-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SmXL9iVgv0cZ7k9/rFOXV8/VlgYVux3d/Ag2YkJHw/5cEDOFMtwy5jsY8qbW1wxK oS26NkLWwcsBbRMRYJCN0A== 0000950135-96-001257.txt : 19960304 0000950135-96-001257.hdr.sgml : 19960304 ACCESSION NUMBER: 0000950135-96-001257 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19960301 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NASL VARIABLE ACCOUNT CENTRAL INDEX KEY: 0000753892 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-76162 FILM NUMBER: 96529776 BUSINESS ADDRESS: STREET 1: 116 HUNTINGTON AVE CITY: BOSTON STATE: MA ZIP: 02111 BUSINESS PHONE: 6174396960 MAIL ADDRESS: STREET 1: 116 HUNTINGTON AVE CITY: BOSTON STATE: MA ZIP: 02116 485APOS 1 NASL VARIABLE ACCOUNT (V20/21) 1 Registration No. 33-76162 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 POST-EFFECTIVE AMENDMENT NO. 2 NASL VARIABLE ACCOUNT (Exact name of Registrant) NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (Name of Depositor) 116 Huntington Avenue Boston, Massachusetts 02116 (Address of Depositor's Principal Executive Offices) (617) 266-6008 (Depositor's Telephone Number Including Area Code) James D. Gallagher Vice President, Secretary Copy to: and General Counsel J. Sumner Jones, Esq. North American Security Life Jones & Blouch Insurance Company 2100 Pennsylvania Avenue, N.W. 116 Huntington Avenue Washington, DC 20037 Boston, Massachusetts 02116 (Name and Address of Agent for Service) Registrant has registered an indefinite amount of securities under the Securities Act of 1933 pursuant to Rule 24f-2. The notice was required pursuant to Rule 24f-2 for the year ended December 31, 1995 was filed on February 28, 1996. ----------------------- It is proposed that this filing will become effective: immediately upon filing pursuant to paragraph (b) --- on _________, 1995 pursuant to paragraph (b) --- X 60 days after filing pursuant to paragraph (a) --- on (date) pursuant to paragraph (a) of Rule 485 --- 2 NASL VARIABLE ACCOUNT CROSS REFERENCE TO ITEMS REQUIRED BY FORM N-4
N-4 Item Caption in Prospectus Part A --------------------- - -------- 1......................... Cover Page 2......................... Special Terms 3......................... Summary 4......................... Values; Performance Data; Financial Statements 5......................... General Information about North American Security Life Insurance Company, NASL Variable Account and NASL Series Trust 6......................... Charges and Deductions; Withdrawal Charge; Reduction or Elimination of Withdrawal Charge; Administration Fees; Reduction or Elimination of Annual Administration Fee; Mortality and Expense Risk Charge; Taxes; Appendix A; Appendix B 7......................... Accumulation Provisions; Company Approval; Purchase Payments; Accumulation Units; Net Investment Factor; Transfers Among Investment Options; Telephone Transactions; Special Transfer Services-Dollar Cost Averaging; Withdrawals; Special Withdrawal Services Systematic Withdrawal Plan; Contract Owner Inquiries; Other Contract Provisions; Ownership; Beneficiary; Modification 8......................... Annuity Provisions; General; Annuity Options; Determination of Amount of the First Variable Annuity
3 Payment; Annuity Units and the Determination of Subsequent Variable Annuity Payments; Transfers After Maturity Date 9......................... Accumulation Provisions; Death Benefit Before Maturity Date; Annuity Provisions; Death Benefit on or After Maturity Date 10........................ Accumulation Provisions; Purchase Payments; Accumulation Units; Value of Accumula- tion Units; Net Investment Factor; Distribution of Contracts 11........................ Withdrawals; Restrictions under the Texas Optional Retirement Program; Accumulation Provisions; Purchase Payments; Other Contract Provisions; Ten Day Right to Review 12........................ Federal Tax Matters; Introduction; The Company's Tax Status; Taxation of Annuities in General; Diversification Requirements; Qualified Retirement Plans 13........................ Legal Proceedings 14........................ Statement of Additional Information - Table of Contents
Part B Caption in Statement of - ------ Additional Information ---------------------- 15........................ Cover Page 16........................ Table of Contents 17........................ General History and Information. 18........................ Services-Accountants; Services-Servicing Agent 19........................ Not Applicable 20........................ Principal Underwriter 21........................ Performance Data 22........................ Not Applicable
4 23........................ Financial Statements
5 PART A INFORMATION REQUIRED IN A PROSPECTUS 6 Annuity Service Office Mailing Address 116 Huntington Avenue Post Office Box 9230 Boston, Massachusetts 02116 Boston, Massachusetts (617) 266-6008 02205-9230 (800) 344-1029 NASL VARIABLE ACCOUNT OF NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY FLEXIBLE PURCHASE PAYMENT INDIVIDUAL DEFERRED COMBINATION FIXED AND VARIABLE ANNUITY CONTRACT NON-PARTICIPATING This Prospectus describes a flexible purchase payment individual deferred combination fixed and variable annuity contract (the "contract") issued by North American Security Life Insurance Company ("the Company"), a stock life insurance company the ultimate parent of which is The Manufacturers Life Insurance Company ("Manulife"). The contract is designed for use in connection with retirement plans which may or may not qualify for special federal income tax treatment. The contract provides for the accumulation of contract values and the payment of annuity benefits on a variable and/or fixed basis. The contract offers twenty investment options: sixteen variable and four fixed. The variable portion of the contract value and annuity payments, if selected on a variable basis, will vary according to the investment performance of the sub-accounts of NASL Variable Account (the "Variable Account"). The Variable Account is a separate account established by the Company. Purchase payments and earnings on those purchase payments may be allocated to and transferred among one or more of sixteen sub-accounts of the Variable Account. The assets of each sub-account are invested in shares of NASL Series Trust (the "Trust"), a mutual fund having sixteen investment portfolios: the Small/Mid Cap Trust, the International Small Cap Trust, the Global Equity Trust, Pasadena Growth Trust, Equity Trust, Value Equity Trust, Growth and Income Trust, International Growth and Income Trust, Strategic Bond Trust, Global Government Bond, Investment Quality Bond Trust, U.S. Government Securities Trust, Money Market Trust, and three Automatic Asset Allocation Trusts (Aggressive, Moderate and Conservative) (see the accompanying Prospectus of the Trust). Fixed contract values may be accumulated under one, three, five and seven year fixed account investment options. Except as specifically noted herein and as set forth under the caption "FIXED ACCOUNT INVESTMENT OPTIONS" below, this Prospectus describes only the variable portion of the contract. Additional information about the variable portion of the contract and Variable Account is contained in a Statement of Additional Information, dated the same date as this Prospectus, which has been filed with the Securities and Exchange Commission and is incorporated herein by reference. The Statement of Additional Information is available without charge upon request by writing the Company at the above address or telephoning (617) 266-6008. The table of contents for the Statement of Additional Information is included on page 36 of this Prospectus. Shares of the Trust are not deposits or obligations of, or guaranteed or endorsed by, any bank, and the shares are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency. PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. IT CONTAINS INFORMATION ABOUT THE VARIABLE ACCOUNT AND THE VARIABLE PORTION OF THE CONTRACT THAT A PROSPECTIVE PURCHASER SHOULD KNOW BEFORE INVESTING. IT SHOULD BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE TRUST. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is May 1, 1996 7 TABLE OF CONTENTS SPECIAL TERMS ............................................................ 3 SUMMARY .................................................................. 4 TABLE OF ACCUMULATION UNIT VALUES ........................................ 9 GENERAL INFORMATION ABOUT NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY, NASL VARIABLE ACCOUNT AND NASL SERIES TRUST .............................. 10 North American Security Life Insurance Company ...................... 10 NASL Variable Account ............................................... 10 NASL Series Trust ................................................... 10 DESCRIPTION OF THE CONTRACT .............................................. 13 ACCUMULATION PROVISIONS ............................................... 13 Purchase Payments ................................................... 13 Accumulation Units .................................................. 13 Value of Accumulation Units ......................................... 14 Net Investment Factor ............................................... 14 Transfers Among Investment Options .................................. 14 Maximum Number of Investment Options ................................ 14 Telephone Transactions .............................................. 15 Special Transfer Services - Dollar Cost Averaging ................... 15 Asset Rebalancing Program ........................................... 15 Withdrawals ......................................................... 15 Special Withdrawal Services - the Income Plan ....................... 16 Loans ............................................................... 16 Death Benefit Before Maturity Date .................................. 17 ANNUITY PROVISIONS .................................................... 18 General ............................................................. 18 Annuity Options ..................................................... 18 Determination of Amount of the First Variable Annuity Payment ....... 19 Annuity Units and the Determination of Subsequent Variable Annuity Payments .................................................. 19 Transfers After Maturity Date ....................................... 20 Death Benefit on or After Maturity Date ............................. 20 OTHER CONTRACT PROVISIONS ............................................. 20 Ten Day Right to Review ............................................. 20 Ownership ........................................................... 20 Beneficiary ......................................................... 21 Annuitant ........................................................... 21 Modification ........................................................ 21 Company Approval .................................................... 21 Misstatement and Proof of Age, Sex or Survival ...................... 21 FIXED ACCOUNT INVESTMENT OPTIONS ...................................... 22 CHARGES AND DEDUCTIONS ................................................... 24 Withdrawal Charges .................................................. 24 Reduction or Elimination of Withdrawal Charge ....................... 25 Administration Fees ................................................. 26 Reduction or Elimination of Annual Administration Fee ............... 26 Mortality and Expense Risk Charge ................................... 27 Taxes ............................................................... 27 FEDERAL TAX MATTERS ...................................................... 27 INTRODUCTION .......................................................... 27 THE COMPANY'S TAX STATUS .............................................. 27 TAXATION OF ANNUITIES IN GENERAL ...................................... 28 Tax Deferral During Accumulation Period ............................. 28 Taxation of Partial and Full Withdrawals ............................ 29 Taxation of Annuity Payments ........................................ 29 Taxation of Death Benefit Proceeds .................................. 29 Penalty Tax on Premature Distributions .............................. 30 Aggregation of Contracts ............................................ 30 QUALIFIED RETIREMENT PLANS ............................................ 30 Qualified Plan Types ................................................ 30
2 8 Direct Rollovers .................................................... 32 FEDERAL INCOME TAX WITHHOLDING ........................................ 32 GENERAL MATTERS .......................................................... 32 Tax Deferral ........................................................ 32 Performance Data .................................................... 32 Financial Statements ................................................ 32 Asset Allocation and Timing Services ................................ 33 Distribution of Contracts ........................................... 33 Contract Owner Inquiries ............................................ 33 Legal Proceedings ................................................... 33 Other Information .................................................. 33 EXCHANGE OFFER AND ENHANCED DEATH BENEFIT OPTION ......................... 33 Exchange Offer ...................................................... 33 Additional Considerations for Ven 1 and Ven 3 Contract Owners ....... 35 Enhanced Death Benefit Option ....................................... 36 Ven 1 Contract Owners ............................................... 36 Additional Considerations for Ven 3 Contract Owners ................. 36 STATEMENT OF ADDITIONAL INFORMATION-TABLE OF CONTENTS .................... 37 APPENDIX A: EXAMPLES OF CALCULATION OF WITHDRAWAL CHARGE ................ 38 APPENDIX B: STATE PREMIUM TAXES ......................................... 39
3 9 SPECIAL TERMS The following terms as used in this Prospectus have the indicated meanings: Accumulation Unit - A unit of measure that is used to calculate the value of the variable portion of the contract before the maturity date. Annuitant - Any natural person or persons whose life is used to determine the duration of annuity payments involving life contingencies. If the contract owner names more than one person as an "annuitant," the second person named shall be referred to as "co-annuitant." The "annuitant" and "co-annuitant" will be referred to collectively as "annuitant." The "annuitant" is as designated on the contract specification page or in the application, unless changed. Annuity Option - The method selected by the contract owner for annuity payments made by the Company. At the maturity date, the Company will provide a fixed annuity with payments guaranteed for 10 years and for the lifetime of the annuitant, if the annuitant lives more than 10 years. This will be the annuity option under the contract unless changed. Annuity Service Office - The service office of the Company is P.O. Box 9230, Boston, Massachusetts 02205-9230. Annuity Unit - A unit of measure that is used after the maturity date to calculate variable annuity payments. Beneficiary - The person, persons or entity entitled to the death benefit under the contract upon the death of a contract owner or, in certain circumstances, an annuitant. The beneficiary is as specified in the application, unless changed. If there is a surviving contract owner, that person will be deemed the beneficiary. Contingent Beneficiary - The person, persons or entity to become the beneficiary if the beneficiary is not alive. The contingent beneficiary is as specified in the application, unless changed. Contract Anniversary - The anniversary of the contract date. Contract Date - The date of issue of the contract. Contract Value - The total of the investment account values and, if applicable, any amount in the loan account attributable to the contract. Contract Year - The period of twelve consecutive months beginning on the contract date or any anniversary thereof. Debt - Any amounts in the loan account attributable to the contract plus any accrued loan interest. The loan provision is applicable to certain qualified contracts only. Due Proof of Death - Due Proof of Death is required upon the death of the contract owner or annuitant, as applicable. One of the following must be received at the Annuity Service Office within one year of the date of death: (a) A certified copy of a death certificate; (b) A certified copy of a decree of a court of competent jurisdiction as to the finding of death; or (c) Any other proof satisfactory to us. Death benefits will be paid within 7 days of receipt of due proof of death and all required claim forms at the Company's Annuity Service Office. Fixed Annuity - An annuity option with payments which are predetermined and guaranteed as to dollar amount. General Account - All the assets of the Company other than assets in separate accounts. Investment Account - An account established by the Company which represents a contract owner's interest in an investment option prior to the maturity date. Investment Account Value - The value of a contract owner's investment in an investment account. 3 10 Investment Options - The investment choices available to contract owners. Currently, there are sixteen variable and four fixed investment options under the contract. Loan Account - The portion of the general account that is used for collateral when a loan is taken. Market Value Charge - A charge that may be assessed if amounts are withdrawn or transferred from the three, five or seven year investment options prior to the end of the interest rate guarantee period. Maturity Date - The date on which annuity benefits commence. The maturity date is the date specified on the contract specifications page and is generally the first day of the month following the later of the annuitant's 85th birthday or the tenth contract anniversary, unless changed. Net Purchase Payment - The purchase payment less the amount of premium tax. Non-Qualified Contracts - Contracts which are not issued under qualified plans. Owner or Contract Owner - The person, persons (co-owner) or entity entitled to all of the ownership rights under the contract. The owner has the legal right to make all changes in contractual designations where specifically permitted by the contract. The owner is as specified in the application, unless changed. Portfolio or Trust Portfolio - A separate investment portfolio of the Trust, a mutual fund in which the Variable Account invests, or of any successor mutual fund. Purchase Payment - An amount paid by a contract owner to the Company as consideration for the benefits provided by the contract. Qualified Contracts - Contracts issued under qualified plans. Qualified Plans - Retirement plans which receive favorable tax treatment under Section 401, 403, 408 or 457 of the Internal Revenue Code of 1986, as amended. Separate Account - A segregated account of the Company that is not commingled with the Company's general assets and obligations. Sub-Account(s) - One or more of the sub-accounts of the Variable Account. Each sub-account is invested in shares of a different Trust portfolio. Valuation Date - Any date on which the New York Stock Exchange is open for business and the net asset value of a Trust portfolio is determined. Valuation Period - Any period from one valuation date to the next, measured from the time on each such date that the net asset value of each portfolio is determined. Variable Account - The Variable Account, which is a separate account of the Company. Variable Annuity - An annuity option with payments which: (1) are not predetermined or guaranteed as to dollar amount, and (2) vary in relation to the investment experience of one or more specified sub-accounts. SUMMARY The Contract. The contract offered by this Prospectus is a flexible purchase payment individual deferred combination fixed and variable annuity contract. The contract provides for the accumulation of contract values and the payment of annuity benefits on a variable and/or fixed basis. Except as specifically noted herein and as set forth under the caption "FIXED ACCOUNT INVESTMENT OPTIONS" below, this Prospectus describes only the variable portion of the contract. Retirement Plans. The contract may be issued pursuant to either non-qualified retirement plans or plans qualifying for special income tax treatment under the Internal Revenue Code, such as individual retirement accounts and annuities, pension and 4 11 profit-sharing plans for corporations and sole proprietorships/partnerships ("H.R. 10" and "Keogh" plans), tax-sheltered annuities, and state and local government deferred compensation plans. (See "QUALIFIED RETIREMENT PLANS") Purchase Payments. A contract may be issued upon the making of an initial purchase payment of as little as $30. A minimum of $300 must be paid during the first contract year. Purchase payments may be made at any time, except that if a purchase payment would cause the contract value to exceed $1,000,000, or the contract value already exceeds $1,000,000, additional purchase payments will be accepted only with the prior approval of the Company. The Company may, at its option, cancel a contract at the end of any two consecutive contract years in which no purchase payments have been made, if both (i) the total purchase payments made over the life of the contract, less any withdrawals, are less than $2,000; and (ii) the contract value at the end of such two year period is less than $2,000. The cancellation of contract privileges may vary in certain states in order to comply with the requirements of insurance laws and regulations in such state. (See "PURCHASE PAYMENTS") Investment Options. Purchase payments may be allocated among the twenty investment options currently available under the contract: sixteen variable account investment options and four fixed account investment options. Due to current administrative capabilities, a contract owner is limited to a maximum of 17 investment options (including all fixed account investment options) during the period prior to the maturity date of the contract. The sixteen variable account investment options are the sixteen sub-accounts of the Variable Account, a separate account established by the Company. The sub-accounts invest in corresponding portfolios of the Trust: the Small/Mid Cap Trust, the International Small Cap Trust, the Global Equity Trust, Pasadena Growth Trust, Equity Trust, Value Equity Trust, Growth and Income Trust, International Growth and Income Trust, Strategic Bond Trust, Global Government Bond Trust, Investment Quality Bond Trust, U.S. Government Securities Trust, Money Market Trust, and