<PAGE>
Rule 497(e)
File No.33-90208
ALLOCATOR 2000
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
ACACIA NATIONAL LIFE INSURANCE COMPANY
Supplement Dated June 18, 1998
to
Prospectus Dated May 1, 1998
The May 1, 1998 Allocator 2000 Prospectus is hereby supplemented to
include after Appendix B the attached Audited Financial Statements of Acacia
National Variable Life Insurance Separate Account I (December 31, 1997 and 1996)
and Audited Financial Statements (Statutory Basis) of Acacia National Life
Insurance Company (December 31, 1997 and 1996).
<PAGE>
AUDITED FINANCIAL STATEMENTS
ACACIA NATIONAL VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I
DECEMBER 31, 1997 AND 1996
<TABLE>
<S> <C>
Report of Independent Accountants........................................ 1
Statement of Assets and Liabilities...................................... 2
Statements of Operations and Changes in Net Assets....................... 3-4
Notes to the Financial Statements........................................ 5-8
</TABLE>
<PAGE>
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Acacia National Life Insurance Company and
Contract Owners of Acacia National Variable Life Insurance Separate Account I
We have audited the accompanying statement of assets and liabilities for each of
the following sub-accounts comprising the Acacia National Variable Life
Insurance Separate Account I (the Account): the Social Money Market; Social
Balanced; Social Strategic Growth; Large Cap Growth; Mid Cap Growth; Small Cap
Growth; S&P 500 Index; Income; Growth; International Growth; Aggressive Growth;
and Hard Assets/Metals sub-accounts as of December 31, 1997, and the related
statements of operations and changes in the net assets for the years ended
December 31,1997 and 1996; statement of assets and liabilities for the Social
Managed Growth; Social Global; High Income; Aggressive Growth; Large Cap Growth;
Balanced; and Managed Income sub-accounts as of December 31,1997 and the related
statements of operations and changes in the net assets for the period May 1,
1997 (date of inception) to December 31, 1997; and the statements of operations
and changes in net assets for the Income; and Balance sub-accounts for the
period January 1,1997 to November 6, 1997 (date of closure) and for the year
ended December 31, 1996. These financial statements are the responsibility of
the Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1997 by correspondence with
the registered investment companies. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
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 respect, the financial position of each of the respective sub-accounts
comprising the Acacia National Variable Life Insurance Separate Account I as of
December 31, 1997 and the results of their operations and changes in net assets
for the respective periods indicated herein, in conformity with generally
accepted accounting principles.
Washington, D.C.
April 22, 1998
<PAGE>
ACACIA NATIONAL VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
CALVERT ALGER
------------------------------------------------------- --------------------------------
SOCIAL SOCIAL SOCIAL
MONEY SOCIAL STRATEGIC MANAGED SOCIAL LARGE CAP MID CAP SMALL CAP
MARKET BALANCED GROWTH GROWTH GLOBAL GROWTH GROWTH GROWTH
--------- -------- -------- ------- ------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, identified costs $ 366,843 $ 23,412 $ 48,212 $11,805 $22,247 $777,906 $298,226 $734,768
========= ======== ======== ======= ======= ======== ======== ========
Investments, at market $ 366,843 $ 22,759 $ 46,146 $11,202 $19,707 $888,391 $316,847 $808,431
========= ======== ======== ======= ======= ======== ======== ========
Number of shares 366,843 11,494 3,842 420 1,036 20,776 13,104 18,478
========= ======== ======== ======= ======= ======== ======== ========
Net Assets $ 366,843 $ 22,759 $ 46,146 $11,202 $19,707 $888,391 $316,847 $808,431
========= ======== ======== ======= ======= ======== ======== ========
ACCUMULATION UNITS
Number of units 330,489 1,678 3,703 900 1,788 62,387 24,543 69,933
========= ======== ======== ======= ======= ======== ======== ========
NET ASSET VALUE PER
ACCUMULATION UNIT
December 31, 1997 $ 1.11 $ 13.56 $ 12.46 $ 12.44 $ 11.02 $ 14.24 $ 12.91 $ 11.56
========= ======== ======== ======= ======= ======== ======== ========
December 31, 1996 $ 1.05 $ 11.28 $ 13.83 -- -- $ 11.33 $ 11.22 $ 10.38
========= ======== ======== ======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DREYFUS NEUBERGER & BERMAN STRONG VAN ECK
------- ------------------------ --------------------------- ---------------
S & P
500 INTERNATIONAL AGGRESSIVE HARD
INDEX INCOME GROWTH GROWTH GROWTH ASSETS / METALS
----------- --------- --------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS $ 1,852,647 $ 844,033 $ 561,219 $ 1,514,457 $ 193,632 $ 260,283
Investments, identified costs =========== ========== ========== ============= ========== ===============
$ 2,028,397 $ 863,833 $ 629,671 $ 1,286,718 $ 208,414 $ 253,944
Investments, at market =========== ========== ========== ============= ========== ===============
78,773 61,178 20,618 138,060 17,324 16,154
Number of shares =========== ========== ========== ============= ========== ===============
$ 2,028,397 $ 863,833 $ 629,671 $ 1,286,718 $ 208,414 $ 253,944
Net Assets =========== ========== ========== ============= ========== ===============
ACCUMULATION UNITS
Number of units 125,133 77,059 45,761 137,912 18,742 22,198
=========== ========== ========== ============= ========== ===============
NET ASSET VALUE PER
ACCUMULATION UNIT
December 31, 1997 $ 16.21 $ 11.21 $ 13.76 $ 9.33 $ 11.12 $ 11.44
=========== ========== ========== ============= ========== ===============
December 31, 1996 $ 12.19 $ 10.50 $ 10.66 $ 11.15 $ 9.98 $ 11.64
=========== ========== ========== ============= ========== ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPPENHEIMER
-------------------------------------------------------------
HIGH AGGRESSIVE LARGE CAP MANAGED
INCOME GROWTH GROWTH BALANCED INCOME
------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, identified costs $69,389 $ 354,826 $ 583,159 $ 71,911 $ 19,554
======= ========= ========= ======== ========
Investments, at market $69,764 $ 356,132 $ 604,610 $ 74,938 $ 19,358
======= ========= ========= ======== ========
Number of shares 6,056 8,695 18,638 3,641 3,781
======= ========= ========= ======== ========
Net Assets $69,764 $ 356,132 $ 604,610 $ 74,938 $ 19,358
======= ========= ========= ======== ========
ACCUMULATION UNITS
Number of units 6,274 28,422 49,967 5,836 1,797
======= ========= ========= ======== ========
NET ASSET VALUE PER
ACCUMULATION UNIT
December 31, 1997 $ 11.12 $ 12.53 $ 12.10 $ 12.84 $ 10.77
======= ========= ========= ======== ========
December 31, 1996 -- -- -- -- --
======= ========= ========= ======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
2
<PAGE>
ACACIA NATIONAL VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CALVERT ALGER
------------------------------------------------------------------- ----------
SOCIAL SOCIAL SOCIAL LARGE
MONEY SOCIAL STRATEGIC MANAGED SOCIAL CAP
MARKET BALANCED GROWTH GROWTH * GLOBAL * GROWTH
----------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Investment Income
Dividends $ 7,942 $ 1,565 $ 4,107 $ 1,160 $ 1,968 $ 5,840
Mortality and expense charge (4,111) (72) (355) (28) (50) (5,914)
----------- -------- -------- ---------- --------- ---------
Net Investment Income (Loss) 3,831 1,493 3,752 1,132 1,918 (74)
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares -- 204 (1,773) 100 4 39,995
