Funds which are offered through our separate accounts, Security
Equity Separate Account 26 and Security Equity Separate Account 27. The separate
accounts have Divisions which each invest in a corresponding Investment Fund.
AIM VARIABLE INSURANCE FUNDS, INC.
Managed by: AIM Advisors, Inc.
Separate Account 26:
AIM V.I. Diversified Income Fund
AIM V.I. Government Securities Fund
AIM V.I. Money Market Fund
Separate Account 27:
AIM V.I. Capital Appreciation Fund
AIM V.I. Global Growth and Income Fund
AIM V.I. International Equity Fund
AIM V.I. Telecommunications Fund
Please read this Prospectus before investing. You should keep it for future
reference. It contains important information. To learn more about the Contract,
you can obtain a copy of the Statement of Additional Information (SAI) (dated
November 9, 1999). The SAI has been filed with the Securities and Exchange
Commission (SEC) and is legally a part of the Prospectus. If you wish to
receive, at no charge, the SAI, call us at (800) 533-8282 (toll free) or write
us at: 84 Business Park Drive, Suite 303, Armonk, New York 10504. The SEC has a
website (http://www.sec.gov) that contains the SAI, material incorporated by
reference, and other information regarding companies that file electronically.
The Contracts:
* are not bank deposits
* are not federally insured
* are not endorsed by any bank or government agency
* are not guaranteed and may be subject to possible loss of
principal
The SEC has not approved these Contracts or determined that this prospectus is
accurate or complete. Any representation that it has is a criminal offense.
November 9, 1999
TABLE OF CONTENTS
Page
INDEX OF SPECIAL TERMS
SUMMARY OF CONTRACT FEES AND EXPENSES
HIGHLIGHTS
THE COMPANY
THE ANNUITY CONTRACTS
PURCHASE
Purchase Payments
Allocation of Purchase Payments
Account Continuation
INVESTMENT OPTIONS
AIM Variable Insurance Funds, Inc.
Transfer Privilege
Dollar Cost Averaging
Additions, Deletions or Substitutions of Investments
CHARGES AND DEDUCTIONS
Administrative Charges
Special Handling Fees
Surrender Charge (Contingent Deferred Sales Charge)
Charge-Free Amounts
Mortality and Expense Risk Charge
Transfer Fees
Fees and Expenses of the Funds
Premium Tax
VARIABLE ACCOUNT
Accumulation Units
Value of Accumulation Units
Net Investment Factor
ACCESS TO YOUR MONEY
Surrenders and Partial Withdrawals
Systematic Withdrawal Plan
DEATH BENEFIT
Death of a Contract Owner who is the Annuitant
Death of a Contract Owner who is not the Annuitant
Death of the Annuitant who is not a Contract Owner
Death of a Joint Owner
Other Provisions
Payment of Death Benefit
Amount of Death Benefit
ANNUITY PROVISIONS
Annuity Date
Annuity Options
Value of Variable Annuity Payments
FEDERAL TAX MATTERS
Annuity Contracts in General
Qualified and Non-Qualified Contracts
Withdrawals - Non-Qualified Contracts
Withdrawals - Qualified Contracts
Withdrawals - Tax-Sheltered Annuities
Diversification
Section 403(b) Plans
Corporate Pension and Profit-Sharing Plans and H.R. 10 Plans
Deferred Compensation Plans
YIELDS AND TOTAL RETURNS
OTHER INFORMATION
The Separate Accounts
Principal Underwriter
Voting Rights
Written Notice or Written Request
Assignments and Changes of Ownership
Ownership
The Beneficiary
Deferment of Payment
Year 2000
Financial Statements
APPENDIX - Condensed Financial Information
INDEX OF SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you as
possible. By the very nature of the Contract, however, certain technical words
or terms are unavoidable. We have identified the following as some of these
words or terms. They are identified in the text in italic and the page that is
indicated here is where we believe you will find the best explanation for the
word or term.
Page
Accumulation Phase 11
Accumulation Unit 19
Annuitant 21
Annuity Date 24
Annuity Options 24
Annuity Payments 11
Beneficiary 32
Business Day 13
Income Phase 9
Investment Funds 13
Joint Owner 22
Non-Qualified 27
Owner 32
Purchase Payment 12
Qualified 27
Tax Deferral 11
SUMMARY OF CONTRACT FEES AND EXPENSES
Contract Owner Transaction Expenses
Surrender Charge (contingent deferred sales charge):
After a purchase payment has been held by us for six complete years it may be
withdrawn free of any surrender charge. For purchase payments held by us for
less than seven complete years, surrender charges are as follows (expressed as a
percentage of net purchase payments withdrawn):
Years Since Receipt of Surrender Charge
Purchase Payment Percentage
---------------- ----------
0 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6 1%
7+ 0%
Each contract year you can withdraw up to ten percent of the accumulated value
of your Contract without having a surrender charge imposed. The ten percent free
amount does not apply upon full surrender and is not cumulative.
Transfer Fee:
Currently, there is no charge for transfers. For each transfer after the first
twelve transfers, we reserve the right to charge a fee of $25.00 or 2% of the
amount transferred, whichever is less. Currently, Contract owners are limited to
no more than twelve transfers per year. Transfers made pursuant to the dollar
cost averaging program are not included in determining the number of transfers
that occur in a contract year.
Annual Contract Fee:
For Contract years ending prior to December 31, 1999, we will deduct the lesser
of $30 or 2% of the accumulated value of your Contract if your accumulated value
is less than $20,000. Afterwards, this fee may be adjusted annually subject to
the following:
* in no event will the fee be adjusted by more than the amount that
reflects the change in the Consumer Price Index since December 31,
1992; and
* in no event will it exceed $50.
If your accumulated value is $20,000 or greater, the Contract fee is waived.
Special Handling Fees
We reserve the right to charge special handling fees to recover costs associated
with certain activities and requests as described under "Charges and
Deductions."
Separate Account Annual Expenses:
Mortality and expense risk charge 1.25%
Administrative expense charge .15%
---
Total Separate Account annual expenses 1.40%
<TABLE>
<CAPTION>
Investment Fund Expenses:
(expressed as a percentage of average daily net assets)
Investment Management
and
Administration Fees Other Expenses(1) Total Expenses(3)
--------------------- -------------- ---------------
<S> <C> <C> <C>
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Capital Appreciation Fund 0.62% 0.16% 0.78%
AIM V.I. Diversified Income Fund 0.60% 0.28% 0.88%
AIM V.I. Global Growth and Income Fund(2) 1.00% 0.45% 1.45%
AIM V.I. Government Securities Fund 0.50% 0.34% 0.84%
AIM V.I. International Equity Fund 0.75% 0.27% 1.02%
AIM V.I. Money Market Fund 0.40% 0.29% 0.69%
AIM V.I. Telecommunications Fund(2) 1.00% 0.44% 1.44%
<FN>
(1) Ratio has been restated to reflect current Administrative Services Agreement.
(2) Commenced operations in October 1999. Expense ratios are estimates for 1999.
(3) On August 25, 1999, the shareholders of the GT Global Variable Investment
Trust and the GT Global Variable Investment Series (GT Global Investment
Funds) approved an Agreement and Plan of Reorganization under which each
GT Global Investment Fund would transfer substantially all of it assets
to a corresponding series of AIM Variable Insurance Funds, Inc. This
transfer of assets was completed on October 24, 1999. Pro forma total fees
and expenses of the AIM Variable Insurance Funds, Inc. after the Reorganization
are as follows: 0.80% for the AIM V.I. Capital Appreciation Fund; 0.88% for
the AIM V.I. Diversified Income Fund; 1.45% for the AIM V.I. Global Growth and
Income Fund; 0.89% for the AIM V.I. Government Securities Fund; 1.04% for
the AIM V.I. International Equity Fund; 0.71% for the AIM V.I. Money Market
Fund; and 1.44% for the AIM V.I. Telecommunications Fund.
</FN>
</TABLE>
Examples
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
(a) if you surrendered your contract after the end of the specified time
period;
(b) if you do not surrender your contract after the end of the specified
time period;
(c) if you annuitize after the end of the specified time period.
<TABLE>
<CAPTION>
Time Periods
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Capital Appreciation Fund (a)$92.82 (a)$120.29 (a)$150.32 (a)$257.54
(b)$22.82 (b)$ 70.29 (b)$120.32 (b)$257.54
(c)$92.82 (c)$120.29 (c)$120.32 (c)$257.54
AIM V.I. Diversified Income Fund (a)$93.82 (a)$123.30 (a)$155.34 (a)$267.58
(b)$23.82 (b)$ 73.30 (b)$125.34 (b)$267.58
(c)$93.82 (c)$123.30 (c)$125.34 (c)$267.58
AIM V.I. Global Growth and Income Fund (a)$99.79 (a)$141.06 (a)$184.68 (a)$324.59
(b)$29.79 (b)$ 91.06 (b)$154.68 (b)$324.59
(c)$99.79 (c)$141.06 (c)$154.68 (c)$324.59
AIM V.I. Government Securities Fund (a)$93.42 (a)$122.09 (a)$153.34 (a)$263.58
(b)$23.42 (b)$ 72.09 (b)$123.34 (b)$263.58
(c)$93.42 (c)$122.09 (c)$123.34 (c)$263.58
AIM V.I. International Equity Fund (a)$95.22 (a)$127.49 (a)$162.33 (a)$281.45
(b)$25.22 (b)$ 77.49 (b)$132.33 (b)$281.45
(c)$95.22 (c)$127.49 (c)$132.33 (c)$281.45
AIM V.I. Money Market Fund (a)$91.91 (a)$117.57 (a)$145.78 (a)$248.41
(b)$21.91 (b)$ 67.57 (b)$115.78 (b)$248.41
(c)$91.91 (c)$117.57 (c)$115.78 (c)$248.41
AIM V.I. Telecommunications Fund (a)$99.41 (a)$139.98 (a)$182.99 (a)$321.81
(b)$29.41 (b)$ 89.98 (b)$152.99 (b)$321.81
(c)$99.41 (c)$139.98 (c)$152.99 (c)$321.81
</TABLE>
Notes to Table of Fees and Expenses and Examples
1. For the purposes of calculating the values in the above examples, we have
translated the administration fees into an annual asset charge of 0.070%,
based on the total annual administrative charges collected in 1998 divided
by the average total assets held under the Contracts offered by this
Prospectus.
2. The purpose of the table above is to help you understand the costs and
expenses that a variable annuity contract owner will bear directly or
indirectly.
3. Note that the expense amounts in the examples are aggregate amounts for the
Investment Funds for the number of years indicated.
4. For a more complete description of the Investment Funds' fees and expenses,
see the Investment Funds' Prospectuses.
5. The examples above are not a representation of past or future expenses, and
the Investment Funds' actual expenses may be higher or lower than those
shown.
6. Neither the table nor the examples reflect any premium tax that may be
applicable to a contract; such taxes currently range from 0% to 3.5%. For a
complete description of Contract costs and expenses, see the section titled
"Charges and Deductions," in this Prospectus.
HIGHLIGHTS
The variable annuity contract that we are offering is a contract between you,
the owner, and us, the insurance company. The Contract provides a means for
investing on a tax-deferred basis in the Investment Funds. The Contract is
intended for retirement savings or other long-term investment purposes and
provides for a death benefit as well as other insurance related benefits. You
bear the entire investment risk.
The Contract, like all deferred annuity contracts, has two phases: the
accumulation phase and the income phase. During the accumulation phase, earnings
accumulate on a tax-deferred basis. You can make withdrawals during this phase.
However, the earnings you take out will be taxed as income, and we may assess a
surrender charge of up to 7% of the amount you withdraw. The income phase
occurs when you begin receiving regular payments from your Contract.
You can choose to receive annuity payments on a variable basis, a fixed basis or
a combination of both. If you choose variable payments, the amount of the
variable annuity payments will depend upon the investment performance of the
Investment Funds you select for the income phase. If you choose fixed payments,
the amount of the fixed annuity payments are level for the payout period.
Free Look. If you cancel your Contract within 10 days after receiving it, we
will give you back the greater of the value of your contract plus any premium
tax that had been deducted or any purchase payments made including any premium
taxes deducted.
Tax Penalty. The earnings in your Contract are not taxed until you take money
out of your Contract. If you take money out during the accumulation phase,
earnings come out first and are taxed as income. If you are younger than 59 1/2
when you take money out, you may be charged a 10% federal tax penalty on these
earnings. Payments during the income phase are considered partly a return of
your original investment.
Inquiries. If you need more information or require assistance after you purchase
a Contract, please contact us at:
Security Equity Life Insurance Company
Annuity Service Office
P.O. Box 208
Armonk, New York 10504
(800) 533-8282
All inquiries should include the Contract number and the name of the contract
owner and/or the annuitant.
THE COMPANY
Security Equity Life Insurance Company ("Security Equity") is a company
domiciled in New York. It is a wholly-owned subsidiary of General American Life
Insurance Company ("General American"), a stock insurance company domiciled in
Missouri. GenAmerica Corporation is the ultimate parent of General American.
Security Equity was incorporated in 1983 under the laws of the State of New York
as a wholly-owned subsidiary of Security Mutual Life Insurance Company of New
York. It was purchased by General American on December 31, 1993. Security Equity
is licensed to do business in 40 states of the United States and the District of
Columbia. The principal office of Security Equity is located at 84 Business Park
Drive, Suite 303, Armonk, NY 10504. The telephone number is (914) 273-1290.
Security Equity is principally engaged in writing individual and corporate owned
life insurance policies and annuity contracts. Assets derived from such business
should be considered by purchasers of variable annuity contracts only as bearing
upon the ability of Security Equity to meet its obligations under the variable
annuity contracts and should not be considered as bearing on the investment
performance of the Separate Accounts.
On August 10, 1999, General American consented to an Order of Administrative
Supervision with the Missouri Department of Insurance. It advised the Department
of its inability to meet substantial demands for surrenders arising from its
institutional funding agreement business without jeopardizing interest of its
other policyholders. Under the Order, General American is allowed to continue
its normal course of business.
In 1993, General American formed a marketing relationship with ARM Financial to
offer a highly specialized portfolio of funding agreements to institutional
investors. General American ceded 50% of the business to an ARM subsidiary. In
June of this year, ARM put itself up for sale, announcing that it was
de-emphasizing its involvement in the institutional business. This led to
General American's recapture of the ARM portion of the business, approximately
$3.4 billion in assets and related liabilities. Moody's Investor Services
reviewed these events and lowered General American's financial strength rating
from A2 to A3. A significant number of the institutional investors reacted to
Moody's action by recalling their assets. While General American is fully
capitalized to meet these obligations, the unexpected volume of recalls created
severe pressure on General American's liquidity position and the ability to
convert the assets within the tight time frame required. Defaults on the
institutional business caused the rating agencies to rate General American below
investment grade.
GenAmerica Corporation and The Metropolitan Life Insurance Company ("MetLife")
have announced a definitive agreement whereby MetLife will acquire GenAmerica
and its subsidiaries, including Security Equity. The acquisition will not
affect any of the terms or conditions of your contract or make MetLife a party
to your contract. The transaction is subject to regulatory approval and certain
other conditions.
Headquartered in New York City since 1868, MetLife is a leading provider of
insurance and financial services to a broad spectrum of individual and group
customers. MetLife, with approximately $357.7 billion worth of assets under
management as of December 31, 1998, provides individual insurance and investment
products to approximately 9 million households in the United States. MetLife
also serves over 33 million people by providing group insurance and investment
products to corporations and other institutions.
THE ANNUITY CONTRACTS
This Prospectus describes the variable annuity contracts that we are offering.
An annuity is a Contract between you, the owner, and us, the insurance company,
where we promise to pay you an income, in the form of annuity payments,
beginning on a designated date in the future. Until you decide to begin
receiving annuity payments, your Contract is in the accumulation phase. Once you
begin receiving annuity payments, your Contract enters the income phase.
The Contract benefits from tax deferral. Tax deferral means that you are not
taxed on earnings or appreciation on the assets in your Contract until you take
money out of your Contract.
The Contract is called a variable annuity because you can choose among the
Investment Funds, and depending upon market conditions, you can make or lose
money in any of these Investment Funds. The amount of money you are able to
accumulate in your Contract during the accumulation phase depends upon the
investment performance of the Investment Fund(s) you select.
The Contract is available to individuals seeking annuity contracts entitled to
favorable tax treatment under the Internal Revenue Code ("Code") as traditional
Individual Retirement Annuity (IRA) plans and qualified plans under Sections
401, 403 and 457. The Contract is also available to individuals not entitled to
any special tax benefits under the Code. The rights and benefits of the
Contracts are described below and in the Contract; however, Security Equity
reserves the right to make any modification to conform the Contract to, or to
give the Contract Owner the benefit of, any Federal or state statute or any rule
or regulation of the United States Treasury Department.
PURCHASE
You can purchase this Contract by completing an application and providing us
with an initial purchase payment. We will not issue a Contract on or after the
annuitant's 80th birthday.
Purchase Payments
The minimum initial purchase payment permitted is $2,000. Each purchase payment
made thereafter must be for at least $100. The amount of purchase payments made
in the first Contract year may be limited to the greater of double your initial
purchase payment or $25,000. In any Contract year after the first, we reserve
the right not to accept purchase payments in excess of twice the amount of
purchase payments made in the first Contract year. Any purchase payments over
this amount, or any purchase payments that would cause the accumulated value of
your Contract to exceed $1,000,000, will be accepted after our prior approval.
You can make purchase payments at any time prior to:
* the annuity date;
* full surrender of the Contract; or
* your death or the death of the annuitant.
Allocation of Purchase Payments
You specify how you want your purchase payments allocated. You may allocate each
purchase payment to one or more of the Investment Funds. However, the requested
allocations must be in whole number percentages and total 100%. The minimum
initial allocation to any Investment Fund must be at least $500. You can change
the allocation instructions for future purchase payments. If any of the
investment options are no longer offered by us when you make an allocation, we
will contact you to secure new allocations.
If the application is in good order, your initial purchase payment will be
credited within two business days after we receive your application. However, if
your application is not in good order (missing information, etc.), we may retain
the initial purchase payment for up to five business days while attempting to
complete the application. If the application cannot be made in good order within
five business days, the initial purchase payment will be returned immediately to
you unless you consent in writing to us retaining the initial purchase payment
until the application is in good order. Subsequent purchase payments are
credited within one business day.
Our business days are each day when both we and the New York Stock Exchange are
open for business. Our business day ends when the New York Stock Exchange
closes, usually 4:00 PM Eastern Time.
Account Continuation
Your Contract does not require continuing purchase payments and will stay in
force until the earlier of the annuity date, surrender of the Contract, or your
death or the death of the annuitant as long as your accumulated value is
sufficient to pay fees and charges. Purchase payments may be resumed at any
time prior to the annuity date, surrender, your death or the death of the
annuitant.
INVESTMENT OPTIONS
The Contract gives you the choice of allocating purchase payments to one or
more of the Investment Funds listed below. Additional Investment Funds may
be available in the future.
The Investment Funds have a separate prospectus that is provided with
this Prospectus. You should read the Investment Fund Prospectus before you
decide to allocate your assets to the Investment Fund.
AIM Variable Insurance Funds, Inc.
AIM Variable Insurance Funds, Inc. is a management investment company with
multiple portfolios. AIM Advisors, Inc. is the investment adviser to each
Portfolio. Each Portfolio pays Investment Management and Administration Fees to
AIM Advisors, Inc. The following Portfolios will be available under your
contract:
Separate Account 26:
AIM V.I. Diversified Income Fund
AIM V.I. Government Securities Fund
AIM V.I. Money Market Fund
Separate Account 27:
AIM V.I. Capital Appreciation Fund
AIM V.I. Global Growth and Income Fund
AIM V.I. International Equity Fund
AIM V.I. Telecommunications Fund
THERE IS NO ASSURANCE THAT ANY OF THE INVESTMENT FUNDS WILL ATTAIN THEIR
RESPECTIVE STATED OBJECTIVES, OR THAT ATTAINMENT CAN BE SUSTAINED.
Transfer Privilege
At any time during the accumulation period you may transfer all or part of your
accumulated value to any of the Investment Funds, subject to the following
conditions:
(1) transfers must be made by written request in good order completed by
you;
(2) transfers from an Investment Fund must be for at least $500, or the
entire amount if less than $500;
(3) any accumulated value remaining in an Investment Fund may not be
less than $500, or the request may be treated as a request to
transfer the entire amount in that Investment Fund; and
(4) currently, you may make up to twelve transfers in a year (one per
calendar month). This limitation does not apply to transfers made
under the dollar cost averaging program.
Transfers involving an Investment Fund may further be limited by additional
terms and conditions imposed by the Investment Funds. You must instruct us as to
what amounts you want transferred from each Investment Fund. A transfer will be
effective on the date we receive your transfer request at the price next
determined after receipt of the request for transfer. We may revoke or modify
the transfer privilege at any time, including the minimum amount for a transfer
and the transfer charge, if any.
Dollar Cost Averaging
The dollar cost averaging program allows you to systematically transfer a set
amount from a selected Investment Fund to any of the other Investment Funds. By
allocating amounts on a regular schedule as opposed to allocating the total
amount at one particular time, you may be less susceptible to the impact of
market fluctuations.
Dollar cost averaging does not assure a profit and does not protect you against
loss in declining markets. Since dollar cost averaging involves continuous
investment in securities regardless of fluctuating price levels of such
securities, you should consider your financial ability to continue the dollar
cost averaging program through periods of fluctuating price levels.
Under the dollar cost averaging program you must designate at least $2,000 for
investment. Transfers from the AIM V.I. Money Market Fund, AIM V.I. Global
Growth and Income Fund, AIM V.I. Diversified Income Fund and the AIM V.I.
Government Securities Fund will continue until the dollar amount requested
has been transferred or the accumulated value in the Investment Fund or
Guarantee Period is exhausted, whichever is sooner. Dollar cost averaging
transfer allocations to an Investment Fund which is no longer offered
will remain in that Investment Fund until you change the allocation
instructions.
Transfers made under the dollar cost averaging program are not taken into
account in determining any applicable transfer fee. We reserve the right to
modify, suspend, or terminate the dollar cost averaging program at any time.
Additions, Deletions or Substitutions of Investments
We may substitute one of the Investment Funds you have selected with another
Investment Fund. We would not do this without the prior approval of the
Securities and Exchange Commission. We may also limit further investment in
an Investment Fund. We will give you notice of either of these actions.
CHARGES AND DEDUCTIONS
The full amount of your initial purchase payment, less any applicable tax, is
invested in the investment option(s) you choose.
Administrative Charges
Annual Contract Fee. On the last day of each Contract year, we deduct an annual
Contract fee, which we refer to as an account fee, to compensate us for expenses
relating to the issue and maintenance of your Contract and your account. For
Contract years ending prior to December 31, 1999, we will deduct the lesser of
$30 or 2% of the accumulated value of your Contract if your accumulated value is
less than $20,000. Afterwards, this fee may be adjusted annually subject to the
following:
* in no event will the fee be adjusted by more than the amount that
reflects the change in the Consumer Price Index since December 31,
1992; and
* in no event will it exceed $50.
The account fee will be waived if your Contract has an accumulated value of
$20,000 or more. We will deduct the account fee if you make a full surrender of
your Contract or upon your death or the annuitant's death.
During the income phase, the account fee will be deducted in equal amounts from
each variable annuity payment made during the year. This deduction will not be
made from fixed annuity payments.