three Automatic Asset Allocation Trusts (Aggressive, Moderate and Conservative) (see the accompanying Prospectus of the Trust). The portion of the contract value in the Variable Account and monthly annuity payments, if selected on a variable basis, will reflect the investment performance of the sub-accounts selected. (See "NASL VARIABLE ACCOUNT") Purchase payments may also be allocated to the four fixed account investment options: one, three, five and seven year guaranteed investment accounts. Under the fixed account investment options, the Company guarantees the principal value of purchase payments and the rate of interest credited to the investment account for the term of the guarantee period. The portion of the contract value in the fixed account investment options and monthly annuity payments, if selected on a fixed basis, will reflect such interest and principal guarantees. (See "FIXED ACCOUNT INVESTMENT OPTIONS") Subject to certain regulatory limitations, the Company may elect to add, subtract or substitute investment options. Transfers. Prior to the maturity date, amounts may be transferred among the variable account investment options and from the variable account investment options to the fixed account investment options without charge. In addition, amounts may be transferred prior to the maturity date among the fixed account investment options and from the fixed account investment options to the variable account investment options, subject to a one year holding period requirement (with certain exceptions) and a market value charge which may apply to such a transfer. (See "FIXED ACCOUNT INVESTMENT OPTIONS") After the maturity date, transfers are not permitted from variable annuity options to fixed annuity options or from fixed annuity options to variable annuity options. Transfers from any investment account must be at least $300 or, if less, the entire balance in the investment account. If, after the transfer the amount remaining in the Investment Account of the contract from which the transfer is made is less than $100, then the Company will transfer the entire amount instead of the requested amount. The Company may impose certain additional limitations on transfers. (See "TRANSFERS AMONG INVESTMENT OPTIONS" and "TRANSFERS AFTER MATURITY DATE") Transfer privileges may also be used under a special service offered by the Company to dollar cost average an investment in the contract. (See "SPECIAL TRANSFER SERVICES - DOLLAR COST AVERAGING") Withdrawals. Prior to the earlier of the maturity date or the death of the contract owner, the owner may withdraw all or a portion of the contract value. The amount withdrawn from any investment account must be at least $300 or, if less, the entire balance of the investment account. If a partial withdrawal plus any applicable withdrawal charge would reduce the contract value to less than $300, the withdrawal request will be treated as a request to withdraw the entire contract value. A withdrawal charge and an administration fee may be imposed. (See "WITHDRAWALS") A withdrawal may be subject to a penalty tax. (See "FEDERAL TAX MATTERS") Withdrawal privileges may also be exercised pursuant to the Company's systematic withdrawal plan service. (See "SPECIAL WITHDRAWAL SERVICES - - SYSTEMATIC WITHDRAWAL PLAN") Loans. The Company offers a loan privilege to owners of contracts issued in connection with Section 403(b) qualified plans that are not subject to Title I of ERISA. Owners of such contracts may obtain loans using the contract as the only security for the loan. The effective cost of a contract loan is 2% per year of the amount borrowed. (See "LOANS") Death Benefits. The Company will pay the death benefit described below (which, as defined, is net of any debt) to the beneficiary if any contract owner dies before the maturity date. If there is a surviving contract owner, that contract owner will be deemed to be the beneficiary. No death benefit is payable on the death of any annuitant, except that if any contract owner is not a 5 12 natural person, the death of any annuitant will be treated as the death of an owner. The death benefit will be determined as of the date on which written notice and proof of death and all required claim forms are received at the Company's Annuity Service Office. If any contract owner dies on or prior to his or her 85th birthday and the oldest owner had an attained age of less than 81 years on the contract date, the death benefit will be determined as follows: During the first contract year, the death benefit will be the greater of: (a) the contract value or (b) the sum of all purchase payments made, less any amounts deducted in connection with partial withdrawals. During any subsequent contract year, the death benefit will be the greater of: (a) the contract value or (b) the death benefit on the last day of the previous contract year, plus any purchase payments made and less any amounts deducted in connection with partial withdrawals since then. If any contract owner dies after his or her 85th birthday and the oldest owner had an attained age of less than 81 years on the contract date, the death benefit will be the greater of: (a) the contract value or (b) the excess of (i) the sum of all purchase payments over (ii) the sum of any amounts deducted in connection with partial withdrawals. If any contract owner dies and the oldest owner had an attained age greater than 80 on the contract date, the death benefit will be the contract value less any applicable withdrawal charges at the time of payment of benefits. If there is any debt under the contract, the death benefit equals the death benefit, as described above, less such debt. (See "DEATH BENEFIT BEFORE MATURITY DATE") If the annuitant dies after the maturity date and annuity payments have been selected based on an annuity option providing for payments for a guaranteed period, the Company will make the remaining guaranteed payments to the beneficiary. (See "DEATH BENEFIT ON OR AFTER MATURITY DATE") Annuity Payments. The Company offers a variety of fixed and variable annuity options. Periodic annuity payments will begin on the maturity date. The contract owner selects the maturity date, frequency of payment and annuity option. (See "ANNUITY PROVISIONS") Ten Day Review. Within 10 days of receipt of a contract, the contract owner may cancel the contract by returning it to the Company. (See "TEN DAY RIGHT TO REVIEW") Charges and Deductions. The following table and Example are designed to assist contract owners in understanding the various costs and expenses that contract owners bear directly and indirectly. The table reflects expenses of the separate account and the underlying portfolio company. In addition to the items listed in the following table, premium taxes may be applicable to certain contracts. The items listed under "Contract Owner Transaction Expenses" and "Separate Account Annual Expenses" are more completely described in this Prospectus (see "CHARGES AND DEDUCTIONS"). The items listed under "Trust Annual Expenses" are described in detail in the accompanying Trust Prospectus to which reference should be made. CONTRACT OWNER TRANSACTION EXPENSES Deferred sales load (as percentage of purchase payments)
NUMBER OF COMPLETE YEARS PURCHASE PAYMENT IN WITHDRAWAL CHARGE CONTRACT PERCENTAGE ---------------------------------------------------------- 0 6% 1 6% 2 5% 3 5% 4 4% 5 3% 6 2% 7+ 0% ANNUAL CONTRACT FEE................................................ $30(1)
(1) The $30 annual administration fee will not be assessed prior to the maturity date if at the time of its assessment the sum of all investment accounts is greater than or equal to $100,000 6 13 SEPARATE ACCOUNT ANNUAL EXPENSES (as a percentage of average account value) Mortality and expense risk fees .................................. 1.25% Administration fee - asset based ................................. 0.15% Total Separate Account Annual Expenses ........................... 1.40%
TRUST ANNUAL EXPENSES (as a percentage of Trust average net assets)
MANAGEMENT OTHER TOTAL TRUST TRUST PORTFOLIO FEES EXPENSES ANNUAL EXPENSES - ----------------------------------------------------------------------------------------- Small/Mid Cap ............................. 1.00% 0.25%* 1.250% International Small Cap ................... 1.10% 0.30%* 1.400% Global Equity ............................. 0.900% 0.150% 1.050% Pasadena Growth ........................... 0.975% 0.000% 0.975% Equity .................................... 0.750% 0.050% 0.800% Value Equity .............................. 0.800% 0.050% 0.850% Growth and Income ......................... 0.750% 0.070% 0.820% International Growth and Income ........... 0.950% 0.300% 1.250% Strategic Bond ............................ 0.775% 0.145% 0.920% Global Government Bond .................... 0.800% 0.130% 0.930% Investment Quality Bond ................... 0.650% 0.090% 0.740% U.S. Government Securities ................ 0.650% 0.060% 0.710% Money Market .............................. 0.500% 0.040% 0.540% Aggressive Asset Allocation ............... 0.750% 0.160% 0.910% Moderate Asset Allocation ................. 0.750% 0.090% 0.840% Conservative Asset Allocation ............. 0.750% 0.120% 0.870%
* Based on estimates of payments to be made during the current fiscal year. EXAMPLE A contract owner would pay the following expenses on a $1,000 investment, assuming 5% annual return on assets, if the contract owner surrendered the contract at the end of the applicable time period:
TRUST PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------------- Small/Mid Cap .......................... $ 83 $133 International Small Cap ................ 84 138 Global Equity .......................... 81 128 $175 $288 Pasadena Growth ........................ 80 126 171 280 Equity ................................. 79 121 162 262 Value Equity ........................... 79 122 165 268 Growth and Income ...................... 79 121 162 262 International Growth and Income ........ 85 140 196 328 Strategic Bond ......................... 80 124 168 275 Global Government Bond ................. 80 124 169 276 Investment Quality Bond ................ 78 119 159 256 U.S. Government Securities ............. 78 118 158 253 Money Market ........................... 76 113 149 236 Aggressive Asset Allocation ............ 80 124 168 274 Moderate Asset Allocation .............. 79 122 164 267 Conservative Asset Allocation .......... 79 123 166 270
7 14 A contract owner would pay the following expenses on a $1,000 investment, assuming 5% annual return on assets, if the contract owner annuitized as provided in the contract or did not surrender the contract at the end of the applicable time period:
TRUST PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------------- Small/Mid Cap .......................... $ 28 $ 85 International Small Cap ................ 29 89 Global Equity .......................... 26 79 $135 $288 Pasadena Growth ........................ 25 77 131 280 Equity ................................. 23 71 122 262 Value Equity ........................... 24 73 125 268 Growth and Income ...................... 23 71 122 262 International Growth and Income ........ 30 91 156 328 Strategic Bond ......................... 24 75 128 275 Global Government Bond ................. 24 75 129 276 Investment Quality Bond ................ 23 70 119 256 U.S. Government Securities ............. 22 69 118 253 Money Market ........................... 21 64 109 236 Aggressive Asset Allocation ............ 24 75 128 274 Moderate Asset Allocation .............. 24 73 124 267 Conservative Asset Allocation .......... 24 74 126 270
For purposes of presenting the foregoing Example, the Company has made certain assumptions mandated by the Securities and Exchange Commission (the "Commission"). The Company has assumed that, where applicable, the maximum sales load is deducted, that there are no exchanges or other transactions and that the "Other Expenses" line item under "Trust Annual Expenses" will remain the same. Such assumptions, which are mandated by the Commission in an attempt to provide prospective investors with standardized data with which to compare various annuity contracts, do not take into account certain features of the contract and prospective changes in the size of the Trust which may operate to change the expenses borne by contract owners. Consequently, the amounts listed in the Example above should not be considered a representation of past or future expenses and actual expenses borne by contract owners may be greater or lesser than those shown. In addition, for purposes of calculating the values in the above Example, the Company has translated the $30 annual administration charge listed under "Annual Contract Fee" to a 0.086% annual asset charge based on the $35,000 approximate average size of contracts of this series issued by the Company in 1995. So translated, such charge would be higher for smaller contracts and lower for larger contracts. * * * * * * * * The above summary is qualified in its entirety by the detailed information appearing elsewhere in this Prospectus and Statement of Additional Information and the accompanying Prospectus and Statement of Additional Information for the Trust, to which reference should be made. This Prospectus generally describes only the variable aspects of the contract, except where fixed aspects are specifically mentioned. 8 15 TABLE OF ACCUMULATION UNIT VALUES
UNIT VALUE AT START UNIT VALUE AT NUMBER OF UNITS SUB-ACCOUNT OF YEAR* END OF YEAR AT END OF YEAR - ------------------------------------------------------------------------------------------------------------ Global Equity 1994 ..................................... $16.715126 15.500933 951,915.210 1995 ..................................... 15.500933 16.459655 3,472,776.106 Pasadena Growth 1994 ..................................... 8.699511 8.837480 427,027.154 1995 ..................................... 8.837480 11.026969 3,534,123.332 Equity 1994 ..................................... 14.381312 14.786831 891,587.416 1995 ..................................... 14.786831 20.821819 5,881,806.714 Value Equity 1994 ..................................... 11.375744 11.107620 747,374.695 1995 ..................................... 11.107620 13.548849 4,453,647.654 Growth and Income 1994 ..................................... 13.239339 13.076664 675,761.489 1995 ..................................... 13.076664 16.660889 4,936,977.686 Inernational Growth and Income 1995 Strategic Bond 1994 ..................................... 10.192707 9.965972 191,924.981 1995 ..................................... 9.965972 11.716972 1,392,653.448 Global Government Bond 1994 ..................................... 14.734788 14.630721 194,131.021 1995 ..................................... 14.630721 17.772344 952,156.169 Investment Quality Bond (formerly called Bond Sub-account) 1994 ..................................... 14.307698 14.216516 128,932.292 1995 ..................................... 14.216516 16.751499 889,906.187 U.S. Gov. Securities (formerly called U.S. Gov. Bond Sub-account) 1994 ..................................... 14.188969 14.111357 231,053.897 1995 ..................................... 14.111357 16.083213 1,744,509.872 Money Market 1994 ..................................... 13.453100 13.623292 870,982.381 1995 ..................................... 13.623292 14.190910 3,204,791.061 Aggressive Asset Allocation 1994 ..................................... 12.538660 12.381395 202,014.859 1995 ..................................... 12.381395 14.990551 963,754.656 Moderate Asset Allocation 1994 ..................................... 12.522239 12.396295 462,460.272 1995 ..................................... 12.396295 14.752561 2,139,216.556 Conservative Asset Allocation 1994 ..................................... 12.478545 12.298940 128,525.165 1995 ..................................... 12.298940 14.320582 716,489.411
* Units under this series of contracts were first credited under the sub-accounts on August 9, 1994, except in the case of International Growth and Income where units were first credited under the sub-account on January 9, 1995. 9 16 GENERAL INFORMATION ABOUT NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY, NASL VARIABLE ACCOUNT AND NASL SERIES TRUST NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY North American Security Life Insurance Company ("the Company") is a stock life insurance company organized under the laws of Delaware in 1979. The Company's principal office is located at 116 Huntington Avenue, Boston, Massachusetts 02116. The ultimate parent of the Company is The Manufacturers Life Insurance Company ("Manulife"), a Canadian mutual life insurance Company based in Toronto, Canada. Prior to January 1, 1996, the Company was a wholly owned subsidiary of North American Life Assurance Company ("NAL"), a Canadian mutual life insurance company. On January 1, 1996 NAL and Manulife merged with the combined company retaining the Manulife name. NASL VARIABLE ACCOUNT The Company established the Variable Account on August 24, 1984 as a separate account under Delaware law. The income, gains and losses, whether or not realized, from assets of the Variable Account are, in accordance with the contracts, credited to or charged against the Variable Account without regard to other income, gains or losses of the Company. Nevertheless, all obligations arising under the contracts are general corporate obligations of the Company. Assets of the Variable Account may not be charged with liabilities arising out of any other business of the Company. The Variable Account is registered with the Commission under the Investment Company Act of 1940 ("1940 Act") as a unit investment trust. A unit investment trust is a type of investment company which invests its assets in specified securities, such as the shares of one or more investment companies. Registration under the 1940 Act does not involve supervision by the Commission of the management or investment policies or practices of the Variable Account. If deemed by the Company to be in the best interests of persons having voting rights under the contracts, the Variable Account may be operated as a management company under the 1940 Act or it may be deregistered under such Act in the event such registration is no longer required. There are currently sixteen sub-accounts within the Variable Account: the Small/Mid Cap Sub-Account, the International Small Cap Sub-Account, the Global Equity Sub-Account, the Pasadena Growth Sub-Account, the Equity Sub-Account, the Value Equity Sub-Account, the Growth and Income Sub-Account, the International Growth and Income Sub-Account, the Strategic Bond Sub-Account, the Global Government Bond Sub-Account, the Investment Quality Bond Sub-Account, the U.S. Government Securities Sub-Account, the Money Market Sub-Account and three Automatic Asset Allocation Sub-Accounts (Aggressive, Moderate and Conservative). The Company reserves the right to add other sub-accounts, eliminate existing sub-accounts, combine sub-accounts or transfer assets in one sub-account to another sub-account established by the Company or an affiliated company. The Company will not eliminate existing sub-accounts or combine sub-accounts without the prior approval of the appropriate state or federal regulatory authorities. NASL SERIES TRUST The assets of each sub-account of the Variable Account are invested in shares of a corresponding portfolio of the Trust: the Small/Mid Cap Trust, the International Small Cap Trust, the Global Equity Trust, the Pasadena Growth Trust, the Equity Trust, the Value Equity Trust, the Growth and Income Trust, the International Growth and Income Trust, the Strategic Bond Trust, the Global Government Bond Trust, the Investment Quality Bond Trust, the U.S. Government Securities Trust, the Money Market Trust, and three Automatic Asset Allocation Trusts (Aggressive, Moderate and Conservative). The Trust is registered under the 1940 Act as an open-end management investment company. Each of the portfolios is diversified for purposes of the 1940 Act, except for the Global Government Bond Trust which is non-diversified so that it may invest more than 5% of its assets in securities issued by a foreign government. The Trust receives investment advisory services from NASL Financial Services, Inc. The Trust currently has nine subadvisers. Oechsle International Advisors, L.P. provides investment subadvisory services to the Global Equity and Global Government Bond Trusts. Roger Engemann Management Co, Inc., provides investment subadvisory services to the Pasadena Growth Trust. Fidelity Management Trust Company provides investment subadvisory services to the Equity, Aggressive Asset Allocation, Moderate Asset Allocation and Conservative Asset Allocation Trusts. Goldman Sachs Asset Management provides investment subadvisory services to the Value Equity Trust. Wellington Management Company provides investment subadvisory services to the Growth and Income, Investment Quality Bond and Money Market Trusts. Salomon Brothers Asset Management Inc provides investment subadvisory services to the Strategic Bond and U.S. Government Securities Trusts. J.P. Morgan Investment Management Inc. provides subadvisory services to the International Growth and Income Trust. Fred Alger 10 17 Management, Inc. provides investment subadvisory services to the Small/Mid Cap Trust and Founders Asset Management, Inc. provides investment subadvisory services to the International Small Cap Trust. The following is a brief description of each portfolio: THE SMALL/MID CAP TRUST seeks long term capital appreciation by investing at least 65% of its total assets (except during temporary defensive periods) in small/mid cap equity securities. As used herein small/mid cap equity securities are equity securities of companies that, at the time of purchase, have total market capitalization between $500 million and $5 billion. THE INTERNATIONAL SMALL CAP TRUST seeks capital appreciation by investing primarily in securities issued by foreign companies which have total market capitalization or annual revenues of $1 billion or less. These securities may represent companies in both established and emerging economies throughout the world. THE GLOBAL EQUITY TRUST seeks long-term capital appreciation, by investing primarily in a globally diversified portfolio of common stocks and securities convertible into or exercisable for common stocks. THE PASADENA GROWTH TRUST seeks to achieve long-term growth of capital by emphasizing investments in companies with rapidly growing earnings per share, some of which may be smaller emerging growth companies. THE EQUITY TRUST seeks growth of capital, by investing primarily in common stocks of United States issuers and securities convertible into or carrying the right to buy common stocks. THE VALUE EQUITY TRUST seeks long-term growth of capital by investing primarily in common stocks and securities convertible into or carrying the right to buy common stocks. THE GROWTH AND INCOME TRUST seeks long-term growth of capital and income, consistent with prudent investment risk, by investing primarily in a diversified portfolio of common stocks of United States issuers which the Subadviser believes are of high quality. THE INTERNATIONAL GROWTH AND INCOME TRUST seeks long term growth of capital and income by investing, under normal circumstances, at least 65% of its total assets in equity securities of foreign issuers. The portfolio may also invest in debt securities of corporate or sovereign issuers rated A or higher by Moody's or S&P or, if unrated, of equivalent credit quality as determined by J.P. Morgan. Under normal circumstances, the portfolio will be invested approximately 85% in equity securities and 15% in fixed income securities. THE STRATEGIC BOND TRUST seeks a high level of total return consistent with preservation of capital by giving its Subadviser broad discretion to deploy the portfolio's assets among certain segments of the fixed-income market as the Subadviser believes will best contribute to achievement of the portfolio's investment objective. THE GLOBAL GOVERNMENT BOND TRUST seeks a high level of total return by placing primary emphasis on high current income and the preservation of capital, by investing primarily in a global portfolio of high-quality, fixed-income securities of foreign and United States governmental entities and supranational issuers. THE INVESTMENT QUALITY BOND TRUST seeks a high level of current income consistent with the maintenance of principal and liquidity, by investing primarily in a diversified portfolio of investment grade corporate bonds and U.S. Government bonds with intermediate to longer term maturities. The Portfolio may also invest up to 20% of its assets in non-investment grade fixed income securities. THE U.S. GOVERNMENT SECURITIES TRUST seeks a high level of current income consistent with preservation of capital and maintenance of liquidity, by investing in debt obligations and mortgage-backed securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities and derivative securities such as collateralized mortgage obligations backed by such securities. THE MONEY MARKET TRUST seeks maximum current income consistent with preservation of principal and liquidity, by investing in high quality money market instruments with maturities of 397 days or less issued primarily by United States entities. 