Unrealized appreciation (depreciation)
of investments 440 (515) (2,228) (603) (2,540) 95,625
----------- -------- -------- ---------- --------- ---------
Net Gain (Loss) on Investments 440 (311) (4,001) (503) (2,536) 135,620
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 4,271 1,182 (249) 629 (618) 135,546
CAPITAL TRANSACTIONS:
Transfer of premium 1,288,575 8,418 31,319 7,751 11,238 658,928
Contract terminations (30,731) (2) (754) -- (15) (6,652)
Policy account value charges (107,268) (1,871) (9,269) (723) (1,311) (154,294)
Sub-account transfers (934,230) 12,200 4,603 3,545 10,413 (66,291)
----------- -------- -------- ---------- --------- ---------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 216,346 18,745 25,899 10,573 20,325 431,691
----------- -------- -------- ---------- --------- --------
TOTAL INCREASE IN NET ASSETS 220,617 19,927 25,650 11,202 19,707 567,237
NET ASSETS, beginning of the year 146,226 2,832 20,496 -- -- 321,154
----------- -------- -------- ---------- --------- ---------
NET ASSETS, at end of the year $ 366,843 $22,759 $46,146 $ 11,202 $ 19,707 $888,391
----------- -------- -------- ---------- --------- ---------
UNITS ISSUED AND REDEEMED
Beginning balance 138,906 251 1,482 -- -- 28,351
Units issued 1,439,931 1,655 4,603 994 1,939 64,768
Units redeemed 1,248,348 228 2,382 94 151 30,732
----------- -------- -------- ---------- --------- ---------
Ending balance 330,489 1,678 3,703 900 1,788 62,387
=========== ======== ======== ========== ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALGER DREYFUS NEUBERGER & BERMAN
----------------------------- ----------- -----------------------------
S & P
MID CAP SMALL CAP 500
GROWTH GROWTH INDEX INCOME GROWTH
----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Investment Income
Dividends $ 2,687 $ 27,461 $ 43,942 $ 20,653 $ 23,873
Mortality and expense charge (1,692) (6,075) (11,588) (4,295) (3,395)
----------- ----------- ----------- ---------- -----------
Net Investment Income (Loss) 995 21,386 32,354 16,358 20,478
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares 11,425 9,397 112,714 1,905 16,065
Unrealized appreciation (depreciation)
of investments 15,140 70,132 146,383 15,273 59,454
---------- ----------- ----------- --------- -----------
Net Gain (Loss) on Investments 26,565 79,529 259,097 17,178 75,519
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 27,560 100,915 291,451 33,536 95,997
CAPITAL TRANSACTIONS:
Transfer of premium 209,184 639,497 1,457,795 573,088 436,222
Contract terminations (1,677) (5,444) (9,634) (6,482) (4,506)
Policy account value charges (44,137) (158,511) (302,335) (112,059) (88,567)
Sub-account transfers 35,378 (171,620) 39,694 170,258 9,415
---------- ----------- ----------- --------- -----------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 198,748 303,922 1,185,520 624,805 352,564
---------- ----------- ----------- --------- -----------
TOTAL INCREASE IN NET ASSETS 226,308 404,837 1,476,971 658,341 448,561
NET ASSETS, beginning of the year 90,539 403,594 551,426 205,492 181,110
---------- ----------- ----------- --------- -----------
NET ASSETS, at end of the year $ 316,847 $ 808,431 $ 2,028,397 $ 863,833 $ 629,671
---------- ----------- ----------- --------- -----------
UNITS ISSUED AND REDEEMED
Beginning balance 8,066 38,887 45,236 19,571 16,990
Units issued 26,097 83,058 141,619 84,591 46,395
Units redeemed 9,620 52,012 61,722 27,103 17,624
---------- ----------- ----------- --------- -----------
Ending balance 24,543 69,933 125,133 77,059 45,761
========== =========== =========== ======== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STRONG VAN ECK
------------------------------------------------------------ --------------
INTERNATIONAL AGGRESSIVE HARD
INCOME ** BALANCE ** GROWTH GROWTH ASSETS / METALS
---------- ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Investment Income
Dividends $ 359 $ 6,377 $ 8,037 -- $ 5,120
Mortality and expense charge (49) (516) (8,011) ($ 1,084) (1,655)
---------- ---------- ----------- ----------- -----------
Net Investment Income (Loss) 310 5,861 26 (1,084) 3,465
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares (38) 11,629 (3,230) 5,524 2,494
Unrealized appreciation (depreciation)
of investments 52 2,621 (230,017) 12,920 (10,841)
---------- ---------- ----------- ----------- -----------
Net Gain (Loss) on Investments 14 14,250 (233,247) 18,444 (8,347)
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 324 20,111 (233,221) 17,360 (4,882)
CAPITAL TRANSACTIONS:
Transfer of premium 3,119 57,796 999,117 133,826 187,675
Contract terminations (75) (70) (9,908) (1,071) (2,030)
Policy account value charges (1,282) (13,450) (209,009) (28,281) (43,175)
Sub-account transfers (11,996) (151,467) 296,376 9,619 28,359
---------- ---------- ----------- ----------- -----------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS (10,234) (107,191) 1,076,576 114,093 170,829
---------- ---------- ----------- ----------- -----------
TOTAL INCREASE IN NET ASSETS (9,910) (87,080) 843,355 131,453 165,947
NET ASSETS, beginning of the year 9,910 87,080 443,363 76,961 87,997
---------- ---------- ----------- ----------- -----------
NET ASSETS, at end of the year $ 0 $ 0 $ 1,286,718 $ 208,414 $ 253,944
---------- ---------- ----------- ----------- -----------
UNITS ISSUED AND REDEEMED
Beginning balance 984 7,816 39,763 7,708 7,560
Units issued 677 11,884 132,459 17,417 22,271
Units redeemed 1,661 19,700 34,310 6,383 7,633
----------- ---------- ----------- ----------- -----------
Ending balance 0 0 137,912 18,742 22,198
=========== ========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPPENHEIMER
--------------------------------------------------------------------------
HIGH AGGRESSIVE LARGE CAP MANAGED
INCOME * GROWTH * GROWTH * BALANCED * INCOME *
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Investment Income
Dividends $ 2,165 -- -- $ 267 $ 765
Mortality and expense charge (248) ($ 1,370) ($ 2,354) (272) ($ 45)
---------- ---------- ---------- ---------- ----------
Net Investment Income (Loss) 1,917 (1,370) (2,354) (5) 720
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares 270 4,036 2,729 1,288 4
Unrealized appreciation (depreciation)
of investments 375 1,306 21,451 3,027 (196)
---------- ---------- ---------- ---------- ----------
Net Gain (Loss) on Investments 645 5,342 24,180 4,315 (192)
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 2,562 3,972 21,826 4,310 528
CAPITAL TRANSACTIONS:
Transfer of premium 33,885 173,578 292,342 44,808 15,617
Contract terminations (49) (2,392) (4,210) (10) (5)
Policy account value charges (6,479) (35,746) (61,426) (7,100) (1,165)
Sub-account transfers 39,845 216,720 356,078 32,930 4,383
---------- ---------- ---------- ---------- ----------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 67,202 352,160 582,784 70,628 18,830
---------- ---------- ---------- ---------- ----------
TOTAL INCREASE IN NET ASSETS 69,764 356,132 604,610 74,938 19,358
NET ASSETS, beginning of the year -- -- -- -- --
---------- ---------- ---------- ---------- ----------
NET ASSETS, at end of the year $ 69,764 $ 356,132 $ 604,610 $ 74,938 $ 19,358
---------- ---------- ---------- ---------- ----------
UNITS ISSUED AND REDEEMED
Beginning balance -- -- -- -- --
Units issued 7,955 36,728 59,904 7,354 2,265
Units redeemed 1,681 8,306 9,937 1,518 468
---------- ---------- ---------- ---------- ----------
Ending balance 6,274 28,422 49,967 5,836 1,797
========== ========== ========== ========== ===========
</TABLE>
* From Sub-account inception, May, 1997.