An administrative expense charge is deducted at the end of each valuation period
(during both the accumulation period and after annuity payments begin) at an
annual rate of 0.15% to reimburse us for those administrative expenses
attributable to your Contract, your account, and the separate accounts which
exceed the revenues received from the account fee. We believe the administrative
expense charge and the account fee have been set at a level that will recover no
more than the actual costs of administering your Contract.
Special Handling Fees
We reserve the right to charge a special handling fee to recover costs
associated with certain activities and requests. These activities and requests
include: wire transfer charges ($11.50), checks returned to us for insufficient
funds ($15), minimum distribution calculations ($10), annuitization calculations
in excess of four annually ($10), duplicate contracts ($25), and additional
copies of confirmation notices or quarterly statements (currently no charge).
We do not expect to profit from these charges.
Surrender Charge (Contingent Deferred Sales Charge)
We may deduct a surrender charge on certain surrenders and withdrawals to cover
our expenses relating to the sale of the Contracts, including commissions to
registered representatives and other promotional expenses.
When you make a full surrender of your Contract or partial withdrawal of
accumulated value, we will apply a surrender charge to the gross withdrawal
amount. This surrender charge will apply to purchase payments made within
seven complete years measured from the date the purchase payment is received
by us. The surrender charge schedule is as follows:
Complete Years Since Receipt Surrender
of Purchase Payment Charge Percentage
-------------------- -----------------
0 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6 1%
7+ 0%
When you make a surrender or partial withdrawal, the amounts that you withdraw
will be done on a "first in first out" (FIFO) basis. Purchase payments which we
received more than seven years before the date of your withdrawal will not be
subject to a surrender charge. If you withdraw all of your purchase payments,
further withdrawals will be made from your earnings without incurring a
surrender charge. If your accumulated value is less than the purchase payments
subject to a surrender charge, the surrender charge will only be applied to your
accumulated value.
We will not assess a surrender charge in the event of annuitization with us
after three Contract years, or on death of the annuitant. Currently, however, we
assess surrender charges upon annuitization within three Contract years only if
Annuity Option 4 (Income for a Fixed Period) is chosen with annuity payments for
a period of less than ten years.
If revenues from surrender charges are not sufficient to cover certain
sales-related expenses, we will bear the shortfall. If the revenues from
surrender charges exceed such expenses, we will retain the excess. We do not
currently believe that the surrender charge revenues will cover the expected
sales-related expenses.
Charge-Free Amounts
You can withdraw up to 10% of your accumulated value each year without incurring
a surrender charge. We refer to this as the 10% free amount. The annual 10% free
amount will be equal to 10% of the accumulated value on the date that the first
withdrawal is made each year.
The 10% free amounts withdrawn will not reduce the purchase payments still
subject to a surrender charge. The 10% free amount does not apply upon full
surrender and is not cumulative.
Mortality and Expense Risk Charge
During the accumulation period and after annuity payments begin, we
deduct a charge for mortality and expense risk at the end of each valuation
period as a percentage of the accumulated value in the Divisions. This charge
is 1.25% annually (1.00% for mortality risk and .25% for expense risk).
The mortality risk that we assume is that annuitants may live for a longer
period of time than estimated when the guarantees in your Contract were
established. Because of these guarantees, each payee is assured that longevity
will not have an adverse effect on the annuity payments received. The mortality
risk that we assume also includes a guarantee to pay a death benefit if the
annuitant dies before the annuity date. The expense risk that we assume is the
risk that the surrender charge and administrative charges will be insufficient
to cover actual future expenses.
Transfer Fees
For each transfer in excess of twelve during the Contract year, we reserve
the right to charge an amount equal to the lesser of $25 or 2% of the amount
transferred. Currently, Contract owners are limited to no more than twelve
transfers per year. Transfers made under the dollar cost averaging program are
not included in determining the amount of transfers.
Fees and Expenses of the Funds
There are deductions from and expenses paid out of the assets of the various
Investment Funds which are described in the "Summary of Contract Fees and
Expenses" in this Prospectus.
Premium Tax
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. We are responsible for the payment of these
taxes and will make a deduction from the value of your Contract for them. Some
of these taxes are due when your Contract is issued, and others are due when
annuity payments begin. When a premium tax is due at the time you make a
purchase payment, we will deduct from the payment such tax. Premium taxes
generally range from 0% to 3.5%, depending on the state.
We reserve the right to defer or waive the charge assessed for premium tax in
certain jurisdictions until your Contract is surrendered or until your death. We
will notify you in writing before exercising our right to collect deferred
premium tax from the accumulated value.
VARIABLE ACCOUNT
Accumulation Units
We will establish an account in your name for each Division to which you
allocate purchase payments or transfer amounts. Purchase payments and transfer
amounts are allocated to Divisions and credited in the form of
accumulation units.
The number of accumulation units credited to each account is determined by
dividing the purchase payment or transfer amount for the account by the value of
an accumulation unit for that Division for the valuation period during which the
purchase payment or transfer request is credited. The number of accumulation
units in any account will be increased at the end of a valuation period by any
purchase payments allocated to the corresponding Division during that valuation
period and by any accumulated value transferred to that Division from another
Division or from a guarantee period during that valuation period. The number of
accumulation units in any account will be decreased at the end of a valuation
period by any transfers of accumulated value out of the corresponding Division,
by any partial withdrawals or surrenders from that Division, and by any
administrative charges or surrender charge deducted from that Division during
that valuation period.
Value of Accumulation Units
The value of accumulation units in each Division will vary from one valuation
period to the next depending upon the investment results of the particular
Division. The value of an accumulation unit for each Division was arbitrarily
set at $12 for the first valuation period. The value of an accumulation unit for
any subsequent valuation period is determined by multiplying the value of an
accumulation unit for the immediately preceding valuation period by the net
investment factor for such Division for the valuation period for which the value
is being determined.
Net investment factor
Each business day we will calculate each Division's net investment factor. A
Division's net investment factor measures its investment performance during a
valuation period. The net investment factor for each Division for any valuation
period is determined by dividing (a) by (b) and subtracting (c) from the result:
Where (a) is: (1) the net asset value per share of an Investment Fund share
held in the Division determined at the end of the current valuation
period, plus (2) the per share amount of any dividend or capital gain
distribution made by an Investment Fund on shares held in the Division
If the "ex-dividend" date occurs during the current valuation period.
Where (b) is: the net asset value per share of an Investment Fund share
held in the Division determined as of the end of the immediately
preceding valuation period.
Where (c) is: a factor representing the charges deducted from the
Division on a daily basis for mortality and expense risks and
administrative expenses. Such factor is equal, on an annual basis, to 1.40%
(1.25% for mortality and expense risk and 0.15% for administrative
expenses).
The net investment factor may be greater or less than or equal to one;
therefore, the value of an accumulation unit may increase, decrease, or remain
the same. The value of an annuity unit, described in the Statement of Additional
Information, is also affected by the net investment factor.
ACCESS TO YOUR MONEY
You can have access to the money in your Contract:
* by making a withdrawal (either a partial or a complete withdrawal);
* when a death benefit is paid; or
* by electing to receive annuity payments.
Surrenders and Partial Withdrawals
You may surrender your Contract or make a partial withdrawal to receive all or
part of the accumulated value of your Contract at any time before you begin
receiving annuity payments and while the annuitant is living.
A full surrender will result in a cash withdrawal payment equal to the
accumulated value of your Contract, less any surrender charge. If you
request a partial withdrawal, it will result in a reduction in your accumulated
value equal to the amount you receive plus any applicable surrender charge.
There is no limit on the frequency of partial withdrawals. In the case of a
partial withdrawal, you must instruct us as to the amounts to be withdrawn
from each Division. However, the minimum amount that you may withdraw is
$500 or, if less, your entire balance in the Division.
If, after the withdrawal (and deduction of any applicable surrender
charge), the amount remaining in the Division is less than $500, we may treat
the partial withdrawal as a withdrawal of the entire amount held in the
Division. If a partial withdrawal plus any applicable surrender charge
would reduce the accumulated value to less than $500, we may treat the
partial withdrawal as a full surrender of your Contract.
The amount you receive can be less than the amount requested if your accumulated
value is insufficient to cover applicable charges. Any withdrawal request cannot
exceed the accumulated value of your Contract.
We will, upon request, provide you with an estimate of the amounts that would be
payable in the event of a full surrender or partial withdrawal. We reserve the
right to charge a reasonable fee to recover the administrative expenses
associated with these requests.
Income taxes, tax penalties and certain restrictions may apply to any withdrawal
you make. If at the time you make a written request for a full surrender or a
partial withdrawal, you do not provide us with a written election not to have
Federal income taxes withheld, we must by law withhold such taxes and any
applicable state taxes from the taxable portion of any surrender or withdrawal.
Systematic Withdrawal Plan
We administer a systematic withdrawal plan ("SWP") which allows you to authorize
periodic withdrawals during the accumulation period. If you enter into a SWP
agreement, you will instruct us to withdraw selected amounts from your Contract
on a monthly, quarterly, semiannual or annual basis. Currently, the SWP is
available if you request a minimum $200 periodic withdrawal. Amounts withdrawn
may be subject to a surrender charge. Withdrawals taken under the SWP may also
be subject to the 10% Federal penalty tax on early withdrawals and to income
taxes. The SWP may be terminated at any time by you or us.
DEATH BENEFIT
In every case of death, we must receive proof of your death or the death of the
annuitant before we are obliged to act. The annuitant is the person whose life
we look to when we make annuity payments. For purposes of the death benefit, if
the owner is not an individual, the annuitant shall be treated as the owner.
Death of a Contract Owner who is the Annuitant.
If you die during the accumulation phase, the death benefit will become
payable to your beneficiary. If your surviving spouse is the beneficiary,
the spouse may continue the Contract as the new owner and annuitant. The
death benefit, if more than the accumulated value, will be paid to
the surviving spouse by crediting the Contract with an amount equal to the
difference between the death benefit and the accumulated value. The amount
equal to the difference between the death benefit and the accumulated value
will be allocated to the Divisions as indicated on the Contract application
or as subsequently changed by a Written Request from you.
If you die during the income phase, we will not pay a death benefit under
the Contract and any remaining payments will be distributed at least as
rapidly as under the method of distribution being used as of the date of
the Contract owner's death.
Death of a Contract Owner who is not the Annuitant.
If a you die during the accumulation phase, the accumulated value, less
any applicable administration fees or surrender charge, will be distributed to
the beneficiary. However, if the surviving spouse is the annuitant or your
beneficiary, the spouse may continue the Contract as the new owner.
If you die during the income phase, we will not pay a death benefit and the
Contract must continue to be distributed at least as rapidly as the method of
distribution being used as of the date of your death.
Death of the Annuitant who is not a Contract Owner.
If the annuitant dies during the accumulation phase and before you or any joint
owner, the death benefit is paid to the beneficiary.
If the annuitant dies during the income phase, we will not pay a death benefit
except as may be provided under the annuity option elected.
Death of a Joint Owner
If any joint owner dies during the accumulation phase, the Contract must be
distributed. Joint ownership must be limited to spousal joint ownership. For
the Contract to continue under the spousal beneficiary exception, the owner's
beneficiary designation must read "surviving spouse". If the surviving spouse
is not the owner's beneficiary, the Contract will be distributed.
If the joint owner who is not the annuitant dies, the beneficiary will receive
the accumulated value less any applicable administrative charges and surrender
charges. If the joint owner who is the annuitant dies, the beneficiary will
receive the death benefit.
If any joint owner dies during the income phase, the Contract must continue to
be distributed at least as rapidly as the method of distribution prior to the
joint owner's death. If the deceased joint owner was also the annuitant, no
death benefit will be payable under the Contract, except as may be provided
under the annuity option elected.
Payment of Death Benefit
Payments made under the death benefit provisions will be made in one lump sum
and must be made within five years after the date of death of a Contract owner
or annuitant. If the beneficiary makes a Written Request within one year of the
owner's or annuitant's death, the proceeds may be applied to create an immediate
annuity for the beneficiary, who will be the owner and annuitant. Payments under
the annuity, or under any other method of payment we make available, must be for
the life of the beneficiary, or for a number of years that is not more than the
life expectancy of the beneficiary (as determined for Federal tax purposes) at
the time of an owner's or annuitant's death, and must begin within one year
after an owner's or annuitant's death.
The death benefit will be paid or credited within seven days of receipt of due
proof of death and a Written Request for payment at the Annuity Service Office,
except as we may be permitted to defer such payment in accordance with
applicable Federal law and state insurance law.
Amount of Death Benefit
The death benefit will be the gross death benefit described below, less any
applicable administrative charges. The surrender charge is not applicable in the
event of the annuitant's death.
The gross death benefit during the first six Contract years will be equal to the
greater of: (a) the accumulated value on the date due proof of death and a
Written Request for payment are received at our Annuity Service Office or (b)
the sum of all purchase payments made, less any amount deducted in connection
with partial withdrawals. During any subsequent six Contract year period, the
gross death benefit will be the greater of: (a) the accumulated value on the
date due proof of death is received at our Annuity Service Office or (b) the
death benefit on the last day of the previous six Contract year period, plus any
purchase payments made, and less any amount deducted in connection with partial
withdrawals since then.
If the Contract is issued on or after the annuitant's 75th birthday, the gross
death benefit will be the accumulated value on the date due proof of death and a
Written Request for payment are received at our Annuity Service Office.
ANNUITY PROVISIONS
The accumulated value on the annuity date, less any applicable administration
charges, surrender charge and premium tax will be applied to an annuity option.
If the annuity date of the Contract occurs within the first three Contract
years, surrender charges may be deducted upon annuitization. Currently, we
assess surrender charges only if Annuity Option 4 (Income for a Fixed Period) is
chosen with annuity payments lasting for a period of less than ten years.
Annuity payments may be made on a fixed or variable basis as elected by you.
Annuity Date
Annuity payments will begin on the annuity date, unless your Contract has been
surrendered or the proceeds have been paid to the designated beneficiary prior
to that date. The annuity date must be no later than the annuitant's 85th
birthday. Under certain qualified arrangements, distributions may be required
before the annuity date. You may change the annuity date.
Annuity Options
The annuity option may be elected or changed, if it was not irrevocable, by
written request, provided the annuitant is still alive. Election of an annuity
option must be made before thirty days before the annuity date.
Currently, the minimum amount which you may apply under an annuity option is
$5,000 and the minimum annuity payment is $50. If the accumulated value of your
Contract is less than $5,000 when the annuity date arrives, we will make a lump
sum payment of the remaining amount to you. If at any time payments are, or
become, less than $50, we may change the frequency of payments to intervals that
will result in payments of at least $50. We reserve the right to change these
requirements.
The following options are currently available:
Option 1 - Life Annuity - An annuity payable in monthly, quarterly,
semi-annual or annual payments during the lifetime of the annuitant,
ceasing with the last installment due prior to the death of the annuitant.
Since there is no provision for a minimum number of payments under this
annuity option, the payee would receive only one payment if the annuitant
died prior to the due date of the second payment, two payments if the
annuitant died prior to the due date of the third payment, etc.
Option 2 - Life Annuity with 60, 120, 180, or 240 Monthly Payments
Guaranteed - An annuity payable in monthly, quarterly, semi-annual, or
annual payments during the lifetime of the annuitant, with the guarantee
that if, at the death of the annuitant, payments have been made for less
than 60 months, 120 months, 180 months, or 240 months, as elected, payments
will be continued to the beneficiary during the remainder of the elected
period.
Option 3 - Joint and Survivor Income for Life - An annuity payable in
monthly, quarterly, semi-annual, or annual payments while both the
annuitant and a second person remain alive, and thereafter during the
remaining lifetime of the survivor, ceasing with the last installment
due prior to the death of the survivor. If the primary payee dies
after payments begin, full payments or payments of 1/2 or 2/3,
(whichever you elected when applying for this option) will continue to
the other payee during his or her lifetime. Since there is no
provision for a minimum number of payments under Annuity Option 3, the
payees would receive only one payment if both the annuitant and the
second person died prior to the due date of the second payment, two
payments if they died prior to the due date of the third payment, etc.
Option 4 - Income for a Fixed Period - An annuity payable in annual,
semiannual, quarterly, or monthly payments over a specified number of
years, not less than five nor more than thirty. When a variable annuity
basis is selected, a mortality and expense risk charge continues to be
assessed, even though we incur no mortality risk under this option.
With respect to any Option not involving a life contingency (e.g., Option 4 -
Income for a Fixed Period), you may elect to have the present value of the
guaranteed monthly annuity payments remaining, as of the date we receive proof
of the claim, commuted and paid in a lump sum.
Value of Variable Annuity Payments
The dollar amount of your payment from the Division(s) will depend upon four
things:
* the value of your Contract in the Division(s) on the annuity
commencement date;
* the 4% assumed investment rate used in the annuity table for the
Contract; and
* the performance of the Investment Funds you selected; and
* if permitted in your state and under the type of Contract you have
purchased, the age and sex of the annuitant(s).
If the actual performance exceeds the 4% assumed rate plus the deductions for
expenses, your annuity payments will increase. Similarly, if the actual
performance is less than 4% plus the amount of the deductions, your annuity
payments will decrease.
The value of all payments (both guaranteed and variable) will be greater for
shorter guaranteed periods than for longer guaranteed periods, and greater for
life annuities than for joint and survivor annuities, because they are expected
to be made for a shorter period.
The method of computation of variable annuity payments is described in more
detail in the Statement of Additional Information.
FEDERAL TAX MATTERS
NOTE: We have prepared the following information on taxes as a general
discussion of the subject. It is not intended as tax advice to any individual.
You should consult your own tax adviser about your own circumstances. We have
included in the Statement of Additional Information an additional discussion
regarding taxes.
Annuity Contracts in General
Annuity contracts are a means of setting aside money for future needs - usually
retirement. Congress recognized how important saving for retirement was and
provided special rules in the Internal Revenue Code (Code) for annuities.
Simply stated, these rules provide that you will not be taxed on the earnings on
the money held in your annuity contract until you take the money out. This is
referred to as tax deferral. There are different rules as to how you are taxed
depending on how you take the money out and the type of contract - qualified or
non-qualified (see following sections).
Under non-qualified contracts, you, as the owner, are not taxed on increases in
the value of your contract until a distribution occurs - either as a withdrawal
or as annuity payments. When you make a withdrawal, you are taxed on the amount
of the withdrawal that is earnings. For annuity payments, different rules apply.
A portion of each annuity payment is treated as a partial return of your
purchase payments and is not taxed. The remaining portion of the annuity payment
is treated as ordinary income. How the annuity payment is divided between
taxable and non-taxable portions depends upon the period over which the annuity
payments are expected to be made. Annuity payments received after you have
received all of your purchase payments are fully includible in income.
When a non-qualified contract is owned by a non-natural person (e.g.,
corporation or certain other entities other than a trust holding the contract as
an agent for a natural person), the contract will generally not be treated as an
annuity for tax purposes.
Qualified and Non-Qualified Contracts
If you purchase the Contract as an individual and not under any pension plan,
specially sponsored program or an individual retirement annuity, your Contract
is referred to as a non-qualified Contract.
If you purchase the Contract under a pension plan, specially sponsored program,
or an individual retirement annuity, your Contract is referred to as a qualified
Contract. Examples of qualified plans are: Individual Retirement Annuities
(IRAs), Tax-Sheltered Annuities (sometimes referred to as 403(b) contracts), and
pension and profit-sharing plans, which include 401(k) plans and H.R. 10 Plans.
Withdrawals - Non-Qualified Contracts
If you make a withdrawal from your Contract, the Code treats such a withdrawal
as first coming from earnings and then from your purchase payments. Such
withdrawn earnings are includible in income.
The Code also provides that any amount received under an annuity contract which
is included in income may be subject to a penalty. The amount of the penalty is
equal to 10% of the amount that is includible in income. Some withdrawals will
be exempt from the penalty. They include any amounts:
(1) paid on or after the taxpayer reaches age 59 1/2;
(2) paid after you die;
(3) paid if the taxpayer becomes totally disabled (as that term is defined
in the Code);
(4) paid in a series of substantially equal payments made annually (or
more frequently) for life or a period not exceeding life expectancy;
(5) paid under an immediate annuity; or
(6) which come from purchase payments made prior to August 14, 1982.
Withdrawals - Qualified Contracts
The above information describing the taxation of non-qualified Contracts does
not apply to qualified Contracts. There are special rules that govern with
respect to qualified Contracts. We have provided a more complete discussion in
the Statement of Additional Information.
Withdrawals - Tax-Sheltered Annuities
The Code limits the withdrawal of purchase payments made by owners from certain
Tax-Sheltered Annuities. Withdrawals can only be made when an owner:
(1) reaches age 59 1/2;
(2) leaves his/her job;
(3) dies;
(4) becomes disabled (as that term is defined in the Code); or
(5) in the case of hardship.
However, in the case of hardship, the owner can only withdraw the purchase
payments and not any earnings.
Diversification
The Code provides that the underlying investments for a variable annuity must
satisfy certain diversification requirements in order to be treated as an
annuity contract. We believe that the Investment Funds are managed so as to
comply with the requirements.
Neither the Code nor the Internal Revenue Service Regulations issued to date
provide guidance as to the circumstances under which you, because of the degree
of control you exercise over the underlying investments, are considered the
owner of the shares of the Investment Funds. If you are considered owner of the
shares, it will result in the loss of the favorable tax treatment for the
Contract. It is unknown to what extent owners are permitted to select Investment
Funds, to make transfers among the Investment Funds or the number and type of
Investment Funds owners may select from without being considered owner of the
shares. If any guidance is provided which is considered a new position, then the
guidance is generally applied prospectively. However, if such guidance is
considered not to be a new position, it may be applied retroactively. This would
mean that you, as the owner of the Contract, could be treated as the owner of
the Investment Funds.
Section 403(b) Plans
Under Code Section 403(b), payments made by public school systems and certain
tax exempt organizations to purchase annuity contracts for their employees are
excludable from the gross income of the employee, subject to certain
limitations. However, these payments may be subject to FICA (Social Security)
taxes.
Code Section 403(b)(11) restricts the distribution under Code Section 403(b)
annuity contracts of: (1) elective contributions made in years beginning after
December 31, 1988; (2) earnings on those contributions; and (3) earnings in such
years on amounts held as of the last year beginning before January 1, 1989.
Distribution of those amounts may only occur upon death of the employee,
attainment of age 59 1/2, separation from service, disability, or financial
hardship. Income attributable to elective contributions may not be distributed
in the case of hardship. Distributions prior to age 59 1/2 due to separation
from service or financial hardship are subject to the nondeductible 10% penalty
tax for premature distributions, in addition to income tax.
The Investment Company Act of 1940 has distribution requirements which differ
from the requirements of Code Section 403(b) set forth above. However, these
Contracts are being offered in reliance upon, and in compliance with, the
provisions of no-action letter number IP-6-88 issued by the Securities and
Exchange Commission to the American Council of Life Insurance. The no-action
letter allows the Separate Account to apply the restrictions created by Code
Section 403(b)(11) as long as specified steps, such as this disclosure, are
taken to ensure Contract Owners are aware of the Code restrictions. Security
Equity believes it is in compliance with the provisions of the no-action
letter.
Corporate Pension and Profit Sharing Plans and H.R. 10 Plans
Code Section 401(a) permits employers to establish various types of retirement
plans for employees, and permits self-employed individuals to establish
retirement plans for themselves and their employees. These retirement plans may
permit the purchase of the Contracts to provide benefits under the plans.