11 18 THE AUTOMATIC ASSET ALLOCATION TRUSTS seek the highest potential total return consistent with a specified level of risk tolerance -- conservative, moderate or aggressive -- by investing primarily in the kinds of securities in which the Equity, Investment Quality Bond, U.S. Government Securities and Money Market Trusts may invest. * THE AGGRESSIVE ASSET ALLOCATION TRUST seeks the highest total return consistent with an aggressive level of risk tolerance. This Trust attempts to limit the decline in portfolio value in very adverse market conditions to 15% over any twelve month period. * THE MODERATE ASSET ALLOCATION TRUST seeks the highest total return consistent with a moderate level of risk tolerance. This Trust attempts to limit the decline in portfolio value in very adverse market conditions to 10% over any twelve month period. * THE CONSERVATIVE ASSET ALLOCATION TRUST seeks the highest total return consistent with a conservative level of risk tolerance. This Trust attempts to limit the decline in portfolio value in very adverse market conditions to 5% over any twelve month period. In pursuing the Strategic Bond and Investment Quality Bond Trusts' investment objective, each portfolio expects to invest a portion of its assets in high yield securities, commonly known as "junk bonds" which also present a high degree of risk. The risks of these securities include price volatility and risk of default in the payment of interest and principal. See "Risk Factors Relating to High Yield Securities" contained in the NASL Series Trust prospectus before investing in either Trust. In pursuing the International Small Cap, Global Equity, Strategic Bond, International Growth & Income and Global Government Bond Trusts' investment objective, each portfolio may invest up to 100% of its assets in foreign securities which may present additional risks. See "Foreign Securities" in the NASL Series Trust prospectus before investing in any of these Trusts. If the shares of a Trust portfolio are no longer available for investment or in the Company's judgment investment in a Trust portfolio becomes inappropriate in view of the purposes of the Variable Account, the Company may eliminate the shares of a portfolio and substitute shares of another portfolio of the Trust or another open-end registered investment company. Substitution may be made with respect to both existing investments and the investment of future purchase payments. However, no such substitution will be made without notice to the contract owner and prior approval of the Commission to the extent required by the 1940 Act. The Company will vote shares of the Trust portfolios held in the Variable Account at meetings of shareholders of the Trust in accordance with voting instructions received from the persons having the voting interest under the contracts. The number of portfolio shares for which voting instructions may be given will be determined by the Company in the manner described below, not more than 90 days prior to the meeting of the Trust. Trust proxy material will be distributed to each person having the voting interest under the contract together with appropriate forms for giving voting instructions. Portfolio shares held in the Variable Account that are attributable to contract owners and as to which no timely instructions are received and portfolio shares held in the Variable Account that are beneficially owned by the Company will be voted by the Company in proportion to the instructions received. Prior to the maturity date, the person having the voting interest under a contract is the contract owner and the number of votes as to each portfolio for which voting instructions may be given is determined by dividing the value of the investment account corresponding to the sub-account in which such portfolio shares are held by the net asset value per share of that portfolio. After the maturity date, the person having the voting interest under a contract is the annuitant and the number of votes as to each portfolio for which voting instructions may be given is determined by dividing the reserve for the contract allocated to the sub-account in which such portfolio shares are held by the net asset value per share of that portfolio. Generally, the number of votes tends to decrease as annuity payments progress since the amount of reserves attributable to a contract will usually decrease after commencement of annuity payments. The Company reserves the right to make any changes in the voting rights described above that may be permitted by the federal securities laws or regulations or interpretations of these laws or regulations. A full description of the Trust, including the investment objectives, policies and restrictions of each of the portfolios is contained in the Prospectus for the Trust which accompanies this Prospectus and should be read by a prospective purchaser before investing. 12 19 DESCRIPTION OF THE CONTRACT ACCUMULATION PROVISIONS PURCHASE PAYMENTS Purchase payments are paid to the Company at its Annuity Service Office. The minimum purchase payment is $30; however, at least $300 must be paid during the first contract year. Purchase payments may be made at any time. The Company may provide for purchase payments to be automatically withdrawn from a contract owner's bank account on a periodic basis. If a purchase payment would cause the contract value to exceed $1,000,000 or the contract value already exceeds $1,000,000, additional purchase payments will be accepted only with the prior approval of the Company. The Company may, at its option, cancel a contract at the end of any two consecutive contract years in which no purchase payments have been made, if both (i) the total purchase payments made over the life of the contract, less any withdrawals, are less than $2,000; and (ii) the contract value at the end of such two year period is less than $2,000. The cancellation of contract privileges may vary in certain states in order to comply with the requirements of insurance laws and regulations in such state. Upon cancellation the Company will pay the contract owner the contract value computed as of the valuation period during which the cancellation occurs less any debt and less the annual $30 administration fee. The amount paid will be treated as a withdrawal for Federal tax purposes and thus may be subject to income tax and to a 10% penalty tax. (See "FEDERAL TAX MATTERS") Purchase payments are allocated among the investment options in accordance with the percentages designated by the contract owner. In addition, contract owners have the option to participate in the Guarantee Plus Program administered by the Company. Under the Guarantee Plus Program the initial purchase payment is split between the fixed and variable investment options. A percentage of the initial purchase payment is allocated to the chosen fixed account, such that, at the end of the guaranteed period the fixed account will have grown to an amount at least equal to the total initial purchase payment. The percentage depends upon the current interest rate of the fixed investment option. The balance of the initial purchase payment is allocated among the variable investment options as indicated on the contract application. Contract owners may elect to participate in the Guarantee Plus Program and may obtain full information concerning the program and its restrictions from their securities dealers or the Annuity Service Office. The contract owner may change the allocation of subsequent purchase payments at any time upon written notice to the Company or by telephone in accordance with the Company's telephone transfer procedures. ACCUMULATION UNITS The Company will establish an investment account for the contract owner for each variable account investment option to which such contract owner allocates purchase payments. Purchase payments are credited to such investment accounts in the form of accumulation units. The following discussion of accumulation units, the value of accumulation units and the net investment factor formula pertains only to the accumulations in the variable account investment options. The parallel discussion regarding accumulations in the fixed account investment options appears elsewhere in this Prospectus. (See "FIXED ACCOUNT INVESTMENT OPTIONS") The number of accumulation units to be credited to each investment account is determined by dividing the net purchase payment allocated to that investment account by the value of an accumulation unit for that investment account for the valuation period during which the purchase payment is received at the Company's Annuity Service Office complete with all necessary information or, in the case of the first purchase payment, pursuant to the procedures described below. Initial purchase payments received by mail will usually be credited in the valuation period during which received at the Annuity Service Office, and in any event not later than two business days after receipt of all information necessary for processing issuance of the contract. The applicant will be informed of any deficiencies preventing processing if the contract cannot be issued and the purchase payment credited within two business days after receipt. If the deficiencies are not remedied within five business days, the purchase payment will be returned promptly to the applicant, unless the applicant specifically consents to the Company's retaining the purchase payment until all necessary information is received. Initial purchase payments received by wire transfer from broker-dealers will be credited in the valuation period during which received where such broker-dealers have made special arrangements with the Company. 13 20 VALUE OF ACCUMULATION UNITS The value of accumulation units will vary from one valuation period to the next depending upon the investment results of the particular sub-accounts to which purchase payments are allocated. The value of an accumulation unit for each sub-account was arbitrarily set at $10 for the first valuation period under contracts similar to the contracts described in this Prospectus. 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 sub-account (described below) for the valuation period for which the value is being determined. NET INVESTMENT FACTOR The net investment factor is an index used to measure the investment performance of a sub-account from one valuation period to the next. The net investment factor for each sub-account 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 a portfolio share held in the sub-account determined at the end of the current valuation period, plus (2) the per share amount of any dividend or capital gain distributions made by the portfolio on shares held in the sub-account if the "ex-dividend" date occurs during the current valuation period. Where (b) is: the net asset value per share of a portfolio share held in the sub-account determined as of the end of the immediately preceding valuation period. Where (c) is: a factor representing the charges deducted from the sub-account on a daily basis for administrative expenses and mortality and expense risks. Such factor is equal on an annual basis to 1.40% (0.15% for administrative expenses and 1.25% for mortality and expense risks). 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. TRANSFERS AMONG INVESTMENT OPTIONS Before the maturity date the contract owner may transfer amounts among the variable account investment options and from such investment options to the fixed account investment options at any time and without charge upon written notice to the Company or by telephone if the contract owner authorizes the Company in writing to accept telephone transfer requests. Accumulation units will be canceled from the investment account from which amounts are transferred and credited to the investment account to which amounts are transferred. The Company will effect such transfers so that the contract value on the date of the transfer will not be affected by the transfer. The contract owner must transfer at least $300 or, if less, the entire value of the investment account. If after the transfer the amount remaining in the investment account is less than $100, then the Company will transfer the entire amount instead of the requested amount. The Company reserves the right to limit, upon notice, the maximum number of transfers a contract owner may make to one per month or six at any time within a contract year. In addition, the Company reserves the right to defer the transfer privilege at any time that the Company is unable to purchase or redeem shares of the Trust portfolios. The Company also reserves the right to modify or terminate the transfer privilege at any time in accordance with applicable law. MAXIMUM NUMBER OF INVESTMENT OPTIONS Due to current administrative capabilities, a contract owner is limited to a maximum of 17 investment options (including all fixed account investment options) during the period prior to the maturity date of the contract (the "Contract Period"). In calculating this limit for each contract owner, investment options to which the contract owner has allocated 14 21 purchase payments at any time during the Contract Period will be counted toward the 17 maximum even if the contract owner no longer has contract value allocated to these investment options. TELEPHONE TRANSACTIONS Contract owners are permitted to request transfers/redemptions by telephone. The Company will not be liable for following instructions communicated by telephone that it reasonably believes to be genuine. To be permitted to request a transfer/redemption by telephone, a contract owner must elect the option on the Application. (If a contract owner does not initially elect an option in the Application form, they may request authorization by executing an appropriate authorization form provided by the Company upon request.) The Company will employ reasonable procedures to confirm that instructions communicated by telephone are genuine and may only be liable for any losses due to unauthorized or fraudulent instructions where it fails to employ its procedures properly. Such procedures include the following. Upon telephoning a request, contract owners will be asked to provide their account number, and if not available, their social security number. For the contract owner's and Company's protection, all conversations with contract owners will be tape recorded. All telephone transactions will be followed by a confirmation statement of the transaction. SPECIAL TRANSFER SERVICES - DOLLAR COST AVERAGING The Company administers a Dollar Cost Averaging ("DCA") program which enables a contract owner to pre-authorize a periodic exercise of the contractual transfer rights described above. Contract owners entering into a DCA agreement instruct the Company to transfer monthly a predetermined dollar amount from any sub-account or the one year fixed account investment option to other sub-accounts until the amount in the sub-account from which the transfer is made or one year fixed account investment option is exhausted. The DCA program is generally suitable for contract owners making a substantial deposit to the contract and who desire to control the risk of investing at the top of a market cycle. The DCA program allows such investments to be made in equal installments over time in an effort to reduce such risk. Contract owners interested in the DCA program may elect to participate in the program on the contract application or by separate application. Contract owners may obtain a separate application and full information concerning the program and its restrictions from their securities dealer or the Annuity Service Office. ASSET REBALANCING PROGRAM The Company administers an Asset Rebalancing Program which enables a contract owner to indicate to the Company the percentage levels he or she would like to maintain in particular portfolios. On the last business day of every calendar quarter, the contract owner's contract value will be automatically rebalanced to maintain the indicated percentages by transfers among the portfolios. (Fixed Account Investment Options are not eligible for participation in the Asset Rebalancing Program.) The entire value of the variable investment accounts must be included in the Asset Rebalancing Program. Other investment programs, such as the DCA program, or other transfers or withdrawals may not work in concert with the Asset Rebalancing Program. Therefore, contract owners should monitor their use of these other programs and any other transfers or withdrawals while the Asset Rebalancing Program is being used. Contract owners interested in the Asset Rebalancing Program may obtain a separate application and full information concerning the program and its restrictions from their securities dealer or the Annuity Service Office. WITHDRAWALS Prior to the earlier of the maturity date or the death of the contract owner, the owner may withdraw all or a portion of the contract value upon written request, complete with all necessary information to the Company's Annuity Service Office. For certain qualified contracts, exercise of the withdrawal right may require the consent of the qualified plan participant's spouse under the Internal Revenue Code and regulations promulgated by the Treasury Department. In the case of a total withdrawal, the Company will pay the contract value as of the date of receipt of the request at its Annuity Service Office, less the annual $30 administration fee if applicable, any debt and any applicable withdrawal charge, and the contract will be canceled. In the case of a partial withdrawal, the Company will pay the amount requested and cancel that number of accumulation units credited to each investment account necessary to equal the amount withdrawn from each investment account plus any applicable withdrawal charge deducted from such investment account. (See "CHARGES AND DEDUCTIONS") When making a partial withdrawal, the contract owner should specify the investment options from which the withdrawal is to be made. The amount requested from an investment option may not exceed the value of that investment option less any applicable withdrawal charge. If the contract owner does not specify the investment options from which a partial withdrawal is to be taken, a partial withdrawal will be taken from the variable account investment options until exhausted and then from the fixed account investment options, beginning with the shortest guarantee period first and ending with the longest guarantee period last. If the partial withdrawal is less than the total value in the variable account investment options, the withdrawal will be taken pro rata from the variable account investment options: taking from each such variable account investment option an amount which bears the same 15 22 relationship to the total amount withdrawn as the value of such variable account investment option bears to the total value of all the contract owner's investments in variable account investment options. For the rules governing the order and manner of withdrawals from the fixed account investment options, see "FIXED ACCOUNT INVESTMENT OPTIONS." There is no limit on the frequency of partial withdrawals; however, the amount withdrawn must be at least $300 or, if less, the entire balance in the investment option. If after the withdrawal (and deduction of any withdrawal charge) the amount remaining in the investment option is less than $100, the Company will treat the partial withdrawal as a withdrawal of the entire amount held in the investment option. If a partial withdrawal plus any applicable withdrawal charge would reduce the contract value to less than $300, the Company will treat the partial withdrawal as a total withdrawal of the contract value. The amount of any withdrawal from the variable account investment options will be paid promptly, and in any event within seven days of receipt of the request, complete with all necessary information at the Company's Annuity Service Office, except that the Company reserves the right to defer the right of withdrawal or postpone payments 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 