** Sub-account closed November, 1997.
SEE NOTES TO FINANCIAL STATEMENTS.
3
<PAGE>
ACACIA NATIONAL VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CALVERT ALGER
------------------------------------- -------------------------------------
SOCIAL SOCIAL
MONEY SOCIAL STRATEGIC LARGE CAP MID CAP SMALL CAP
MARKET BALANCED GROWTH GROWTH GROWTH GROWTH
--------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Investment Income
Dividends $ 1,630 $ 213 $ 64 $ 934 $ 146 $ 160
Mortality and expense charge (2,525) (6) (13) (842) (255) (1,053)
--------- -------- -------- --------- -------- ---------
Net Investment Income (Loss) (895) 207 51 92 (109) (893)
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares -- 1 430 (104) (1,307) (1,177)
Unrealized appreciation (depreciation)
of investments -- (138) 160 14,859 3,481 3,531
--------- -------- -------- --------- -------- ---------
Net Gain (Loss) on Investments -- (137) 590 14,755 2,174 2,354
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS (895) 70 641 14,847 2,065 1,461
CAPITAL TRANSACTIONS:
Transfer of premium 816,161 286 3,334 278,552 83,500 347,283
Contract terminations (3,610) -- -- -- -- --
Policy account value charges (58,360) (67) (1,740) (53,632) (12,263) (61,314)
Sub-account transfers (607,070) 2,543 18,243 81,387 17,220 116,164
--------- -------- -------- --------- -------- ---------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 147,121 2,762 19,837 306,307 88,457 402,133
--------- -------- -------- --------- -------- ---------
TOTAL INCREASE IN NET ASSETS 146,226 2,832 20,478 321,154 90,522 403,594
NET ASSETS, beginning of the year -- -- 18 -- 17 --
--------- -------- -------- --------- -------- ---------
NET ASSETS, at end of the year $ 146,226 $ 2,832 $ 20,496 $ 321,154 $ 90,539 $ 403,594
--------- -------- -------- --------- -------- ---------
UNITS ISSUED AND REDEEMED
Beginning balance -- -- 2 -- 2 --
Units issued 977,173 257 1,962 38,131 11,514 50,998
Units redeemed 838,267 6 482 9,780 3,450 12,111
--------- -------- -------- --------- -------- ---------
Ending balance 138,906 251 1,482 28,351 8,066 38,887
========= ======== ======== ========= ======== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DREYFUS NEUBERGER & BERMAN
--------- -----------------------
S & P
500
INDEX INCOME GROWTH
--------- --------- ---------
<S> <C> <C> <C>
OPERATIONS:
Investment Income
Dividends $ 11,429 -- --
Mortality and expense charge (1,417) ($ 561) ($ 488)
--------- --------- ---------
Net Investment Income (Loss) 10,012 (561) (488)
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares 2,674 205 (830)
Unrealized appreciation (depreciation)
of investments 29,363 4,527 8,997
--------- --------- ---------
Net Gain (Loss) on Investments 32,037 4,732 8,167
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 42,049 4,171 7,679
CAPITAL TRANSACTIONS:
Transfer of premium 467,059 185,490 161,291
Contract terminations -- -- --
Policy account value charges (74,883) (27,407) (27,362)
Sub-account transfers 115,387 43,238 39,485
--------- --------- ---------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 507,563 201,321 173,414
--------- --------- ---------
TOTAL INCREASE IN NET ASSETS 549,612 205,492 181,093
NET ASSETS, beginning of the year 1,814 -- 17
--------- --------- ---------
NET ASSETS, at end of the year $ 551,426 $ 205,492 $ 181,110
--------- --------- ---------
UNITS ISSUED AND REDEEMED
Beginning balance 182 -- 2
Units issued 58,200 23,977 21,957
Units redeemed 13,146 4,406 4,969
--------- --------- ---------
Ending balance 45,236 19,571 16,990
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
STRONG VAN ECK
---------------------------------------------------- ----------------
INTERNATIONAL AGGRESSIVE HARD
INCOME BALANCE GROWTH GROWTH ASSETS / METALS
--------- --------- ------ --------- ---------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Investment Income
Dividends $ 74 $ 5,750 $ 883 $ 1,846 --
Mortality and expense charge (32) (241) (1,189) (174) ($ 244)
--------- --------- --------- --------- ---------
Net Investment Income (Loss) 42 5,509 (306) 1,672 (244)
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares 1 238 878 (1,036) (1,312)
Unrealized appreciation (depreciation)
of investments (85) (2,308) 2,278 1,862 4,499
--------- --------- --------- --------- ---------
Net Gain (Loss) on Investments (84) (2,070) 3,156 826 3,187
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS (42) 3,439 2,850 2,498 2,943
CAPITAL TRANSACTIONS:
Transfer of premium 10,632 79,588 393,723 58,715 77,901
Contract terminations -- -- -- -- --
Policy account value charges (808) (8,635) (63,486) (13,702) (12,527)
Sub-account transfers 128 12,688 110,253 29,439 18,762
--------- --------- --------- --------- ---------
NET INCREASE IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 9,952 83,641 440,490 74,452 84,136
--------- --------- --------- --------- ---------
TOTAL INCREASE IN NET ASSETS 9,910 87,080 443,340 76,950 87,079
NET ASSETS, beginning of the year -- -- 23 11 918
--------- --------- --------- --------- ---------
NET ASSETS, at end of the year $ 9,910 $ 87,080 $ 443,363 $ 76,961 $ 87,997
--------- --------- --------- --------- ---------
UNITS ISSUED AND REDEEMED
Beginning balance -- -- 2 1 93
Units issued 1,081 9,163 50,321 10,758 10,494
Units redeemed 97 1,347 10,560 3,051 3,027
--------- --------- --------- --------- ---------
Ending balance 984 7,816 39,763 7,708 7,560
========= ========= ========= ========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
ACACIA NATIONAL VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - ORGANIZATION AND DESCRIPTION OF OPERATIONS
The Acacia National Variable Life Insurance Separate Account I (the Account)
began operations on December 1, 1995 as a separate investment account within
Acacia National Life Insurance Company (the Company) to receive and invest net
premiums paid under a flexible premium variable life insurance policy (the
Policy). The Policy allows for flexible premium deposits, as payments may be
made with varying amounts and frequency within stated limitations. The primary
purpose of the policy is to provide life insurance protection in the event of
the insured's death.
The Company is a member of the Acacia Group which includes Acacia Life Insurance
Company (known prior to June 30, 1997 as Acacia Mutual Life Insurance Company)
and its other wholly-owned subsidiaries: Acacia Financial Corporation (AFCO) and
its subsidiaries, Acacia Federal Savings Bank F.S.B., Calvert Group, Ltd. and
The Advisors Group, Inc.
Assets of the Account are the property of the Company. However, those assets
attributable to the policies are not chargeable with liabilities arising out of
any other business which the Company may conduct. The Account operates and is
registered as a unit investment trust under the Investment Company Act of 1940.
The net assets maintained in the Account attributable to the policies provide
the base for the periodic determination of the increased or decreased benefits
under the policies.
NOTE 2 - SEPARATE ACCOUNT ASSETS
As of December 31, 1997, the Account has nineteen separate sub-accounts which
are invested as directed by the contract owner. The Account purchases shares of
each of the sub-accounts subject to the terms of the Participation Agreements
between the Company and the sub-accounts. Shares of each sub-account are offered
at a price equal to their respective net asset values per share, without sales
charge, which represents their fair value. Calvert Asset Management Company,
Inc., an indirectly wholly-owned subsidiary of AFCO, serves as an investment
advisor to the Calvert Variable Series Inc. Calvert Social Money Market, Calvert
Social Small Cap, Calvert Social Mid Cap and Calvert Social International Equity
Portfolios. The Advisors Group, Inc. acts as a principal underwriter of the
policies pursuant to an underwriting agreement with the Company.