Adverse tax consequences to the plan, to the participant or to both may result
if this Contract is assigned or transferred to any individual as a means to
provide benefit payments.
Deferred Compensation Plans
Code Section 457 provides for certain deferred compensation plans. These plans
may be offered with respect to service for state governments, local governments,
political subdivisions, agencies, instrumentalities and certain affiliates of
such entities, and tax exempt organizations. With respect to non-governmental
Section 457 plans, all investments are owned by the sponsoring employer and are
subject to the claims of the general creditors of the employer. Distributions
are taxable in full. Depending on the terms of the particular plan, the employer
may be entitled to draw on deferred amounts for purposes unrelated to its
Section 457 plan obligations. These plans are subject to various restrictions on
contributions and distributions.
Due to the uncertainty in this area, we reserve the right to modify the Contract
in an attempt to maintain favorable tax treatment.
YIELDS AND TOTAL RETURNS
We periodically advertise performance of the various Divisions. We will
calculate performance by determining the percentage change in the accumulated
value for selected periods. This performance number reflects the deduction of
the insurance charges. It does not reflect the deduction of any surrender
charge. The deduction of any surrender charges would reduce the percentage
increase or make greater any percentage decrease. Any advertisement will also
include total return figures which reflect the deduction of the mortality and
expense charges, and surrender charges.
We may, from time to time, include in our advertising and sales materials, tax
deferred compounding charts and other hypothetical illustrations, which may
include comparisons of currently taxable and tax deferred investment programs,
based on selected tax brackets.
OTHER INFORMATION
The Separate Accounts
Separate Account 26 was established on February 10, 1994 and Separate Account 27
was established on August 11, 1994, pursuant to authorization by our Board of
Directors. The Separate Accounts are registered as unit investment trusts with
the Securities and Exchange Commission (the "SEC") under the Investment Company
Act of 1940, as amended (the "1940 Act"). Such registration does not involve
supervision of the management, investment practices, policies of the Separate
Accounts, or of us by the SEC.
Purchase payments may be received by the Separate Accounts from individual
variable annuity contracts that are qualified Contracts entitled to favorable
tax treatments under the Code and also from individual variable annuity
contracts not entitled to any special tax benefits. Any such purchase payments
are pooled together and invested separately from our General Account (the
general assets of the insurance company other than separate account assets). The
persons participating in the variable portion of these Contracts look to the
investment experience of the assets in the Separate Accounts.
Under New York law, the net assets of the Separate Accounts are held for the
exclusive benefit of the owners of the Contracts and for the persons entitled to
annuity payments which reflect the investment results of the Separate Accounts.
That portion of the assets of each Separate Account equal to the reserves and
other liabilities under the Contracts participating in it is not chargeable with
liabilities arising out of any other business that we may conduct. The income,
gains, and losses, whether or not realized, from the assets of each Investment
Fund of a Separate Account are credited to or charged against that Investment
Fund without regard to any other income, gains, or losses.
Separate Accounts 26 and 27 currently have Divisions which each invests in one
of the following corresponding Investment Funds:
Separate Account 26:
* AIM V.I. Diversified Income Fund
* AIM V.I. Government Securities Fund
* AIM V.I. Money Market Fund
Separate Account 27:
* AIM V.I. Capital Appreciation Fund
* AIM V.I. Global Growth and Income Fund
* AIM V.I. International Equity Fund
* AIM V.I. Telecommunications Fund
These are the only Investment Funds currently available under the Contracts.
Principal Underwriter
Cova Life Sales Company ("Life Sales"), One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644, acts as the distributor of the Contracts.
Life Sales is one of our affiliates. Life Sales will pay distribution
compensation to selling broker/dealers in varying amounts which under normal
circumstances are not expected to exceed 6.25% of purchase payments for such
Contracts.
Voting Rights
We are the legal owner of the Investment Fund shares. However, we believe that
when an Investment Fund solicits proxies in conjunction with a vote of
shareholders, it is required to obtain from you and other owners instructions as
to how to vote those shares. When we receive those instructions, we will vote
all of the shares we own in proportion to those instructions. This will also
include any shares that we own on our own behalf. Should we determine that we
are no longer required to comply with the above, we will vote the shares in our
own right.
Written Notice or Written Request
A written notice or written request is any notice or request that you send to us
requesting any changes or making any request affecting your Contract. Such a
request or notice must be in a format and content acceptable to us.
Assignments and Changes of Ownership
With respect to nonqualified individual Contracts, an assignment or change in
ownership of the Contract or of any interest in it will not bind us unless:
(1) it is made in a written instrument;
(2) the original instrument or a certified copy is filed at our Annuity
Service Office; and
(3) we send you a receipt.
We are not responsible for the validity of any assignment. If a claim is based
on an assignment or change of ownership, proof of interest of the claimant may
be required. A valid assignment will take precedence over any claim of a
beneficiary. Any amounts due under a valid assignment will be paid in one lump
sum.
With respect to all other Contracts, the Contract Owner may not transfer, sell,
assign, discount, or pledge a Contract for a loan or a security for the
performance of an obligation or any other purpose, to any person other than to
us at our Annuity Service Office.
Ownership
You, as the owner of the Contract, have all the rights under the Contract. Prior
to the Annuity Commencement Date, the owner is as designated at the time the
Contract is issued, unless changed. If there are joint owners, any rights of
ownership must be done by joint action.
The Beneficiary
The beneficiary is the person or legal entity that may receive benefits under
the Contract in the event of the annuitant's or your death. The original
beneficiary is named in the Contract Application. Subject to any assignment of a
Contract, you may change the beneficiary designation during the lifetime of the
annuitant by the filing of a written request acceptable to us at our Annuity
Service Office. If Annuity Option 3 (Joint and Survivor Income for Life) is
selected, the designation of the second annuitant may not be changed after
annuity payments begin. If the beneficiary designation is changed, we reserve
the right to require that the Contract be returned for endorsement. A
beneficiary who becomes entitled to receive benefits under the Contract may also
designate, in the same manner, a second beneficiary to receive any benefits
which may become payable under the Contract to him or her by reason of the
primary beneficiary's death. If a beneficiary has not been designated by you or
if a beneficiary so designated is not living on the date a lump sum death
benefit is payable or on the date any annuity payments are to be made, the
beneficiary shall be your estate.
Deferment of Payment
We may be required to suspend or postpone payments for surrenders or transfers
for any period when:
1. the New York Stock Exchange is closed (other than customary weekend
and holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of shares of the
Investment Funds is not reasonably practicable or we cannot reasonably
value the shares of the Investment Funds;
4. during any other period when the Securities and Exchange Commission,
by order, so permits for the protection of owners.
Year 2000
We have developed and initiated plans to assure that our computer systems will
function properly in the year 2000 and later years. These efforts have included
receiving assurances from outside service providers that their computer systems
will also function properly in this context. Included within these plans are the
computer systems of the advisers and sub-advisers of the various investment
portfolios underlying the Separate Account.
Although an assessment of the total cost of implementing these plans has not
been completed, the total amounts to be expended are not expected to have a
material effect on our financial position or results of operation. We believe
that we have taken all reasonable steps to address these potential problems.
There can be no assurance, however, that the steps taken will be adequate to
avoid any adverse impact.
Financial Statements
The financial statements for Security Equity and both Separate Accounts 26 and
27 (as well as the auditors' reports thereon) are included in the Statement of
Additional Information.
Statement of Additional Information - Table of Contents
A Statement of Additional Information is available which contains more details
concerning the subjects discussed in this Prospectus. The following is the Table
of Contents for that Statement:
COMPANY
EXPERTS
LEGAL OPINIONS
DISTRIBUTION
PERFORMANCE INFORMATION
Total Return
Money Market Yield Calculation
Yields of Other Divisions
Historical Unit Values
Effect of the Annual Contract Fee
FEDERAL TAX STATUS
General
Diversification
Multiple Contracts
Contracts Owned by Other than Natural Persons
Tax Treatment of Assignments
Income Tax Withholding
Tax Treatment of Withdrawals - Non-Qualified Contracts
Qualified Plans
Tax Treatment of Withdrawals - Qualified Contracts
Tax-Sheltered Annuities - Withdrawal Limitations
ANNUITY PROVISIONS
Computation of the Value of an Annuity Unit
Determination of the Amount of the First Annuity Installment
Determination of the Fluctuating Values of the Annuity Installments
GENERAL MATTERS
Incorrect Age or Sex
Annuity Data
Quarterly Reports
Incontestability
Ownership
SAFEKEEPING OF ACCOUNT ASSETS
STATE REGULATION
RECORDS AND REPORTS
LEGAL PROCEEDINGS
OTHER INFORMATION
FINANCIAL STATEMENTS
APPENDIX
CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUE HISTORY
The following schedule includes accumulation unit values for the periods
indicated. This data has been extracted from the Separate Accounts'
Financial Statements. This information should be read in conjunction
with the Separate Accounts' Financial Statements and related notes which
are included in the Statement of Additional Information.
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX AND
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
CONDENSED FINANCIAL INFORMATION
For the six-month period ended June 30, 1999 (Unaudited and
for the years ended December 31, 1998 and 1997)
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
ACCUMULATION
ACCUMULATION UNIT VALUE: TOTAL UNITS
UNIT VALUE: END OF OUTSTANDING,
BEGINNING OF PERIOD* PERIOD END OF PERIOD
-------------------- ------------ --------------
<S> <C> <C> <C> <C>
SEPARATE ACCOUNT TWENTY-SIX:
Money Market Division............................................... 6/30/99 12.68 12.84 41,086
1998 12.26 12.68 14,605
1997 N/A 12.26 15,631
Variable Strategic Income Division.................................. 6/30/99 14.32 13.88 10,509
1998 14.61 14.32 45,701
1997 13.82 14.61 44,913
Variable U.S. Government Income Division............................ 6/30/99 13.67 13.16 2,000
1998 12.71 13.67 2,000
1997 12.00 12.71 2,518
SEPARATE ACCOUNT TWENTY-SEVEN:
Variable New Pacific Division....................................... 6/30/99 7.55 8.77 16,137
1998 8.96 7.55 20,703
1997 15.43 8.96 28,896
1996 11.95 15.43 59,302
Variable Europe Division............................................ 6/30/99 19.93 18.59 12,341
1998 19.93 19.93 5,647
1997 15.34 19.93 8,163
Variable America Division........................................... 6/30/99 15.59 18.19 11,681
1998 14.62 15.59 11,055
1997 12.90 14.62 6,419
1996 11.03 12.90 2,236
Variable Growth & Income Division................................... 6/30/99 16.37 15.76 2,879
1998 13.88 16.37 2,879
1997 12.00 13.88 2,116
Variable Latin America Division..................................... 6/30/99 8.59 11.27 10,724
1998 14.94 8.59 10,724
1997 13.23 14.94 13,385
Variable Telecommunications Division................................ 6/30/99 18.06 22.41 35,250
1998 14.99 18.06 34,820
1997 13.27 14.99 37,030
1996 11.27 13.27 31,391
Variable International Division..................................... 6/30/99 12.90 13.41 4,853
1998 13.16 12.90 4,853
1997 12.48 13.16 4,879
Variable Emerging Markets Division.................................. 6/30/99 7.04 9.15 2,750
1998 11.31 7.04 2,750
1997 13.30 11.31 5,161
Variable Natural Resources Division................................. 6/30/99 8.98 10.32 5,916
1998 13.59 8.98 5,916
1997 13.60 13.59 6,760
Variable Infrastructure Division.................................... 6/30/99 13.88 14.84 953
1998 13.24 13.88 953
1997 12.79 13.24 780
</TABLE>
- - --------------
* At inception of Separate Account on September 7, 1995, except for the Variable
Strategic Income Division, the Variable Europe Division, and the Variable
Latin America Division, which commenced operations on January 30, 1996; the
Variable Emerging Markets Division, which commenced operations on March 25,
1996; the Variable International Division, which commenced operations on April
9, 1996; the Money Market Division, which commenced operations on July 26,
1996; the Variable Natural Resources Division the Variable Infrastructure
Division which commenced operations on August 26, 1996; the Variable Growth &
Income Division which commenced operations on April 8, 1997; and the Variable
U.S. Government Division which commenced operations on June 4, 1997.
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL VARIABLE ANNUITY CONTRACT
issued by
SECURITY EQUITY SEPARATE ACCOUNT 26
AND
SECURITY EQUITY LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED NOVEMBER 9, 1999, FOR THE
INDIVIDUAL VARIABLE ANNUITY CONTRACT WHICH IS DESCRIBED HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE THE
COMPANY AT: SECURITY EQUITY LIFE INSURANCE COMPANY, P.O. BOX 208, ARMONK, NY
10504, (800) 533-8282.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED NOVEMBER 9, 1999.
TABLE OF CONTENTS
Page
COMPANY
EXPERTS
LEGAL OPINIONS
DISTRIBUTION
PERFORMANCE INFORMATION
Total Return
Money Market Yield Calculation
Yields of Other Divisions
Historical Unit Values
Effect of the Annual Contract Fee
FEDERAL TAX STATUS
General
Diversification
Multiple Contracts
Contracts Owned by Other than Natural Persons
Tax Treatment of Assignments
Income Tax Withholding
Tax Treatment of Withdrawals - Non-Qualified Contracts
Qualified Plans
Tax Treatment of Withdrawals - Qualified Contracts
Tax-Sheltered Annuities - Withdrawal Limitations
ANNUITY PROVISIONS
Computation of the Value of an Annuity Unit
Determination of the Amount of the First Annuity Installment
Determination of the Fluctuating Values of the Annuity Installments
GENERAL MATTERS
Incorrect Age or Sex
Annuity Data
Quarterly Reports
Incontestability
Ownership
SAFEKEEPING OF ACCOUNT ASSETS
STATE REGULATION
RECORDS AND REPORTS
LEGAL PROCEEDINGS
OTHER INFORMATION
FINANCIAL STATEMENTS
COMPANY
Security Equity Life Insurance Company ("Security Equity") is a company
domiciled in New York. It is a wholly-owned subsidiary of General American Life
Insurance Company ("General American"), a stock insurance company domiciled in
Missouri. Security Equity was incorporated in 1983 under the laws of the State
of New York as a wholly-owned subsidiary of Security Mutual Life Insurance
Company of New York. It was purchased by General American on December 31, 1993.
Security Equity is licensed to do business in 40 states of the United States and
the District of Columbia. The principal office of Security Equity is located at
84 Business Park Drive, Suite 303, Armonk, NY 10504. The telephone number is
(914) 273-1290.
Security Equity is principally engaged in writing individual and corporate owned
life insurance policies and annuity contracts. Assets derived from such business
should be considered by purchasers of variable annuity contracts only as bearing
upon the ability of Security Equity to meet its obligations under the variable
annuity contracts and should not be considered as bearing on the investment
performance of the Separate Accounts.
EXPERTS
Audited financial statements of Security Equity Life Insurance Company and
Separate Accounts Twenty-Six and Twenty-Seven as of December 31, 1998 have been
included in reliance upon the reports of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice on
certain matters relating to the federal securities and income tax laws in
connection with the Contracts.
DISTRIBUTION
Cova Life Sales Company ("Life Sales"), the principal underwriter of the
Contracts, is registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc.
PERFORMANCE INFORMATION
Total Return
From time to time, the Company may advertise performance data. Such data will
show the percentage change in the value of an accumulation unit based on the
performance of a Division over a period of time, usually a calendar year,
determined by dividing the increase (decrease) in value for that unit by the
accumulation unit value at the beginning of the period.
Any such advertisement will include total return figures for the time periods
indicated in the advertisement. Such total return figures will reflect the
deduction of the expenses for the underlying Investment Fund being advertised
and any applicable surrender charges.
The hypothetical value of a Contract purchased for the time periods described in
the advertisement will be determined by using the actual accumulation unit
values for an initial $1,000 purchase payment, and deducting any applicable
surrender charge to arrive at the ending hypothetical value. The average annual
total return is then determined by computing the fixed interest rate that a
$1,000 purchase payment would have to earn annually, compounded annually, to
grow to the hypothetical value at the end of the time periods described. The
formula used in these calculations is:
n
P (1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the time periods used (or
fractional portion thereof) of a hypothetical $1,000 payment made at the
beginning of the time periods used.
The Company may also advertise performance data which will be calculated in the
same manner as described above but which will not reflect the deduction of any
surrender charge. The deduction of any surrender charge would reduce any
percentage increase or make greater any percentage decrease.
Owners should note that the investment results of each Division will
fluctuate over time, and any presentation of the Division's total return
for any period should not be considered as a representation of what an
investment may earn or what an owner's total return may be in any future period.
Money Market Yield Calculation
Advertisements and sales literature concerning the Contracts may report the
"current annualized yield" for the Divisions of the Separate Accounts
that invests in the AIM Money Market Fund, without taking into account
any realized or unrealized gains or losses on shares in the Fund. The annualized
yield is computed by:
(a) determining the net change after 7 days (exclusive of realized gains and
losses on shares of the underlying Investment Fund or on its respective
portfolio securities and unrealized appreciation and depreciation) in the
value of a hypothetical account having a balance of 1 unit at the beginning
of the period;
(b) dividing such net change in account value by the value of the account at
the beginning of the 7-day period to determine the base period return; and
(c) annualizing the result of this division on a 365-day basis.
The net change in account value reflects (1) net income from the Division
attributable to the hypothetical account; and (2) charges and deductions imposed
under the contract upon the hypothetical account. The charges and deductions
include the per unit charges for mortality and expense risk, the administrative
charge for the Division, and the annual contract fee. For the purpose of
calculating current yields for a Contract, an average per unit contract fee is
used, as described below. Current yield will be calculated according to the
following formula:
Current Yields = (NCF - ES/UV) X (365/7)
Where:
NCF = the net change in the value of one unit in the Division
(exclusive of realized gains and losses on the sale of securities
and unrealized appreciation and depreciation) for the 7-day
period specified.
ES = per unit expenses for a hypothetical account having one unit
over the 7-day period.
UV = the unit value for the first day of the 7-day period.
Security Equity advertisement and sales literature may also quote the "effective
yield" of the Division investing in the AIM Money Market Fund for the same
7-day period, determined on a compounded basis. The effective yield is
calculated by compounding the unannualized base period return according to the
following formula:
365/7
Effective Yield = (1+((NCF-ES)/UV)) - 1,
Where:
NCF = the net change in the value of one unit in the Division
(exclusive of realized gains and losses on the sale of securities
and unrealized appreciation and depreciation) for the 7-day
period specified.
ES = per unit expenses for a hypothetical account having one unit
over the 7-day period.
UV = the unit value for the first day of the 7-day period.
Because of the charges and deductions imposed on units according to the terms of
the Contract, the yield for the Money Market Fund will be higher than the yield
for the Division.
Yields on amounts in the Money Market Fund will normally fluctuate on a daily
basis. For that reason the yield for any past period is not an indication nor a
representation of future yields. The actual yield for the Division is affected
by changes in interest rates on money market securities, the average portfolio
maturity of the underlying Fund, the types and qualities of portfolio securities
held by the Fund, and the operating expenses of the Fund. Yields on amounts held
in the Money Market Fund may also be presented for periods other than seven
days.
Yields of Other Divisions
Advertisements and sales literature for the Contract may report the current
annualized yield of one or more of the Divisions (other than the Money Market
Division) for a 30-day or one-month period. The annualized yield of a Division
refers to income generated by the Division during a specified 30-day or
one-month period. Because the yield is annualized, the yield generated by the
Division during the specified period is assumed to be generated every 30-day or
one-month period over a year. The yield is computed by:
(1) dividing the net investment income of the fund corresponding to the
Division less expenses for the Division for the period; by
(2) the maximum offering price per unit of the Division on the last day
of the period times the daily average number of units outstanding for the
period; then
(3) compounding that yield for a 6-month period; and then
(4) multiplying that result by 2.
Expenses attributable to the Division include the mortality and expense
risk charge, the administrative charge for the Division, and the annual
contract fee. A contract fee of $2.50 is used to calculate the 30-day or
one-month yield as in the following equation:
6
Yield = 2x((((N1-ES)/(UxUV))+1) - 1)
Where:
NI = net investment income of the Division for the 30-day or
one-month period in question
ES = expenses of the Division for the 30-day or one-month
period
U = the average number of units outstanding
UV = the unit value at the close of the last day in the 30-day or
one- month period
Because of the charges and deductions imposed under the Contracts (ES in the
equation) the yield for a Division will be lower than the yield for the
corresponding Fund.
The yield on amounts in any Division will normally fluctuate. For that
reason yields for any past periods are not indications nor representations of
future yields. The actual yield for a Division is affected by the type
and the quality of the portfolio securities held in the underlying Fund, and the
operating expenses of the Fund.
Yield calculations do not take surrender charges into account, but such charges
are deducted from amounts greater than ten percent of the Accumulated Value
under a Contract if such amounts are withdrawn within the first six contract
years after they were deposited.
Historical Unit Values
The Company may also show historical accumulation unit values in certain
advertisements containing illustrations. These illustrations will be based on
actual accumulation unit values.
In addition, the Company may distribute sales literature which compares the
percentage change in accumulation unit values for any of the Divisions
against established market indices such as the Standard & Poor's 500 Composite
Stock Price Index, the Dow Jones Industrial Average or other management
investment companies which have investment objectives similar to the Division
being compared. The Standard & Poor's 500 Composite Stock Price Index is an
unmanaged, unweighted average of 500 stocks, the majority of which are listed on
the New York Stock Exchange. The Dow Jones Industrial Average is an unmanaged,
weighted average of thirty blue chip industrial corporations listed on the New
York Stock Exchange. Both the Standard & Poor's 500 Composite Stock Price Index
and the Dow Jones Industrial Average assume quarterly reinvestment of dividends.
Effect of the Annual Contract Fee
The Contract provides for the deduction each year of the lesser of $30 or 2% of
an account's value provided the account value is less than $20,000. If the
account value equals or exceeds $20,000, then no contract fee is charged. So
that this charge can be reflected in yield and total return calculations it is
assumed that the annual charge will be $30 and this charge is converted into a
per-dollar, per-day charge based on the average Accumulated Value in the
Separate Accounts of all the Contracts as of the last day of the period for
which quotations are provided. The average value of Contracts in the Separate
Accounts is assumed to be $20,000. The per-dollar, per-day average charge will
be adjusted to reflect the assumptions underlying a particular performance
quotation.
FEDERAL TAX STATUS
General
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE POSSIBILITY
OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF THE CONTRACTS.
PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE TREATED AS
"ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE FURTHER
UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL
RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS. MOREOVER, NO
ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX LAWS.
Section 72 of the Code governs taxation of annuities in general. An Owner is not
taxed on increases in the value of a Contract until distribution occurs, either
in the form of a lump sum payment or as annuity payments under the Annuity
Option selected. For a lump sum payment received as a total withdrawal (total
surrender), the recipient is taxed on the portion of the payment that exceeds
the cost basis of the Contract. For Non-Qualified Contracts, this cost basis is
generally the purchase payments, while for Qualified Contracts there may be no
cost basis. The taxable portion of the lump sum payment is taxed at ordinary
income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion amount
is includible in taxable income. The exclusion amount for payments based on a
fixed annuity option is determined by multiplying the payment by the ratio that
the cost basis of the Contract (adjusted for any period or refund feature) bears
to the expected return under the Contract. The exclusion amount for payments
based on a variable annuity option is determined by dividing the cost basis of
the Contract (adjusted for any period certain or refund guarantee) by the number
of years over which the annuity is expected to be paid. Payments received after
the investment in the Contract has been recovered (i.e. when the total of the
excludable amount equals the investment in the Contract) are fully taxable. The
taxable portion is taxed at ordinary income tax rates. For certain types of
Qualified Plans there may be no cost basis in the Contract within the meaning of
Section 72 of the Code. Owners, Annuitants and Beneficiaries under the Contracts
should seek competent financial advice about the tax consequences of any
distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Accounts are not a separate entity from the
Company, and its operations form a part of the Company.