securities held in the Variable Account is not reasonably practicable or it is not reasonably practicable to determine the value of the Variable Account's net assets, or (4) the Commission, by order, so permits for the protection of security holders; provided that applicable rules and regulations of the Commission shall govern as to whether the conditions described in (2) and (3) exist. Withdrawals from the contract may be subject to income tax and a 10% penalty tax. Withdrawals are permitted from contracts issued in connection with Section 403(b) qualified plans only under limited circumstances. (See "FEDERAL TAX MATTERS") TELEPHONE REDEMPTIONS. The contract owner may request the option to withdraw a portion of the contract value by telephone by completing the application described under "Telephone Transactions" above. The Company reserves the right to impose maximum withdrawal amounts and procedural requirements regarding this privilege. For additional information on Telephone Redemptions see "Telephone Transactions" above. SPECIAL WITHDRAWAL SERVICES - THE INCOME PLAN The Company administers an Income Plan ("IP") which enables a contract owner to pre-authorize a periodic exercise of the contractual withdrawal rights described above. Contract owners entering into an IP agreement instruct the Company to withdraw a level dollar amount from specified investment options on a periodic basis. The total of IP withdrawals in a contract year is limited to not more than 10% of the purchase payments made to ensure that no withdrawal or market value charge will ever apply to an IP withdrawal. If an additional withdrawal is made from a contract participating in an IP, the IP will terminate automatically and may be reinstated only on or after the next contract anniversary pursuant to a new application. The IP is not available to contracts participating in the dollar cost averaging program or for which purchase payments are being automatically deducted from a bank account on a periodic basis. IP withdrawals will be free of withdrawal and market value charges. IP withdrawals may, however, be subject to income tax and a 10% penalty tax. (See "FEDERAL TAX MATTERS") Contract owners interested in an IP may obtain a separate application and full information concerning the program and its restrictions from their securities dealer or the Annuity Service Office. LOANS The Company offers a loan privilege only to owners of contracts issued in connection with Section 403(b) qualified plans that are not subject to Title I of ERISA. Owners of such contracts may obtain loans using the contract as the only security for the loan. Loans are subject to provisions of the Code and to applicable retirement program rules (collectively, "loan rules"). Tax advisers and retirement plan fiduciaries should be consulted prior to exercising loan privileges. Under the terms of the contract, the maximum loan value is equal to 80% of the contract value, although loan rules may serve to reduce such maximum loan value in some cases. The amount available for a loan at any given time is the loan value less any outstanding debt. Debt equals the amount of any loans plus accrued interest. Loans will be made only upon written request from the owner. The Company will make loans within seven days of receiving a properly completed loan application (applications are available from the Annuity Service Office), subject to postponement under the same circumstances that payment of withdrawals may be postponed. (See "WITHDRAWALS") 16 23 When an owner requests a loan, the Company will reduce the owner's investment in the investment accounts and transfer the amount of the loan to the loan account, a part of the Company's general account. The owner may designate the investment accounts from which the loan is to be withdrawn. Absent such a designation, the amount of the loan will be withdrawn from the investment accounts in accordance with the rules for making partial withdrawals. (See "WITHDRAWALS.") The contract provides that owners may repay contract debt at any time. Under applicable loan rules, loans generally must be repaid within five years, repayments must be made at least quarterly and repayments must be made in substantially equal amounts. When a loan is repaid, the amount of the repayment will be transferred from the loan account to the investment accounts. The owner may designate the investment accounts to which a repayment is to be allocated. Otherwise, the repayment will be allocated in the same manner as the owner's most recent purchase payment. On each contract anniversary, the Company will transfer from the investment accounts to the loan account the amount by which the debt on the contract exceeds the balance in the loan account. The Company charges interest of 6% per year on contract loans. Loan interest is payable in arrears and, unless paid in cash, the accrued loan interest is added to the amount of the debt and bears interest at 6% as well. The Company credits interest with respect to amounts held in the loan account at a rate of 4% per year. Consequently, the net cost of loans under the contract is 2%. If on any date debt under a contract exceeds the contract value, the contract will be in default. In such case the owner will receive a notice indicating the payment needed to bring the contract out of default and will have a thirty-one day grace period within which to pay the default amount. If the required payment is not made within the grace period, the contract may be foreclosed (terminated without value). The amount of any debt will be deducted from the death benefit otherwise payable under the contract. (See "DEATH BENEFIT BEFORE THE MATURITY DATE") In addition, debt, whether or not repaid, will have a permanent effect on the contract value because the investment results of the investment accounts will apply only to the unborrowed portion of the contract value. The longer debt is outstanding, the greater the effect is likely to be. The effect could be favorable or unfavorable. If the investment results are greater than the rate being credited on amounts held in the loan account while the debt is outstanding, the contract value will not increase as rapidly as it would have if no debt were outstanding. If investment results are below that rate, the contract value will be higher than it would have been had no debt been outstanding. DEATH BENEFIT BEFORE MATURITY DATE In General. The following discussion applies principally to contracts that are not issued in connection with qualified plans, i.e., a "non-qualified contract." The requirements of the tax law applicable to qualified plans, and the tax treatment of amounts held and distributed under such plans, are quite complex. Accordingly, a prospective purchaser of the contract to be used in connection with a qualified plan should seek competent legal and tax advice regarding the suitability of the contract for the situation involved and the requirements governing the distribution of benefits, including death benefits, from a contract used in the plan. In particular, a prospective purchaser who intends to use the contract in connection with a qualified plan should consider that the contract provides a death benefit (described below) that could be characterized as an incidental death benefit. There are limits on the amount of incidental benefits that may be provided under certain qualified plans and the provision of such benefits may result in currently taxable income to plan participants. (See "FEDERAL TAX MATTERS") Amount of Death Benefit. If any contract owner dies on or prior to his or her 85th birthday and the oldest owner had an attained age of less than 81 years on the contract date, the death benefit will be determined as follows: During the first contract year, the death benefit will be the greater of: (a) the contract value or (b) the sum of all purchase payments made, less any amounts deducted in connection with partial withdrawals. During any subsequent contract year, the death benefit will be the greater of: (a) the contract value or (b) the death benefit on the last day of the previous contract year, plus any purchase payments made and less any amounts deducted in connection with partial withdrawals since then. If any contract owner dies after his or her 85th birthday and the oldest owner had an attained age of less than 81 years on the contract date, the death benefit will be the greater of: (a) the contract value or (b) the excess of (i) the sum of all purchase payments over (ii) the sum of any amounts deducted in connection with partial withdrawals. If any contract owner dies and the oldest owner had an attained age greater than 80 on the contract date, the death benefit will be the contract value less any applicable withdrawal charges at the time of payment of benefits. The determination of the death benefit will be made on the date written notice and proof of death, as well as all required claims forms, are received at the Company's Annuity Service Office. No person is entitled to the death benefit until this time. In addition, partial withdrawals include amounts applied under an annuity option under the contract. Also, amounts deducted in connection with partial withdrawals include charges imposed on a partial withdrawal, but not amounts charged to the contract in payment of the annual administration fee. If there is any debt under the contract, the death benefit equals the death benefit, as described above, less such debt. 17 24 Payment of Death Benefit. The Company will pay the death benefit (which, as defined above, is net of any debt) to the beneficiary if any contract owner dies before the maturity date. If there is a surviving contract owner, that contract owner will be deemed to be the beneficiary. No death benefit is payable on the death of any annuitant, except that if any contract owner is not a natural person, the death of any annuitant will be treated as the death of an owner. On the death of the last surviving annuitant, the contract owner, if a natural person, will become the annuitant unless the contract owner designates another person as the annuitant. The death benefit may be taken in the form of a lump sum immediately. If not taken immediately, the contract will continue subject to the following: (1) The beneficiary will become the contract owner. (2) Any excess of the death benefit over the contract value will be allocated to the owner's investment accounts in proportion to their relative values on the date of the Company's receipt at its Annuity Service Office of due proof of the owner's death. (3) No additional purchase payments may be made. (4) If the beneficiary is not the deceased's owner spouse, distribution of the contract owner's entire interest in the contract must be made within five years of the owner's death, or alternatively, distribution may be made as an annuity, under one of the annuity options described below, which begins within one year of the owner's death and is payable over the life of the beneficiary or over a period not extending beyond the life expectancy of the beneficiary. Upon the death of the beneficiary, the death benefit will equal the contract value which must be distributed immediately in a single sum. (5) If the owner's spouse is the beneficiary, the spouse continues the contract as the new owner. In such a case, the distribution rules described in "(4)" applicable when a contract owner dies will apply when the spouse, as the owner, dies. (6) If any contract owner dies and the oldest owner had an attained age of less than 81 on the contract date, withdrawal charges are not applied on payment of the death benefit (whether taken through a partial or total withdrawal or applied under an annuity option). If any contract owner dies and the oldest owner had an attained age greater than 80 on the contract date, withdrawal charges will be assessed only upon payment of the death benefit (if such charges are otherwise applicable), so that if the death benefit is paid in a subsequent year, a lower withdrawal charge will be applicable. If any annuitant is changed and any contract owner is not a natural person, the entire interest in the contract must be distributed to the contract owner within five years. A substitution or addition of any contract owner may result in resetting the death benefit to an amount equal to the contract value as of the date of the change and treating such value as a payment made on that date for purposes of computing the amount of the death benefit. No such change in death benefit will be made if the individual whose death will cause the death benefit to be paid is the same after the change in ownership or if ownership is transferred to the owner's spouse. Death benefits will be paid within seven days of the date the amount of the death benefit is determined, as described above, subject to postponement under the same circumstances that payment of withdrawals may be postponed. (See "WITHDRAWALS") ANNUITY PROVISIONS GENERAL The proceeds of the contract payable on death, withdrawal or the contract maturity date may be applied to the annuity options described below, subject to the distribution of death benefit provisions. See "DEATH BENEFIT BEFORE MATURITY DATE") Generally, annuity benefits under the contract will begin on the maturity date. The maturity date is the date specified on the contract specifications page, unless changed. If no date is specified, the maturity date is the maximum maturity date described below. The maximum maturity date is the first day of the month following the later of the 85th birthday of the annuitant or the tenth contract anniversary. The contract owner may specify a different maturity date at any time by written request at least one month before both the previously specified and the new maturity date. The new maturity date may not be later than the maximum maturity date unless the Company consents. Maturity dates which occur at advanced ages, e.g., past age 85, may in some circumstances have adverse income tax consequences. See "FEDERAL TAX MATTERS" Distributions from qualified contracts may be required before the maturity date. The contract owner may select the frequency of annuity payments. However, if the contract value at the maturity date is such that a monthly payment would be less than $20, the Company may pay the contract value, less any debt, in one lump sum to the annuitant on the maturity date. ANNUITY OPTIONS 18 25 Annuity benefits are available under the contract on a fixed or variable basis, or any combination of fixed and variable bases. Upon purchase of the contract, and on or before the maturity date, the contract owner may select one or more of the annuity options described below on a fixed and/or variable basis (except Option 5 which is available on a fixed basis only) or choose an alternate form of settlement acceptable to the Company. If an annuity option is not selected, the Company will provide as a default option annuity payments on a fixed, variable or combined fixed and variable basis in proportion to the Investment Account Value of each investment option at the maturity date, such payments to be made for a period certain of 10 years and continuing thereafter during the lifetime of the annuitant. Treasury Department regulations may preclude the availability of certain annuity options in connection with certain qualified contracts. The following annuity options are guaranteed in the contract. Option 1(a): Non-Refund Life Annuity - An annuity with payments during the lifetime of the annuitant. No payments are due after the death of the annuitant. Since there is no guarantee that any minimum number of payments will be made, an annuitant may receive only one payment if the annuitant dies prior to the date the second payment is due. Option 1(b): Life Annuity with Payments Guaranteed for 10 Years - An annuity with payments guaranteed for 10 years and continuing thereafter during the lifetime of the annuitant. Since payments are guaranteed for 10 years, annuity payments will be made to the end of such period if the annuitant dies prior to the end of the tenth year. Option 2(a): Joint & Survivor Non-Refund Life Annuity - An annuity with payments during the lifetimes of the annuitant and a designated co-annuitant. No payments are due after the death of the last survivor of the annuitant and co-annuitant. Since there is no guarantee that any minimum number of payments will be made, an annuitant or co-annuitant may receive only one payment if the annuitant and co-annuitant die prior to the date the second payment is due. Option 2(b): Joint & Survivor Life Annuity with Payments Guaranteed for 10 Years - An annuity with payments guaranteed for 10 years and continuing thereafter during the lifetimes of the annuitant and a designated co-annuitant. Since payments are guaranteed for 10 years, annuity payments will be made to the end of such period if both the annuitant and the co-annuitant die prior to the end of the tenth year. In addition to the foregoing annuity options which the Company is contractually obligated to offer at all times, the Company currently offers the following annuity options. The Company may cease offering the following annuity options at any time and may offer other annuity options in the future. Option 3: Life annuity with Payments Guaranteed for 5, 15 or 20 Years - An Annuity with payments guaranteed for 5, 15 or 20 years and continuing thereafter during the lifetime of the annuitant. Since payments are guaranteed for the specific number of years, annuity payments will be made to the end of the last year of the 5, 15 or 20 year period. Option 4: Joint & Two-Thirds Survivor Non-Refund Life Annuity - An annuity with full payments during the joint lifetime of the annuitant and a designated co-annuitant and two-thirds payments during the lifetime of the survivor. Since there is no guarantee that any minimum number of payments will be made, an annuitant or co-annuitant may receive only one payment if the annuitant and co-annuitant die prior to the date the second payment is due. Option 5: Period Certain Only Annuity for 5, 10, 15 or 20 years - An annuity with payments for a 5, 10, 15 or 20 year period and no payments thereafter. DETERMINATION OF AMOUNT OF THE FIRST VARIABLE ANNUITY PAYMENT The first variable annuity payment is determined by applying that portion of the contract value used to purchase a variable annuity, measured as of a date not more than ten business days prior to the maturity date (minus any applicable premium taxes), to the annuity tables contained in the contract. The rates contained in such tables depend upon the annuitant's sex and age (as adjusted depending on the annuitant's year of birth) and the annuity option selected. Under such tables, the longer the life expectancy of the annuitant under any life annuity option or the duration of any period for which payments are guaranteed under the option , the smaller will be the amount of the first monthly variable annuity payment. The rates are based on the 1983 Table A projected at Scale G, assume births in year 1942 and reflect an assumed interest rate of 3% per year. ANNUITY UNITS AND THE DETERMINATION OF SUBSEQUENT VARIABLE ANNUITY PAYMENTS 19 26 Variable annuity payments subsequent to the first will be based on the investment performance of the sub-accounts selected. The amount of such subsequent payments is determined by dividing the amount of the first annuity payment from each sub-account by the annuity unit value of such sub-account (as of the same date the contract value to effect the annuity was determined) to establish the number of annuity units which will thereafter be used to determine payments. This number of annuity units for each sub-account is then multiplied by the appropriate annuity unit value as of a uniformly applied date not more than ten business days before the annuity payment is due, and the resulting amounts for each sub-account are then totaled to arrive at the amount of the payment to be made. The number of annuity units remains constant during the annuity payment period. A pro-rata portion of the administration fee will be deducted from each annuity payment. The value of an annuity unit for each sub-account for any valuation period is determined by multiplying the annuity unit value for the immediately preceding valuation period by the net investment factor for that sub-account (see "NET INVESTMENT FACTOR") for the valuation period for which the annuity unit value is being calculated and by a factor to neutralize the assumed interest rate. A 3% assumed interest rate is built into the annuity tables in the contract used to determine the first variable annuity payment. A higher assumption would mean a larger first annuity payment, but more slowly rising subsequent payments when actual investment performance exceeds the assumed rate, and more rapidly falling subsequent payments when actual investment performance is less than the assumed rate. A lower assumption would have the opposite effect. If the actual net investment performance is 3% annually, annuity payments will be level. TRANSFERS AFTER MATURITY DATE Once variable annuity payments have begun, the contract owner may transfer all or part of the investment upon which such payments are based from one sub-account to another. Transfers will be made upon notice to the Company at least 30 days before the due date of the first annuity payment to which the change will apply. Transfers after the maturity date will be made by converting the number of annuity units being transferred to the number of annuity units of the sub-account to which the transfer is made, so that the next annuity payment if it were made at that time would be the same amount that it would have been without the transfer. Thereafter, annuity payments will reflect changes in the value of the new annuity units. The Company reserves the right to limit, upon notice, the maximum number of transfers a contract owner may make per contract year to four. Once annuity payments have commenced, no transfers may be made from a fixed annuity option to a variable annuity option or from a variable annuity option to a fixed annuity option. In addition, the Company reserves the right to defer the transfer privilege at any time that the Company is unable to purchase or redeem shares of the Trust portfolios. The Company also reserves the right to modify or terminate the transfer privilege at any time in accordance with applicable law. DEATH BENEFIT ON OR AFTER MATURITY DATE If annuity payments have been selected based on an annuity option providing for payments for a guaranteed period, and the annuitant dies on or after the maturity date, the Company will make the remaining guaranteed payments to the beneficiary. Any remaining payments will be made as rapidly