In addition to the nineteen separate sub-accounts, a contract owner may also
allocate net premiums to the General Account, which is part of the Company.
Because of exclusionary provisions, interests in the General Account have not
been registered as securities under the Securities Act of 1933 and the General
Account has not been registered as an investment company under the Investment
Company Act of 1940.
5
<PAGE>
ACACIA NATIONAL VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I
NOTES TO FINANCIAL STATEMENTS
The sub-accounts and the respective portfolios in effect during 1997 were as
follows:
<TABLE>
<CAPTION>
Sub-Account Portfolio Invested
----------- ------------------
<S> <C>
Calvert Variable Series, Inc.:
Social Money Market - Calvert Social Money Market
Social Balanced - Calvert Social Balanced
Social Strategic Growth - Calvert Small Cap Growth
Social Managed Growth - Calvert Mid Cap Growth
Social Global - Calvert Social International Equity
Alger American:
Large Cap Growth - Growth
Mid Cap Growth - Mid Cap Growth
Small Cap Growth - Small Capitalization
S & P 500 Index Dreyfus Stock Index
The Neuberger & Berman Advisers
Management Trust:
Income - Limited Maturity Bond
Growth - Growth
Strong:
Income (closed November, 1997) - Advantage Fund II
Balance (closed November 1997) - Asset Allocation Fund II
International Growth - International Stock Fund II
Aggressive Growth - Discovery Fund II
Hard Assets / Metals Van Eck Worldwide Hard Assets Fund
Oppenheimer Variable Account Funds:
High Income - High Income Fund
Aggressive Growth - Aggressive Growth Fund
Large Cap Growth - Growth Fund
Balanced - Growth & Income Fund
Managed Income - Strategic Bond Fund
</TABLE>
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Account in the preparation of the financial statements in
conformity with generally accepted accounting principles.
6
<PAGE>
ACACIA NATIONAL VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I
NOTES TO FINANCIAL STATEMENTS
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENTS VALUATION
Investments are stated at market value based on the net asset value of the
underlying investment in each of the respective funds. Net asset values are
based upon market quotations of the securities held in each of the corresponding
portfolios of the sub-accounts.
ACCOUNTING FOR INVESTMENTS
Investment transactions are accounted for on the trade date. Dividend income is
recorded on the exdividend date. Identified cost is the basis followed in
determining the cost of investments sold for financial statement purposes.
FEDERAL INCOME TAXES
The operations of the Account are taxed as part of the total operations of the
Company. The Company is taxed as a life insurance company under the Internal
Revenue Code. Under existing law, no taxes are payable on investment income or
realized capital gains of the Account.
NOTE 4 - RELATED PARTY TRANSACTIONS
The following charges are deducted by the Company from the Account's net assets
attributed to each policy:
Premium Expense Charge: Premiums are reduced by a charge equal to
2.25% of each premium to compensate the Company for expenses
associated with state premium taxes of the policy.
Policy Account Value Charges: The policy account value will be reduced
by a monthly deduction equal to the sum of the cost of insurance
charge, the cost of any optional insurance benefits added by a rider
and a monthly administrative charge equal to $27 per month for the
first policy year and $8 each month thereafter. The cost of insurance
will vary based upon a number of factors including the face amount of
the policy, issue age, attained age and rate class of the insured. The
net investment income includes charges for investment management fees
and other expenses incurred by the Portfolios.
Surrender Charges: A surrender charge will be assessed at 30% of
premiums received up to target premium, as defined in the
prospectus, for years 1-7 decreasing to 10% per year until
reaching zero in year 10. Partial Surrender Charges: During the
surrender charge period for the policy, there will be a charge
for a partial surrender equal to 8% of the amount withdrawn or
$25, whichever is greater.
7
<PAGE>
ACACIA NATIONAL VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I
NOTES TO FINANCIAL STATEMENTS
Mortality and Expense Charge: A charge not to exceed an annual
rate of 0.90% for years 1-15, decreasing 0.05% per year for years
16 and thereafter until the annual rate reaches 0.45%, of the
average daily net asset value of the Account applicable to
policies issued when each rate was in effect. These charges are
deducted by the Company in return for its assumption of expenses
arising from adverse mortality experience and excess
administrative expenses in connection with the policies issued.
NOTE 5 - PURCHASES AND SALES
The cost of purchases and proceeds from sales for the two years ended December
31,1997 and 1996 for the sub-accounts are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Cost of Proceeds Cost of Proceeds
Portfolio Purchases from Sales Purchases from Sales
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Social Money Market $1,576,665 $1,356,488 $1,015,455 $ 865,453
Social Balanced 23,228 2,786 3,043 67
Social Strategic Growth 56,820 28,943 26,292 6,168
Social Managed Growth 12,865 1,060 --- ---
Social Global 23,900 1,653 --- ---
Large Cap Growth 850,686 379,075 411,411 105,948
Mid Cap Growth 323,556 112,388 124,641 36,438
Small Cap Growth 903,714 569,009 528,237 127,156
S & P 500 Index 2,121,116 790,528 655,166 147,891
Income 938,144 295,076 245,923 45,196
Growth 600,065 210,959 223,540 50,730
Income (closed November, 1997) 7,191 17,186 10,941 981
Balance (closed November, 1997) 147,277 236,665 103,483 14,369
International Growth 1,446,217 372,845 556,992 117,229
Aggressive Growth 184,328 65,795 104,590 29,585
Hard Assets / Metals 267,866 91,078 119,090 33,537
High Income 87,229 17,840 --- ---
Aggressive Growth 456,233 101,407 --- ---
Large Cap Growth 700,305 117,146 --- ---
Balanced 89,341 17,430 --- ---
Managed Income 24,834 5,280 --- ---
</TABLE>
8
<PAGE>
AUDITED FINANCIAL STATEMENTS (STATUTORY BASIS)
ACACIA NATIONAL LIFE INSURANCE COMPANY
DECEMBER 31, 1997 AND 1996
<TABLE>
<S> <C>
Report of Independent Accountants............................................1-2
Statements of Financial Condition..............................................3
Statements of Operations and Changes
in Capital and Surplus......................................................4
Statements of Cash Flow........................................................5
Notes to Financial Statements.............................................6 - 17
Supplemental Schedule of Selected Financial Data.........................18 - 20
</TABLE>
<PAGE>
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Acacia National Life Insurance Company
We have audited the accompanying statutory statements of financial condition of
Acacia National Life Insurance Company as of December 31, 1997 and 1996, and the
related statutory statements of operations and changes in capital and surplus,
and cash flow for the years then ended. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Note 2 to the financial statements, these financial
statements were prepared in conformity with accounting practices prescribed or
permitted by the Bureau of Insurance, State Corporation Commission of the
Commonwealth of Virginia, which practices differ from generally accepted
accounting principles. The effects on the financial statements of the variances
between the statutory basis of accounting and generally accepted accounting
principles are material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Acacia National Life Insurance Company as of December 31, 1997 and 1996 or
the results of its operations or its cash flow for the years then ended.
In our opinion, however, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and surplus
of Acacia National Life Insurance Company as of December 31, 1997 and 1996, and
the results of its operations and its cash flow for the years then ended, on the
basis of accounting described in Note 2.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Supplemental Schedule of Selected
Financial Data is presented for purposes of additional analysis and is not a
required part of the basic financial statements, but is supplementary
information required by the National Association of Insurance Commissioners.