Diversification
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity Contracts. The Code provides that a
variable annuity Contract will not be treated as an annuity Contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury Department
("Treasury Department"), adequately diversified. Disqualification of the
Contract as an annuity Contract would result in the imposition of federal income
tax to the Owner with respect to earnings allocable to the Contract prior to the
receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity Contracts such as the Contract meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. Government securities and securities of other regulated investment
companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas.
Reg.1.817-5), which established diversification requirements for the Investment
Funds underlying variable Contracts such as the Contract. The Regulations
amplify the diversification requirements for variable contracts set forth in the
Code and provide an alternative to the safe harbor provision described above.
Under the Regulations, an Investment Fund will be deemed adequately diversified
if: (1) no more than 55% of the value of the total assets of the option is
represented by any one investment; (2) no more than 70% of the value of the
total assets of the option is represented by any two investments; (3) no more
than 80% of the value of the total assets of the option is represented by any
three investments; and (4) no more than 90% of the value of the total assets of
the option is represented by any four investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable Contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that all Investment Funds underlying the Contracts will be
managed in such a manner as to comply with these diversification requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Accounts will cause the Owner to be treated as the
owner of the assets of the Separate Accounts, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the Separate Accounts. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the Owner to be considered as the owner of the assets of the Separate
Accounts resulting in the imposition of federal income tax to the Owner with
respect to earnings allocable to the Contract prior to receipt of payments under
the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the Owners being
retroactively determined to be the owners of the assets of the Separate
Accounts.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
Multiple Contracts
The Code provides that multiple non-qualified annuity Contracts which are issued
within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity Contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from such
combination of Contracts. For purposes of this rule, Contracts received in a
Section 1035 exchange will be considered issued in the year of the exchange.
Owners should consult a tax adviser prior to purchasing more than one
non-qualified annuity Contract in any calendar year.
Contracts Owned by Other than Natural Persons
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts will be taxed currently to the Owner if the Owner is a non-natural
person, e.g., a corporation or certain other entities. Such Contracts generally
will not be treated as annuities for federal income tax purposes. However, this
treatment is not applied to a Contract held by a trust or other entity as an
agent for a natural person nor to Contracts held by Qualified Plans. Purchasers
should consult their own tax counsel or other tax adviser before purchasing a
Contract to be owned by a non-natural person.
Tax Treatment of Assignments
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Contracts.
Income Tax Withholding
All distributions or the portion thereof which is includible in the gross income
of the Owner are subject to federal income tax withholding. Generally, amounts
are withheld from periodic payments at the same rate as wages and at the rate of
10% from non-periodic payments. However, the Owner, in most cases, may elect not
to have taxes withheld or to have withholding done at a different rate.
Effective January 1, 1993, certain distributions from retirement plans qualified
under Section 401 or Section 403(b) of the Code, which are not directly rolled
over to another eligible retirement plan or individual retirement account or
individual retirement annuity, are subject to a mandatory 20% withholding for
federal income tax. The 20% withholding requirement generally does not apply to:
a) a series of substantially equal payments made at least annually for the life
or life expectancy of the participant or joint and last survivor expectancy of
the participant and a designated beneficiary or for a specified period of 10
years or more; or b) distributions which are required minimum distributions; or
c) the portion of the distributions not includible in gross income (i.e. returns
of after-tax contributions); or d) hardship withdrawals. Participants should
consult their own tax counsel or other tax adviser regarding withholding
requirements.
Tax Treatment of Withdrawals - Non-Qualified Contracts
Section 72 of the Code governs treatment of distributions from annuity
Contracts. It provides that if the Contract Value exceeds the aggregate purchase
payments made, any amount withdrawn will be treated as coming first from the
earnings and then, only after the income portion is exhausted, as coming from
the principal. Withdrawn earnings are includible in gross income. It further
provides that a ten percent (10%) penalty will apply to the income portion of
any premature distribution. However, the penalty is not imposed on amounts
received: (a) after the taxpayer reaches age 59 1/2; (b) after the death of the
Owner; (c) if the taxpayer is totally disabled (for this purpose disability is
as defined in Section 72(m)(7) of the Code); (d) in a series of substantially
equal periodic payments made not less frequently than annually for the life (or
life expectancy) of the taxpayer or for the joint lives (or joint life
expectancies) of the taxpayer and his or her Beneficiary; (e) under an immediate
annuity; or (f) which are allocable to purchase payments made prior to August
14, 1982.
With respect to (d) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years in which the exception was used.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified Contracts.
(See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Qualified Plans
The Contracts offered herein are designed to be suitable for use under various
types of Qualified Plans. Taxation of participants in each Qualified Plan varies
with the type of plan and terms and conditions of each specific plan. Owners,
Annuitants and Beneficiaries are cautioned that benefits under a Qualified Plan
may be subject to the terms and conditions of the plan regardless of the terms
and conditions of the Contracts issued pursuant to the plan. Some retirement
plans are subject to distribution and other requirements that are not
incorporated into the Company's administrative procedures. Owners, Annuitants
and Beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the Contracts comply with
applicable law. Following are general descriptions of the types of Qualified
Plans with which the Contracts may be used. Such descriptions are not exhaustive
and are for general informational purposes only. The tax rules regarding
Qualified Plans are very complex and will have differing applications depending
on individual facts and circumstances. Each purchaser should obtain competent
tax advice prior to purchasing a Contract issued under a Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described
herein. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals - Qualified Contracts" below.)
On July 6, 1983, the Supreme Court decided in Arizona Governing Committee v.
Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection with
Qualified Plans will utilize annuity tables which do not differentiate on the
basis of sex. Such annuity tables will also be available for use in connection
with certain non-qualified deferred compensation plans.
a. Tax-Sheltered Annuities
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities" by
public schools and certain charitable, educational and scientific organizations
described in Section 501(c)(3) of the Code. These qualifying employers may make
contributions to the Contracts for the benefit of their employees. Such
contributions are not includible in the gross income of the employees until the
employees receive distributions from the Contracts. The amount of contributions
to the tax-sheltered annuity is limited to certain maximums imposed by the Code.
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions, nondiscrimination and withdrawals. (See "Tax
Treatment of Withdrawals - Qualified Contracts" and "Tax-Sheltered Annuities -
Withdrawal Limitations" below.) Employee loans are not allowable under the
Contracts. Any employee should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
b. Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which will be deductible from the individual's taxable income. These IRAs
are subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Under certain conditions, distributions from other IRAs and other Qualified
Plans may be rolled over or transferred on a tax-deferred basis into an IRA.
Sales of Contracts for use with IRAs are subject to special requirements imposed
by the Code, including the requirement that certain informational disclosure be
given to persons desiring to establish an IRA. Purchasers of Contracts to be
qualified as Individual Retirement Annuities should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
Roth IRAs
Section 408A of the Code provides that beginning in 1998, individuals may
purchase a new type of non-deductible IRA, known as a Roth IRA. Purchase
payments for a Roth IRA are limited to a maximum of $2,000 per year and are not
deductible from taxable income. Lower maximum limitations apply to individuals
with adjusted gross incomes between $95,000 and $110,000 in the case of single
taxpayers, between $150,000 and $160,000 in the case of married taxpayers filing
joint returns, and between $0 and $10,000 in the case of married taxpayers
filing separately. An overall $2,000 annual limitation continues to apply to all
of a taxpayer's IRA contributions, including Roth IRA and non-Roth IRAs.
Qualified distributions from Roth IRAs are free from federal income tax. A
qualified distribution requires that an individual has held the Roth IRA for at
least five years and, in addition, that the distribution is made either after
the individual reaches age 59 1/2, on the individual's death or disability, or
as a qualified first-time home purchase, subject to a $10,000 lifetime maximum,
for the individual, a spouse, child, grandchild, or ancestor. Any distribution
which is not a qualified distribution is taxable to the extent of earnings in
the distribution. Distributions are treated as made from contributions first and
therefore no distributions are taxable until distributions exceed the amount of
contributions to the Roth IRA. The 10% penalty tax and the regular IRA
exceptions to the 10% penalty tax apply to taxable distributions from a Roth
IRA.
Amounts may be rolled over from one Roth IRA to another Roth IRA. Furthermore,
an individual may make a rollover contribution from a non-Roth IRA to a Roth
IRA, unless the individual has adjusted gross income over $100,000 or the
individual is a married taxpayer filing a separate return. The individual must
pay tax on any portion of the IRA being rolled over that represents income or a
previously deductible IRA contribution.
Purchasers of Contracts to be qualified as a Roth IRA should obtain competent
tax advice as to the tax treatment and suitability of such an investment.
c. Pension and Profit-Sharing Plans
Sections 401(a) and 401(k) of the Code permit employers, including self-employed
individuals, to establish various types of retirement plans for employees. These
retirement plans may permit the purchase of the Contracts to provide benefits
under the Plan. Contributions to the Plan for the benefit of employees will not
be includible in the gross income of the employees until distributed from the
Plan. The tax consequences to participants may vary depending upon the
particular plan design. However, the Code places limitations and restrictions on
all Plans including on such items as: amount of allowable contributions; form,
manner and timing of distributions; transferability of benefits; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Purchasers of Contracts for use with Pension or Profit Sharing Plans should
obtain competent tax advice as to the tax treatment and suitability of such an
investment.
Tax Treatment of Withdrawals - Qualified Contracts
In the case of a withdrawal under a Qualified Contract, a ratable portion of the
amount received is taxable, generally based on the ratio of the individual's
cost basis to the individual's total accrued benefit under the retirement plan.
Special tax rules may be available for certain distributions from a Qualified
Contract. Section 72(t) of the Code imposes a 10% penalty tax on the taxable
portion of any distribution from qualified retirement plans, including Contracts
issued and qualified under Code Sections 401 (Pension and Profit-Sharing Plans),
403(b)(Tax-Sheltered Annuities) and 408 and 408A (Individual Retirement
Annuities). To the extent amounts are not includible in gross income because
they have been rolled over to an IRA or to another eligible Qualified Plan, no
tax penalty will be imposed. The tax penalty will not apply to the following
distributions: (a) if distribution is made on or after the date on which the
Owner or Annuitant (as applicable) reaches age 59 1/2; (b) distributions
following the death or disability of the Owner or Annuitant (as applicable) (for
this purpose disability is as defined in Section 72(m) (7) of the Code); (c)
after separation from service, distributions that are part of substantially
equal periodic payments made not less frequently than annually for the life (or
life expectancy) of the Owner or Annuitant (as applicable) or the joint lives
(or joint life expectancies) of such Owner or Annuitant (as applicable) and his
or her designated Beneficiary; (d) distributions to an Owner or Annuitant (as
applicable) who has separated from service after he has attained age 55; (e)
distributions made to the Owner or Annuitant (as applicable) to the extent such
distributions do not exceed the amount allowable as a deduction under Code
Section 213 to the Owner or Annuitant (as applicable) for amounts paid during
the taxable year for medical care; (f) distributions made to an alternate payee
pursuant to a qualified domestic relations order; (g) distributions from an
Individual Retirement Annuity for the purchase of medical insurance (as
described in Section 213(d)(1)(D) of the Code) for the Owner or Annuitant (as
applicable) and his or her spouse and dependents if the Owner or Annuitant (as
applicable) has received unemployment compensation for at least 12 weeks (this
exception will no longer apply after the Owner or Annuitant (as applicable) has
been re-employed for at least 60 days); (h) distributions from an Individual
Retirement Annuity made to the Owner or Annuitant (as applicable) to the extent
such distributions do not exceed the qualified higher education expenses (as
defined in Section 72(t)(7) of the Code) of the Owner or Annuitant (as
applicable) for the taxable year; and (i) distributions from an Individual
Retirement Annuity made to the Owner or Annuitant (as applicable) which are
qualified first-time home buyer distributions (as defined in Section 72(t)(8)of
the Code.) The exceptions stated in (d) and (f) above do not apply in the case
of an Individual Retirement Annuity. The exception stated in (c) above applies
to an Individual Retirement Annuity without the requirement that there be a
separation from service.
With respect to (c) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years on which the exception was used.
Generally, distributions from a qualified plan must begin no later than April
1st of the calendar year following the later of (a) the year in which the
employee attains age 70 1/2 or (b) the calendar year in which the employee
retires. The date set forth in (b) does not apply to an Individual Retirement
Annuity. Required distributions must be over a period not exceeding the life
expectancy of the individual or the joint lives or life expectancies of the
individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed.
Tax-Sheltered Annuities - Withdrawal Limitations
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b)(11) of
the Code) to circumstances only when the Owner: (1) attains age 59 1/2; (2)
separates from service; (3) dies; (4) becomes disabled (within the meaning of
Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Owner's Contract
Value which represents contributions made by the Owner and does not include any
investment results. The limitations on withdrawals became effective on January
1, 1989 and apply only to salary reduction contributions made after December 31,
1988, to income attributable to such contributions and to income attributable to
amounts held as of December 31, 1988. The limitations on withdrawals do not
affect transfers between Tax-Sheltered Annuity Plans. Owners should consult
their own tax counsel or other tax adviser regarding any distributions.
ANNUITY PROVISIONS
Computation of the Value of an Annuity Unit
The table of contractual guaranteed annuity rates is based on an assumed
interest rate. The assumed interest rate is 4% for all contracts.
As a starting point, the value of a Separate Account 26 and 27 annuity unit was
established at $12.00. The value of the annuity unit at the end of any
subsequent business day is determined by multiplying such value for the
preceding business day by the product of (a) the daily reduction factor
(.99989256) once for each calendar day expiring between the end of the sixth
preceding business day and the end of the fifth preceding business day and (b)
the net investment factor for the fifth business day preceding such business
day.
These daily reduction factors are necessary to neutralize the assumed net
investment rate built into the annuity tables. Calculations are performed as of
the fifth preceding business day to permit calculation of amounts and the
mailing of checks in advance of their due date.
This may be illustrated by the following hypothetical example. Assuming that the
net investment factor for the fifth preceding business day was 1.00176027, and
assuming that the annuity unit value for the preceding business day was $12.20,
then the annuity unit for the current business day is $12.22, determined as
follows:
1.00176027 $12.200000
X .99989256 X 1.00165264
----------- ------------
1.00165264 $12.2201622
Determination of the Amount of the First Annuity Installment
When annuity installments begin, the accumulated value of the Contract is
established. This is the sum of the products of the values of an accumulation
unit in each Division on the fifth business day preceding the annuity
commencement date and the number of accumulation units credited to the Contract
as of the annuity commencement date.
The Contract contains tables indicating the dollar amount of the first annuity
installment under each form of variable annuity for each $1,000 of value of the
Contract. The amount of the first annuity installment depends on the option
chosen and the sex (if applicable) and age of the annuitant.
The first annuity installment is determined by multiplying the benefit per
$1,000 of value shown in the tables in the Contract by the number of thousands
of dollars of accumulated value of the Contract allocated to the Investment
Fund.
If a greater first installment would result, Security Equity will compute the
first installment on the same mortality basis as is used in determining such
installments under individual variable annuity Contracts then being issued for a
similar class of annuitants.
Determination of the Fluctuating Values of the Annuity Installments
The dollar amount of the first annuity installment, determined as described
above, is translated into annuity units by dividing that dollar amount by the
value of an annuity unit on the due date of the first annuity installment. The
number of annuity units remains fixed and the amount of each subsequent annuity
installment is determined by multiplying this fixed number of annuity units by
the value of an annuity unit on the date the installment is due.
If in any month after the first the application of the above net investment
factors produces a net investment increment exactly equivalent to the assumed
annualized rate of 4%, then the payment in that month will not change. Since it
is unlikely that it will be exactly equivalent, installments will vary up or
down depending upon whether such investment increment is greater or less than
the assumed annualized rate of 4%. A higher assumption would mean a higher
initial annuity payment but a more slowly rising series of subsequent annuity
payments (or a more rapidly falling series of subsequent annuity payments if the
value of an annuity unit is decreasing). A lower assumption would have the
opposite effect.
GENERAL MATTERS
Incorrect Age or Sex
If the age at issue or sex of the annuitant as shown in the Contract is
incorrect, any benefit payable under a supplemental agreement will be such as
the premiums paid would have purchased at the correct age at issue and sex.
After Security Equity begins paying monthly income installments, appropriate
adjustment will be made in any remaining installments.
Annuity Data
Security Equity will not be liable for obligations which depend on receiving
information from a payee until such information is received in a form
satisfactory to Security Equity.
Quarterly Reports
Quarterly, Security Equity will give the contract owner a report of the current
accumulated value allocated to each Division; and any purchase payments,
charges, transfers, or surrenders during that period. This report will also give
the contract owner any other information required by law or regulation. The
contract owner may ask for a report like this at any time. The quarterly reports
will be distributed without charge. Security Equity reserves the right to charge
a fee for additional reports.
Incontestability
Security Equity cannot contest this Contract.
Ownership
The owner of the Contract on the contract date is the annuitant, unless
otherwise specified in the application. The owner may specify a new owner by
written notice at any time thereafter. During the annuitant's lifetime all
rights and privileges under this Contract may be exercised solely by the owner.
SAFEKEEPING OF ACCOUNT ASSETS
Title to assets of the Separate Accounts is held by Security Equity. The assets
are kept physically segregated and held separate and apart from Security
Equity's general account assets. Records are maintained of all purchases and
redemptions of eligible shares held by each of the Divisions of the separate
account.
STATE REGULATION
Security Equity is a stock life insurance company organized under the laws of
the State of New York, and is subject to regulation by the New York State
Insurance Department. An annual statement is filed with the New York State
Insurance Department on or before March 1 of each year covering the operations
and reporting on the financial condition of Security Equity as of December 31 of
the preceding calendar year. Periodically, the New York State Insurance
Department examines the financial condition of Security Equity, including
the liabilities and reserves of the Separate Accounts.
In addition, Security Equity is subject to the insurance laws and regulations of
all the states where it is licensed to operate. The availability of certain
contract rights and provisions depends on state approval or state filing and
review processes. Where required by state law or regulation, the Contracts
will be modified accordingly.
RECORDS AND REPORTS
All records and accounts relating to the Separate Accounts will be maintained by
Security Equity or by its service provider, General American Life Insurance
Company (or its wholly-owned, second tier subsidiary, Navisys). As presently
required by the Investment Company Act of 1940 and regulations
promulgated thereunder, Security Equity will mail to all contract owners at
their last known address of record, at least semi-annually, reports
containing such information as may be required under that Act or by any other
applicable law or regulation.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Accounts are a party or to
which the assets of the Separate Accounts are subject. Security Equity is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Accounts.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
Contracts discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statement, amendments, and exhibits
thereto has been included in this Statement of Additional Information.
Statements contained in this Statement of Additional Information concerning the
content of the Contracts and other legal instruments are intended to be
summaries. For a complete statement of the terms of these documents, reference
should be made to the instruments filed with the Securities and Exchange
Commission.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company included herein
should be considered only as bearing upon the ability of the Company
to meet its obligations under the Contracts.
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX
STATEMENTS OF ASSETS AND LIABILITIES
(Unaudited)
June 30, 1999
<TABLE>
<CAPTION>
Variable Variable U.S.
Money Strategic Government
Market Income Income
Division Division Division
------------ ------------ -----------
<S> <C> <C> <C>
Assets:
Investments in GT Global Variable Investment Funds,
at market value (see Schedule of Investments): $ 526,262 $ 146,054 $ 26,363
Receivable from GT Global Financial Services 2,079 0 0
---------- ---------- ----------
Total assets 528,341 146,054 26,363
---------- ---------- ----------
Liability:
Payable to Security Equity Life Insurance Company 606 214 33
---------- ---------- ----------
Total net assets $ 527,735 $ 145,840 $ 26,330
========== ========== ==========
Total net assets represented by:
Individual variable annuity contracts cash value
invested in Separate Account $ 527,735 $ 145,840 $ 26,330
========== ========== ==========
Total individual units held 41,086 10,509 2,000
Accumulation unit value $ 12.84 $ 13.88 $ 13.16
Cost of investments $ 526,262 $ 152,236 $ 27,471
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX
STATEMENTS OF OPERATIONS
(Unaudited)
For the period ended June 30, 1999
<TABLE>
<CAPTION>
Variable Variable U.S.