as under the method of distribution being used as of the date of the annuitant's death. If no beneficiary is living, the Company will commute any unpaid guaranteed payments to a single sum (on the basis of the interest rate used in determining the payments) and pay that single sum to the estate of the last to die of the annuitant and the beneficiary. OTHER CONTRACT PROVISIONS TEN DAY RIGHT TO REVIEW The contract owner may cancel the contract by returning it to the Company's Annuity Service Office or agent at any time within 10 days after receipt of the contract. Within 7 days of receipt of the contract by the Company, the Company will pay the contract value, less any debt, computed at the end of the valuation period during which the contract is received by the Company, to the contract owner. No withdrawal charge is imposed upon return of the contract within the ten day right to review period. The ten day right to review may vary in certain states in order to comply with the requirements of insurance laws and regulations in such states. When the contract is issued as an individual retirement annuity under Internal Revenue Code section 408, during the first 7 days of the 10 day period, the Company will return all purchase payments if this is greater than the amount otherwise payable. OWNERSHIP 20 27 The contract owner is the person entitled to exercise all rights under the contract. Prior to the maturity date, the contract owner is the person designated in the contract specifications page or as subsequently named. On and after the maturity date, the annuitant is the contract owner. If amounts become payable to any beneficiary under the contract, the beneficiary is the contract owner. In the case of non-qualified contracts, ownership of the contract may be changed or the contract may be collaterally assigned at any time prior to the maturity date, subject to the rights of any irrevocable beneficiary. Assigning a contract, or changing the ownership of a contract, may be treated as a distribution of the contract value for Federal tax purposes. (See "FEDERAL TAX MATTERS") A change of any contract owner may result in resetting the death benefit to an amount equal to the contract value as of the date of the change and treating such value as a purchase payment made on that date for purposes of computing the amount of the death benefit. See "DEATH BENEFIT BEFORE MATURITY DATE" Any change of ownership or assignment must be made in writing. Any change must be approved by the Company. Any assignment and any change, if approved, will be effective as of the date the Company receives the request at its Annuity Service Office. The Company assumes no liability for any payments made or actions taken before a change is approved or an assignment is accepted or responsibility for the validity or sufficiency of any assignment. An absolute assignment will revoke the interest of any revocable beneficiary. In the case of qualified contracts, ownership of the contract generally may not be transferred except by the trustee of an exempt employees' trust which is part of a retirement plan qualified under Section 401 of the Internal Revenue Code or as otherwise permitted by applicable IRS regulations. Subject to the foregoing, a qualified contract may not be sold, assigned, transferred, discounted or pledged as collateral for a loan or as security for the performance of an obligation or for any other purpose to any person other than the Company. BENEFICIARY The beneficiary is the person, persons or entity designated in the contract specifications page or as subsequently named. However, if there is a surviving contract owner, that person will be treated as the beneficiary. The beneficiary may be changed subject to the rights of any irrevocable beneficiary. Any change must be made in writing, approved by the Company and if approved, will be effective as of the date on which written. The Company assumes no liability for any payments made or actions taken before the change is approved. If no beneficiary is living, the contingent beneficiary will be the beneficiary. The interest of any beneficiary is subject to that of any assignee. If no beneficiary or contingent beneficiary is living, the beneficiary is the estate of the deceased contract owner. In the case of certain qualified contracts, regulations promulgated by the Treasury Department prescribe certain limitations on the designation of a beneficiary. ANNUITANT The annuitant is any natural person or persons whose life is used to determine the duration of annuity payments involving life contingencies. If the contract owner names more than one person as an "annuitant," the second person named shall be referred to as "co-annuitant." The annuitant is as designated on the contract specifications page or in the application, unless changed. On the death of the annuitant, the co-annuitant, if living, becomes the annuitant. If there is no living co-annuitant, the owner becomes the annuitant. In the case of certain qualified contracts, there are limitations on the ability to designate and change the annuitant and the co-annuitant. MODIFICATION The contract may not be modified by the Company without the consent of the contract owner, except as may be required to make it conform to any law or regulation or ruling issued by a governmental agency. The provisions of the contract shall be interpreted so as to comply with the requirements of Section 72(s) of the Internal Revenue Code. COMPANY APPROVAL The Company reserves the right to accept or reject any contract application at its sole discretion. MISSTATEMENT AND PROOF OF AGE, SEX OR SURVIVAL The Company may require proof of age, sex or survival of any person upon whose age, sex or survival any payment depends. If the age or sex of the annuitant has been misstated, the benefits will be those that would have been provided for 21 28 the annuitant's correct age and sex. If the Company has made incorrect annuity payments, the amount of any underpayment will be paid immediately and the amount of any overpayment will be deducted from future annuity payments. FIXED ACCOUNT INVESTMENT OPTIONS Due to certain exemptive and exclusionary provisions, interests in the fixed account investment options are not registered under the Securities Act of 1933 ("1933 Act") and the Company's general account is not registered as an investment company under the Investment Company Act of 1940 ("1940 Act"). Accordingly, neither interests in the fixed account investment options nor the general account are subject to the provisions or restrictions of the 1933 Act or the 1940 Act and the staff of the Commission has not reviewed the disclosures in this Prospectus relating thereto. Disclosures relating to interests in the fixed account investment options and the general account, however, may be subject to certain generally applicable provisions of the federal securities laws relating to the accuracy of statements made in a registration statement. Pursuant to a Guarantee Agreement dated November 19, 1993 (originally entered into by NAL and assumed by Manulife in the merger), Manulife, the ultimate parent of the Company, unconditionally guarantees to the Company on behalf of and for the benefit of the Company and owners of fixed annuity contracts issued by the Company that it will, on demand, make funds available to the Company for the timely payment of contractual claims under fixed annuity contracts. This Guarantee covers the fixed portion of the contracts described by this Prospectus. This Guarantee may be terminated by Manulife on notice to the Company. Termination will not affect ManuLife's continuing liability with respect to all fixed annuity contracts issued prior to the termination of the Guarantee. Effective June 30, 1995, the Company entered into a Reinsurance Agreement with Peoples Security Life Insurance Company ("Peoples") pursuant to which Peoples reinsures certain amounts with respect to the fixed account portion of the contract described in this Prospectus. Under this Reinsurance Agreement, the Company remains liable for the contractual obligations of the contracts' fixed account and Peoples agrees to reimburse the Company for certain amounts and obligations in connection with the fixed account. Peoples contractual liability runs solely to the Company, and no contract owner shall have any right of action against Peoples. Peoples is a wholly-owned subsidiary of Louisville, Kentucky based Providian Corporation, a diversified financial services corporation. Peoples is rated A+ (Superior) by A.M. Best for operation performance and financial stability and AAA by Standard & Poor's Corporation for claims paying ability. Investment Options. Currently, there are four fixed account investment options under the contract: one, three, five and seven year investment accounts. The Company may offer additional fixed account investment options for any yearly period from two to ten years. Fixed investment accounts provide for the accumulation of interest on purchase payments at guaranteed rates for the duration of the guarantee period. The guaranteed interest rates on new amounts allocated or transferred to a fixed investment account are determined from time-to-time by the Company in accordance with market conditions. In no event will the guaranteed rate of interest be less than 3%. Once an interest rate is guaranteed for a fixed investment account, it is guaranteed for the duration of the guarantee period and may not be changed by the Company. Notwithstanding the foregoing, with respect to contracts issued in the State of Oregon, no purchase payments may be invested, transferred or reinvested into any fixed account investment option with a guarantee period of more than one year within 15 years of the maturity date, and no purchase payments may be invested in the one year fixed account investment option within six years of the maturity date. Investment Accounts. Contract owners may allocate purchase payments, or make transfers from the variable investment options, to the fixed account investment options at any time prior to the maturity date. The Company establishes a separate investment account each time the contract owner allocates or transfers amounts to a fixed account investment option, except that amounts allocated or transferred to the same fixed account investment option on the same day will establish a single investment account. Amounts may not be allocated to a fixed account investment option that would extend the guarantee period beyond the maturity date. Renewals. At the end of a guarantee period, the contract owner may establish a new investment account with the same guarantee period at the then current interest rate, select a different fixed account investment option or transfer the amounts to a variable account investment option, all without the imposition of any charge. The contract owner may not select a guarantee period that would extend beyond the maturity date. In the case of renewals within one year of the maturity date, the only fixed account investment option available is to have interest accrued up to the maturity date at the then current interest rate for one year guarantee periods. If the contract owner does not specify the renewal option desired, the Company will select the same guarantee period as has just expired, so long as such period does not extend beyond the 22 29 maturity date. In the event a renewal would extend beyond the maturity date, the Company will select the longest period that will not extend beyond such date, except in the case of a renewal within one year of the maturity date in which case the Company will credit interest up to the maturity date at the then current interest rate for one year guarantee periods. Market Value Charge. Any amount withdrawn, transferred or borrowed from an investment account prior to the end of the guarantee period may be subject to a market value charge. A market value charge will be calculated separately for each investment account affected by a transaction to which a market value charge may apply. The market value charge for an investment account will be calculated by multiplying the amount withdrawn or transferred from the investment account by the adjustment factor described below. The adjustment factor is determined by the following formula: 0.75x(B-A)xC/12 where: A - The guaranteed interest rate on the investment account. B - The guaranteed interest rate available, on the date the request is processed, for amounts allocated to a new investment account with the same length of guarantee period as the investment account from which the amounts are being withdrawn. C - The number of complete months remaining to the end of the guarantee period. For purposes of applying this calculation, the maximum difference between "B" and "A" will be 3%. The adjustment factor may never be less than zero. The total market value charge will be the sum of the market value charges for each investment account being withdrawn. Where the guaranteed rate available on the date of the request is less than the rate guaranteed on the investment account from which the amounts are being withdrawn (B-A in the adjustment factor is negative), there is no market value charge. There is only a market value charge when interest rates have increased (B-A in the adjustment factor is positive). There will be no market value charge on withdrawals from the fixed account investment options in the following situations: (a) death of the contract owner; (b) amounts withdrawn to pay fees or charges; (c) amounts applied at the maturity date to purchase an annuity at the guaranteed rates provided in the contract; (d) amounts withdrawn from investment accounts within one month prior to the end of the guarantee period; (e) amounts withdrawn from a one-year fixed investment account; and (f) amounts withdrawn in any contract year that do not exceed 10% of (i) total purchase payments less (ii) any prior partial withdrawals in that year. Notwithstanding application of the foregoing formula, in no event will the market value charge (i) be greater than the amount by which the earnings attributable to the amount withdrawn or transferred from an investment account exceed an annual rate of 3%, (ii) together with any withdrawal charges for an investment account be greater than 10% of the amount transferred or withdrawn, or (iii) reduce the amount payable on withdrawal or transfer below the amount required under the non-forfeiture laws of the state with jurisdiction over the contract. The cumulative effect of the market value and withdrawal charges could, however, result in a contract owner receiving total withdrawal proceeds of less than the contract owner's investment in the contract. Transfers. Prior to the maturity date, the contract owner may transfer amounts among the fixed account investment options and from the fixed account investment options to the variable account investment options, subject to the following conditions. An amount in a fixed investment account may not be transferred until held in such account for at least one year, except (i) transfers may be made pursuant to the Dollar Cost Averaging program and (ii) transfers may be made from a one year fixed investment account to the variable account investment options if, at the time of the transfer, the guaranteed interest rate for the funds to be transferred is equal to or greater than the then current guaranteed rate for funds being transferred into a one year fixed investment option. The Company may withdraw its permission to make the transfers described in (ii) above at any time after April 30, 1996. Consequently, except as noted above, amounts in one year investment accounts effectively may not be transferred prior to the end of the guarantee period. Amounts in any other investment accounts may be transferred after the one year holding period has been satisfied, but the market value charge described above may apply to such a transfer. The market value charge, if applicable, will be deducted from the amount transferred. The contract owner must specify the fixed account investment option from or to which a transfer is to be made. Where there are multiple investment accounts within a fixed account investment option, amounts must be withdrawn from the fixed account investment option on a first-in-first-out basis. Withdrawals. The contract owner may make total and partial withdrawals of amounts held in fixed account investment options at any time prior to his or her death. Withdrawals from fixed account investment options will be made in the same manner 23 30 and be subject to the same limitations as set forth under "WITHDRAWALS" plus the following provisions also apply to withdrawals from fixed account investment options: (1) the Company reserves the right to defer payment of amounts withdrawn from fixed account investment options for up to six months from the date it receives the written withdrawal request (if a withdrawal is deferred for more than 30 days pursuant to this right, the Company will pay interest on the amount deferred at a rate not less than 3% per year); (2) if there are multiple investment accounts under a fixed account investment option, amounts must be withdrawn from such accounts on a first-in-first-out basis; and (3) the market value charge described above may apply to withdrawals from any investment option except for a one year investment option. In the event a market value charge applies to a withdrawal from a fixed investment account, it will be calculated with respect to the full amount in the investment account and deducted from the amount payable in the case of a total withdrawal. In the case of a partial withdrawal, the market value charge will be calculated on the amount requested and deducted, if applicable, from the remaining investment account value. Where a contract owner requests a partial withdrawal from a contract in excess of the amounts in the variable account investment options and does not specify the fixed account investment options from which the withdrawal is to be made, such withdrawal will be made from the investment options beginning with the shortest guarantee period. Within such sequence, where there are multiple investment accounts within a fixed account investment option, withdrawals will be made on a first-in-first-out basis. Withdrawals from the contract may be subject to income tax and a 10% penalty tax. Withdrawals are permitted from contracts issued in connection with Section 403(b) qualified plans only under limited circumstances. (See "FEDERAL TAX MATTERS") Loans. The Company offers a loan privilege only to owners of contracts issued in connection with Section 403(b) qualified plans that are not subject to Title I of ERISA. Owners of such contracts may obtain loans using the contract as the only security for the loan. Owners of such contracts may borrow amounts allocated to fixed investment accounts in the same manner and subject to the same limitations as set forth under "LOANS". The market value charge described above may apply to amounts transferred from the fixed investment accounts to the loan account in connection with such loans and, if applicable, will be deducted from the amount so transferred. Fixed Annuity Options. Subject to the distribution of death benefits provisions (see "DEATH BENEFIT BEFORE MATURITY DATE"), on death, withdrawal or the maturity date of the contract, the proceeds may be applied to a fixed annuity option. (See "ANNUITY OPTIONS") The amount of each fixed annuity payment is determined by applying the portion of the proceeds (less any applicable premium taxes) applied to purchase the fixed annuity to the appropriate table in the contract. If the table in use by the Company is more favorable to the contract owner, the Company will substitute that table. The Company guarantees the dollar amount of fixed annuity payments. CHARGES AND DEDUCTIONS Charges and deductions under the contracts are assessed against purchase payments, contract values or annuity payments. Currently, there are no deductions made from purchase payments, except for premium taxes in certain states. In addition, there are deductions from and expenses paid out of the assets of the Trust portfolios that are described in the accompanying Prospectus of the Trust. WITHDRAWAL CHARGES If a withdrawal is made from the contract before the maturity date, a withdrawal charge (contingent deferred sales charge) may be assessed against amounts withdrawn attributable to purchase payments that have been in the contract less than seven complete contract years. There is never a withdrawal charge with respect to earnings accumulated in the contract, certain other free withdrawal amounts described below or purchase payments that have been in the contract more than seven complete contract years. In no event may the total withdrawal charges exceed 6% of the amount invested. The amount of the withdrawal charge and when it is assessed is discussed below: 1. Each withdrawal from the contract is allocated first to the "free withdrawal amount" and second to "unliquidated purchase payments". In any contract year, the free withdrawal amount for that year is the greater of (1) the excess of the contract value on the date of withdrawal over the unliquidated purchase payments (the accumulated earnings on the contract) or (2) the excess of (i) over (ii), where (i) is 10% of total purchase payments and (ii) is all prior partial withdrawals in that contract year. Withdrawals allocated to the free withdrawal amount may be withdrawn without the imposition of a withdrawal charge. The free withdrawal amount will be applied to a requested withdrawal, first, to withdrawals from variable account investment options and 24 31 then to withdrawals from fixed account investment options beginning with those with the shortest guarantee period first and the longest guarantee period last. 2. If a withdrawal is made for an amount in excess of the free withdrawal amount, the excess will be allocated to purchase payments which will be liquidated on a first-in first-out basis. On any withdrawal request, the Company will liquidate purchase payments equal to the amount of the withdrawal request which exceeds the free withdrawal amount in the order such purchase payments were made: the oldest unliquidated purchase payment first, the next purchase payment second, etc... until all purchase payments have been liquidated. 3. Each purchase payment or portion thereof liquidated in connection with a withdrawal request is subject to a withdrawal charge based on the length of time the purchase payment has been in the contract. The amount of the withdrawal charge is calculated by multiplying the amount of the purchase payment being liquidated by the applicable withdrawal charge percentage obtained from the table below.