Such information has been subjected to the auditing procedures applied in the
audit of the basic financial statements and in our opinion is fairly stated, in
all material respects, in relation to the basic financial statements taken as a
whole.
/s/ COOPERS & LYBRAND LLP
Washington, D.C.
February 24, 1998
2
<PAGE>
ACACIA NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL CONDITION (STATUTORY BASIS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Debt securities $570,348 $596,394
Equity securities 2,373 2,405
Mortgage loans 5,031 47
Policy loans 8,100 8,091
Cash and cash equivalents 13,090 16,246
Accrued investment income 9,992 10,520
Separate account assets 31,095 6,433
Other assets 2,820 2,671
-------- --------
TOTAL ASSETS $642,849 $642,807
======== ========
LIABILITIES
Insurance and annuity reserves $508,884 $539,065
Deposit administration contracts and other
deposit reserves 26,459 25,659
Other policyowner funds 28,666 19,633
Policy claims 3,143 2,821
Interest maintenance reserve 2,587 2,230
Asset valuation reserve 5,188 5,712
Separate account liabilities 31,095 6,433
Other liabilities 4,321 11,613
-------- --------
TOTAL LIABILITIES 610,343 613,166
CAPITAL AND SURPLUS
Preferred stock, 8% non-voting, non-cumulative, $1,000 par value,
10,000 shares authorized; 6,000 shares issued and outstanding 6,000 6,000
Common stock, $170 par value; 15,000 shares authorized
issued and outstanding 2,550 2,550
Gross paid-in surplus 13,450 13,450
Surplus 10,506 7,641
-------- --------
TOTAL CAPITAL AND SURPLUS 32,506 29,641
-------- --------
TOTAL LIABILITIES AND CAPITAL AND SURPLUS $642,849 $642,807
======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
3
<PAGE>
ACACIA NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN CAPITAL AND SURPLUS (STATUTORY BASIS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
INCOME
Premiums and annuity considerations $ 59,646 $ 42,444
Net investment income 47,774 45,701
Supplementary contracts 16,809 12,589
Other income 1,042 3,845
--------- ---------
125,271 104,579
BENEFITS AND EXPENSES
Benefits for policyholders and beneficiaries:
Benefit payments, surrenders, and withdrawals 108,148 114,085
Decrease in insurance and annuity reserves (21,269) (24,741)
Increase in deposit administration funds 800 977
--------- ---------
87,679 90,321
Commissions to managing directors
and account managers 5,202 3,146
Net transfers to separate accounts 20,387 --
Operating expenses allocated from Acacia Life 12,724 13,539
Other operating expenses and taxes 1,247 162
--------- ---------
127,239 107,168
--------- ---------
NET (LOSS) GAIN FROM OPERATIONS BEFORE FEDERAL
INCOME TAXES AND REALIZED CAPITAL LOSSES (1,968) (2,589)
Federal income tax benefit (expense) 2,511 (642)
--------- ---------
NET GAIN (LOSS) FROM OPERATIONS BEFORE
REALIZED CAPITAL GAINS (LOSSES) 543 (3,231)
REALIZED CAPITAL GAINS (LOSSES)
Net realized capital gains 1,183 339
Capital gains taxes (521) (335)
Transferred to interest maintenance reserve (516) (224)
--------- ---------
NET REALIZED CAPITAL GAINS (LOSSES) 146 (220)
--------- ---------
NET INCOME (LOSS) 689 (3,451)
Capital and surplus, beginning of year 29,641 26,775
Issuance of preferred stock -- 6,000
Contribution of gross paid-in surplus -- 6,000
Change in valuation basis of reserves (119) --
Change in asset valuation reserve 524 (1,068)
Change in net unrealized capital gains 495 323
Change in non-admitted assets 1,276 (4,938)
--------- ---------
CAPITAL AND SURPLUS, END OF YEAR $ 32,506 $ 29,641
========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
ACACIA NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOW (STATUTORY BASIS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
1997 1996
-------- --------
OPERATING ACTIVITIES (IN THOUSANDS)
<S> <C> <C>
Premiums and annuity considerations $ 59,646 $ 42,453
Other premiums, considerations and deposits 16,809 12,589
Net investment income received 47,368 43,220
Cash and short-term investments received from
execution of assumption reinsurance agreement -- 52,671
Annuity and other fund deposits 2,167 4,069
Benefits paid to policyholders (10,980) (10,092)
Commissions and other expenses paid (20,698) (16,601)
Surrender benefits and other fund withdrawals paid (96,822) (103,994)
Net transfers to separate accounts (22,815) --
Federal and state income tax paid (1,093) (41)
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (26,418) 24,274
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds 68,392 52,368
Equities 756 191
Mortgage loans 16 --
Partnership and other interests 240 --
Cost of investments acquired:
Bonds (40,619) (92,269)
Mortgage loans (5,000) --
Partnership and other interests (1,158) (435)
Net change in policy loans and premium notes (9) 210
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 22,618 (39,935)
FINANCING ACTIVITIES
Cash provided:
Issuance of preferred stock -- 6,000
Capital contribution -- 6,000
Other provisions (applications) 644 (80)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 644 11,920
DECREASE IN CASH AND CASH EQUIVALENTS (3,156) (3,741)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,246 19,987
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 13,090 $ 16,246
======== ========
NON-CASH TRANSACTIONS:
Non-cash items received from execution of assumption
reinsurance agreement:
Investment in bonds -- $ 68,429
Policy loans -- $ 1,600
Annuity reserve liabilities -- $127,851
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
ACACIA NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - ORGANIZATION AND DESCRIPTION OF OPERATIONS
Acacia National Life Insurance Company (the Company) is a wholly-owned
subsidiary of Acacia Life Insurance Company (Acacia Life), known prior to June
30, 1997 as Acacia Mutual Life Insurance Company. Acacia Life is a wholly-owned
subsidiary of Acacia Financial Group, Ltd (AFG) which is wholly owned by Acacia
Mutual Holding Corporation (AMHC). AMHC and AFG were formed in 1997 pursuant to
a plan of reorganization whereby Acacia Life became a stock life insurance
company. AMHC and its wholly-owned subsidiaries are collectively known as The
Acacia Group (the Group). Other members of the Group include Acacia Financial
Corporation and its subsidiaries, Acacia Federal Savings Bank, Calvert Group,
Ltd. and The Advisors Group, Inc.
The Company underwrites and markets deferred and immediate annuities and life
insurance products within the United States and is licensed to operate in 46
states and the District of Columbia. On December 1, 1995 and September 9, 1996,
respectively, operations began for the Acacia National Variable Life Insurance
Separate Account I and Acacia National Variable Annuity Separate Account II
which are separate investment accounts within the Company.
NOTE 2 - SIGNIFICANT ACCOUNTING PRACTICES
The Company, domiciled in Virginia, prepares its statutory financial statements
in accordance with statutory accounting practices (SAP) prescribed or permitted
by the Bureau of Insurance, State Corporation Commission of the Commonwealth of
Virginia. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners (NAIC), as
well as state laws, regulations, and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. Such practices vary, in some respects, from generally accepted
accounting principles (GAAP). The significant statutory basis accounting
practices followed by the Company are described below.