Money Strategic Government
Market Income Income
Division Division Division
-------------- -------------- --------------
<S> <C> <C> <C>
Investment income:
Dividend income $ 6,317 $ 20,943 $ 718
Expenses:
Mortality, expense and administrative charges (2,177) (3,743) (184)
------------- ------------ -------------
Net investment income 4,140 17,200 534
Net realized (loss) on investments:
Realized (loss) on sales 0 (11,468) (2)
------------- ------------ -------------
Net realized (loss) on investments 0 (11,468) (2)
Net unrealized (loss) on investments:
Unrealized gain on investments,
beginning of period 0 14,168 442
Unrealized (loss) on investments,
end of period 0 (6,182) (1,108)
------------- ------------ -------------
Net unrealized (loss) on investments 0 (20,350) (1,550)
------------- ------------ -------------
Net (loss) on investments 0 (31,818) (1,552)
------------- ------------ -------------
Net increase (decrease) in net assets
resulting from operations $ 4,140 $ (14,618) $ (1,018)
============= ============ =============
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
For the six months ended June 30, 1999 and the year ended December 31, 1998
<TABLE>
<CAPTION>
Money Market Strategic Income
Division Division
-------------------------------- -------------------------------
June 30, 1999 Dec. 31, 1998 June 30, 1999 Dec. 31, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 4,140 $ 11,708 $ 17,200 $ 24,829
Net realized (loss) on investments 0 0 (11,468) (50,748)
Net unrealized (loss) on investments 0 0 (20,350) 19,019
------------ ------------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations 4,140 11,708 (14,618) (6,900)
Deposits into Separate Account 0 0 0 12,016
Transfers into Separate Account 342,005 16,831 (493,834) 5,338
Withdrawals from Separate Account (3,538) (35,082) (60) (12,060)
------------ ------------- ------------ ------------
Net deposits into (withdrawals from)
Separate Account 338,467 (18,251) (493,894) 5,294
------------ ------------- ------------ ------------
Increase (decrease) in net assets 342,607 (6,543) (508,512) (1,606)
Net assets, beginning of period 185,128 191,671 654,352 655,958
------------ ------------- ------------ ------------
Net assets, end of period $ 527,735 $ 185,128 $ 145,840 $ 654,352
============ ============= ============ ============
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
For the six months ended June 30, 1999 and the year ended December 31, 1998
<TABLE>
<CAPTION>
Variable U.S. Government
Income Division
--------------------------------
June 30, 1999 Dec. 31, 1998
-------------- --------------
<S> <C> <C>
Operations:
Net investment income $ 534 $ 5,542
Net realized gain (loss) on investments (2) 14,233
Net unrealized (loss) on investments (1,550) (611)
------------ -------------
Net increase (decrease) in net assets
resulting from operations (1,018) 19,164
Deposits into Separate Account 0 4
Transfers into (from) Separate Account 0 (17,102)
Withdrawals from Separate Account 0 (6,726)
------------ --------------
Net (withdrawals from) Separate Account 0 (23,824)
------------ --------------
(Decrease) in net assets (1,018) (4,660)
Net assets, beginning of period 27,348 32,008
------------ -------------
Net assets, end of period $ 26,330 $ 27,348
============ =============
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF ASSETS AND LIABILITIES
(Unaudited)
June 30, 1999
<TABLE>
<CAPTION>
Variable
Variable Variable Variable Growth &
New Pacific Europe America Income
Division Division Division Division
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Assets:
Investments in GT Global Variable Investment Funds,
at market value (see Schedule of Investments): $ 141,741 $ 229,766 $ 212,778 $ 45,426
Receivable from Security Equity Life Insurance Company 0 0 0 0
------------ ------------ ------------- ------------
Total assets 141,741 229,766 212,778 45,426
------------ ------------ ------------- ------------
Liability:
Payable to Security Equity Life Insurance Company 178 291 269 57
------------ ------------ ------------- ------------
Total net assets $ 141,563 $ 229,475 $ 212,509 $ 45,369
============ ============ ============= ============
Total net assets represented by:
Individual variable annuity contracts cash value
invested in Separate Account $ 141,563 $ 229,475 $ 212,509 $ 45,369
============ ============ ============= ============
Total individual units held 16,137 12,341 11,681 2,879
Accumulation unit value $ 8.77 $ 18.59 $ 18.19 $ 15.76
Cost of investments $ 135,905 $ 240,885 $ 184,649 $ 39,406
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF ASSETS AND LIABILITIES
(Unaudited)
June 30, 1999
<TABLE>
<CAPTION>
Variable
Variable Telecom- Variable
Latin America munications International
Division Division Division
------------ ------------ -----------
<S> <C> <C> <C>
Assets:
Investments in GT Global Variable Investment Funds,
at market value (see Schedule of Investments): $ 120,964 $ 781,460 $ 65,166
Receivable from Security Equity Life Insurance Company 0 8,485 0
---------- ---------- ----------
Total assets 120,964 789,945 65,166
---------- ---------- ----------
Liability:
Payable to Security Equity Life Insurance Company 153 0 82
---------- ---------- ----------
Total net assets $ 120,811 $ 789,945 $ 65,084
========== ========== ==========
Total net assets represented by:
Individual variable annuity contracts cash value
invested in Separate Account $ 120,811 $ 789,945 $ 65,084
========== ========== ==========
Total individual units held 10,724 35,250 4,853
Accumulation unit value $ 11.27 $ 22.41 $ 13.41
Cost of investments $ 129,352 $ 571,872 $ 62,223
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF ASSETS AND LIABILITIES
(Unaudited)
June 30, 1999
<TABLE>
<CAPTION>
Variable Variable
Emerging Natural Variable
Markets Resources Infrastructure
Division Division Division
------------ ------------ -----------
<S> <C> <C> <C>
Assets:
Investments in GT Global Variable Investment Funds,
at market value (see Schedule of Investments): $ 25,179 $ 61,115 $ 14,151
Receivable from Security Equity Life Insurance Company 0 0 0
---------- ---------- ----------
Total assets 25,179 61,115 14,151
---------- ---------- ----------
Liability:
Payable to Security Equity Life Insurance Company 31 77 18
---------- ---------- ----------
Total net assets $ 25,148 $ 61,038 $ 14,133
========== ========== ==========
Total net assets represented by:
Individual variable annuity contracts cash value
invested in Separate Account $ 25,148 $ 61,038 $ 14,133
========== ========== ==========
Total individual units held 2,750 5,916 953
Accumulation unit value $ 9.15 $ 10.32 $ 14.84
Cost of investments $ 27,163 $ 95,060 $ 13,123
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF OPERATIONS
(Unaudited)
For the period ended June 30, 1999
<TABLE>
<CAPTION>
Variable
Variable Variable Variable Growth &
New Pacific Europe America Income
Division Division Division Division
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Investment income:
Dividend income $ 0 $ 0 $ 0 $ 468
Expenses:
Mortality, expense and administrative charges (1,038) (985) (734) (302)
----------- ------------ ------------ ------------
Net investment income (loss) (1,038) (985) (734) 166
Net realized gain (loss) on investments:
Realized gain (loss) on sales (15,487) (8,912) 11,820 76
----------- ------------ ------------ ------------
Net realized gain (loss) on investments (15,487) (8,912) 11,820 76
Net unrealized gain (loss) on investments:
Unrealized gain (loss) on investments,
beginning of period (18,379) (8,721) 13,623 7,807
Unrealized gain (loss) on investments,
end of period 5,836 (11,119) 28,129 6,020
----------- ------------ ------------ ------------
Net unrealized gain (loss) on investments 24,215 (2,398) 14,506 (1,787)
----------- ------------ ------------ ------------
Net gain (loss) on investments 8,728 (11,310) 26,326 (1,711)
----------- ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations $ 7,690 $ (12,295) $ 25,592 $ (1,545)
=========== ============ ============ ============
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF OPERATIONS
(Unaudited)
For the period ended June 30, 1999
<TABLE>
<CAPTION>
Variable
Variable Telecom- Variable
Latin America munications International
Division Division Division
----------- ------------- ------------
<S> <C> <C> <C>
Investment income:
Dividend income $ 0 $ 0 $ 0
Expenses:
Mortality, expense and administrative charges (788) (5,124) (449)
---------- ----------- ----------
Net investment income (loss) (788) (5,124) (449)
Net realized gain (loss) on investments:
Realized gain (loss) on sales (22,961) 4,161 31
---------- ----------- ----------
Net realized gain (loss) on investments (22,961) 4,161 31
Net unrealized gain (loss) on investments:
Unrealized gain (loss) on investments,
beginning of period (40,086) 57,352 26
Unrealized gain (loss) on investments,
end of period (8,388) 209,588 2,943
---------- ----------- ----------
Net unrealized gain (loss) on investments 31,698 152,236 2,917
---------- ----------- ----------
Net gain (loss) on investments 8,737 156,397 2,948
---------- ----------- ----------
Net increase (decrease) in net assets
resulting from operations $ 7,949 $ 151,273 $ 2,499
========== =========== ==========
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF OPERATIONS
(Unaudited)
For the period ended June 30, 1999
<TABLE>
<CAPTION>
Variable Variable
Emerging Natural Variable
Markets Resources Infrastructure
Division Division Division
----------- ----------- -----------
<S> <C> <C> <C>
Investment income:
Dividend income $ 0 $ 0 $ 0
Expenses:
Mortality, expense and administrative charges (156) (394) (93)
---------- ---------- ----------
Net investment income (loss) (156) (394) (93)
Net realized gain (loss) on investments:
Realized gain (loss) on sales (39) (361) 0
---------- ---------- ----------
Net realized gain (loss) on investments (39) (361) 0
Net unrealized gain (loss) on investments:
Unrealized gain (loss) on investments,
beginning of period (7,966) (42,610) 27
Unrealized gain (loss) on investments,
end of period (1,984) (33,945) 1,028
---------- ---------- ----------
Net unrealized gain (loss) on investments 5,982 8,665 1,001
---------- ---------- ----------
Net gain (loss) on investments 5,943 8,304 1,001
---------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations $ 5,787 $ 7,910 $ 908
========== ========== ==========
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
For the six months ended June 30, 1999 and the year ended December 31, 1998
<TABLE>
<CAPTION>
Variable Variable Europe
New Pacific Division Division
------------------------------- -------------------------------
June 30, 1999 Dec. 31, 1998 June 30, 1999 Dec. 31, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ (1,038) $ 2,003 $ (985) $ (1,931)
Net realized gain (loss) on investments (15,487) (99,869) (8,912) 32,675
Net unrealized gain (loss) on investments 24,215 38,166 (2,398) (13,238)
------------ ------------ ------------- ------------
Net increase (decrease) in net assets
resulting from operations 7,690 (59,700) (12,295) 17,506
Deposits into Separate Account 0 54,681 0 32,000
Transfers into (from) Separate Account (22,444) (50,643) 134,045 7,361
Withdrawals from Separate Account (30) (46,928) (4,810) (86,538)
------------ ------------ ------------- ------------
Net deposits into (withdrawals from)
Separate Account (22,474) (42,890) 129,235 (47,177)
------------ ------------ ------------- ------------
Increase (decrease) in net assets (14,784) (102,590) 116,940 (29,671)
Net assets, beginning of period 156,347 258,937 112,535 142,206
------------ ------------ ------------- ------------
Net assets, end of period $ 141,563 $ 156,347 $ 229,475 $ 112,535
============ ============ ============= ============
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
For the six months ended June 30, 1999 and the year ended December 31, 1998
<TABLE>
<CAPTION>
Variable Variable Growth
America Division & Income Division
------------------------------- -------------------------------
June 30, 1999 Dec. 31, 1998 June 30, 1999 Dec. 31, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ (734) $ (1,066) $ 166 $ 271
Net realized gain (loss) on investments 11,820 14,712 76 628
Net unrealized gain (loss) on investments 14,506 12,840 (1,787) 4,887
------------ ------------ ------------- ------------
Net increase (decrease) in net assets
resulting from operations 25,592 26,486 (1,545) 5,786
Deposits into Separate Account 0 600 0 32,012
Transfers into (from) Separate Account 20,079 55,877 (216) 12,323
Withdrawals from Separate Account (5,493) (4,477) 0 (32,360)
------------ ------------ ------------- ------------
Net deposits into (withdrawals from)
Separate Account 14,586 52,000 (216) 11,975
------------ ------------ ------------- ------------
Increase (decrease) in net assets 40,178 78,486 (1,761) 17,761
Net assets, beginning of period 172,331 93,845 47,130 29,369
------------ ------------ ------------- ------------
Net assets, end of period $ 212,509 $ 172,331 $ 45,369 $ 47,130
============ ============ ============= ============
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
For the six months ended June 30, 1999 and the year ended December 31, 1998
<TABLE>
<CAPTION>
Variable
Variable Latin America Telecommunications
Division Division
------------------------------- -------------------------------
June 30, 1999 Dec. 31, 1998 June 30, 1999 Dec. 31, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ (788) $ 1,256 $ (5,124) $ (8,185)
Net realized gain (loss) on investments (22,961) (51,768) 4,161 46,832
Net unrealized gain (loss) on investments 31,698 (45,252) 152,236 62,665
------------ ------------ ------------- ------------
Net increase (decrease) in net assets
resulting from operations 7,949 (95,764) 151,273 101,312
Deposits into Separate Account 0 42,534 17,782 31,109
Transfers into (from) Separate Account 20,737 (2,788) 742 (421)
Withdrawals from Separate Account 0 (51,876) (8,552) (58,487)
------------ ------------ ------------- ------------
Net deposits into (withdrawals from)
Separate Account 20,737 (12,130) 9,972 (27,799)
------------ ------------ ------------- ------------
Increase (decrease) in net assets 28,686 (107,894) 161,245 73,513
Net assets, beginning of period 92,125 200,019 628,700 555,187
------------ ------------ ------------- ------------
Net assets, end of period $ 120,811 $ 92,125 $ 789,945 $ 628,700
============ ============ ============= ============
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
For the six months ended June 30, 1999 and the year ended December 31, 1998
<TABLE>
<CAPTION>
Variable
Variable International Emerging Markets
Division Division
------------------------------- --------------------------------
June 30, 1999 Dec. 31, 1998 June 30, 1999 Dec. 31, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ (449) $ (406) $ (156) $ (351)
Net realized gain (loss) on investments 31 3,887 (39) (16,091)
Net unrealized gain (loss) on investments 2,917 (4,740) 5,982 3,396
------------ ------------ ------------ -------------
Net increase (decrease) in net assets
resulting from operations 2,499 (1,259) 5,787 (13,046)
Deposits into Separate Account 0 0 0 46,031
Transfers into (from) Separate Account 0 0 0 (26,015)
Withdrawals from Separate Account 0 (372) 0 (46,000)
------------ ------------ ------------ -------------
Net deposits into (withdrawals from)
Separate Account 0 (372) 0 (25,984)
------------ ------------ ------------ -------------
Increase (decrease) in net assets 2,499 (1,631) 5,787 (39,030)
Net assets, beginning of period 62,585 64,216 19,361 58,391
------------ ------------ ------------ -------------
Net assets, end of period $ 65,084 $ 62,585 $ 25,148 $ 19,361
============ ============ ============ =============
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
For the six months ended June 30, 1999 and the year ended December 31, 1998
<TABLE>
<CAPTION>
Variable Variable
Natural Resources Infrastructure
Division Division
------------------------------- -------------------------------
June 30, 1999 Dec. 31, 1998 June 30, 1999 Dec. 31, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ (394) $ (806) $ (93) $ (70)
Net realized gain (loss) on investments (361) 9,224 0 1
Net unrealized gain (loss) on investments 8,665 (37,226) 1,001 525
------------ ------------ ------------- ------------
Net increase (decrease) in net assets
resulting from operations 7,910 (28,808) 908 456
Deposits into Separate Account 0 0 0 0
Transfers into (from) Separate Account 0 (3,210) 0 2,445
Withdrawals from Separate Account 0 (6,726) 0 0
------------ ------------ ------------- ------------
Net deposits into (withdrawals from)
Separate Account 0 (9,936) 0 2,445
------------ ------------ ------------- ------------
Increase (decrease) in net assets 7,910 (38,744) 908 2,901
Net assets, beginning of period 53,128 91,872 13,225 10,324
------------ ------------ ------------- ------------
Net assets, end of period $ 61,038 $ 53,128 $ 14,133 $ 13,225
============ ============ ============= ============
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX AND
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
SCHEDULE OF INVESTMENTS
(Unaudited)
June 30, 1999
<TABLE>
<CAPTION>
Market
No. of Shares Value
-------------- ------------
<S> <C> <C>
Separate Account Twenty-Six:
GT Global: Money Market Fund 526,262 526,262
GT Global: Variable Strategic Income Fund 12,537 146,054
GT Global: U.S. Government Income Fund 2,306 26,363
Separate Account Twenty-Seven:
GT Global: Variable New Pacific Fund 13,896 141,741
GT Global: Variable Europe Fund 10,487 229,766
GT Global: Variable America Fund 8,986 212,778
GT Global: Variable Growth & Income Fund 2,201 45,426
GT Global: Variable Latin America Fund 9,532 120,964
GT Global: Variable Telecommunications Fund 30,266 781,460
GT Global: Variable International Fund 5,243 65,166
GT Global: Variable Emerging Markets Fund 2,878 25,179
GT Global: Variable Natural Resources Fund 4,847 61,115
GT Global: Variable Infrastructure Fund 764 14,151
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX AND
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
CONDENSED FINANCIAL INFORMATION
(Unaudited)
For the period December 31, 1998 through June 30, 1999
<TABLE>
<CAPTION>
YTD
Return
--------------
<S> <C>
Separate Account Twenty-Six:
Money Market Division 1.34
Variable Strategic Income Division (3.07)
Variable U.S. Government Income Division (3.72)
Separate Account Twenty-Seven:
Variable New Pacific Division 16.16
Variable Europe Division (6.70)
Variable America Division 16.71
Variable Growth & Income Division (3.74)
Variable Latin America Division 31.14
Variable Telecommunications Division 24.11
Variable International Division 3.99
Variable Emerging Markets Division 29.89
Variable Natural Resources Division 14.89
Variable Infrastructure Division 6.86
</TABLE>
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX AND
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999
Note 1--Organization
Security Equity Separate Account Twenty-six commenced operations on January 30,
1996, and Security Equity Separate Account Twenty-seven commenced operations on
September 7, 1995. The Separate Accounts are registered under the Investment
Company Act of 1940 (1940 Act) as unit investment trusts. The Separate Accounts
receive purchase payments from individual variable annuity contracts issued by
Security Equity Life Insurance Company (Security Equity) which may be qualified
or non-tax qualified.
Separate Account Twenty-six is divided into four divisions and Separate Account
Twenty-seven is divided into ten divisions. Each Division invests exclusively in
shares of a single fund of GT Global Variable Investment Funds (the Funds), an
open-end diversified management investment company. Separate Account Twenty-six
has the ability to invest in the Money Market, Variable Strategic Income,
Variable Global Government Income, and Variable U.S. Government Income Funds.
Separate Account Twenty-seven has the ability to invest in the Variable New
Pacific, Variable Europe, Variable America, Variable Growth & Income, Variable
Latin America, Variable Telecommuncations, Variable International, Variable
Emerging Markets, Variable Natural Resources and Variable Infrastructure Funds.
Contractholders have the option of directing their deposits into one or more of
the Divisions. The unit values for Separate Account Twenty-six began at $12.00
on January 30, 1996, for the Variable Strategic Income Division; on July 26,
1996, for the Money Market Division; and on June 4, 1997, for the Variable U.S.
Government Income Division. The unit values for Separate Account Twenty-seven
began at $12.00 on September 7, 1995, for the Variable New Pacific Division,
Variable America Division and the Variable Telecommunications Division; on
January 30, 1996, for the Variable Europe Division and Variable Latin America
Division; on March 25, 1996, for the Variable Emerging Markets Division; on
April 9, 1996, for the Variable International Division, on August 26, 1996, for
the Variable Natural Resources Division and the Variable Infrastructure
Division; and on April 8, 1997, for the Variable Growth & Income Division. As of
December 31, 1998, no deposits have been directed into the Variable Global
Government Income Division of Separate Account Twenty-six. As such, no financial
statements for this Division are included.
Note 2--Significant Accounting Policies
The following is a summary of significant accounting policies followed by the
Separate Accounts in the preparation of financial statements. The policies
followed are in conformity with generally accepted accounting principles.
A. Investments
The Separate Accounts' investments in the GT Global Variable Funds are valued
daily on the respective shares held and based on the net asset values as
reported to Security Equity by the Funds at the close of each business day. The
specific identification method is used in determining the cost of shares sold on
withdrawals by the Separate Account. Share transactions are recorded on the
trade date which is generally consistent with the settlement date.
B. Federal Income Taxes
Under current Federal income tax law, the investment income and capital gains
from sales of investments of the Separate Accounts are not taxable. Therefore,
no Federal income tax expense has been provided.
C. Dividend Reinvestment
Dividends are recorded on the ex-dividend date and immediately reinvested on the
pay date.
D. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increase and decrease in net assets from operations
during the period. Actual results could differ from those estimates.
Note 3--Contract Charges
Mortality and Expense Risk Charge: Security Equity assumes the mortality and
expense risks and provides certain administrative services related to operating
the Separate Accounts for which the Separate Accounts are charged an annual fee
of 1.25% based on the values at the end of each valuation period. Mortality and
expense charges for Separate Account Twenty-six totaled $5,450 for the period
ended June 30, 1999. Mortality and expense charges for Separate Account
Twenty-seven totaled $8,985 for the period ended June 30, 1999.
Surrender Charge (Contingent Deferred Sales Charge): Under Separate Account
contractual arrangements, Security Equity is entitled to collect payment for
sales charges. Contracts are subject to a deferred sales charge contingent upon
surrender of the contract or a greater than 10% partial withdrawal of funds on
deposit. The sales charge is 7% the first contract year, decreasing by 1% each
subsequent year. The contingent deferred sales charge will be waived in the
event of annuitization after the third year or on death.
Account Fee and Administrative Charges: Security Equity has the responsibility
for the administration of the contract. As reimbursement for account
administrative expenses, on the last day of the contract year, Security Equity
deducts an account fee. For contracts with accumulated values less than $20,000,
the fee is the lesser of $30 or 2% of the accumulated value for contract years
ending prior to December 31, 1999. Thereafter, the account fee may be adjusted
annually. The account fee is waived for contracts with accumulated values of
$20,000 or more. Security Equity charges $25 for each transfer in excess of
twelve (12) during the Contract Year, excluding transfers made under the Dollar
Cost Averaging program and reserves the right to charge a fee to cover the
expenses for special handling. Security Equity also provides certain
administrative services for which it charges an administrative charge to the
Separate Accounts at an annual rate of 0.15% at the end of each valuation
period. Administrative charges for Separate Account Twenty-six totaled $654 for
the period ended June 30, 1999. Administarative charges for Separate Account
Twenty-seven totaled $1,708 for the period ended June 30, 1999.
Premium Taxes: In states which charge premium taxes, the taxes are withdrawn
from the purchase payment or the accumulated value of the contract.
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX AND
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
INDEPENDENT AUDITORS' REPORT
- - ------------------------------------------------------------------------------
The Board of Directors
Security Equity Life Insurance Company
and Contractholders of Security Equity Separate Account Twenty-six
and Separate Account Twenty-seven:
We have audited the statements of assets and liabilities, including the schedule
of investments, of the Money Market, Variable Strategic Income, and Variable
U.S. Government Income Divisions of Security Equity Separate Account Twenty-six
and of the Variable New Pacific, Variable Europe, Variable America, Variable
Growth & Income, Variable Latin America, Variable Telecommunications, Variable
International, Variable Emerging Markets, Variable Natural Resources, and
Variable Infrastructure Divisions of Security Equity Separate Account
Twenty-seven as of December 31, 1998, and the related statements of operations
for the year then ended, changes in net assets for each of the years in the
two-year period then ended, and the condensed financial information for the
periods presented. These financial statements and condensed financial
information are the responsibility of the management of Security Equity Separate
Accounts Twenty-six and Twenty-seven. Our responsibility is to express an
opinion on these financial statements, and condensed financial information based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and condensed
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of December 31, 1998 by correspondence with GT Global Variable
Investment Funds. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and condensed financial information
referred to above present fairly, in all material respects, the financial
position of the Money Market, Variable Strategic Income, and Variable U.S.
Government Income Divisions of Security Equity Separate Account Twenty-six and
of the Variable New Pacific, Variable Europe, Variable America, Variable Growth
& Income, Variable Latin America, Variable Telecommunications, Variable
International, Variable Emerging Markets, Variable Natural Resources, and
Variable Infrastructure Divisions of Security Equity Separate Account
Twenty-seven as of December 31, 1998, the results of their operations for the
year then ended, the changes in their net assets for each of the years in the
two-year period then ended, and the condensed financial information for the
periods presented, in conformity with generally accepted accounting principles.
[SIGNATURE]
ST. LOUIS, MISSOURI
FEBRUARY 12, 1999
F1
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
F2
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX
STATEMENTS OF ASSETS
AND LIABILITIES
December 31, 1998
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE
VARIABLE U.S.
MONEY STRATEGIC GOVERNMENT
MARKET INCOME INCOME
DIVISION DIVISION DIVISION
--------- --------- -----------
<S> <C> <C> <C>
Assets:
Investments in GT Global Variable
Investment Funds, at market value
(see Schedule of Investments):....... $ 184,674 $ 655,128 $ 27,381
Receivable from GT Global Financial
Services............................. 688 0 0
--------- --------- -----------
Total assets........................ 185,362 655,128 27,381
--------- --------- -----------
Liability:
Payable to Security Equity Life
Insurance Company.................... 234 776 33
--------- --------- -----------
Total net assets.................... $ 185,128 $ 654,352 $ 27,348
--------- --------- -----------
--------- --------- -----------
Total net assets represented by:
Individual variable annuity contracts
cash value invested in Separate
Account.............................. $ 185,128 $ 654,352 $ 27,348
--------- --------- -----------
--------- --------- -----------
Total individual units held............. 14,605 45,701 2,000
Accumulation unit value................. $ 12.68 $ 14.32 $ 13.67
Cost of investments..................... $ 184,674 $ 640,960 $ 26,939
</TABLE>
See accompanying notes to the financial statements.