NUMBER OF COMPLETE YEARS OF PURCHASE PAYMENT IN WITHDRAWAL CHARGE CONTRACT PERCENTAGE ----------------------------------------------------------- 0 6% 1 6% 2 5% 3 5% 4 4% 5 3% 6 2% 7+ 0%
The total withdrawal charge will be the sum of the withdrawal charges for the purchase payments being liquidated. 4. The withdrawal charge is deducted from the contract value remaining after the contract owner is paid the amount requested, except in the case of a complete withdrawal when it is deducted from the amount otherwise payable. In the case of a partial withdrawal, the amount requested from an investment account may not exceed the value of that investment account less any applicable withdrawal charge. 5. There is generally no withdrawal charge on distributions made as a result of the death of the contract owner or, if applicable, the annuitant, (see "Death Benefit Before Maturity Date - Amount of Death Benefit), and no withdrawal charges are imposed on the maturity date if the contract owner annuitizes as provided in the contract. The amount collected from the withdrawal charge will be used to reimburse the Company for the compensation paid to cover selling concessions to broker-dealers, preparation of sales literature and other expenses related to sales activity. For examples of calculation of the withdrawal charge, see Appendix A. Withdrawals from the fixed account investment options may be subject to a market value charge in addition to the withdrawal charge described above. (See "FIXED ACCOUNT INVESTMENT OPTIONS.") REDUCTION OR ELIMINATION OF WITHDRAWAL CHARGES The amount of the withdrawal charge on a contract may be reduced or eliminated when sales of the contracts are made to individuals or to a group of individuals in such a manner that results in savings of sales expenses. The entitlement to such a reduction in the withdrawal charge will be determined by the Company in the following manner: 1. The size and type of group to which sales are to be made will be considered. Generally, sales expenses for a larger group are smaller than for a smaller group because of the ability to implement large numbers of contracts with fewer sales contacts. 2. The total amount of purchase payments to be received will be considered. Per dollar sales expenses are likely to be less on larger purchase payments than on smaller ones. 25 32 3. Any prior or existing relationship with the Company will be considered. Per contract sales expenses are likely to be less when there is a prior or existing relationship because of the likelihood of implementing the contract with fewer sales contacts. 4. The level of commissions paid to selling broker-dealers will be considered. Certain broker-dealers may offer the contract in connection with financial planning programs offered on a fee for service basis. In view of the financial planning fees, such broker-dealers may elect to receive lower commissions for sales of the contracts, thereby reducing the Company's sales expenses. 5. There may be other circumstances of which the Company is not presently aware, which could result in reduced sales expenses. If, after consideration of the foregoing factors, it is determined that there will be a reduction in sales expenses, the Company will provide a reduction in the withdrawal charge. The withdrawal charge will be eliminated when a contract is issued to an officer, director or employee (or a relative thereof) of the Company, Manulife, the Trust or any of their affiliates. In no event will reduction or elimination of the withdrawal charge be permitted where such reduction or elimination will be unfairly discriminatory to any person. ADMINISTRATION FEES Except as noted below, the Company will deduct each year an annual administration fee of $30 as partial compensation for the cost of providing all administrative services attributable to the contracts and the operations of the Variable Account and the Company in connection with the contracts. However, if prior to the maturity date the contract value is equal to or greater than $100,000 at the time of the fee's assessment, the fee will be waived. Prior to the maturity date, this administration fee is deducted on the last day of each contract year. It is withdrawn from each investment option in the same proportion that the value of such investment option bears to the contract value. If the entire contract is withdrawn on other than the last day of any contract year, the $30 administration fee will be deducted from the amount paid. During the annuity period, the fee is deducted on a pro-rata basis from each annuity payment. A daily charge in an amount equal to 0.15% of the value of each variable investment account on an annual basis is also deducted from each sub-account to reimburse the Company for administrative expenses. This asset based administrative charge will not be deducted from the fixed account investment options. The charge will be reflected in the contract value as a proportionate reduction in the value of each variable investment account. Because this portion of the administrative fee is a percentage of assets rather than a flat amount, larger contracts will in effect pay a higher proportion of this portion of the administrative expense than smaller contracts. The Company does not expect to recover from such fees any amount in excess of its accumulated administrative expenses. Even though administrative expenses may increase, the Company guarantees that it will not increase the amount of the administration fees. REDUCTION OR ELIMINATION OF ANNUAL ADMINISTRATION FEE The amount of the annual administration fee on a contract may be reduced or eliminated when sales of the contracts are made to individuals or to a group of individuals in such a manner that results in savings of administration expenses. The entitlement to such a reduction or elimination of the administration charges will be determined by the Company in the following manner: 1. The size and type of group to which administrative services are to be provided will be considered. 2. The total amount of purchase payments to be received will be considered. 3. There may be other circumstances of which the Company is not presently aware, which could result in reduced administrative expense. If, after consideration of the foregoing factors, it is determined that there will be a reduction or elimination of administration expenses, the Company will provide a reduction in the annual administration fee. In no event will reduction or elimination of the administration fees be permitted where such reduction or elimination will be unfairly discriminatory to any person. The Company may waive all or a portion of the administration fee when a contract is issued to an officer, director or employee, or relative thereof, of the Company, Manulife, the Trust or any of their affiliates. 26 33 MORTALITY AND EXPENSE RISK CHARGE The mortality risk assumed by the Company is the risk that annuitants may live for a longer period of time than estimated. The Company assumes this mortality risk by virtue of annuity rates incorporated into the contract which cannot be changed. This assures each annuitant that his longevity will not have an adverse effect on the amount of annuity payments. Also, the Company guarantees that if the contract owner dies before the maturity date, it will pay a death benefit. (See "DEATH BENEFIT BEFORE MATURITY DATE") The expense risk assumed by the Company is the risk that the administration charges or withdrawal charge may be insufficient to cover actual expenses. To compensate it for assuming these risks, the Company deducts from each of the sub-accounts a daily charge in an amount equal to 1.25% of the value of the variable investment accounts on an annual basis, consisting of .8% for the mortality risk and .45% for the expense risk. The charge will be reflected in the contract value as a proportionate reduction in the value of each variable investment account. The rate of the mortality and expense risk charge cannot be increased. If the charge is insufficient to cover the actual cost of the mortality and expense risks undertaken, the Company will bear the loss. Conversely, if the charge proves more than sufficient, the excess will be profit to the Company and will be available for any proper corporate purpose including, among other things, payment of distribution expenses. The mortality and expense risk charge is not assessed against the fixed account investment options. TAXES The Company reserves the right to charge, or provide for, certain taxes against purchase payments, contract values or annuity payments. Such taxes may include premium taxes or other taxes levied by any government entity which the Company determines to have resulted from the (i) establishment or maintenance of the Variable Account, (ii) receipt by the Company of purchase payments, (iii) issuance of the contacts, or (iv) commencement or continuance of annuity payments under the contracts. In addition, the Company will withhold taxes to the extent required by applicable law. Except for residents in Pennsylvania and South Dakota, premium taxes will be deducted from the contract value used to provide for fixed or variable annuity payments unless required otherwise by applicable law. The amount deducted will depend on the premium tax assessed in the applicable state. State premium taxes currently range from 0% to 3.5% depending on the jurisdiction and the tax status of the contract and are subject to change by the legislature or other authority. (See "APPENDIX B: STATE PREMIUM TAXES") FOR RESIDENTS OF SOUTH DAKOTA OR PENNSYLVANIA, THE FOLLOWING PREMIUM TAX ASSESSMENT WILL APPLY: A premium tax will be assessed against all non-qualified purchase payments received from contract owners who are residents of South Dakota. The rate of tax is 1.25% for South Dakota residents. Purchase payments received for the period October 1, 1992 through September 7, 1995 for nonqualified contracts of Pennsylvania residents will be assessed a 2.00% premium tax; purchase payments received on or after Septemer 8, 1995 will not be assessed a premium tax. The state premium tax will be collected upon payment of any withdrawal benefits, upon any annuitization or payment of death benefits. In the states of Pennsylvania and South Dakota, purchase payments received in connection with the funding of a qualified plan are exempt from state premium tax. FEDERAL TAX MATTERS INTRODUCTION The following discussion of the federal income tax treatment of the contract is not exhaustive, does not purport to cover all situations, and is not intended as tax advice. A qualified tax adviser should always be consulted with regard to the application of law to individual circumstances. This discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations, and interpretations existing on the date of this Prospectus. These authorities, however, are subject to change by Congress, the Treasury Department, and judicial decisions. This discussion does not address state or local tax consequences associated with the purchase of a contract. In addition, THE COMPANY MAKES NO GUARANTEE REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT. THE COMPANY'S TAX STATUS 27 34 The Company is taxed as a life insurance company under Subchapter L of the Code. Since the operations of the Variable Account are a part of, and are taxed with, the operations of the Company, the Variable Account is not separately taxed as a "regulated investment company" under Subchapter M of the Code. Under existing federal income tax laws, investment income and capital gains of the Variable Account are not taxed to the extent they are applied to increase reserves under a contract. Since, under the contracts, investment income and realized capital gains of the Variable Account are automatically applied to increase reserves, the Company does not anticipate that it will incur any federal income tax liability attributable to the Variable Account, and therefore the Company does not intend to make provision for any such taxes. If the Company is taxed on investment income or capital gains of the Variable Account, then the Company may impose a charge against the Variable Account in order to make provision for such taxes. TAXATION OF ANNUITIES IN GENERAL TAX DEFERRAL DURING ACCUMULATION PERIOD Under existing provisions of the Code, except as described below, any increase in the contract value is generally not taxable to the contract owner or annuitant until received, either in the form of annuity payments, as contemplated by the contract, or in some other form of distribution. However, this rule applies only if (1) the owner is an individual, (2) the investments of the Variable Account are "adequately diversified" in accordance with Treasury Department regulations, and (3) the Company, rather than the owner, is considered the owner of the assets of the Variable Account for federal tax purposes. Non-Natural Owner. As a general rule, deferred annuity contracts held by "non-natural persons" such as a corporation, trust or other similar entity, as opposed to a natural person, are not treated as annuity contracts for federal tax purposes. The investment income on such contracts is taxed as ordinary income that is received or accrued by the owner of the contract during the taxable year. There are several exceptions to this general rule for non-natural contract owners. First, contracts will generally be treated as held by a natural person if the nominal owner is a trust or other entity which holds the contract as an agent for a natural person. However, this special exception will not apply in the case of any employer who is the nominal owner of an annuity contract under a non-qualified deferred compensation arrangement for its employees. In addition, exceptions to the general rule for non-natural contract owners will apply with respect to (1) contracts acquired by an estate of a decedent by reason of the death of the decedent, (2) certain qualified contracts, (3) contracts purchased by employers upon the termination of certain qualified plans, (4) certain contracts used in connection with structured settlement agreements, and (5) contracts purchased with a single premium when the annuity starting date is no later than a year from purchase of the annuity and substantially equal periodic payments are made, not less frequently than annually, during the annuity period. Diversification Requirements. For a contract to be treated as an annuity for federal income tax purposes, the investments of the Variable Account must be "adequately diversified" in accordance with Treasury Department regulations. The Secretary of the Treasury has issued regulations which prescribe standards for determining whether the investments of the Variable Account are "adequately diversified." If the Variable Account failed to comply with these diversification standards, a contract would not be treated as an annuity contract for federal income tax purposes and the contract owner would be taxable currently on the excess of the contract value over the premiums paid for the contract. Although the Company does not control the investments of NASL Series Trust, it expects that the Trust will comply with such regulations so that the Variable Account will be considered "adequately diversified." Ownership Treatment. In certain circumstances, variable annuity contract owners may be considered the owners, for federal income tax purposes, of the assets of the separate account used to support their contracts. In those circumstances, income and gains from the separate account assets would be includible in the contract owners' gross income. The Internal Revenue Service (the "Service") has stated in published rulings that a variable contract owner will be considered the owner of separate account assets if the owner possesses incidents of ownership in those assets, such as the ability to exercise investment control over the assets. In addition, the Treasury Department announced, in connection with the issuance of regulations concerning investment diversification, that those regulations "do not provide guidance concerning the circumstances in which investor control of the investments of a separate account may cause the investor, rather than the insurance company, to be treated as the owner of the assets in the account." This announcement also stated that guidance would be issued by way of regulations or rulings on the "extent to which policyholders may direct their investments to particular sub-accounts [of a separate account] without being treated as owners of the underlying assets." As of the date of this Prospectus, no such guidance has been issued. The ownership rights under this contract are similar to, but different in certain respects from, those described by the Service in rulings in which it was determined that contract owners were not owners of separate account assets. For example, the owner of 28 35 this contract has the choice of more investment options to which to allocate premiums and contract values, and may be able to transfer among investment options more frequently than in such rulings. These differences could result in the contract owner being treated as the owner of the assets of the Variable Account. In addition, the Company does not know what standards will be set forth in the regulations or rulings which the Treasury Department has stated it expects to issue. The Company therefore reserves the right to modify the contract as necessary to attempt to prevent the contract owner from being considered the owner of the assets of the Variable Account. Delayed Maturity Dates. If the contract's scheduled maturity date is at a time when the annuitant has reached an advanced age, e.g., past age 85, it is possible that the contract would not be treated as an annuity. In that event, the income and gains under the contract could be currently includible in the owner's income. The remainder of this discussion assumes that the contract will be treated as an annuity contract for federal income tax purposes and that the Company will be treated as the owner of the Variable Account assets. TAXATION OF PARTIAL AND FULL WITHDRAWALS In the case of a partial withdrawal, amounts received are includible in income to the extent the contract value before the withdrawal exceeds the "investment in the contract." In the case of a full withdrawal, amounts received are includible in income to the extent they exceed the "investment in the contract." For these purposes the investment in the contract at any time equals the total of the purchase payments made under the contract to that time (to the extent such payments were neither deductible when made nor excludible from income as, for example, in the case of certain contributions to qualified plans) less any amounts previously received from the contract which were not included in income. Other than in the case of certain qualified contracts, any amount received as a loan under a contract, and any assignment or pledge (or agreement to assign or pledge) any portion of the contract value, is treated as a withdrawal of such amount or portion. The investment in the contract is increased by the amount includible as income with respect to such assignment or pledge, though it is not affected by any other aspect of the assignment or pledge (including its release). If an individual transfers an annuity contract without adequate consideration to a person other than the owner's spouse (or to a former spouse incident to divorce), the owner will be taxed on the difference between the "contract value" and the "investment in the contract" at the time of transfer. In such case, the transferee's investment in the contract will be increased to reflect the increase in the transferor's income. The contract provides a death benefit that in certain circumstances may exceed the greater of the purchase payments and the contract value. As described elsewhere in this prospectus, the Company imposes certain charges with respect to the death benefit. It is possible that some portion of those charges could be treated for federal tax purposes as a partial withdrawal from the contract. TAXATION OF ANNUITY PAYMENTS Normally, the portion of each annuity payment taxable as ordinary income is equal to the excess of the payment over the exclusion amount. In the case of variable annuity payments, the exclusion amount is the "investment in the contract" (defined above) allocated to the variable annuity option, adjusted for any period certain or refund feature, when payments begin to be made divided by the number of payments expected to be made (determined by Treasury Department regulations which take into account the annuitant's life expectancy and the form of annuity benefit selected). In the case of fixed annuity payments, the exclusion amount is the amount determined by multiplying (1) the payment by (2) the ratio of the investment in the contract allocated to the fixed annuity option, adjusted for any period certain or refund feature, to the total expected value of annuity payments for the term of the contract (determined under Treasury Department regulations). Once the total amount of the investment in the contract is excluded using these ratios, annuity payments will be fully taxable. If annuity payments cease because of the death of the annuitant and before the total amount of the investment in the contract is recovered, the unrecovered amount generally will be allowed as a deduction to the annuitant in his last taxable year. TAXATION OF DEATH BENEFIT PROCEEDS Amounts may be distributed from a contract because of the death of an owner or an annuitant. In the case of a non-qualified contract, such death benefit proceeds are includible in income as follows: (1) if distributed in a lump sum, they are taxed in the same manner as a full withdrawal, as described above, or (2) if distributed under an annuity option, they are taxed in the same manner as annuity payments, as described above. 29 36 PENALTY TAX ON PREMATURE DISTRIBUTIONS There is a 10% penalty tax on the taxable amount of any payment from a non-qualified contract unless the payment is: (a) received on or after the contract owner reaches age 59 1/2; (b) attributable to the contract owner's becoming disabled (as defined in the tax law); (c) made to a beneficiary on or after the death of the contract owner or, if the contract owner is not an individual, on or after the death of the primary annuitant (as defined in the tax law); (d) made as a series of substantially equal periodic payments (not less frequently than annually) for the life (or life expectancy) of the annuitant or the joint lives (or joint life expectancies) of the annuitant and "designated beneficiary" (as defined in the tax law); (e) made under an annuity contract purchased with a single premium when the annuity starting date is no later than a year from purchase of the annuity and substantially equal periodic payments are made, not less frequently than annually, during the annuity period; and (f) made with respect to certain annuities issued in connection with structured settlement agreements. There is also a 10% penalty tax on the taxable amount of any payment from certain qualified contracts (but not section 457 plans). There are exceptions to this penalty tax which vary depending on the type of qualified plan. In the case of an "Individual Retirement Annuity" ("IRA"), exceptions provide that the penalty tax does not apply to a payment (a) received on or after the contract owner reaches age 59 1/2, (b) received on or after the owner's death or because of the owner's disability (as defined in the tax law), or (c) made as a series of substantially equal periodic payments (not less frequently than annually) for the life (or life expectancy) of the owner or the joint lives (or joint life expectancies) of the owner and "designated beneficiary" (as defined in the tax law). These exceptions, as well as certain others not described herein, generall y apply to taxable distributions from other qualified plans (although, in the case of plans qualified under section 401 and 403, exception "c" above for substantially equal periodic payments applies only if the owner has separated from service). AGGREGATION OF CONTRACTS In certain circumstances, the Service may determine the amount of an annuity payment or a withdrawal from a contract that is includible in income by combining some or all of the non-qualified contracts owned by an individual. For example, if a person purchases a contract offered by this Prospectus and also purchases at approximately the same time an immediate annuity, the Service may treat the two contracts as one contract. In addition, if a person purchases two or more deferred annuity contracts from the same insurance company (or its affiliates) during any calendar year, all such contracts will be treated as one contract. The effects of such aggregation are not clear; however, it could affect the time when income is taxable and the amount which might be subject to the 10% penalty tax described above. QUALIFIED RETIREMENT PLANS The contracts are also designed for use in connection with certain types of retirement plans which receive favorable treatment under the Code. Numerous special tax rules apply to the participants in such qualified plans and to the contracts used in connection with such qualified plans. These tax rules vary according to the type of plan and the terms and conditions of the plan itself. For example, for both withdrawals and annuity payments under certain qualified contracts, there may be no "investment in the contract" and the total amount received may be taxable. In addition, loans from qualified contracts, where allowed, are subject to a variety of limitations, including restrictions as to the amount that may be borrowed, the duration of the loan, and the manner in which the loans must be repaid. (Owners should always consult their tax advisors and retirement plan fiduciaries prior to exercising their loan privileges.) Also, special rules apply to the time at which distributions must commence and the form in which the distributions must be paid. For example, failure to comply with minimum distribution requirements applicable to qualified plans will result in the imposition of an excise tax. This excise tax generally equals 50% of the amount by which a minimum required distribution exceeds the actual distribution from the qualified plan. In the case of IRAs and certain other qualified plans, distributions of minimum amounts (as specified in the tax law) must generally commence by April 1 of the calendar year in which the owner attains age 70 1/2. For these reasons, no attempt is made to provide more than general information about the use of contracts with the various types of qualified plans. When issued in connection with a qualified plan, a contract will be amended as generally necessary to conform to the requirements of the type of plan. However, contract owners, annuitants, and beneficiaries are cautioned that the rights of any person to any benefits under qualified plans may be subject to the terms and conditions of the plans themselves, regardless of the terms and conditions of the contract. In addition, the Company shall not be bound by terms and conditions of qualified plans to the extent such terms and conditions contradict the contract, unless the Company consents. 30 37 QUALIFIED PLAN TYPES Following are brief descriptions of various types of qualified plans in connection with which the Company may issue a contract. Individual Retirement Annuities. Section 408 of the Code permits eligible individuals to contribute to an individual retirement program known as an "Individual Retirement Annuity" or "IRA." IRAs are subject to limits on the amounts that may be contributed, the persons who may be eligible and on the time when distributions may commence. Also, distributions from certain other types of qualified retirement plans may be "rolled over" on a tax-deferred basis into an IRA. Simplified Employee Pensions (SEP-IRAs). Section 408(k) of the Code allows employers to establish simplified employee pension plans for their employees, using the employees' IRAs for such purposes, if certain criteria are met. Under these plans the employer may, within specified limits, make deductible contributions on behalf of the employees to IRAs. Employers intending to use the contract in connection with such plans should seek competent advice. In particular, employers should consider that IRAs generally may not provide life insurance, but they may provide a death benefit that equals the greater of the premiums paid and the contract's cash value. The contract provides a death benefit that in certain circumstances may exceed the greater of the purchase payments and the contract value. The Company has asked the IRS to approve use of the contract, as to form, as an IRA, but there is no assurance that such approval will be granted. Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and Profit-Sharing Plans. Sections 401(a) and 403(a) of the Code permit corporate employers to establish various types of tax-favored retirement plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed individuals also to establish such tax-favored retirement plans for themselves and their employees. Such retirement plans may permit the purchase of the contracts in order to provide benefits under the plans. The contract provides a death benefit that in certain circumstances may exceed the greater of the purchase payments and the contract value. It is possible that such death benefit could be characterized as an incidental death benefit. There are limitations on the amount of incidental benefits that may be provided under pension and profit sharing plans. In addition, the provision of such benefits may result in currently taxable income to participants. Employers intending to use the contract in connection with such plans should seek competent advice. Tax-Sheltered Annuities. Section 403(b) of the Code permits public school employees and employees of certain types of charitable, educational and scientific organizations specified in Section 501(c)(3) of the Code to have their employers purchase annuity contracts for them and, subject to certain limitations, to exclude the amount of purchase payments from gross income for tax purposes. These annuity contracts are commonly referred to as "tax-sheltered annuities." Purchasers of the contracts for such purposes should seek competent advice as to eligibility, limitations on permissible amounts of purchase payments and other tax consequences associated with the contracts. In particular, purchasers should consider that the contract provides a death benefit that in certain circumstances may exceed the greater of the purchase payments and the contract value. It is possible that such death benefit could be characterized as an incidental death benefit. If the death benefit were so characterized, this could result in currently taxable income to purchasers. In addition, there are limitations on the amount of incidental death benefits that may be provided under a tax-sheltered annuity. Even if the death benefit under the contract were characterized as an incidental death benefit, it is unlikely to violate those limits unless the purchaser also purchases a life insurance contract as part of his or her tax-sheltered annuity plan. Withdrawals from a tax-sheltered annuity attributable to contributions made pursuant to a salary reduction agreement in a taxable year beginning after December 31, 1988, may be paid only if the employee has reached age 59 1/2, separated from service, died, become disabled, or in the case of hardship. Amounts permitted to be distributed in the event of hardship are limited to actual contributions; earnings thereon may not be distributed on account of hardship. (These limitations on withdrawals do not apply to the extent the Company is directed to transfer some or all of the contract value to the issuer of another tax-sheltered annuity or into a Section 403(b)(7) custodial account.) Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations. Section 457 of the Code permits employees of state and local governments and tax-exempt organizations to defer a portion of their compensation without paying current taxes. The employees must be participants in an eligible deferred compensation plan. To the extent the contracts are used in connection with an eligible plan, employees are considered general creditors of the employer and the employer as owner of 31 38 the contract has the sole right to the proceeds of the contract. Loans to employees are not permitted under such plans. Generally, with respect to purchase payments made after February 28, 1986, a contract purchased by a state or local government or a tax-exempt organization will not be treated as an annuity contract for federal income tax purposes. Those who intend to use the contracts in connection with such plans should seek competent advice. DIRECT ROLLOVERS If the contract is used in connection with a pension, profit-sharing, or annuity plan qualified under sections 401(a) or 403(a) of the Code, or is a tax-sheltered annuity under section 403(b) of the Code, any "eligible rollover distribution" from the contract will be subject to the direct rollover and mandatory withholding requirements enacted by Congress in 1992. An eligible rollover distribution generally is any taxable distribution from a qualified pension plan under section 401(a) of the Code, qualified annuity plan under section 403(a) of the Code, or section 403(b) annuity or custodial account, excluding certain amounts (such as minimum distributions required under section 401(a)(9) of the Code and distributions which are part of a "series of substantially equal periodic payments" made for life or a specified period of 10 years or more). Under these requirements, federal income tax equal to 20% of the eligible rollover distribution will be withheld from the amount of the distribution. Unlike withholding on certain other amounts distributed from the contract, discussed below, the owner cannot elect out of withholding with respect to an eligible rollover distribution. However, this 20% withholding will not apply if, instead of receiving the eligible rollover distribution, the owner elects to have it directly transferred to certain qualified plans. Prior to receiving an eligible rollover distribution, the owner will receive a notice explaining generally the direct rollover and mandatory withholding requirements and how to avoid the 20% withholding by electing a direct transfer. FEDERAL INCOME TAX WITHHOLDING The Company will withhold and remit to the U.S. government a part of the taxable portion of each distribution made under a contract unless the distributee notifies the Company at or before the time of the distribution that he or she elects not to have any amounts withheld. In certain circumstances, the Company may be required to withhold tax, as explained above. The withholding rates applicable to the taxable portion of periodic annuity payments (other than eligible rollover distributions) are the same as the withholding rates generally applicable to payments of wages. In addition, the withholding rate applicable to the taxable portion of non-periodic payments (including withdrawals prior to the maturity date) is 10%. As discussed above, the withholding rate applicable to eligible rollover distributions is 20%. GENERAL MATTERS TAX DEFERRAL The status of the contract as an annuity generally allows all earnings on the underlying investments to be tax-deferred until withdrawn or until annuity payments begin. (See "FEDERAL TAX MATTERS"). This tax deferred treatment may be beneficial to contract owners in building assets in a long-term investment program. PERFORMANCE DATA From time to time the Variable Account may publish advertisements containing performance data relating to its sub-accounts. For periods prior to August 9, 1994, performance data will be hypothetical figures based on the assumption that a contract offered by this Prospectus was issued when the sub-accounts first became available for investment under other contracts offered by the Company. The sub-accounts may advertise both "standardized" and "non-standardized" total return figures, although standardized figures will always accompany non-standardized figures. Standardized performance data will consist of total return quotations, which will always include quotations for recent one year and, when applicable, five and ten year periods and, where less than ten years, for the period subsequent to the date each sub-account first became available for investment. Such quotations for such periods will be the average annual rates of return required for an initial purchase payment of $1,000 to equal the actual contract value attributable to such purchase payment on the last day of the period, after reflection of all charges. Standardized total return figures will be quoted assuming redemption at the end of the period. Such figures may be accompanied by non-standardized total return figures that are calculated on the same basis as the standardized returns except that the calculations (i) assume no redemption a the end of the period and (ii) do not reflect imposition of the $30 per contract charge inasmuch as the impact of such charge varies by contract size. In addition to the non-standardized returns, each of the sub-accounts may from time to time quote aggregate non-standardized total returns for other time periods. Except as noted above, performance figures used by the Variable Account are based 32 39 on the actual historical performance of its sub-accounts for specified periods, and the figures are not intended to indicate future performance. More detailed information on the computations is set forth in the Statement of Additional Information. FINANCIAL STATEMENTS Financial Statements for the Variable Account and the Company are contained in the Statement of Additional Information. ASSET ALLOCATION AND TIMING SERVICES The Company is aware that certain third parties are offering asset allocation and timing services in connection with the contracts. In certain cases the Company has agreed to honor transfer instructions from such asset allocation and timing services where it has received powers of attorney, in a form acceptable to it, from the contract owners participating in the service. THE COMPANY DOES NOT ENDORSE, APPROVE OR RECOMMEND SUCH SERVICES IN ANY WAY AND CONTRACT OWNERS SHOULD BE AWARE THAT FEES PAID FOR SUCH SERVICES ARE SEPARATE AND IN ADDITION TO FEES PAID UNDER THE CONTRACTS. DISTRIBUTION OF CONTRACTS NASL Financial Services, Inc. ("NASL Financial"), 116 Huntington Avenue, Boston, Massachusetts 02116, a wholly-owned subsidiary of the Company, is the principal underwriter of the contracts in addition to providing advisory services to the Trust. NASL Financial is a broker-dealer registered under the Securities Exchange Act of 1934 ("1934 Act") and a member of the National Association of Securities Dealers, Inc. ("NASD"). NASL Financial has entered into an exclusive promotional agent agreement with Wood Logan Associates, Inc. ("Wood Logan"). Wood Logan is a broker-dealer registered under the 1934 Act and a member of the NASD. Wood Logan is a wholly owned subsidiary of a holding company that is 85% owned by Manulife and approximately 15% owned by the principals of Wood Logan. Sales of the contracts will be made by registered representatives of broker-dealers authorized by NASL Financial to sell the contracts. Such registered representatives will also be licensed insurance agents of the Company. Under the promotional agent agreement, Wood Logan will recruit and provide sales training and licensing assistance to such registered representatives. In addition, Wood Logan will prepare sales and promotional materials for the Company's approval. NASL Financial will pay distribution compensation to selling brokers in varying amounts which under normal circumstances are not expected to exceed 5% of purchase payments plus 0.25% of the contract value per year beginning in the second contract year. NASL Financial may from time to time pay additional compensation pursuant to promotional contests. Additionlly, in some circumstances, NASL Financial will provide reimbursement of certain sales and marketing expenses. NASL Financial will pay the promotional agent for providing marketing support for the distribution of the contracts. CONTRACT OWNER INQUIRIES All contract owner inquiries should be directed to the Company's Annuity Service Office at P.O. Box 9230, Boston, Massachusetts 02205-9230. LEGAL PROCEEDINGS There are no legal proceedings to which the Variable Account is a party or to which the assets of the Variable Account are subject. Neither the Company nor NASL Financial are involved in any litigation that is of material importance in relation to their total assets or that relates to the Variable Account. OTHER INFORMATION A registration statement has been filed with the Commission under the Securities Act of 1933, as amended, with respect to the variable portion of the contracts discussed in this Prospectus. Not all the information set forth in the registration statement, amendments and exhibits thereto has been included in this Prospectus. Statements contained in this Prospectus or the Statement of Additional Information concerning the content of the contracts and other legal instruments are only summaries. For a complete statement of the terms of these documents, reference should be made to the instruments filed with the Commission. EXCHANGE OFFER AND ENHANCED DEATH BENEFIT OPTION EXCHANGE OFFER 33 40 The Contracts described in this Prospectus ("New Contracts") may be issued in exchange for certain individual annuity contracts previously issued by the Company ("Old Contracts"), which are substantially similar to the New Contracts, if the New Contract is available for sale in the state or jurisdiction of the owner of the Old Contract. The Company will permit an owner of an outstanding Old Contract to exchange his or her Contract for a New Contract without surrender charge, except a possible market value charge, as described below. For purposes of computing the applicable surrender charge upon any withdrawals made subsequent to the exchange, the New Contract will be deemed to have been issued on the date the Old Contract was issued, and any purchase payment credited to the Old Contract will be deemed to have been credited to the New Contract on the date it was credited under the Old Contract. The death benefit under the New Contract on the date of its issue will be the greater of the minimum death benefit under the Old Contract or the contract value on the date of exchange and will "step up" annually thereafter as described in paragraph "2." below. Old Contract owners interested in a possible exchange should carefully review both the Old Contract prospectus and this Prospectus before deciding to make an exchange. AN EXCHANGE MAY NOT BE IN THE BEST INTERESTS OF AN OWNER OF AN OLD CONTRACT, particularly in light of the availability of the Enhanced Death Benefit described below. Further, under Old Contracts with a fixed account investment option, a market value charge may apply to any amounts transferred from a three or six year investment account in connection with an exchange. (Reference should be made to the discussion of the market value charge under the caption "Fixed Account Investment Options" in the Old Contract prospectus.) The Company believes that an exchange of Contracts will not be a taxable event for Federal tax purposes; however, any owner considering an exchange should consult a tax adviser. The Company reserves the right to terminate this exchange offer or to vary its terms at any time. The principal differences between the Old and New Contracts are as follows: 1. In general, the death benefit of the New Contract will be payable upon the death of the owner (or first owner to die if there is more than one owner). The death benefit of the Old Contract is generally payable on the death of the annuitant (or last annuitant to die if there is more than one annuitant); if the owner predeceases the annuitant, the Old Contract contract value is paid, which may be a lesser amount than the death benefit payable on the death of the annuitant. 2. The guaranteed death benefit payable under the New Contract will be in most circumstances more favorable. If an owner dies on or prior to his or her 85th birthday and the oldest owner had an attained age of less than 81 years on the contract date, the death benefit will be the greater of (i) the contract value or (ii) the sum of all purchase payments made less any amounts deducted in connection with certain withdrawals. The New Contract will step up the measure of clause (ii) every year, so that clause (ii) will be the greater of clause (i) or (ii) on the last day of the previous contract year period plus any purchase payments made and less any amounts deducted in connection with certain withdrawals since then. Under the Old Contract, the death benefit is stepped up every six years instead of every year. Under the New Contract, if an owner dies after his or her 85th birthday and the oldest owner had an attained age of less than 81 years on the contract date, the death benefit will be the greater of the contract value or the excess of the sum of all purchase payments less the sum of any amounts deducted in connection with certain withdrawals. If an owner dies and the oldest owner had an attained age greater than 80 on the contract date, the death benefit will be the contract value less any applicable withdrawal charges at the time of payment. Under the Old Contract, if the annuitant dies after the first of the month following his or her 85th birthday, the minimum death benefit will be the contract value. Also, if the owner is not the annuitant and dies before the maturity date and before the annuitant, an amount equal to the amount payable on total withdrawal, without reduction for any withdrawal charge, will be paid. 3. The New Contract will waive the $30 annual administration fee prior to the maturity date if the contract value is equal to or greater than $100,000 at the time the fee is to be assessed. 4. The surrender charges under the New Contract will be higher in certain cases. The surrender charges are the same under both Contracts for the first three contract years, but thereafter the charges under the New Contract are 5%, 4%, 3% and 2% for withdrawals made within years four, five, six and seven, respectively, of payment while under the Old Contract the charges for such years are 4%, 3%, 2% and 0%, respectively. 5. The minimum interest rate to be credited for any guarantee period under the fixed portion of the New Contract will be three percent as opposed to four percent under the Old Contract. The market value charge under the New Contract will be limited so 34 41 as to only affect accumulated earnings in excess of three percent, whereas under the Old Contract the market value charge is limited so as to not invade principal. 6. The annuity purchase rates guaranteed in the New Contract have been determined using 3% as opposed to 4% under the Old Contract. The above comparison does not take into account differences between the Old Contracts, as amended by qualified plan endorsements, and the New Contracts, as amended by similar qualified plan endorsements. Owners using their Old Contract in connection with a qualified plan should consult a tax advisor. See also the Federal Tax Matters section of the prospectuses for both the Old Contract and the New Contract. Contract owners who do not wish to exchange their Old Contracts for the New Contracts may continue to make purchase payments to their Old Contracts. Or, they can keep their Old Contracts and buy a New Contract to which to apply additional purchase payments. ADDITIONAL CONSIDERATIONS FOR VEN 1 AND VEN 3 CONTRACT OWNERS The comparison of Old and New Contract provisions set forth above does not include the Ven 1 and Ven 3 contracts (which are no longer being issued and which are desribed in Appendix C to the Old Contract prospectus). These contracts will also be eligible for voluntary exchange for the New Contracts. Ven 3 and Ven 1 contract owners should in particular consider the following differences between the Ven 3 and Ven 1 contracts and the New Contract. 1. In general, the death benefit of the New Contract will be payable on the death of the owner (or first owner to die if there is more than one owner). The death benefit of the Ven 3 and Ven 1 contracts is generally payable on the death of the annuitant (or last annuitant to die if there is more than one annuitant); if the owner predeceases the annuitant, the Ven 3 or Ven 1 contract value (as applicable) is paid, which may be a lesser amount than the death benefit payable on the death of the annuitant. 2. The guaranteed death benefit payable under the New Contract will in most circumstances be more favorable. The minimum death benefit for the Ven 1 contract is the greater of (a) the contract value or (b) the sum of all purchase payments made, less any amount deducted in connection with partial withdrawals. The minimum death benefit for the Ven 3 contract is described below under "Enhanced Death Benefit Additional Considerations for Ven 3 Contract Owners." The minimum death benefit for the New Contract is as described above in this "Exchange Offer" section. Ven 3 contract owners should also note that the New Contract contains additional provisions which limit the death benefit paid if an owner dies after his or her 85th birthday and the oldest owner had an attained age of less than 81 years on the contract date, to the greater of the contract value or the excess of the sum of all purchase payments less the sum of any amounts deducted in connection with certain withdrawals . Ven 3 contract owners should also note that the New Contract contains a provision which limits the death benefit paid to the contract value less any applicable withdrawal charges at the time of payment if the owner dies and the oldest owner had an attained age greater than 80 on the contract date. These provisions may not be as favorable to Ven 3 contract owners. 3. The New Contract will waive the $30 annual administration fee prior to the maturity date if the contract value is equal to or greater than $100,000 at the time the fee is to be assessed. 4. The surrender charges under the New Contract are higher in certain cases. The New Contract surrender charges are 6%, 6%, 5%, 5%, 4%, 3%, 2% for withdrawals made within one, two, three, four, five, six and seven, respectively, of payment. The surrender charges for the Ven 3 and Ven 1 contract is 5% for withdrawals made within five years of payment (certain exceptions apply to the withdrawal charge as described in Appendix C) to the Old Contract. 5. The New Contract provides for twenty investment options (sixteen variable and four fixed). Neither the Ven 3 contract nor the Ven 1 contract provide for fixed investment options. In addition, the Ven 1 contract offers only three variable investment options. 6. The New Contract provides for the deduction from each sub-account each valuation period of a charge at an effective annual rate of 1.40% (1.25% for mortality and expense risk fees and 0.15% for administration fees) of the contract reserves allocated to such subaccount. The Ven 1 contract provides for the deduction from each sub-account each valuation period of a charge at an effective annual rate of 1.30% (for mortality and expense risk) of the contract reserves allocated to such subaccount. The Ven 3 charges are the same as those for the New Contract. 35 42 7. The annuity purchase rates guaranteed in the New Contract have been determined using 3% as opposed to 4% under the Ven 1 and Ven 3 contracts. 8. Certain Ven 3 and Ven 1 contracts may not be subject to some changes in the Federal tax law that have occurred since the contracts were issued, i.e., the contract were "grandfathered." If such a grandfathered contract is exchanged, the New Contract is likely to be subject to the changes in the law. For example, annuity contract issued on or prior to April 22, 1987 are generally not subject to Federal tax rules treating transferred of annuity contracts for inadequate consideration as taxable events. See "Taxation of Partial and Full Withdrawals" in the Federal Tax Matters section of the prospectus. A New Contract received in exchange for a Ven 3 or Ven 1 contract would, however, typically be subject to these rules. ENHANCED DEATH BENEFIT OPTION As an alternative to the exchange privilege described above, the Company is offering an Enhanced Death Benefit Option to any owner of an Old Contract issued prior to August 15, 1994 in all states except California, Idaho, Illinois, Montana, New Jersey, Oregon and South Carolina. The Company is offering the Enhanced Death Benefit Option to any owner of an Old Contract issued prior to September 6, 1994 in Illinois and Montana, prior to October 3, 1994 in Idaho, New Jersey and Oregon and prior to January 3, 1995 in California. The Enhanced Death Benefit Option is not available in South Carolina. The Enhanced Death Benefit, as described below, is available as an endorsement to such Contracts, only upon the payment of (i) an additional purchase payment of at least 10% of all purchase payments made to the Old Contract through the date the Enhanced Death Benefit Option first became available in that state, or (ii) $10,000, whichever is greater. The Enhanced Death Benefit will provide an annual step-up in death benefit comparable to the New Contract death benefit described above, except that the death benefit under the endorsement will be payable on the death of the last surviving annuitant as opposed to the death of the first owner as provided in the New Contract. The Enhanced Death Benefit provided by the endorsement will always be equal to or better than the death benefit of an Old Contract issued without the endorsement. In the case of the death of the annuitant on or prior to the first of the month following his or her 85th birthday, the minimum death benefit is as described in the Old Contract prospectus under the caption "Death Benefit Before Maturity Date," except that the death benefit is stepped up each contract year instead of each six contract year period. In the case of the death of the annuitant after the first of the month following his or her 85th birthday, the minimum death benefit is the greater of the contract value or the excess of the sum of all purchase payments less the sum of any amounts deducted in connection with partial withdrawals. Under an Old Contract issued without the endorsement, if the annuitant dies after the first of the month following his or her 85th birthday, the death benefit is the contract value only. For purposes of computing the Enhanced Death Benefit under an Old Contract issued without the endorsement, the death benefit will be computed as if the Enhanced Death Benefit endorsement had been a part of the Old Contract on the contract date. The Company believes that the addition of the Enhanced Death Benefit endorsement to an Old Contract will not be treated as a taxable event for Federal tax purposes; however, any owner considering the addition of the endorsement should consult a tax advisor. VEN 1 CONTRACT OWNERS The Enhanced Death Benefit described above is not available for the Ven 1 contract. ADDITIONAL CONSIDERATIONS FOR VEN 3 CONTRACT OWNERS The Enhanced Death Benefit described above is available for the Ven 3 contract. For Ven 3 contracts, the Enhanced Death Benefit provided by the endorsement will always be equal to or better than the death benefit of the Ven 3 contract issued without the endorsement . The Enhanced Death Benefit provides that upon the death of the annuitant, the death benefit, during the first contract year, will be the greater of (a) the contract value or (b) the sum of all the purchase payments made, lessa any amount deducted in connection with partial withdrawals and, during any subsequent year, will be (a) the contract value or (b) the death benefit on the last day of the previous contract year plus plus any purchase payments made and less any amounts deducted in connection with partial withdrawals since then. As described in Appendix C of the Old Contract prospectus, upon the death of the annuitant, the minimum death benefit for the Ven 3 contract, during the first five contract years, will be the greater of (a) the contract value or (b) the sum of all purchase payments made, less any amount deducted in connection with partial withdrawals and, during any subsequent five contract year period, will be the greater of (a) the contract value or (b) the minimum death benefit determined in 36 43 accordance with these provisions as of the last day of the previous five contract year period plus any purchase payments made and less any amount deducted in connection with partial withdrawals since then. Ven 3 contracts may not be subject to some changes in the Federal tax law that have occurred since the contracts were issued, i.e., the contracts were "grandfathered". If the Enhanced Death Benefit endorsement is added to such a grandfathered contract, the amended contract is likely to be subject to the changes in the law. For example, annuity contracts issued on or prior to April 22, 1987 are generally not subject to Federal tax rules treating transfers of annuity contracts for inadequate consideration as taxable events. See Taxation of Partial and Full Withdrawals in the Federal Tax Matters section of the prospectus. A contract to which the Enhanced Death Benefit endorsement is added may, however, be subject to these rules. STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS General Information and History .......................................... 3 Performance Data ......................................................... 3 Services Independent Accountants ........................................... 6 Servicing Agent ................................................... 6 Cancellation of Contract .......................................... 6 Principal Underwriter ............................................. 6 Financial Statements ..................................................... 7
37 44 APPENIDX A EXAMPLES OF CALCULATION OF WITHDRAWAL CHARGE EXAMPLE 1 - Assume a single payment of $50,000 is made into the contract, no transfers are made, no additional payments are made and there are no partial withdrawals. The table below illustrates four examples of the withdrawal charges that would be imposed if the contract is completely withdrawn, based on hypothetical contract values.