The preparation of the financial statements in conformity with statutory
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
6
<PAGE>
In general, the SAP basis of accounting varies in certain respects from GAAP in
that:
o Acquisition costs incurred at policy issuance, such as commissions and
other costs in connection with acquiring new business, are charged to
expense in the year in which they are incurred, rather than being deferred
and amortized over the periods benefited.
o Certain assets designated as "non-admitted' are excluded from the balance
sheets by a direct charge to unassigned surplus.
o The asset valuation reserve and interest maintenance reserve are not
recorded for GAAP purposes.
o Federal income taxes are computed in accordance with those sections of the
Internal Revenue Code applicable to life insurance companies and are based
solely on currently taxable income. Under GAAP, the recognition of deferred
tax liabilities and assets is required for the expected future tax
consequences of temporary differences between the carrying amounts for
financial statements purposes and the tax basis of other assets and
liabilities.
o The liability for policy reserves is based on statutory assumptions for
interest and mortality without considerations of withdrawals, rather than
assumptions for interest, mortality and withdrawals based on actual
experience.
o Premiums for universal life, single premium non-life contingent immediate
annuity and single premium deferred annuity contracts are reported as
premium income or fund deposits rather than additions to liabilities.
o Reinsurance ceded to other companies is reported on a net basis for premium
revenue, benefits and underwriting, acquisition and insurance expenses, and
policy reserves and accruals. Under GAAP, policy reserves and claim
liabilities ceded are reported separately in the balance sheet as a
reinsurance recoverable asset.
o Debt securities are generally carried at amortized costs, whereas, under
GAAP, investments in debt securities are stated at amortized cost or
current market values depending on the classification pursuant to FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Any difference between cost and current market values of debt
securities classified as available-for-sale, net of deferred income taxes
or benefit and related deferred acquisition cost effects, is reported as a
separate component in GAAP shareholder's equity and does not affect net
income.
7
<PAGE>
The impact of the differences between SAP and GAAP basis reporting on Net Income
and Capital and Surplus is as follows:
($ IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
NET CAPITAL NET CAPITAL
INCOME AND SURPLUS INCOME AND SURPLUS
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
AS REPORTED UNDER SAP: $ 689 $ 32,506 $ (3,451) $ 29,641
Adjustments:
Deferred policy acquisition costs (66) 53,937 (663) 62,324
AVR and IMR 357 7,775 17 7,942
Deferred Federal income taxes (2,372) (19,561) (307) (15,244)
Net policyholder liabilities 731 (9,813) 5,287 (10,664)
Investments -- 22,521 -- 9,135
Other 1,289 (456) 444 (467)
-------- -------- -------- --------
AMOUNTS UNDER GAAP $ 628 $ 86,909 $ 1,327 $ 82,667
======== ======== ======== ========
</TABLE>
VALUATION OF ASSETS
Debt and equity securities are valued in accordance with rules prescribed by the
NAIC. Debt securities are generally stated at amortized cost, preferred stocks
at cost and common stocks at market value. Collateralized mortgage obligations
are valued using the prospective method and currently anticipated prepayment
assumptions, based on data from current actual experience. Mortgage loans and
policy loans are recorded at their unpaid balance. Discount or premium on debt
securities is amortized using the interest method. Unrealized capital gains and
losses are reflected directly in surplus and are not included in net income.
Realized gains and losses are determined on a first-in, first-out basis and are
presented in the statements of operations, net of taxes and excluding amounts
transferred to the Interest Maintenance Reserve.
As prescribed by the NAIC, the Company maintains an Asset Valuation Reserve
(AVR). The AVR is computed in accordance with a prescribed formula. The purpose
of the AVR is to stabilize surplus against fluctuations in the value of stocks
and credit-related declines in the value of bonds, mortgage loans and other
invested assets. Changes to the AVR are charged or credited directly to surplus.
As also prescribed by the NAIC, the Company maintains an Interest Maintenance
Reserve, which represents the net accumulated unamortized realized capital gains
and losses attributable to changes in the general level of interest rates on
sales of fixed income investments, principally bonds and mortgage loans. Such
gains or losses are amortized into income using schedules prescribed by the NAIC
over the remaining period to expected maturity of the individual securities
sold.
8
<PAGE>
CASH EQUIVALENTS
The Company considers overnight repurchase agreements, money market funds and
short-term investments with original maturities of less than three months at the
time of acquisition to be cash equivalents. Cash equivalents are carried at
cost.
SEPARATE ACCOUNTS
Separate Accounts are assets and liabilities associated with certain life
insurance and annuity contracts, for which the investment risk lies solely with
the holder of the contract rather than the Company. Consequently, the insurer's
liability for these Separate Accounts equals the value of the Separate Account
assets. Investment income and realized gains (losses) related to Separate
Accounts are excluded from the statements of operations and cash flows. Assets
held in Separate Accounts are primarily shares in mutual funds, which are
carried at fair value, based on the quoted net asset value per share.
NON-ADMITTED ASSETS
Certain assets, primarily goodwill, are designated as "non-admitted" under SAP.
The cost of these assets is charged directly to surplus. Non-admitted balances
totaled $3,662,000 and $4,938,000 at December 31, 1997 and 1996, respectively.
POLICY RESERVES
Life policy reserves are computed by using the Commissioners Reserve Valuation
Method and the Commissioners Standard Ordinary Mortality table. Annuity reserves
are calculated using the Commissioners Annuity Reserve Valuation Method and the
maximum valuation interest rate; for annuities with life contingencies, the
prescribed valuation mortality table is used. Policy claims in process of
settlement include provision for reported claims and claims incurred but not
reported. The valuation rates for fixed immediate and deferred annuities range
between 6.0% and 11.25% as of December 31, 1997.
FEDERAL INCOME TAXES
The Company files a consolidated tax return with the Group. Under statutory
accounting practices, no provision is made for deferred federal income taxes
related to temporary differences between statutory and taxable income. Such
temporary differences arise primarily from Internal Revenue Code requirements
regarding the capitalization and amortization of deferred policy acquisition
costs, calculation of life insurance reserves and recognition of realized gains
or losses on sales of debt securities.
9
<PAGE>
PREMIUMS AND RELATED EXPENSE
Premiums are recognized as income over the premium paying period of the
policies. Annuity considerations and fund deposits are included in revenue as
received. Commissions and other policy acquisition costs are expensed as
incurred.
REINSURANCE
The Company cedes reinsurance to provide for greater diversification of
business, additional capacity for growth as well as a way for management to
control exposure to potential losses arising from large risks. A significant
portion of reinsurance is ceded to Acacia Life.
The excess of the amount of liabilities assumed over the amount of assets
received upon execution of an assumption reinsurance agreement is recorded as
goodwill, a non-admitted asset, and charged directly to surplus. Goodwill is
being amortized over a period of ten years using the interest method.
RECLASSIFICATIONS
Certain reclassifications of 1996 amounts were made to conform with the 1997
financial statement presentation.
NOTE 3 - INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS
FAIR VALUES OF FINANCIAL INSTRUMENTS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities $570,348 $610,928 $596,394 $620,368
Equity securities 2,373 2,713 2,405 2,773
Mortgage loans 5,031 5,084 47 50
Cash and cash equivalents 13,090 13,090 16,246 16,246
FINANCIAL LIABILITIES:
Investment-type insurance
contracts $407,643 $475,678 $440,645 $512,452
</TABLE>
10
<PAGE>
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
INVESTMENT SECURITIES: Fair values for fixed maturity securities (including
redeemable preferred stocks and mortgage backed securities) are based on quoted
market prices, where available. For fixed maturity securities not actively
traded and for private placements, fair values are estimated using values
obtained from independent pricing services. The fair values for equity
securities are based on quoted market prices.
MORTGAGE LOANS: The fair values for mortgage loans are estimated using
discounted cash flow analysis, based on interest rates currently being offered
for similar loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
CASH AND CASH EQUIVALENTS: The carrying amount approximates fair values because
of the short maturity of these instruments.
POLICY LOANS: Policy loans are an integral component of insurance contracts and
have no maturity dates. Future cash flows are uncertain and difficult to
predict. Therefore, management has concluded that it is not practical to
estimate their fair value.