F3
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX
STATEMENTS OF OPERATIONS
For the period ended December 31, 1998
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE
VARIABLE U.S.
MONEY STRATEGIC GOVERNMENT
MARKET INCOME INCOME
DIVISION DIVISION DIVISION *
----------- ----------- -----------
<S> <C> <C> <C>
Investment income:
Dividend income....................... $ 16,645 $ 31,470 $ 7,126
Expenses:
Mortality, expense and administrative
charges.............................. (4,937) (6,641) (1,584)
----------- ----------- -----------
Net investment income............... 11,708 24,829 5,542
----------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sales......... 0 (50,748) 14,233
----------- ----------- -----------
Net realized gain (loss) on
investments........................ 0 (50,748) 14,233
----------- ----------- -----------
Net unrealized gain (loss) on
investments:
Unrealized gain (loss) on
investments, beginning of period... 0 (4,851) 1,053
Unrealized gain on investments, end
of period.......................... 0 14,168 442
----------- ----------- -----------
Net unrealized gain (loss) on
investments....................... 0 19,019 (611)
----------- ----------- -----------
Net gain (loss) on investments.... 0 (31,729) 13,622
----------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations.............. $ 11,708 $ (6,900) $ 19,164
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- - ----------------
* The Variable U.S.Government Income Division commenced operations June
4, 1997.
See accompanying notes to the financial statements.
F4
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX
STATEMENTS OF CHANGES IN NET ASSETS
- - ------------------------------------------------------------------------------
For the periods ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
VARIABLE U.S.
GOVERNMENT INCOME
MONEY MARKET STRATEGIC INCOME
DIVISION * DIVISION ** DIVISION***
-------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income.......................................... $ 11,708 $ 4,388 $ 24,829 $ 26,620 $ 5,542 $ 769
Net realized gain (loss) on investments........................ 0 0 (50,748) 23,729 14,233 186
Net unrealized gain (loss) on investments...................... 0 0 19,019 (13,897) (611) 1,053
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in net assets resulting from
operations.................................................. 11,708 4,388 (6,900) 36,452 19,164 2,008
--------- --------- --------- --------- --------- ---------
Deposits into Separate Account................................. 0 145,058 12,016 25,039 4 0
Transfers into (from) Separate Account......................... 16,831 43,617 5,338 495,534 (17,102) 30,000
Withdrawals from Separate Account.............................. (35,082) (1,392) (12,060) (2,104) (6,726) 0
--------- --------- --------- --------- --------- ---------
Net deposits into (withdrawals from) Separate Account........ (18,251) 187,283 5,294 518,469 (23,824) 30,000
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net assets.......................... (6,543) 191,671 (1,606) 554,921 (4,660) 32,008
Net assets, beginning of period................................ 191,671 0 655,958 101,037 32,008 0
--------- --------- --------- --------- --------- ---------
Net assets, end of period...................................... $ 185,128 $ 191,671 $ 654,352 $ 655,958 $ 27,348 $ 32,008
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<FN>
- - ----------------
* The Money Market Division commenced operations July 26, 1996.
** The Variable Strategic Income Division commenced operations January 30,
1996.
*** The Variable U.S. Government Income Division commenced operations June 4,
1997.
</FN>
</TABLE>
See accompanying notes to the financial statements.
F5
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF ASSETS
AND LIABILITIES
December 31, 1998
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE VARIABLE VARIABLE
NEW PACIFIC EUROPE AMERICA
DIVISION DIVISION DIVISION
----------- --------- --------
<S> <C> <C> <C>
Assets:
Investments in GT Global Variable
Investment Funds, at market value
(see Schedule of Investments):....... $ 165,678 $ 112,675 $172,501
Receivable from Security Equity Life
Insurance Company.................... 0 0 0
----------- --------- --------
Total assets........................ 165,678 112,675 172,501
----------- --------- --------
Liability:
Payable to Security Equity Life
Insurance Company.................... 9,331 140 170
----------- --------- --------
Total net assets.................... $ 156,347 $ 112,535 $172,331
----------- --------- --------
----------- --------- --------
Total net assets represented by:
Individual variable annuity contracts
cash value invested in Separate
Account.............................. $ 156,347 $ 112,535 $172,331
----------- --------- --------
----------- --------- --------
Total individual units held............. 20,703 5,647 11,055
Accumulation unit value................. $ 7.55 $ 19.93 $ 15.59
Cost of investments..................... $ 184,057 $ 121,396 $158,878
</TABLE>
See accompanying notes to the financial statements.
F6
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF ASSETS
AND LIABILITIES (cont'd)
December 31, 1998
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE VARIABLE VARIABLE VARIABLE
GROWTH & VARIABLE TELECOM- VARIABLE EMERGING NATURAL
INCOME LATIN AMERICA MUNICATIONS INTERNATIONAL MARKETS RESOURCES
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
------------ ------------- ----------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments in GT Global Variable
Investment Funds, at market value
(see Schedule of Investments):....... $ 38,049 $ 92,288 $ 629,443 $ 62,659 $19,384 $ 53,191
Receivable from Security Equity Life
Insurance Company.................... 9,081 0 0 0 0 0
------------ ------------- ----------- ------------- -------- ---------
Total assets........................ 47,130 92,288 629,443 62,659 19,384 53,191
------------ ------------- ----------- ------------- -------- ---------
Liability:
Payable to Security Equity Life
Insurance Company.................... 0 163 743 75 23 63
------------ ------------- ----------- ------------- -------- ---------
Total net assets.................... $ 47,130 $ 92,125 $ 628,700 $ 62,584 $19,361 $ 53,128
------------ ------------- ----------- ------------- -------- ---------
------------ ------------- ----------- ------------- -------- ---------
Total net assets represented by:
Individual variable annuity contracts
cash value invested in Separate
Account.............................. $ 47,130 $ 92,125 $ 628,700 $ 62,584 $19,361 $ 53,128
------------ ------------- ----------- ------------- -------- ---------
------------ ------------- ----------- ------------- -------- ---------
Total individual units held............. 2,879 10,724 34,820 4,853 2,750 5,916
Accumulation unit value................. $ 16.37 $ 8.59 $ 18.06 $ 12.90 $ 7.04 $ 8.98
Cost of investments..................... $ 30,242 $ 132,374 $ 572,091 $ 62,633 $27,350 $ 95,801
<CAPTION>
VARIABLE
INFRASTRUCTURE
DIVISION
--------------
<S> <C>
Assets:
Investments in GT Global Variable
Investment Funds, at market value
(see Schedule of Investments):....... $ 13,241
Receivable from Security Equity Life
Insurance Company.................... 0
--------------
Total assets........................ 13,241
--------------
Liability:
Payable to Security Equity Life
Insurance Company.................... 16
--------------
Total net assets.................... $ 13,225
--------------
--------------
Total net assets represented by:
Individual variable annuity contracts
cash value invested in Separate
Account.............................. $ 13,225
--------------
--------------
Total individual units held............. 953
Accumulation unit value................. $ 13.88
Cost of investments..................... $ 13,214
</TABLE>
See accompanying notes to the financial statements.
F7
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF OPERATIONS
For the period ended December 31, 1998
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE VARIABLE VARIABLE
NEW PACIFIC EUROPE AMERICA
DIVISION DIVISION DIVISION
----------- --------- -----------
<S> <C> <C> <C>
Investment income:
Dividend income....................... $ 3,870 $ 296 $ 0
Expenses:
Mortality, expense and administrative
charges.............................. (1,867) (2,227) (1,066)
----------- --------- -----------
Net investment income (loss)........ 2,003 (1,931) (1,066)
----------- --------- -----------
Net realized gain (loss) on investments:
Realized gain from distributions...... 0 19,022 7,625
Realized gain (loss) on sales......... (99,869) 13,653 7,087
----------- --------- -----------
Net realized gain (loss) on
investments........................ (99,869) 32,675 14,712
----------- --------- -----------
Net unrealized gain (loss) on
investments:
Unrealized gain (loss) on investments,
beginning of period.................. (56,545) 4,517 783
Unrealized gain (loss) on investments,
end of period........................ (18,379) (8,721) 13,623
----------- --------- -----------
Net unrealized gain (loss) on
investments........................ 38,166 (13,238) 12,840
----------- --------- -----------
Net gain (loss) on investments...... (61,703) 19,437 27,552
----------- --------- -----------
Net increase (decrease) in net assets
resulting from operations.............. $ (59,700) $ 17,506 $ 26,486
----------- --------- -----------
----------- --------- -----------
</TABLE>
- - ----------------
* The Variable Growth & Income Division commenced operations April 8,
1997.
See accompanying notes to the financial statements.
F8
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF OPERATIONS (cont'd)
For the period ended December 31, 1998
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
GROWTH & LATIN TELECOM- VARIABLE EMERGING NATURAL
INCOME AMERICA MUNICATIONS INTERNATIONAL MARKETS RESOURCES
DIVISION * DIVISION DIVISION DIVISION DIVISION DIVISION
----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income....................... $ 771 $ 3,018 $ 0 $ 457 $ 12 $ 0
Expenses:
Mortality, expense and administrative
charges.............................. (500) (1,762) (8,185) (863) (363) (806)
----------- ----------- ----------- ------------- ----------- -----------
Net investment income (loss)........ 271 1,256 (8,185) (406) (351) (806)
----------- ----------- ----------- ------------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain from distributions...... 446 1,457 52,601 3,784 2,168 12,469
Realized gain (loss) on sales......... 182 (53,225) (5,769) 103 (18,259) (3,245)
----------- ----------- ----------- ------------- ----------- -----------
Net realized gain (loss) on
investments........................ 628 (51,768) 46,832 3,887 (16,091) 9,224
----------- ----------- ----------- ------------- ----------- -----------
Net unrealized gain (loss) on
investments:
Unrealized gain (loss) on investments,
beginning of period.................. 2,920 5,166 (5,313) 4,766 (11,362) (5,384)
Unrealized gain (loss) on investments,
end of period........................ 7,807 (40,086) 57,352 26 (7,966) (42,610)
----------- ----------- ----------- ------------- ----------- -----------
Net unrealized gain (loss) on
investments........................ 4,887 (45,252) 62,665 (4,740) 3,396 (37,226)
----------- ----------- ----------- ------------- ----------- -----------
Net gain (loss) on investments...... 5,515 (97,020) 109,497 (853) (12,695) (28,002)
----------- ----------- ----------- ------------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations.............. $ 5,786 $ (95,764) $ 101,312 $ (1,259) $ (13,046) $ (28,808)
----------- ----------- ----------- ------------- ----------- -----------
----------- ----------- ----------- ------------- ----------- -----------
<CAPTION>
VARIABLE
INFRASTRUCTURE
DIVISION
---------------
<S> <C>
Investment income:
Dividend income....................... $ 55
Expenses:
Mortality, expense and administrative
charges.............................. (125)
-------
Net investment income (loss)........ (70)
-------
Net realized gain (loss) on investments:
Realized gain from distributions...... 0
Realized gain (loss) on sales......... 1
-------
Net realized gain (loss) on
investments........................ 1
-------
Net unrealized gain (loss) on
investments:
Unrealized gain (loss) on investments,
beginning of period.................. (498)
Unrealized gain (loss) on investments,
end of period........................ 27
-------
Net unrealized gain (loss) on
investments........................ 525
-------
Net gain (loss) on investments...... 526
-------
Net increase (decrease) in net assets
resulting from operations.............. $ 456
-------
-------
</TABLE>
- - ----------------
* The Variable Growth & Income Division commenced operations April 8,
1997.
See accompanying notes to the financial statements.
F9
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF CHANGES IN NET ASSETS
For the periods ended December 31, 1998 and 1997
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE VARIABLE VARIABLE
NEW PACIFIC DIVISION EUROPE DIVISION * AMERICA DIVISION
-------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss).......... $ 2,003 $ (3,335) $ (1,931) $ (1,581) $ (1,066) $ (1,056)
Net realized gain (loss) on
investments.......................... (99,869) (106,227) 32,675 24,571 14,712 7,452
Net unrealized gain (loss) on
investments.......................... 38,166 (105,090) (13,238) (3,684) 12,840 849
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in net
assets resulting from operations... (59,700) (214,652) 17,506 19,306 26,486 7,245
--------- --------- --------- --------- --------- ---------
Deposits into Separate Account........ 54,681 322,717 32,000 97,213 600 9,078
Transfers into (from) Separate
Account.............................. (50,643) (746,617) 7,361 (41,369) 55,877 50,662
Withdrawals from Separate Account..... (46,928) (17,643) (86,538) (1,004) (4,477) (1,989)
--------- --------- --------- --------- --------- ---------
Net deposits into (withdrawals from)
Separate Account................... (42,890) (441,543) (47,177) 54,840 52,000 57,751
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net
assets........................... (102,590) (656,195) (29,671) 74,146 78,486 64,996
Net assets, beginning of period....... 258,937 915,132 142,206 68,060 93,845 28,849
--------- --------- --------- --------- --------- ---------
Net assets, end of period............. $ 156,347 $ 258,937 $ 112,535 $ 142,206 $ 172,331 $ 93,845
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
VARIABLE VARIABLE VARIABLE
EMERGING MARKETS NATURAL RESOURCES INFRASTRUCTURE
DIVISION * * DIVISION * * * * DIVISION * * * *
-------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss).......... $ (351) $ (505) $ (806) $ (1,108) $ (70) $ (49)
Net realized gain (loss) on
investments.......................... (16,091) 8,334 9,224 3,592 1 519
Net unrealized gain (loss) on
investments.......................... 3,396 (12,043) (37,226) (5,533) 525 (574)
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in net
assets resulting from operations... (13,046) (4,214) (28,808) (3,049) 456 (104)
--------- --------- --------- --------- --------- ---------
Deposits into Separate Account........ 46,031 38,043 0 3,358 0 3,352
Transfers into (from) Separate
Account.............................. (26,015) 11,719 (3,210) 90,120 2,445 5,700
Withdrawals from Separate Account..... (46,000) (1,684) (6,726) 0 0 0
--------- --------- --------- --------- --------- ---------
Net deposits into (withdrawals from)
Separate Account................... (25,984) 48,078 (9,936) 93,478 2,445 9,052
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net
assets........................... (39,030) 43,864 (38,744) 90,429 2,901 8,948
Net assets, beginning of period....... 58,391 14,527 91,872 1,443 10,324 1,376
--------- --------- --------- --------- --------- ---------
Net assets, end of period............. $ 19,361 $ 58,391 $ 53,128 $ 91,872 $ 13,225 $ 10,324
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- - ----------------
* The Variable Europe Division and the Variable Latin America Division
commenced operations January 30, 1996.
* * The Variable Emerging Markets Division commenced operations March 25,
1996.
* * * The Variable International Division commenced operations April 9,
1996.
* * * * The Variable Natural Resources Division and the Variable
Infrastructure Division commenced operations August 26, 1996.
* * * * * The Variable Growth & Income Division commenced operations April 8,
1997.
See accompanying notes to the financial statements.
F10
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
STATEMENTS OF CHANGES IN NET ASSETS (cont'd)
For the periods ended December 31, 1998 and 1997
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE VARIABLE VARIABLE VARIABLE
GROWTH & INCOME LATIN AMERICA TELECOMMUNICATIONS INTERNATIONAL
DIVISION DIVISION * DIVISION DIVISION * * *
-------------------- -------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss).......... $ 271 $ 382 $ 1,256 $ (3,220) $ (8,185) $ (7,287) $ (407) $ (693)
Net realized gain (loss) on
investments.......................... 628 68 (51,768) 717 46,832 63,056 3,887 128
Net unrealized gain (loss) on
investments.......................... 4,887 2,919 (45,252) (4,580) 62,665 8,483 (4,740) 2,967
--------- --------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in net
assets resulting from operations... 5,786 3,369 (95,764) (7,083) 101,312 64,252 (1,260) 2,402
--------- --------- --------- --------- --------- --------- --------- ---------
Deposits into Separate Account........ 32,012 16,000 42,534 66,495 31,109 74,000 0 12,347
Transfers into (from) Separate
Account.............................. 12,323 10,000 (2,788) 35,358 (421) 5,276 0 10,000
Withdrawals from Separate Account..... (32,360) 0 (51,876) (5,000) (58,487) (4,804) (372) (691)
--------- --------- --------- --------- --------- --------- --------- ---------
Net deposits into (withdrawals from)
Separate Account................... 11,975 26,000 (12,130) 96,853 (27,799) 74,472 (372) 21,656
--------- --------- --------- --------- --------- --------- --------- ---------
Increase (decrease) in net
assets........................... 17,761 29,369 (107,894) 89,770 73,513 138,724 (1,632) 24,058
Net assets, beginning of period....... 29,369 0 200,019 110,249 555,187 416,463 64,216 40,158
--------- --------- --------- --------- --------- --------- --------- ---------
Net assets, end of period............. $ 47,130 $ 29,369 $ 92,125 $ 200,019 $ 628,700 $ 555,187 $ 62,584 $ 64,216
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- - ----------------
* The Variable Europe Division and the Variable Latin America Division
commenced operations January 30, 1996.
* * The Variable Emerging Markets Division commenced operations March 25,
1996.
* * * The Variable International Division commenced operations April 9,
1996.
* * * * The Variable Natural Resources Division and the Variable
Infrastructure Division commenced operations August 26, 1996.
* * * * * The Variable Growth & Income Division commenced operations April 8,
1997.
See accompanying notes to the financial statements.
F11
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX AND
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- - ------------------------------------------------------------------------------
NOTE 1 -- ORGANIZATION
Security Equity Separate Account Twenty-six commenced operations on January 30,
1996, and Security Equity Separate Account Twenty-seven commenced operations on
September 7, 1995. The Separate Accounts are registered under the Investment
Company Act of 1940 (1940 Act) as unit investment trusts. The Separate Accounts
receive purchase payments from individual variable annuity contracts issued by
Security Equity Life Insurance Company (Security Equity) which may be qualified
or non-tax qualified.
Separate Account Twenty-six is divided into four divisions and Separate Account
Twenty-seven is divided into ten divisions. Each Division invests exclusively in
shares of a single fund of GT Global Variable Investment Funds (the Funds), an
open-end diversified management investment company. Separate Account Twenty-six
has the ability to invest in the Money Market, Variable Strategic Income,
Variable Global Government Income, and Variable U.S. Government Income Funds.
Separate Account Twenty-seven has the ability to invest in the Variable New
Pacific, Variable Europe, Variable America, Variable Growth & Income, Variable
Latin America, Variable Telecommuncations, Variable International, Variable
Emerging Markets, Variable Natural Resources and Variable Infrastructure Funds.
Contractholders have the option of directing their deposits into one or more of
the Divisions. The unit values for Separate Account Twenty-six began at $12.00
on January 30, 1996, for the Variable Strategic Income Division; on July 26,
1996, for the Money Market Division; and on June 4, 1997, for the Variable U.S.
Government Income Division. The unit values for Separate Account Twenty-seven
began at $12.00 on September 7, 1995, for the Variable New Pacific Division,
Variable America Division and the Variable Telecommunications Division; on
January 30, 1996, for the Variable Europe Division and Variable Latin America
Division; on March 25, 1996, for the Variable Emerging Markets Division; on
April 9, 1996, for the Variable International Division, on August 26, 1996, for
the Variable Natural Resources Division and the Variable Infrastructure
Division; and on April 8, 1997, for the Variable Growth & Income Division. As of
December 31, 1998, no deposits have been directed into the Variable Global
Government Income Division of Separate Account Twenty-six. As such, no financial
statements for this Division are included.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Separate Accounts in the preparation of financial statements. The policies
followed are in conformity with generally accepted accounting principles.
(A) INVESTMENTS
The Separate Accounts' investments in the GT Global Variable Funds are valued
daily on the respective shares held and based on the net asset values as
reported to Security Equity by the Funds at the close of each business day. The
specific identification method is used in determining the cost of shares sold on
withdrawals by the Separate Account. Share transactions are recorded on the
trade date which is generally consistent with the settlement date.
(B) FEDERAL INCOME TAXES
Under current Federal income tax law, the investment income and capital gains
from sales of investments of the Separate Accounts are not taxable. Therefore,
no Federal income tax expense has been provided.
(C) DIVIDEND REINVESTMENT
Dividends are recorded on the ex-dividend date and immediately reinvested on the
pay date.
(D) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increase and decrease in net assets from operations
during the period. Actual results could differ from those estimates.
NOTE 3 -- CONTRACT CHARGES
MORTALITY AND EXPENSE RISK CHARGE: Security Equity assumes the mortality and
expense risks and provides certain administrative services related to operating
the Separate Accounts for which the Separate Accounts are charged an annual fee
of 1.25% based on the values at the end of each valuation period. Mortality and
expense charges for Separate Account Twenty-six totaled $11,752 for the period
ended December 31, 1998. Mortality and expense charges for Separate Account
Twenty-seven totaled $15,861 for the period ended December 31, 1998.
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE): Under Separate Account
contractual arrangements, Security Equity is entitled to collect payment for
sales charges. Contracts are subject to a deferred sales charge contingent upon
surrender of the contract or a greater than 10% partial withdrawal of funds on
deposit. The sales charge is 7% the first contract year, decreasing by 1% each
subsequent year. The contingent deferred sales charge will be waived in the
event of annuitization after the third year or on death. Sales charges as a
result of surrenders are disclosed in Note 6.
ACCOUNT FEE AND ADMINISTRATIVE CHARGES: Security Equity has the responsibility
for the administration of the contract. As reimbursement for account
administrative expenses, on the last day of the contract year, Security Equity
deducts an account fee. For contracts with accumulated values less than $20,000,
the fee is the lesser of $30 or 2% of the accumulated value for contract years
ending prior to December 31, 1999. Thereafter, the account fee may be adjusted
annually. The account fee is waived for contracts with
F12
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX AND
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
NOTE 3 -- CONTRACT CHARGES (CONTINUED)
accumulated values of $20,000 or more. Security Equity charges $25 for each
transfer in excess of twelve (12) during the Contract Year, excluding transfers
made under the Dollar Cost Averaging program and reserves the right to charge a
fee to cover the expenses for special handling. Account fees are disclosed in
Note 6. Security Equity also provides certain administrative services for which
it charges an administrative charge to the Separate Accounts at an annual rate
of 0.15% at the end of each valuation period. Administrative charges for
Separate Account Twenty-six totaled $1,410 for the period ended December 31,
1998. Administarative charges for Separate Account Twenty-seven totaled $1,903
for the period ended December 31, 1998.
PREMIUM TAXES: In states which charge premium taxes, the taxes are withdrawn
from the purchase payment or the accumulated value of the contract. Premium
taxes are disclosed in Note 6.