INVESTMENT CONTRACTS: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued. The carrying values for the deposit administration contracts and
supplementary contracts without life contingencies approximate their fair
values.
INVESTMENTS
Major categories of investment income for the years ended December 31 are
summarized as follows:
($ IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Fixed maturity securities $ 47,086 $ 44,932
Common stock -- 54
Preferred stock 60 81
Mortgage loans 110 4
Policy loans 502 436
Other 1,001 1,544
-------- --------
Gross investment income 48,759 47,051
Investment expenses (1,143) (1,558)
Interest maintenance reserve amortization 158 208
-------- --------
Net investment income $ 47,774 $ 45,701
======== ========
</TABLE>
11
<PAGE>
Realized gains (losses) on investments for the years ended December 31 are
summarized as follows:
($ IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Available for sale fixed maturity securities
Gross realized gains 963 355
Gross realized losses (11) (16)
Equity securities
Gross realized gains 230 --
Gross realized losses -- --
Other invested assets 1 --
------- -------
$ 1,183 $ 339
======= =======
</TABLE>
The statement values and estimated fair values of the Company's investments in
debt securities are as follows:
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS GROSS
STATEMENT UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1997
U.S. government and agencies $ 87,514 $ 8,228 $ -- $ 95,742
Other government 30,943 856 (73) 31,726
Mortgaged backed securities 150,831 5,592 (402) 156,021
Corporate 301,060 26,994 (615) 327,439
--------- --------- --------- ---------
$ 570,348 $ 41,670 $ (1,090) $ 610,928
========= ========= ========= =========
AT DECEMBER 31, 1996
U.S. government and agencies $ 117,448 $ 7,161 $ (28) $ 124,581
Other government 3,300 23 -- 3,323
Mortgaged backed securities 153,001 2,641 (1,627) 154,015
Corporate 322,645 17,503 (1,699) 338,449
--------- --------- --------- ---------
$ 596,394 $ 27,328 $ (3,354) $ 620,368
========= ========= ========= =========
</TABLE>
12
<PAGE>
The amortized cost and estimated fair value of debt securities, by contractual
maturity at December 31, 1997 are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without prepayment penalties.
($ IN THOUSANDS)
<TABLE>
<CAPTION>
STATEMENT FAIR
VALUE VALUE
-------- --------
<S> <C> <C>
Maturities in 1998 $ 16,980 $ 17,243
In 1999 to 2002 121,926 130,953
In 2003 to 2007 153,737 163,299
After 2007 126,874 143,412
Mortgaged-backed securities 150,831 156,021
-------- --------
$570,348 $610,928
======== ========
</TABLE>
INVESTMENT PORTFOLIO CREDIT RISK
The Company's bond investment portfolio is predominately comprised of investment
grade securities. At December 31, 1997 and 1996, approximately $3.9 million and
$2.7 million, respectively, in debt security investments (0.7% and 0.5%,
respectively, of the total debt security portfolio) are considered "below
investment grade." Securities are classified as "below investment grade" by
utilizing rating criteria established by the NAIC.
NOTE 4 - REINSURANCE
The Company reinsures all life insurance risks over its retention limit of $10
thousand per policy under yearly renewable term insurance agreements with Acacia
Life and several other non-affiliated companies. The Company remains obligated
for amounts ceded in the event that reinsurers do not meet their obligations.
Since the reinsurance treaties are of such a nature as to pass economic risk to
the reinsurer, appropriate reductions are made from income, claims, expense and
liability items in accounting for the reinsurance ceded.
13
<PAGE>
Premiums and benefits have been reduced by amounts reinsured as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
---------- ----------
<S> <C> <C>
Premiums ceded:
Acacia Life $ 3,384 $ 3,559
Others 533 540
---------- ----------
Total premium ceded $ 3,917 $ 4,099
========== ==========
Death benefits reimbursed:
Acacia Life $ 2,989 $ 3,380
Other 277 1,841
---------- ----------
Total benefits reimbursed $ 3,236 $ 5,221
========== ==========
Amounts recoverable on paid and unpaid losses:
Acacia Life $ 643 $ 424
Other -- 24
---------- ----------
Total amounts recoverable on paid
and unpaid losses $ 643 $ 448
========== ==========
Policy reserves ceded:
Acacia Life $ 1,897 $ 3,238
Others 350 379
---------- ----------
Total policy reserves ceded $ 2,247 $ 3,617
========== ==========
Life insurance in force ceded:
Acacia Life $1,206,052 $ 926,529
Others 90,471 74,550
---------- ----------
Total life insurance in force ceded $1,296,523 $1,001,079
========== ==========
</TABLE>
During 1997, the Company terminated a reinsurance agreement whereby disability
benefits were ceded to Acacia Life. Termination of the agreement resulted in net
expense to the Company of $372,000.
ASSUMPTION REINSURANCE AGREEMENT
Effective May 31, 1996 under an assumption reinsurance agreement, the Company
assumed certain assets and liabilities relating to annuities previously
underwritten by the National American Life Insurance Company (NALICO), which had
been in rehabilitation. Under the agreement, the Company assumed fixed annuity
policies with statutory liabilities of $127.9 million. The Company received from
NALICO assets with a fair value of approximately $122.7, consisting principally
of investment grade bonds and short-term investments. The difference between
14
<PAGE>
assets acquired and liabilities assumed of $5.2 million was capitalized as
goodwill and treated as a non-admitted asset. Based on adjustments in 1997,
additional assets of $0.4 million were received and reduced the goodwill.
Approximately $1.1 million was amortized through operations during 1997 as an
offset to miscellaneous income. At December 31, 1997, the balance of goodwill
was $3.7 million.
NOTE 5 - ANNUITY RESERVES AND DEPOSIT LIABILITIES
Annuity reserves and deposit liabilities have the following withdrawal
characteristics:
($ in thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------------- ----------------------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with adjustment,
at book value less surrender charge $228,262 46% $362,603 72%
Subject to discretionary withdrawal without adjustment,
at book value (minimal or no charge) 226,606 45 107,453 21
Not subject to discretionary withdrawal provision 46,550 9 32,205 7
-------- -------- -------- --------
Total annuity actuarial reserves and deposit
fund liabilities $501,418 100% $502,261 100%
======== ======== ======== ========
</TABLE>
NOTE 6 - FEDERAL INCOME TAXES
Under a tax sharing agreement between the Company and other members of the
Group, Acacia Life reimburses or receives from the Company an amount
representing the taxes that would have been paid or refunded had the Company
filed a separate income tax return.
Under the statutes in effect before the Deficit Reduction Act of 1984, a portion
of "net income" was not subject to current income taxation for stock life
insurance companies, but was accumulated for tax purposes in a memorandum tax
account. The 1984 Act prohibited any additions to the memorandum tax account
after 1983. The balance in this account for the Company was $6.6 million at
December 31, 1997 and 1996. In the event that either cash distributions from the
Company to Acacia Life or the balance in the memorandum tax account exceeds
certain stated minimums, such amounts distributed would become subject to
federal income taxes at rates then in effect.
15
<PAGE>
NOTE 7 - OTHER RELATED PARTY TRANSACTIONS
The Company has entered into an agreement whereby Acacia Life provides such
services and facilities as are necessary for the operation of the Company. Net
amounts payable to Acacia Life at December 31, 1997 and 1996 are $1.5 million
and $5.5 million, respectively, and are included in other liabilities.
During 1997, the Company purchased participations of $5 million in two
commercial mortgage loans from Acacia Life. The participations were purchased at
the unpaid principal balance.
NOTE 8 - CONTINGENT LIABILITIES
The Company is involved in various lawsuits that have arisen in the ordinary
course of business. Management believes that its defenses are meritorious and
the eventual outcome of these lawsuits will not have a material effect on the
Company's financial position.