NOTE 4 -- PURCHASES AND SALES OF GT GLOBAL VARIABLE INVESTMENT FUND SHARES
During the period ended December 31, 1998, cost of purchases and proceeds from
sales of GT Global Variable Investment Fund shares were as follows:
<TABLE>
<CAPTION>
SEPARATE ACCOUNT TWENTY-SIX PURCHASES SALES
- - -------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Money Market Fund............................................................... $1,336,481 $1,380,721
Variable Strategic Income Fund.................................................. 1,543,417 1,502,019
Variable U.S. Government Income Fund............................................ 588,103 606,464
<CAPTION>
SEPARATE ACCOUNT TWENTY-SEVEN
- - --------------------------------------------------------------------------------
<S> <C> <C>
Variable New Pacific Fund....................................................... $ 205,803 $ 238,196
Variable Europe Fund............................................................ 234,603 265,052
Variable America Fund........................................................... 246,796 188,583
Variable Growth & Income Fund................................................... 4,427 918
Variable Latin America Fund..................................................... 96,390 106,020
Variable Telecommunications Fund................................................ 85,356 69,962
Variable International Fund..................................................... 4,241 1,389
Variable Emerging Markets Fund.................................................. 64,715 63,814
Variable Natural Resources Fund................................................. 12,469 11,005
Variable Infrastructure Fund.................................................... 7,655 5,300
</TABLE>
There were no purchases or sales of GT Global Variable Investment Fund shares
for the Variable Global Government Income Fund Division of Separate Account
Twenty-six.
NOTE 5 -- ACCUMULATION UNIT ACTIVITY
The following is a summary of the accumulation unit activity for the Money
Market Division and Variable Strategic Income Division for the period from
January 1, 1997 to December 31, 1998, and for the Variable U.S. Government
Income Division for the period from June 4, 1997 to December 31, 1998 for
Separate Account Twenty-six:
<TABLE>
<CAPTION>
VARIABLE VARIABLE U.S.
MONEY MARKET STRATEGIC INCOME GOVERNMENT INCOME
DIVISION DIVISION DIVISION
---------------- ---------------- ----------------------
1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Individual units held:
Deposits........................................ 0 11,950 892 1,797 0 0
Transfers....................................... 1,802 3,796 792 35,859 0 2,518
Withdrawals..................................... (2,828) (115) (896) (53) (518) 0
Outstanding units, beginning of period.......... 15,631 0 44,913 7,310 2,518 0
------- ------- ------- ------- ------- -------------
Outstanding units, end of period................ 14,605 15,631 45,701 44,913 2,000 2,518
------- ------- ------- ------- ------- -------------
------- ------- ------- ------- ------- -------------
</TABLE>
F13
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX AND
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
NOTE 5 -- ACCUMULATION UNIT ACTIVITY (CONTINUED)
The following is a summary of the accumulation unit activity for the period from
January 1, 1997 to December 31, 1998 for all divisions except for the Variable
Growth & Income Division which shows the unit activity from April 8, 1997
(inception) to December 31, 1998 for Separate Account Twenty-seven:
<TABLE>
<CAPTION>
VARIABLE GROWTH
VARIABLE NEW VARIABLE EUROPE VARIABLE AMERICA & INCOME VARIABLE LATIN
PACIFIC DIVISION DIVISION DIVISION DIVISION AMERICA DIVISION
---------------- ---------------- ---------------- ---------------- ----------------
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Individual units held:
Deposits.............................. 4,180 20,759 2,024 6,235 0 758 2,667 1,333 2,925 4,756
Transfers............................. (9,108) (49,925) 430 (2,448) 4,914 3,425 785 783 (846) 347
Withdrawals........................... (3,265) (1,240) (4,971) (61) (278) 0 (2,689) 0 (4,740) (50)
Outstanding units, beginning of
period............................... 28,896 59,302 8,163 4,437 6,419 2,236 2,116 0 13,385 8,332
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Outstanding units, end of period...... 20,703 28,896 5,646 8,163 11,055 6,419 2,879 2,116 10,724 13,385
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
VARIABLE
TELECOMMUN- VARIABLE VARIABLE VARIABLE NATURAL VARIABLE
ICATIONS INTERNATIONAL EMERGING MARKETS RESOURCES INFRASTRUCTURE
DIVISION GROWTH DIVISION DIVISION DIVISION DIVISION
---------------- ---------------- ---------------- ---------------- ----------------
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Individual units held:
Deposits......................... 1,853 5,614 0 947 3,376 2,634 0 263 0 249
Transfers........................ (5) 372 0 767 (2,411) 1,549 (263) 6,391 173 423
Withdrawals...................... (4,058) (347) (26) (52) (3,376) (114) (581) 0 0 0
Outstanding units, beginning of
period.......................... 37,030 31,391 4,879 3,217 5,161 1,092 6,760 106 780 108
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Outstanding units, end of
period.......................... 34,820 37,030 4,853 4,879 2,750 5,161 5,916 6,760 953 780
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
NOTE 6 -- SUMMARY OF GROSS AND NET DEPOSITS INTO SEPARATE ACCOUNT
Deposits into the Separate Account are used to purchase shares in GT Global
Variable Investment Funds. Net deposits represent the amounts available for
investment in such shares after deduction of premium taxes, administrative
costs, and surrender charges. Activity for Separate Account Twenty-six follows:
<TABLE>
<CAPTION>
VARIABLE U.S. GOVERNMENT
MONEY MARKET VARIABLE STRATEGIC
DIVISION INCOME DIVISION INCOME DIVISION*
-------------------- -------------------- ------------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits.............................. $ 0 $ 145,058 $ 12,076 $ 25,099 $ 4 $ 0
Transfers between fund divisions and Security
Equity........................................... 16,831 43,617 5,338 495,534 (17,102) 30,000
Surrenders and withdrawals........................ (35,082) (1,336) (12,060) (2,104) (6,726) 0
--------- --------- --------- --------- --------- -------------
Total gross deposits, transfers, and
surrenders between fund divisions............ (18,251) 187,339 5,354 518,529 (23,824) 30,000
--------- --------- --------- --------- --------- -------------
Deductions:
Account fees.................................... 0 0 (60) (60) 0 0
Surrender charges............................... 0 (56) 0 0 0 0
--------- --------- --------- --------- --------- -------------
Total deductions.............................. 0 (56) (60) (60) 0 0
--------- --------- --------- --------- --------- -------------
Net deposits into (deductions from) Separate
Account.......................................... $ (18,251) $ 187,283 $ 5,294 $ 518,469 $ (23,824) $ 30,000
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
</TABLE>
- - --------------
* The Variable U.S. Government Income Division commenced operations on June
4, 1997.
F14
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX AND
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
NOTE 6 -- SUMMARY OF GROSS AND NET DEPOSITS INTO SEPARATE ACCOUNT (CONTINUED)
Deposits into the Separate Account are used to purchase shares in GT Global
Variable Investment Funds. Net deposits represent the amounts available for
investment in such shares after deduction of premium taxes, administrative
costs, and surrender charges. Activity for Separate Accont Twenty-seven follows:
<TABLE>
<CAPTION>
VARIABLE
GROWTH &
VARIABLE NEW PACIFIC VARIABLE EUROPE VARIABLE AMERICA INCOME
DIVISION DIVISION* DIVISION DIVISION*****
-------------------- -------------------- -------------------- ---------
1998 1997 1998 1997 1998 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Total gross deposits.............................. $ 54,711 322,747 $ 32,060 $ 97,213 $ 660 $ 9,078 $ 32,012
Transfers between fund divisions and Security
Equity........................................... (50,643) (746,617) 7,361 (41,369) 55,877 50,662 12,323
Surrenders and withdrawals........................ (46,928) (17,609) (83,980) (1,004) (4,407) (1,989) (32,360)
--------- --------- --------- --------- --------- --------- ---------
Total gross deposits, transfers, and
surrenders between fund divisions............ (42,860) (441,479) (44,559) 54,840 52,130 57,751 11,975
--------- --------- --------- --------- --------- --------- ---------
Deductions:
Account Fees.................................... (30) (30) (60) 0 (60) 0 0
Surrender charges............................... 0 (34) (2,558) 0 (70) 0 0
--------- --------- --------- --------- --------- --------- ---------
Total deductions.............................. (30) (64) (2,618) 0 (130) 0 0
--------- --------- --------- --------- --------- --------- ---------
Net deposits into (deductions from) Separate
Account.......................................... $ (42,890) $(441,543) $ (47,177) $ 54,840 $ 52,000 $ 57,751 $ 11,975
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1997
---------
<S> <C>
Total gross deposits.............................. $ 16,000
Transfers between fund divisions and Security
Equity........................................... 10,000
Surrenders and withdrawals........................ 0
---------
Total gross deposits, transfers, and
surrenders between fund divisions............ 26,000
---------
Deductions:
Account Fees.................................... 0
Surrender charges............................... 0
---------
Total deductions.............................. 0
---------
Net deposits into (deductions from) Separate
Account.......................................... $ 26,000
---------
---------
</TABLE>
<TABLE>
<CAPTION>
VARIABLE VARIABLE
VARIABLE LATIN TELECOMMUNICATIONS INTERNATIONAL
AMERICA DIVISION* DIVISION DIVISION***
-------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits.................... $ 42,564 $ 66,585 $ 31,199 $ 74,120 $ 0 $ 12,347
Transfers between fund divisions and
Security Equity........................ (2,788) 35,358 (421) 5,276 0 10,000
Surrenders and withdrawals.............. (51,003) (5,000) (55,859) (4,474) (372) (691)
--------- --------- --------- --------- --------- ---------
Total gross deposits, transfers, and
surrenders between fund
divisions.......................... (11,227) 96,943 (25,081) 74,922 (372) 21,656
--------- --------- --------- --------- --------- ---------
Deductions:
Account Fees.......................... (30) (90) (90) (120) 0 0
Surrender charges..................... (873) 0 (2,628) (330) 0 0
--------- --------- --------- --------- --------- ---------
Total deductions.................... (903) (90) (2,718) (450) 0 0
--------- --------- --------- --------- --------- ---------
Net deposits into (deductions from)
Separate Account....................... $ (12,130) $ 96,853 $ (27,799) $ 74,472 $ (372) $ 21,656
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
VARIABLE NATURAL VARIABLE
VARIABLE EMERGING RESOURCES INFRASTRUCTURE
MARKETS DIVISION** DIVISION**** DIVISION****
-------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total gross deposits.............................. $ 46,031 $ 38,043 $ 0 $ 3,358 $ 330 $ 3,352
Transfers between fund divisions and Security
Equity........................................... (26,015) 11,719 (3,210) 90,120 2,445 5,700
Surrenders and withdrawals........................ (46,000) (1,684) (6,726) 0 6,070 0
--------- --------- --------- --------- --------- ---------
Total gross deposits, transfers, and
surrenders between fund divisions............ (25,984) 48,078 (9,936) 93,478 8,845 9,052
--------- --------- --------- --------- --------- ---------
Deductions:
Account Fees.................................... 0 0 0 0 (330) 0
Surrender charges............................... 0 0 0 0 (6,070) 0
--------- --------- --------- --------- --------- ---------
Total deductions.............................. 0 0 0 0 (6,400) 0
--------- --------- --------- --------- --------- ---------
Net deposits into (deductions from) Separate
Account.......................................... $ (25,984) $ 48,078 $ (9,936) $ 93,478 $ 2,445 $ 9,052
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- - --------------
<TABLE>
<C> <S>
* The Variable Europe Division and the Variable Latin America Division commenced operations January
30, 1996.
** The Variable Emerging Markets Division commenced operations March 25, 1996.
*** The Variable International Division commenced operations April 9, 1996.
**** The Variable Natural Resources Division and the Variable Infrastructure Division commenced
operations August 26, 1996.
***** The Variable Growth & Income Division commenced operations April 8, 1997.
</TABLE>
F15
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX AND
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
SCHEDULE OF INVESTMENTS*
December 31, 1998
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPARATE ACCOUNT TWENTY-SIX: NO. OF SHARES MARKET VALUE
- - -------------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
GT Global: Money Market Fund.................................................. 184,674 $ 184,674
GT Global: Variable Strategic Income Fund..................................... 52,876 655,128
GT Global: U.S. Government Income Fund........................................ 2,261 27,381
<CAPTION>
SEPARATE ACCOUNT TWENTY-SEVEN:
- - --------------------------------------------------------------------------------
<S> <C> <C>
GT Global: Variable New Pacific Fund.......................................... 19,000 165,678
GT Global: Variable Europe Fund............................................... 4,832 112,675
GT Global: Variable America Fund.............................................. 8,561 172,501
GT Global: Variable Growth & Income Fund...................................... 1,769 38,049
GT Global: Variable Latin America Fund........................................ 9,603 92,288
GT Global: Variable Telecommunications Fund................................... 30,467 629,443
GT Global: Variable International Fund........................................ 5,279 62,659
GT Global: Variable Emerging Markets Fund..................................... 2,897 19,384
GT Global: Variable Natural Resources Fund.................................... 4,880 53,191
GT Global: Variable Infrastructure Fund....................................... 769 13,241
</TABLE>
- - --------------
* There were no investments of GT Global Investment Fund shares for the Variable
Global Government Income Fund.
See accompanying independent auditors' report.
F16
<PAGE>
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SIX AND
SECURITY EQUITY SEPARATE ACCOUNT TWENTY-SEVEN
CONDENSED FINANCIAL INFORMATION
December 31, 1998
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATION
ACCUMULATION UNIT VALUE: TOTAL UNITS
UNIT VALUE: END OF OUTSTANDING,
BEGINNING OF PERIOD* PERIOD END OF PERIOD
-------------------- ------------ --------------
<S> <C> <C> <C> <C>
SEPARATE ACCOUNT TWENTY-SIX:
Money Market Division............................................... 1998 12.26 12.68 14,605
1997 N/A 12.26 15,631
Variable Strategic Income Division.................................. 1998 14.61 14.32 45,701
1997 13.82 14.61 44,913
Variable U.S. Government Income Division............................ 1998 12.71 13.67 2,000
1997 12.00 12.71 2,518
SEPARATE ACCOUNT TWENTY-SEVEN:
Variable New Pacific Division....................................... 1998 8.96 7.55 20,703
1997 15.43 8.96 28,896
1996 11.95 15.43 59,302
Variable Europe Division............................................ 1998 19.93 19.93 5,647
1997 15.34 19.93 8,163
Variable America Division........................................... 1998 14.62 15.59 11,055
1997 12.90 14.62 6,419
1996 11.03 12.90 2,236
Variable Growth & Income Division................................... 1998 13.88 16.37 2,879
1997 12.00 13.88 2,116
Variable Latin America Division..................................... 1998 14.94 8.59 10,724
1997 13.23 14.94 13,385
Variable Telecommunications Division................................ 1998 14.99 18.06 34,820
1997 13.27 14.99 37,030
1996 11.27 13.27 31,391
Variable International Division..................................... 1998 13.16 12.90 4,853
1997 12.48 13.16 4,879
Variable Emerging Markets Division.................................. 1998 11.31 7.04 2,750
1997 13.30 11.31 5,161
Variable Natural Resources Division................................. 1998 13.59 8.98 5,916
1997 13.60 13.59 6,760
Variable Infrastructure Division.................................... 1998 13.24 13.88 953
1997 12.79 13.24 780
</TABLE>
- - --------------
* At inception of Separate Account on September 7, 1995, except for the Variable
Strategic Income Division, the Variable Europe Division, and the Variable
Latin America Division, which commenced operations on January 30, 1996; the
Variable Emerging Markets Division, which commenced operations on March 25,
1996; the Variable International Division, which commenced operations on April
9, 1996; the Money Market Division, which commenced operations on July 26,
1996; the Variable Natural Resources Division the Variable Infrastructure
Division which commenced operations on August 26, 1996; the Variable Growth &
Income Division which commenced operations on April 8, 1997; and the Variable
U.S. Government Division which commenced operations on June 4, 1997.
See accompanying independent auditors' report.
F17
<PAGE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Security Equity Life Insurance Company:
We have audited the accompanying balance sheets of Security Equity Life
Insurance Company as of December 31, 1998 and 1997, and the related
statements of operations and comprehensive income, stockholder's equity,
and cash flows for each of the years in the three-year 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.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Security
Equity Life Insurance Company as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
As discussed in Note 1(h) to the financial statements, the Company changed
its accounting policy for the capitalization of acquisition costs in
1998.
April 30, 1999
<PAGE>
<PAGE>
<TABLE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Balance Sheets
December 31, 1998 and 1997
<CAPTION>
Assets 1998 1997
<S> <C> <C>
Bonds, at fair value $ 59,841,336 58,580,394
Policy loans 4,831,088 4,738,178
Cash and cash equivalents 1,403,321 4,519,584
------------ -----------
Total cash and invested assets 66,075,745 67,838,156
Reinsurance benefits recoverable:
Future policy benefits 4,970,259 5,575,381
Policy and contract claims 1,784,950 1,572,069
Accrued investment income 1,281,720 1,264,239
Goodwill 1,190,301 1,269,661
Deferred policy acquisition costs 17,698,757 14,112,608
Value of business acquired 2,375,000 2,467,000
Deferred tax asset 5,830,710 5,671,074
Other assets 1,247,845 665,967
Separate account assets 403,857,411 290,409,444
------------ -----------
Total assets $506,312,698 390,845,599
============ ===========
Liabilities and Stockholder's Equity
Reserve for future policy benefits 3,161,224 3,426,250
Policyholder account balances 47,409,775 47,594,304
Policy and contract claims 1,140,695 320,358
Other policyholders' funds 18,215 13,733
Unearned revenue 17,139,317 16,079,166
Other liabilities and accrued expenses 2,924,436 4,643,201
Payable to affiliates 136,209 41,307
Separate account liabilities 403,857,411 290,409,444
------------ -----------
Total liabilities 475,787,282 362,527,763
Commitments and contingencies (note 10)
Stockholder's equity:
Common stock, par value $25; 100,000 shares
authorized, issued, and outstanding 2,500,000 2,500,000
Additional paid-in capital 27,447,892 27,447,892
Accumulated other comprehensive income 2,553,998 1,870,338
Accumulated deficit (1,976,474) (3,500,394)
------------ -----------
Total stockholder's equity 30,525,416 28,317,836
------------ -----------
Total liabilities and stockholder's equity $506,312,698 390,845,599
============ ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Statements of Operations and Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues:
Premiums $ 3,663,368 4,246,718 6,371,662
Net investment income 4,296,760 4,774,386 4,546,544
Universal Life Policy Charges 8,736,733 9,307,665 3,811,896
Other Income 105,456 49,671 19,069
Realized investment gains 13,154 93,385 313,185
----------- ---------- ----------
Total revenues 16,815,471 18,471,825 15,062,356
Benefits and expenses:
Policy benefits 2,946,281 1,326,460 3,309,410
Policy surrenders, net 1,760,448 4,335,709 1,635,498
Change in unearned revenue 1,060,151 9,342,363 1,912,470
Change in reserve for future policy benefits (1,729,615) (5,075,024) (2,757,042)
Interest credited 2,341,796 2,392,355 2,437,432
Commissions 2,097,482 479,380 3,590,084
Change in deferred acquisition costs (2,870,169) (5,578,850) (3,235,101)
General and administrative expenses 4,950,753 5,412,113 4,795,193
Amortization of goodwill 79,360 79,356 79,356
Amortization (accretion) of value of business
acquired, net 91,996 (6,000) (20,000)
Other expenses 4,300,430 4,256,509 3,598,597
----------- ---------- ----------
Total benefits and expenses 15,028,913 16,964,371 15,345,897
Income (loss) from operations before
federal income tax expense (benefit) 1,786,558 1,507,454 (283,541)
Federal income tax expense (benefit):
Current 1,506,379 3,790,833 15,000
Deferred (778,354) (3,243,000) (92,000)
----------- ---------- ----------
Total Federal income tax expense (benefit) 728,025 547,833 (77,000)
----------- ---------- ----------
Income (loss) before cumulative effect of a change
in accounting principle 1,058,533 959,621 (206,541)
Cumulative effect on prior years (to December 31,
1997) of changing to a different capitalization
policy for policy acquistion costs, net of
taxes of $250,593 465,387 - -
----------- ---------- ----------
Net income (loss) 1,523,920 959,621 (206,541)
----------- ---------- ----------
Other comprehensive income (loss) 683,660 1,811,226 (1,931,020)
----------- ---------- ----------
Comprehensive income $ 2,207,580 2,770,847 (2,137,561)
=========== ========== ==========
Pro forma net income assuming the new policy
acquisition costs capitalization method is
applied retroactively $ 1,058,533 1,009,662 61,787
=========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Statements of Stockholder's Equity
Years ended December 31, 1998, 1997, and 1996
<CAPTION>
Accumulated
Additional Other Total
Common paid-in comprehensive Accumulated stockholder's
stock capital income (loss) deficit equity
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,500,000 27,447,892 1,990,132 (4,253,474) 27,684,550
Net loss - - - (206,541) (206,541)
Other comprehensive loss - - (1,931,020) - (1,931,020)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 2,500,000 27,447,892 59,112 (4,460,015) 25,546,989
Net income - - - 959,621 959,621
Other comprehensive income - - 1,811,226 - 1,811,226
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 $2,500,000 27,447,892 1,870,338 (3,500,394) 28,317,836
Net income - - - 1,523,920 1,523,920
Other comprehensive income - - 683,660 - 683,660
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 $2,500,000 27,447,892 2,553,998 (1,976,474) 30,525,416
========== ========== ========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,523,920 959,621 (206,541)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Change in:
Reinsurance benefits ceded 392,241 1,337,497 441,300
Accrued investment income (17,481) (33,756) 48,733
Other assets (581,879) 211,321 372,746
Deferred policy acquisition costs, net (3,586,149) (5,578,850) (3,235,101)
Policy liabilities (449,553) (3,496,036) (1,004,266)
Policy and contract claims 820,337 (1,173,980) (682,499)
Other policyholders' funds 4,482 (7,990) (3,341)
Federal income tax payable (550,832) 709,833 15,000
Change in unearned revenue reserve 1,060,151 9,342,363 1,912,470
Other liabilities and accrued expenses (1,167,933) (2,669,279) 4,257,913
Payable to affiliates 94,902 (34,203) 23,725
Accretion of bond premiums, net 153,255 130,011 189,350
Deferred tax expense (benefit) (527,761) (3,243,000) (92,000)
Net (gain) loss on sale of investments (13,154) (93,385) (313,185)
Amortization of goodwill 79,360 79,356 79,356
Amortization (accretion) of value of
business acquired 91,996 (6,000) (20,000)
----------- ------------ -----------
Net cash provided by (used in)
operating activities (2,674,098) (3,566,477) 1,783,660
----------- ------------ -----------
Cash flows from investing activities:
Purchase of investments (4,950,790) (6,925,121) (12,790,361)
Sale or maturity of investments 4,597,722 9,153,009 15,141,063
Increase in policy loans, net (92,910) 343,771 (557,046)
----------- ------------ -----------
Net cash provided by (used in)
investing activities (445,978) 2,571,659 1,793,656
----------- ------------ -----------
Cash flows from financing activities:
Policyholder account balances:
Deposits on interest-sensitive life
contracts 73,457,292 147,698,966 48,448,968
Transfers to separate account for
interest-sensitive life contracts, net (73,453,479) (147,718,944) (48,468,986)
----------- ------------ -----------
Net cash provided by (used in)
financing activities 3,813 (19,978) (20,018)
----------- ------------ -----------
Net increase (decrease) in cash and
cash equivalents (3,116,263) (1,014,796) 3,557,298
Cash and cash equivalents at beginning of year 4,519,584 5,534,380 1,977,082
----------- ------------ -----------
Cash and cash equivalents at end of year $ 1,403,321 4,519,584 5,534,380
=========== ============ ===========
Supplemental disclosure of cash flow
information -- taxes paid $ 2,057,000 3,081,000 -
=========== ============ ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<PAGE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Notes to Financial Statements
December 31, 1998 and 1997
=============================================================================
(1) General Information and Summary of Significant Accounting Policies
Security Equity Life Insurance Company (SELIC or the Company) is a
wholly owned subsidiary of General American Life Insurance Company
(General American or the Parent). On December 31, 1993, Security
Mutual Life Insurance Company of New York (Security Mutual) sold
100% of the Company's stock to General American, as approved by
the State of New York Department of Insurance.