The Company is also subject to insurance guaranty laws in the states in which it
does business. Periodically, the Company is assessed by various state guaranty
funds as part of those funds' activities to collect funds from solvent insurance
companies to cover certain losses to policyholders that resulted from the
insolvency or rehabilitation of other insurance companies. The Company has
established an estimated liability for guaranty fund assessments for those
insolvencies or rehabilitations that have actually occurred prior to the balance
sheet date. For those payments made which are expected to offset future premium
taxes, an asset has been recorded. Because of the many uncertainties regarding
the amounts that will be assessed against the Company, the ultimate assessments
may vary from the estimated liability included in the accompanying financial
statements. Expected premium tax offsets, net of the estimated liability for
future assessments, at December 31, 1997 and 1996 were $359,000 and $736,000,
respectively.
NOTE 9 - CAPITAL AND DIVIDEND RESTRICTIONS
The maximum amount of annual dividends and other distributions which may be
remitted by the Company to its shareholder without prior approval of the
appropriate state insurance commissioner is subject to restrictions relating to
statutory capital and surplus and statutory gains from operations. The maximum
dividend payout which may be made in 1998 without prior approval is $ 688,503.
Regulatory risk-based capital rules require a specified level of capital
depending on the types and quality of investments held, the types of business
written and the types of liabilities maintained. Depending on the ratio of an
insurer's adjusted surplus to its risk-based capital, the insurer could be
subject to various regulatory actions ranging from increased scrutiny to
conservatorship. The Company's risk-based capital ratios for 1997 and 1996 are
significantly above the regulatory action levels.
16
<PAGE>
NOTE 10 - CAPITAL AND SURPLUS
During 1996, the Company received a $6 million capital contribution from Acacia
Life and also issued to Acacia Life $6 million of 8% non-voting, non-cumulative
preferred stock at par.
During 1997, the Company changed the valuation interest rates for certain
supplementary contracts, resulting in an increase in the liability of
approximately $700,000. Based on an agreement with the Bureau of Insurance, the
increase is being recognized evenly over three years, with $119,000 charged
directly against surplus and the remainder charged through operations.
17
<PAGE>
ACACIA NATIONAL LIFE INSURANCE COMPANY
ANNUAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1997
SUPPLEMENTAL SCHEDULE OF SELECTED FINANCIAL DATA (IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME EARNED
Government bonds $ 6,863
Other bonds (unaffiliated) 40,223
Bonds of Affiliates --
Preferred stocks (unaffiliated) 60
Preferred stocks of affiliates --
Common stocks (unaffiliated) --
Common stocks of affiliates --
Mortgage loans 110
Real estate --
Premium notes, policy loans and liens 502
Collateral loans --
Cash on hand and on deposit --
Short-term investments 896
Other invested assets 105
Derivative instruments --
Aggregate write-ins for investment income --
----------
Gross investment income $ 48,759
==========
REAL ESTATE OWNED - BOOK VALUE LESS ENCUMBRANCES --
==========
MORTGAGE LOANS - BOOK VALUE:
Farm mortgages --
Residential mortgages $ 46
Commercial mortgages 4,985
----------
Total mortgage loans $ 5,031
==========
MORTGAGE LOANS BY STANDING - BOOK VALUE:
Good standing $ 5,031
==========
Good standing with restructured terms --
==========
Interest overdue more than three months, not in foreclosure --
==========
Foreclosure in process --
==========
OTHER LONG TERM ASSETS - STATEMENT VALUE $ 699
==========
COLLATERAL LOANS --
==========
BONDS AND STOCKS OF PARENTS, SUBSIDIARIES AND AFFILIATES - BOOK VALUE:
Bonds --
==========
Preferred stocks --
==========
Common stocks --
==========
</TABLE>
18
<PAGE>
ACACIA NATIONAL LIFE INSURANCE COMPANY
ANNUAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1997
SUPPLEMENTAL SCHEDULE OF SELECTED FINANCIAL DATA (IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
BONDS AND SHORT-TERM INVESTMENTS BY CLASS AND MATURITY:
BONDS AND SHORT-TERM INVESTMENTS BY MATURITY - STATEMENT VALUE
Due within one year $ 42,315
Over 1 year through 5 years 162,771
Over 5 years through 10 years 206,802
Over 10 years through 20 years 99,753
Over 20 years 69,582
----------
Total by Maturity $ 581,223
==========
BONDS AND SHORT-TERM INVESTMENTS BY CLASS - STATEMENT VALUE
Class 1 $ 341,820
Class 2 212,120
Class 3 23,348
Class 4 1,980
Class 5 1,955
Class 6 --
----------
Total by Class $ 581,223
==========
TOTAL BONDS AND SHORT-TERM INVESTMENTS PUBLICLY TRADED $ 551,865
==========
TOTAL BONDS AND SHORT-TERM INVESTMENTS PRIVATELY PLACED $ 29,358
==========
PREFERRED STOCKS - STATEMENT VALUE $ 546
==========
COMMON STOCKS - MARKET VALUE $ 1,827
==========
SHORT-TERM INVESTMENTS - BOOK VALUE $ 10,875
==========
FINANCIAL OPTIONS OWNED - STATEMENT VALUE --
==========
FINANCIAL OPTIONS WRITTEN AND IN-FORCE - STATEMENT VALUE --
==========
FINANCIAL FUTURES CONTRACTS OPEN - CURRENT PRICE --
==========
CASH ON DEPOSIT $ 2,215
==========
LIFE INSURANCE IN FORCE:
Industrial --
==========
Ordinary $1,463,791
==========
Credit Life --
==========
Group Life --
==========
AMOUNT OF ACCIDENTAL DEATH INSURANCE IN FORCE UNDER ORDINARY POLICIES $ 103,610
==========
LIFE INSURANCE POLICIES WITH DISABILITY PROVISIONS IN FORCE
Industrial --
==========
Ordinary $ 587
==========
Credit Life --
==========
Group Life --
==========
</TABLE>
19
<PAGE>
ACACIA NATIONAL LIFE INSURANCE COMPANY
ANNUAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1997
SUPPLEMENTAL SCHEDULE OF SELECTED FINANCIAL DATA (IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
SUPPLEMENTARY CONTRACTS IN FORCE:
Ordinary - Not Involving Life Contingencies
Amount on Deposit $ 3,412
==========
Income Payable $ 25,492
==========
Ordinary - Involving Life Contingencies
Income Payable $ 9,975
==========
Group - Not Involving Life Contingencies
Amount on Deposit --
Income Payable --
==========
Group - Involving Life Contingencies
Income Payable --
==========
ANNUITIES -- ORDINARY
Immediate - Amount of Income Payable $ 3,119
==========
Deferred - Fully Paid - Account Balance $ 388,585
==========
Deferred - Not Fully Paid - Account Balance $ 49,131
==========
ANNUITIES -- GROUP
Amount of Income Payable $ 18
==========
Fully Paid - Account Balance --
==========
Not Fully Paid - Account Balance $ 300
==========
ACCIDENT AND HEALTH INSURANCE - PREMIUM IN FORCE:
Ordinary --
==========
Group --
==========
Credit --
==========
DEPOSIT FUNDS AND DIVIDEND ACCUMULATIONS:
Deposits Funds - Account Balance $ 26,459
==========
Dividend Accumulations - Account Balance --
==========
<PAGE>
CLAIM PAYMENTS - YEAR ENDED DECEMBER 31, 1997:
Group Accident and Health
1997 --
==========
1996 --
==========
1995 --
==========
Other Accident and Health
1997 --
==========
1996 --
==========
1995 --
==========
Other Coverage that use developmental methods to calculate claims reserves
1997 --
==========
1996 --
==========
1995 --
==========
</TABLE>
20