In 1986, the Company commenced direct writing of universal life
and term business, and in 1987 began marketing a single premium
whole life policy. In 1984, the Company began assuming single
premium deferred annuity (SPDA) and other insurance business
through reinsurance agreements with Security Mutual. The SPDA and
ordinary life insurance blocks of business were recaptured by
Security Mutual in 1992.
SELIC is licensed in 40 states and the District of Columbia.
Insurance operations have generally been limited to the sale of
individual life insurance products (term and universal life) made
through the general agency system, including career agents and
brokers.
With the sale of SELIC by Security Mutual to General American,
SELIC's activities have been redirected to serving the insurance
needs of publicly held corporations and New York state residents.
Additionally, SELIC focuses on accessing numerous and alternative
distribution channels in addition to a general agency system.
SELIC markets Corporate Owned Life Insurance (COLI) primarily
through specially designed variable products.
The acquisition of Security Equity by General American was
accounted for as a purchase transaction and, accordingly, the
purchase price was allocated to the assets and liabilities
acquired based upon the fair market value of such assets and
liabilities at the date of acquisition. These allocations have
been reflected, or "pushed down," in the financial statements of
the Company. The total purchase price of $19,947,892 was
allocated among the fair value of tangible net assets of
$15,997,813, value of business acquired of $2,363,000, and
goodwill of $1,587,079 at the date of acquisition.
The accompanying financial statements are prepared on the basis of
generally accepted accounting principles. The preparation of
financial statements requires the use of estimates by management
which affect the amounts reflected in the financial statements.
Actual results could differ from those estimates.
The significant accounting policies of the Company are as follows:
(a) Recognition of Policy Revenue and Related Expenses
Policy revenue recognition varies depending upon the type of
insurance product. For traditional life products with fixed and
guaranteed premiums and benefits, such as whole life and term
insurance policies, premiums are recognized when due. Benefits
and other expenses
(Continued)
<PAGE>
<PAGE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Notes to Financial Statements
=============================================================================
of these products are associated with earned premiums and other
sources of earnings so as to result in recognition of profits over
the life of the contracts. This association is accomplished by
means of the provision for liabilities for future benefits and the
deferral and amortization of policy acquisition costs. Premiums
collected on universal life-type policies are reported as deposits
to the policyholder account balance and not as income to SELIC.
Income to SELIC on these policies consists of the assessments for
mortality costs, surrenders, and expenses.
(b) Investment Securities
At December 31, 1998 and 1997, all long-term securities are
carried at fair value with the unrealized gain (loss), net of tax
impact, being reflected as a separate component of stockholder's
equity as the Company considers all long-term securities as
available-for-sale. Short-term investments are carried at cost
which approximates fair value. Policy loans are valued at
aggregate unpaid balances. The fair value of policy loans is
assumed to equal the carrying value because the loans have no
fixed maturity date and, therefore, it is not practicable to
determine a fair value.
Realized gains or losses on the sale of securities are determined
on the basis of specific identification and include the impact of
any related amortization of premium or accretion of discount which
is generally computed consistent with the interest method.
(c) Value of Business Acquired
Value of business acquired (VOBA) represents the present value of
future profits resulting from the acquisition of insurance
policies in a purchase transaction. VOBA is amortized in
proportion to the estimated premiums or gross profits, depending
on the type of contract, with accretion of interest on the
unamortized discounted balance. In 1998, 1997 and 1996,
amortization of VOBA was $222,000, $134,000 and $121,000, and the
accretion of interest on the unamortized balance was $130,000,
$140,000 and $141,000, respectively. The carrying value of VOBA
is periodically evaluated to ascertain recoverability from future
operations. Impairment would be recognized in current operations
when determined.
(d) Goodwill
Goodwill, representing the excess of purchase price over the fair
value of assets acquired, is amortized on a straight-line basis
over 20 years. The carrying value of goodwill is periodically
evaluated to ascertain recoverability from future operations.
Impairment would be recognized in current operations when
determined.
(e) Reserve for Future Policy Benefits
Liabilities for future benefits on life policies are established
in amounts adequate to meet the estimated future obligations on
policies in force. Liabilities for future policy benefits on
certain life insurance policies are computed using the net level
premium method and are based upon assumptions as to future
investment yield, mortality, and withdrawals.
(Continued)
<PAGE>
<PAGE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Notes to Financial Statements
=============================================================================
Mortality and withdrawal assumptions for all policies have been
based on various actuarial tables which are consistent with the
Company's own experience. Liabilities for future benefits on
certain long-duration life insurance contracts are carried at
accumulated policyholder values.
(f) Federal Income Taxes
The Company is taxed as a life insurance company under the Deficit
Reduction Act of 1984. The Company establishes deferred taxes
under the asset and liability method of SFAS No. 109, Accounting
for Income Taxes, and deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
The Company files its federal income tax return as a separate
entity.
(g) Reinsurance
Reinsurance premiums, commissions, expense reimbursements, and
reserves related to reinsured business are accounted for on a
basis consistent with terms of the risk transfer reinsurance
contracts. Premiums ceded to other companies have been reported
as a reduction of premium income. Amounts applicable to
reinsurance ceded for future policy benefits and claim liabilities
have been reported as assets for these items, and commissions and
expense allowances received in connection with reinsurance ceded
have been accounted for in income as earned over the anticipated
reinsurance contract life. Reinsurance does not relieve the
Company from its primary responsibility to meet claim obligations.
(h) Deferred Policy Acquisition Costs and Unearned Revenues
The costs of acquiring new business, which vary with and are
primarily related to the production of new business, have been
deferred to the extent that such costs are deemed recoverable.
Such costs may include commissions, as well as certain costs of
policy issuance and underwriting. Also, certain charges which are
assessed to contract holders at the inception of the contract are
deferred as unearned revenues. These deferred costs and revenues
are amortized based on and in relation to the estimated gross
profit streams of the underlying business. In 1998, 1997 and
1996, the Company deferred $5,100,000, $5,900,000 and $2,400,000,
respectively, in acquisition costs and recognized amortization of
$2,100,000, $336,000 and ($798,000), respectively. During 1998, 1997,
and 1996, the Company deferred certain contract charge revenues of
$4,400,000, $8,000,000, and $2,300,000, respectively and recognized
amortization of $1,600,000, $1,000,000, and ($480,000), respectively.
During 1997 a policyholder utilized their "free-look" provision of
their variable life contract written in 1996 which resulted in the
return of approximately $13 million in contract deposits to the
policyholder. Accordingly, the Company wrote off $1.5 million of
related deferred acquisition costs associated with the contract
which were capitalized in 1996.
Prior to 1998, commission expenses and premium taxes were the only
acquisition costs deferred by the Company. During 1998, the
Company changed its accounting policy to defer other acquisition
costs, such as marketing and underwriting, in its calculation of
deferred acquisition costs. This change was adopted to provide
for an accounting
(Continued)
<PAGE>
<PAGE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Notes to Financial Statements
=============================================================================
policy which is consistent with that of its parent and has been
applied retroactively. The effect of the change in 1998 was to
increase income by $715,980. The adjustment of $415,387, after
reduction for income taxes of $250,593 to apply the new policy
retroactively is included in income in 1998. The pro forma amounts,
net of tax, shown on the income statement have been adjusted for the
effect of retroactive application of the change in policy.
(i) Separate Account Business
The assets and liabilities of the separate account represent
segregated funds administered and invested by the Company for
purposes of funding variable life insurance contracts for the
exclusive benefit of variable life insurance contract holders.
The Company receives administrative fees from the separate account
and retains varying amounts of withdrawal charges to cover
expenses in the event of early withdrawals by contract holders.
The assets and liabilities of the separate account are carried at
market value.
(j) Fair Value Disclosures
Fair value disclosures are required under SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. Such fair
value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument.
Although fair value estimates are calculated using assumptions
that management believes are appropriate, changes in assumptions
could significantly affect the estimates and such estimates should
be used with care. The following assumptions were used to
estimate the fair market value of each class of financial
instrument for which it was practicable to estimate fair value:
Invested assets - Fixed maturities (Bonds) are valued using quoted
---------------
market prices, if available. If quoted market prices are not
available, fair value is estimated using quoted market prices of
similar securities. The carrying value of policy loans
approximates fair value.
Policyholder account balances - The fair value of policyholder
-----------------------------
account balances is equal to the discounted estimated future cash
flows using discounted cash flow calculations, based on interest
rates currently being offered for similar contracts with
maturities consistent with those remaining for the contracts being
valued. The carrying value approximates fair value at December
31, 1998 and 1997.
Cash and short-term investments - The carrying amount is a
-------------------------------
reasonable estimate of fair value.
(k) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
represent demand deposits and highly liquid short-term
investments, which include U.S. Treasury bills, commercial paper,
and repurchase agreements with original or remaining maturities of
90 days or less when purchased.
(l) Reclassification
Certain amounts in the 1996 and 1997 financial statements have
been reclassified to conform to the 1998 presentation.
(Continued)
<PAGE>
<PAGE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Notes to Financial Statements
=============================================================================
(2) Investments
The sources of net investment income (principally interest)
follow:
<TABLE>
<CAPTION>
===================================================================================
1998 1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Bonds $3,996,895 4,161,182 4,291,428
Short-term investments 157,456 278,606 75,110
Policy loans and other 287,761 409,406 260,276
-----------------------------------------------------------------------------------
4,442,112 4,849,194 4,626,814
Investment expenses 145,352 74,808 80,270
-----------------------------------------------------------------------------------
Net investment income $4,296,760 4,774,386 4,546,544
===================================================================================
</TABLE>
The amortized cost and estimated fair value of bonds at December
31, 1998 and 1997 are shown below. Fair value is based upon
market prices obtained from independent pricing services.
<TABLE>
<CAPTION>
============================================================================================
1998
--------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government obligations (including
obligations guaranteed by the
U.S. government) $18,244,322 2,368,205 164,359 20,448,168
Corporate securities 35,997,741 2,173,872 529,901 37,641,712
Mortgage-backed securities 1,670,046 81,410 0 1,751,456
--------------------------------------------------------------------------------------------
$55,912,109 4,623,487 694,260 59,841,336
============================================================================================
</TABLE>
(Continued)
<PAGE>
<PAGE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Notes to Financial Statements
=============================================================================
<TABLE>
<CAPTION>
==============================================================================================
1997
----------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government obligations (including
obligations guaranteed by the
U.S. government) $ 6,387,244 369,801 148 6,756,897
Corporate securities 36,700,238 2,523,621 153,514 39,070,345
Mortgage-backed securities 12,615,469 323,476 185,793 12,753,152
----------------------------------------------------------------------------------------------
$55,702,951 3,216,898 339,455 58,580,394
==============================================================================================
</TABLE>
The amortized cost 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>
===================================================================================
Estimated
Amortized market
cost value
-----------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 1,297,987 1,302,600
Due after one year through five years 4,784,883 4,871,814
Due after five years through ten years 7,371,362 7,713,857
Due after ten years 40,787,831 44,201,609
Mortgage-backed securities 1,670,046 1,751,456
-----------------------------------------------------------------------------------
$55,912,109 59,841,336
===================================================================================
</TABLE>
Proceeds from the sale, call, and maturity of investments in
bonds during 1998, 1997, and 1996 were $4,597,724, $9,153,009,
and $15,141,063, respectively. Gross gains of $84,860, $346,842,
and $381,856 and gross losses of $0, $253,457, and $68,671 were
realized on those sales in 1998, 1997, and 1996, respectively.
The Company has bonds on deposit with various state insurance
departments with an amortized cost of approximately $2,388,000
and $2,387,000 at December 31, 1998 and 1997, respectively.
(Continued)
<PAGE>
<PAGE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Notes to Financial Statements
=============================================================================
(3) Reinsurance
The Company reinsures certain risks with other insurance
companies as the Company sets a maximum retention amount
(currently $125,000) to help reduce the loss on any single
policy.
Premiums and related reinsurance amounts for the years ended
December 31, 1998, 1997, and 1996 as they relate to transactions
with affiliates are summarized as follows:
<TABLE>
<CAPTION>
============================================================================================
1998 1997 1996
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reinsurance transactions with affiliates:
Reinsurance premiums ceded $1,154,059 1,489,006 1,632,262
Policy benefits ceded 574,307 (23,067) 1,397,188
============================================================================================
</TABLE>
Premiums and related reinsurance amounts for the years ended
December 31, 1998, 1997, and 1996 as they relate to transactions
with non-affiliates are summarized as follows:
<TABLE>
<CAPTION>
============================================================================================
1998 1997 1996
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reinsurance transactions with non-affiliates:
Reinsurance premiums ceded $5,585,519 5,352,578 5,744,060
Policy benefits ceded 3,132,174 463,458 3,824,327
============================================================================================
</TABLE>
The Company remains contingently liable with respect to any
reinsurance ceded and would become actually liable if the
assuming company was unable to meet its obligations under the
reinsurance treaty.
(4) Federal Income Taxes
A reconciliation of the Company's "expected" federal income tax
expense (benefit), computed by applying the federal U.S.
corporate tax rate of 35% to income (loss) from operations before
federal income tax expense (benefit), is as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
==================================================================================================
1998 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $625 528 (99)
Amortization of intangibles, net 60 26 21
Other, net 43 (6) 1
--------------------------------------------------------------------------------------------------
Federal income tax expense (benefit) $728 548 (77)
==================================================================================================
<CAPTION>
==================================================================================================
Total income taxes were allocated as follows: 1998 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes from continuing operations $ 728 548 (77)
Tax effect of cumulative effect of change in accounting 251 0 0
Income tax from shareholder's equity:
Unrealized holding gain on debt and equity securities
Recognized for financial reporting purposes 368 1,839 (1,059)
--------------------------------------------------------------------------------------------------
Total income tax $1,347 2,387 (1,136)
==================================================================================================
</TABLE>
(Continued)
<PAGE>
<PAGE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Notes to Financial Statements
=============================================================================
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and liabilities at
December 31, 1998 and 1997 are presented below (in thousands of
dollars):
<TABLE>
<CAPTION>
=================================================================================
1998 1997
---------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Policy acquisition costs $ 1,003 4,897
Reserves 3,024 3,380
Capital loss carry-forward 0 101
Unearned Revenue 5,999 1,307
---------------------------------------------------------------------------------
Total gross deferred tax assets 10,026 9,685
Less valuation allowance - -
---------------------------------------------------------------------------------
Net deferred tax assets 10,026 9,685
---------------------------------------------------------------------------------
Deferred tax liabilities:
Investments 1,374 1,023
Other, net 2,821 2,991
---------------------------------------------------------------------------------
Total gross deferred tax liabilities 4,195 4,014
---------------------------------------------------------------------------------
Net deferred tax asset $ 5,831 5,671
=================================================================================
</TABLE>
On December 31, 1993, General American purchased 100% of the
Company. Pursuant to the acquisition, the election was made under
Internal Revenue Code Section 338(h)(10) to treat the purchase of
stock as a purchase of assets for tax purposes. As a result, a
revaluation of the tax bases of the Company's assets and
liabilities was made in connection with the acquisition.
The Company believes that a valuation allowance with respect to
the realization of the total gross deferred tax asset is not
necessary. In assessing the realization of deferred tax assets,
the Company considers whether it is more likely than not that the
deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible. Although the Company has a limited
history of earnings, its Parent does have a long history of
earnings. Pursuant to Internal Revenue Service regulations, the
Company cannot file a consolidated tax return with its Parent
until five years following the acquisition. However, after five
years, the Company will be able to file a consolidated tax return
with its Parent, and realization of the gross tax asset will not
be dependent solely on the Company's ability to generate its own
taxable income. General American has a proven history of earnings
and it appears more likely than not that the Company's gross
deferred tax asset will ultimately be fully realized.
The Company filed its federal income tax return on a consolidated
basis with Security Mutual prior to 1994. In connection with the
Company's transfer of stock ownership, Security Mutual agreed to
assume all unpaid tax liability incurred prior to the date of
sale.
(Continued)
<PAGE>
<PAGE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Notes to Financial Statements
=============================================================================
(5) Related-Party Transactions
The Company purchases certain administrative services from General
American. Charges for services performed are based upon personnel
and other costs involved in providing such services. The expenses
incurred for these services were $508,000, $578,000, and $529,000
for 1998, 1997, and 1996, respectively.
Effective January 1, 1994, the Company entered into an
administrative service agreement with Security Mutual. Under the
agreement, Security Mutual provides for the administration of
policies issued through December 31, 1993. The expenses incurred
for these services were $1,420,538, $1,467,364, and $1,621,268 for
1998, 1997, and 1996, respectively.
On November 18, 1997, General American elected to surrender their
existing VUL policy which was purchased from the Company in
November 1996. General American incorporated the cash value from
their surrendered policy of $2,965,211 with an additional
contribution of $37,400,000 to purchase another VUL policy with
the Company totaling $40,365,211.
(6) Pension, Incentive, and Health and Life Insurance Benefit Plans
Associates of SELIC participate in a noncontributory multi-
employer defined benefit pension plan jointly sponsored by SELIC
and General American. The benefit is accrued are based on the
number of years of service and compensation level of each
participant. No pension expense was recognized in 1998, 1997, and
1996 due to overfunding of the plan.
In addition, in 1995 SELIC adopted an associate bonus plan
applicable to full-time exempt associates. Bonuses are based on
an economic value-added model prepared annually by the Company.
Total bonuses accrued to Company employees were $54,000 and
$302,000 in 1998 and 1997, respectively.
In order to attract and retain highly qualified Non-Employee
Directors, the Company enacted an arrangement under which Non-
Employee Directors may elect to reduce their current Director's
Compensation in exchange for future benefits. This plan, known as
the Security Equity Deferred Compensation Plan for Non-Employee
Directors, was adopted and effective as of April 15, 1995. The
deferred liabilities were $331,000, $222,000, and $117,000 in
1998, 1997, and 1996, respectively.
SELIC provides for certain health care and life insurance benefits
for retired employees in accordance with Statement of Financial
Accounting Standards No. 106, Employer's Accounting for
Postretirement Benefits Other Than Pensions (SFAS No. 106). SFAS
No. 106 requires the Company to accrue the estimated cost of
retiree benefit payments during the years the employee provides
services. The amounts involved are not material.
(7) STATUTORY FINANCIAL INFORMATION
The Company is subject to financial statement filing requirements
of the State of New York Department of Insurance, its state of
domicile, as well as the states in which it transacts business.
Such financial statements, generally referred to as statutory
financial statements, are prepared on a basis of accounting which
varies in some respects from generally accepted accounting
principles (GAAP). Statutory accounting principles include: (1)
charging of policy acquisition costs to income as incurred; (2)
establishment of a liability for future policy benefits computed
using required valuation standards which may vary in methodology
utilized; (3) nonprovision of deferred federal income taxes
resulting from temporary differences between financial reporting
and tax bases of assets and liabilities; (4) recognition of
statutory liabilities for asset impairments and yield
stabilization on fixed maturity dispositions prior to maturity
with asset valuation reserves based on statutorily determined
formulae and interest stabilization reserves designed to level
yields over their original purchase maturities; (5) deferred
premiums provided for statutory mean reserves; (6) annuity
contract deposits represent funds deposited by policyholders and
are included in premiums or contract charges; (7) non-recognition
of certain assets as nonadmitted through a direct charge to
surplus; and (8) valuation of investments in bonds at amortized
cost.
(Continued)
<PAGE>
<PAGE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Notes to Financial Statements
=============================================================================
The stockholder's equity (surplus) and net gain/(loss) of the
Company at December 31, 1998, 1997, and 1996, as determined using
statutory accounting practices, is summarized as follows:
<TABLE>
<CAPTION>
=========================================================================================
1998 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Surplus as reported to
regulatory authorities $11,691,630 13,420,004 12,441,081
Net gain/(loss) reported
to regulatory authorities (1,745,154) 1,090,066 (2,778,942)
=========================================================================================
</TABLE>
(8) DIVIDEND RESTRICTIONS
Dividend payments by the Company are restricted by state insurance
laws as to the amount that may be paid as well as requiring the
prior notice and approval of the State of New York Department of
Insurance. The Company did not pay a dividend in 1998, 1997, or
1996.
(9) RISK-BASED CAPITAL
The insurance departments of various states, including the
Company's domiciliary state of New York, impose risk-based capital
(RBC) requirements on insurance enterprises. The RBC calculation
serves as a benchmark for the regulation of life insurance
companies by state insurance regulators. The requirements apply
various weighted factors to financial balances or activity levels
based on their perceived degree of risk.
(Continued)
<PAGE>
<PAGE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Notes to Financial Statements
=============================================================================
The RBC guidelines define specific capital levels where action by
the Company or regulatory authorities is required based on the
ratio of a company's actual total adjusted capital (sum of capital
and surplus and asset valuation reserve) to control levels
determined by the RBC formula. At December 31, 1998, the
Company's actual total adjusted capital was well in excess of
minimum levels which would require action by the Company or
regulatory authorities under the RBC formula.
(10) COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities under a non-
cancelable lease which expires in August 2003. The future minimum
lease obligations under the terms of the lease are summarized as
follows:
====================================================================
Year ended December 31, 1999 $130,690
Year ended December 31, 2000 $136,291
Year ended December 31, 2001 $141,892
Year ended December 31, 2002 $147,497
Year ended December 31, 2003 $153,094
--------------------------------------------------------------------
Rent expense totaled approximately $110,780, $86,700, and $82,700
in 1998, 1997, and 1996, respectively.
(11) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS), No. 130,
"Reporting Comprehensive Income," effective for years beginning
after December 15, 1997. SFAS No. 130 establishes standards for
reporting and display or comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-
purpose financial statements. The most significant items of
comprehensive income are net income and changes in unrealized
gains and losses on securities. The adoption of SFAS No. 130 does
not affect results of operations or financial position, but
affects their presentation and disclosure. The Company has
adopted SFAS No. 130 as of January 1, 1998, and the following
summaries present the components of the Company's comprehensive
income, other than net income, for the periods ending December 31,
1998, 1997, and 1996:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
1998
===========================================================================================
Before tax (Expense) Net of tax
amount benefit amount
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains arising
during the period $1,064,939 (372,729) 692,210
Less: reclassification adjustment
for gains realized in net income (13,154) 4,604 (8,550)
-------------------------------------------------------------------------------------------
Other comprehensive income 1,051,785 (368,125) 683,660
===========================================================================================
</TABLE>
12
<PAGE>
<PAGE>
SECURITY EQUITY LIFE INSURANCE COMPANY
Notes to Financial Statements
=============================================================================
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
1997
===================================================================================================
Before tax (Expense) Net of tax
amount benefit amount
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains arising
during the period $2,879,887 (1,007,961) 1,871,926
Less: reclassification adjustment
for gains realized in net income (93,385) 32,685 (60,700)
---------------------------------------------------------------------------------------------------
Other comprehensive income 2,786,502 (975,276) 1,811,226
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
1996
===================================================================================================
Before tax (Expense) Net of tax
amount benefit amount
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding losses arising
during the period $(2,657,615) 930,165 (1,727,450)
Less: reclassification adjustment
for gains realized in net income (313,185) 109,615 (203,570)
---------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (2,970,800) 1,039,780 (1,931,020)
===================================================================================================
</TABLE>
13