CONTRACT HYPOTHETICAL FREE WITHDRAWAL YEAR CONTRACT WITHDRAWAL PAYMENTS CHARGE VALUE AMOUNT LIQUIDATED ---------------------- PERCENT AMOUNT - ---------------------------------------------------------------------------------------------------- 2 55,000 5,000(a) 50,000 6% 3,000 4 50,500 5,000(b) 45,500 5% 2,275 6 60,000 10,000(c) 50,000 3% 1,500 8 70,000 20,000(d) 50,000 0% 0
- ---------- (a) During any contract year the free withdrawal amount is the greater of accumulated earnings, or 10% of the total payments made under the contract less any prior partial withdrawals in that contract year. In the second contract year the earnings under the contract and 10% of payments both equal $5,000. Consequently, on total withdrawal $5,000 is withdrawn free of the withdrawal charge, the entire $50,000 payment is liquidated and the withdrawal charge is assessed against such liquidated payment (contract value less free withdrawal amount). (b) In the example for the fourth contract year, the accumulated earnings of $500 is less than 10% of payments, therefore the free withdrawal amount is equal to 10% of payments ($50,000 X 10% = $5,000) and the withdrawal charge is only applied to payments liquidated (contract value less free withdrawal amount). (c) In the example for the sixth contract year, the accumulated earnings of $10,000 is greater than 10% of payments ($5,000), therefore the free withdrawal amount is equal to the accumulated earnings of $10,000 and the withdrawal charge is applied to the payments liquidated (contract value less free withdrawal amount). (d) There is no withdrawal charge on any payments liquidated that have been in the contract for at least 7 years. EXAMPLE 2 - Assume a single payment of $50,000 is made into the contract, no transfers are made, no additional payments are made and there are a series of four partial withdrawals made during the third contract year of $2,000, $5,000, $7,000, and $8,000.
HYPOTHETICAL PARTIAL WITHDRAWAL FREE WITHDRAWAL CONTRACT REQUESTED WITHDRAWAL PAYMENTS CHARGE VALUE AMOUNT LIQUIDATED PERCENT AMOUNT - ---------------------------------------------------------------------------------------------------------- 65,000 2,000 15,000(a) 0 5% 0 49,000 5,000 3,000(b) 2,000 5% 100 52,000 7,000 4,000(c) 3,000 5% 150 44,000 8,000 0(d) 8,000 5% 400
- ---------- (a) The free withdrawal amount during any contract year is the greater of the contract value less the unliquidated payments (accumulated earnings), or 10% of payments less 100% of all prior withdrawals in that contract year. For the first example, accumulated earnings of $15,000 is the free withdrawal amount since it is greater than 10% of payments less prior withdrawals ($5,000-0). The amount requested ($2,000) is less than the free withdrawal amount so no payments are liquidated and no withdrawal charge applies. (b) The contract has negative accumulated earnings ($49,000-$50,000), so the free withdrawal amount is limited to 10% of payments less all prior withdrawals. Since $2,000 has already been withdrawn in the current contract year, the remaining free withdrawal amount during the third contract year is $3,000. The $5,000 partial withdrawal will consist of $3,000 free of withdrawal charge, and the remaining $2,000 will be subject to a withdrawal charge and result in payments being liquidated. The remaining unliquidated payments are $48,000. 38 45 (c) The contract has increased in value to $52,000. The unliquidated payments are $48,000 so the accumulated earnings are $4,000, which is greater than 10% of payments less prior withdrawals ($5,000-$2,000-$5,000<0). Hence the free withdrawal amount is $4,000. Therefore, $3,000 of the $7,000 partial withdrawal will be subject to a withdrawal charge and result in payments being liquidated. The remaining unliquidated payments are $45,000. (d) The free withdrawal amount is zero since the contract has negative accumulated earnings ($44,000-$45,000) and the full 10% of payments ($5,000) has already been withdrawn. The full amount of $8,000 will result in payments being liquidated subject to a withdrawal charge. At the beginning of the next contract year the full 10% of payments would be available again for withdrawal requests during that year. APPENIDX B STATE PREMIUM TAXES Premium taxes vary according to the state and are subject to change. In many jurisdictions there is no tax at all. For current information, a tax adviser should be consulted.
TAX RATE QUALIFIED NON-QUALIFIED STATE CONTRACTS CONTRACTS - ---------------------------------------------------------------------------------------- CALIFORNIA ....................................... .50% 2.35% DISTRICT OF COLUMBIA ............................. 2.25% 2.25% KANSAS ........................................... .00 2.00% KENTUCKY ......................................... 2.00% 2.00% MAINE ............................................ .00 2.00% MICHIGAN ......................................... .00075% .00075% NEVADA ........................................... .00 3.50% PUERTO RICO ...................................... 1.00% 1.00% SOUTH DAKOTA ..................................... .00 1.25% TEXAS ............................................ .04% .04% WEST VIRGINIA .................................... 1.00% 1.00% WYOMING .......................................... .00 1.00%
39 46 PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION 47 STATEMENT OF ADDITIONAL INFORMATION NASL VARIABLE ACCOUNT OF NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY FLEXIBLE PURCHASE PAYMENT INDIVIDUAL DEFERRED COMBINATION FIXED AND VARIABLE ANNUITY CONTRACT NON-PARTICIPATING This Statement of Additional Information is not a Prospectus. It contains information in addition to that described in the Prospectus and should be read in conjunction with the Prospectus dated the same date as this Statement of Additional Information. The Prospectus may be obtained by writing North American Security Life Insurance Company (the "Company") at the Annuity Service Office, P.O. Box 9230, Boston, Massachusetts 02205-9230 or telephoning (617) 266-6008. The date of this Statement of Additional Information is May 1, 1996. North American Security Life Insurance Company 116 Huntington Avenue Boston, Massachusetts 02116 (617) 266-6008 48 STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS General Information and History ............................................ 3 Performance Data ........................................................... 3 Services Independent Accountants ............................................. 6 Servicing Agent ..................................................... 6 Principal Underwriter ............................................... 6 Cancellation of Contract ............................................ 6 Financial Statements ....................................................... 7
2 49 GENERAL INFORMATION AND HISTORY The NASL Variable Account ("Variable Account") is a separate investment account of the Company, a stock life insurance company organized under the laws of Delaware in 1979. The ultimate parent of the Company is The Manufacturers Life Insurance Company ("Manulife"), a Canadian mutual life insurance Company based in Toronto, Canada. Prior to January 1, 1996, the Company was a wholly owned subsidiary of North American Life Assurance Company ("NAL"), a Canadian mutual life insurance company. On January 1, 1996 NAL and Manulife merged with the combined company retaining the name Manulife. PERFORMANCE DATA Each of the sub-accounts may in its advertising and sales materials quote total return figures. For periods prior to August 9, 1994, performance data will be hypothetical figures based on the assumption that a contract offered by the Prospectus was issued when the sub-accounts first became available for investment under other contracts offered by the Company. The sub-accounts may advertise both "standardized" and "non-standardized" total return figures, although standardized figures will always accompany non-standardized figures. Such figures will always include the average annual total return for recent one year and, when applicable, five and ten year periods and, where less than ten years, the period since the sub-account first became available for investment. Where the period since in ception is less than one year, the total return quoted will be the aggregate return for the period. The average annual total return is the average annual compounded rate of return that equates a purchase payment to the market value of such purchase payment on the last day of the period for which such return is calculated. The aggregate total return is the percentage change (not annualized) that equates a purchase payment to the market value of such purchase payment on the last day of the period for which such return is calculated. For purposes of the calculations it is assumed that an initial payment of $1,000 is made on the first day of the period for which the return is calculated. In calculating standardized return figures, all recurring charges (all asset charges (mortality and expense risk fees and administration fees) and the $30 administration fee) are reflected, the asset charges are reflected in changes in unit values and the $30 administration fee is deducted as a dollar amount based on the approximate average contract size of contracts of this series issued by the Company in 1995 of $35,000. Standardized total return figures will be quoted assuming redemption at the end of the period. Such figures may be accompanied by non-standardized total return figures that are calculated on the same basis as the standardized returns except that the calculations (i) assume no redemption at the end of the period and (ii) do not reflect imposition of the $30 per contract charge inasmuch as the impact of such charge varies by contract size. The Company believes such non-standardized figures are useful to contract owners who wish to assess the performance of an ongoing contract of the size that is meaningful to the individual contract owner. 3 50 STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FIGURES CALCULATED AS OF DECEMBER 31, 1995
================================================================================ TRUST PORTFOLIO 1 Year 5 Year Since Inception or Inception Date 10 Years Whichever is Shorter - -------------------------------------------------------------------------------- Global Equity .32% 8.07% 6.48% 3/18/88 - -------------------------------------------------------------------------------- Pasadena Growth 18.68% N/A 1.59% 12/11/92 - -------------------------------------------------------------------------------- Equity 34.71% 13.86% 9.62%+ 6/18/85 - -------------------------------------------------------------------------------- Value Equity 15.88% N/A 9.64% 2/19/93 - -------------------------------------------------------------------------------- Growth and 21.31% N/A 10.82% 4/23/91 Income - -------------------------------------------------------------------------------- International -0.28%++ N/A N/A 1/09/95 Growth and Income - -------------------------------------------------------------------------------- Strategic Bond 11.47% N/A 3.99% 2/19/93 - -------------------------------------------------------------------------------- Global Government 15.37% 8.16% 7.53% 3/18/88 Bond - -------------------------------------------------------------------------------- Investment Quality 11.73% N/A 7.20% 4/23/91 Bond* - -------------------------------------------------------------------------------- U.S. Government 7.87% 6.05% 6.74% 5/01/89 Securities+ - -------------------------------------------------------------------------------- Money Market -1.58% 1.97% 4.06%+ 6/18/85 - -------------------------------------------------------------------------------- Aggressive Asset 14.97% 10.17% 6.50% 8/03/89 Allocation - -------------------------------------------------------------------------------- Moderate Asset 12.91% 9.21% 6.10% 8/03/89 Allocation - -------------------------------------------------------------------------------- Conservative Asset 10.34% 7.81% 5.50% 8/03/89 Allocation - --------------------------------------------------------------------------------
+ 10 Year ++ Aggregate total return from January 9, 1995 to December 31, 1995 4 51 NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FIGURES CALCULATED AS OF DECEMBER 31, 1995
================================================================================ TRUST PORTFOLIO 1 Year 5 Year Since Inception or Inception Date 10 Years Whichever is Shorter - -------------------------------------------------------------------------------- Global Equity 6.18% 8.74% 6.56% 3/18/88 - -------------------------------------------------------------------------------- Pasadena Growth 24.78% N/A 3.25% 12/11/92 - -------------------------------------------------------------------------------- Equity 40.81% 14.42% 12.15%+ 6/18/85 - -------------------------------------------------------------------------------- Value Equity 21.98% N/A 11.19% 2/19/93 - -------------------------------------------------------------------------------- Growth and 27.41% N/A 11.49% 4/23/91 Income - -------------------------------------------------------------------------------- International 5.54%++ N/A N/A 01/09/95 Growth and Income - -------------------------------------------------------------------------------- Strategic Bond 17.57% N/A 5.69% 2/19/93 - -------------------------------------------------------------------------------- Global Government 21.47% 8.83% 7.62% 3/18/88 Bond - -------------------------------------------------------------------------------- Investment Quality 17.83% N/A 7.94% 4/23/91 Bond* - -------------------------------------------------------------------------------- U.S. Government 13.97% 6.76% 7.03% 5/01/89 Securities** - -------------------------------------------------------------------------------- Money Market 4.17% 2.79% 4.15%+ 6/18/85 - -------------------------------------------------------------------------------- Aggressive Asset 21.07% 10.74% 6.82% 8/03/89 Allocation - -------------------------------------------------------------------------------- Moderate Asset 19.01% 9.85% 6.43% 8/03/89 Allocation - -------------------------------------------------------------------------------- Conservative Asset 16.44% 8.48% 5.83% 8/03/89 Allocation - --------------------------------------------------------------------------------
+ 10 Years ++ Aggregate total return from January 9, 1995 to December 31, 1995 * Because the Investment Quality Bond Trust changed its subadviser and investment objective effective April 23, 1991, the Company has elected to quote performance for the Investment Quality Bond Sub-account only since the date of change in order to quote returns representative of its current objective and produced by its current portfolio manager. Per share information concerning the period prior to the change appears in the Trust's Prospectus. The average annual total rates of return for the one, five and ten year periods for the sub-account are available upon request. ** The U.S. Government Securities Sub-account commenced operations on March 18, 1988 by investing in shares of the Convertible Securities Trust. That Trust changed its investment objective and its investment Subadviser effective May 1, 1989, pursuant to a vote of its shareholders. In view of the change in investment objective and portfolio manager, the U.S. Government Securities Sub-account has elected 5 52 to quote performance only since the date of the change in order to quote returns representative of its current objective and produced by its current portfolio manager. Per share information concerning the period prior to the change appears in the Trust's Prospectus. The average annual total rates of return for the one, five and ten year periods for the sub-account are available upon request. In addition to the non-standardized returns quoted above, each of the sub-accounts may from time to time quote aggregate nonstandardized total returns calculated in the same manner as set forth above for other time periods. From time to time the Trust may include in its advertising and sales literature general discussions of economic theories, including but not limited to, discussions on how demographic and political trends can affect the financial markets. Further, the Trust may also include in its advertising and sales literature specific information on each of the Trust's subadvisers, including but not limited to, research capabilities of a subadviser, assets under management, information relating to other clients of a subadviser, and other generalized information. SERVICES INDEPENDENT ACCOUNTANTS The financial statements of the Comapny and the Variable Account included in this Statement of Additional Information have been examined by Coopers & Lybrand, L.L.P., certified public accountants, as indicated in their reports in this Statement of Additional Information, and are included herein in reliance upon such reports and upon the authority of such accountants as experts in accounting and auditing. The financial statements of the Company which are included in the Statement of Additional Information should be considered only as bearing on the ability of the Company to meet its obligations under the contracts. They should not be considered as bearing on the investment performance of the assets held in the Variable Account. SERVICING AGENT Vantage Computer Systems, Inc. ("Vantage") provides to the Company a computerized data processing recordkeeping system for variable annuity administration. Vantage provides various daily, semimonthly, monthly, semiannual and annual reports including: daily updates on accumulation unit values, variable annuity participants and transactions, agent production and commissions; semimonthly commission statements; monthly summaries of agent production and daily transaction reports; semiannual statements for contract owners; and annual contract owner tax reports. Vantage receives approximately $7.00 per policy per year, plus certain other fees paid by the Company for the services provided. PRINCIPAL UNDERWRITER NASL Financial Services, Inc., a wholly-owned subsidiary of the Company, serves as principal underwriter of the contracts. Contracts are offered on a continuous basis. The aggregate dollar amount of underwriting commissions paid to NASL Financial Services, Inc. in 1995, 1994,and 1993 were $68,782,161, $69,999,469 and $60,174,411, respectively. The amounts retained by NASL Financial Services, Inc. during such periods were $0, $0 and $0, respectively. CANCELLATION OF CONTRACT The Company may, at its option, cancel a contract at the end of any two consecutive contract years in which no purchase payments by or on behalf of the contract owner have been made, if both (i) the total purchase payments made for the contract, less any withdrawals, are less than $2,000; and (ii) the contract value at the end of such two year period is less than $2,000. The Company, as a matter of administrative practice, will attempt to notify a contract owner prior to such cancellation in order to allow the contract owner to make the necessary purchase payment to keep the contract in force. The cancellation of contract provisions may vary in certain states in order to comply with the requirements of insurance laws and regulations in such states. 6 53 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (A Wholly-Owned Subsidiary of North American Life Assurance Company of North York, Canada) ------------ FINANCIAL STATEMENTS For the years ended December 31, 1995, 1994 and 1993 54 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder of North American Security Life Insurance Company: We have audited the accompanying statements of admitted assets, liabilities, capital and surplus of North American Security Life Insurance Company (a wholly-owned subsidiary of North American Life Assurance Company of North York, Canada) as of December 31, 1995 and 1994, and the related statements of operations, capital and surplus, and cash flows for the three years ended December 31, 1995, 1994 and 1993. 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 admitted assets, liabilities, capital and surplus of North American Security Life Insurance Company as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with accounting practices prescribed or permitted by the Insurance Department of the State of Delaware, which practices are considered to be generally accepted accounting principles for wholly-owned stock life subsidiaries of mutual life insurance companies. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The information contained in Schedule 1 - Selected Financial Data, is presented to comply with the NAIC's Annual Statement Instructions and is not a required part of the basic financial statements. 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. COOPERS & LYBRAND L.L.P. Boston, Massachusetts February 23, 1996 55 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN LIFE ASSURANCE COMPANY OF NORTH YORK, CANADA) STATEMENTS OF ADMITTED ASSETS, LIABILITIES, CAPITAL AND SURPLUS December 31, 1995 and 1994
1995 1994 ---- ---- ASSETS Investments Bonds $ 16,281,452 $ 333,973,085 Mortgages -- 115,429,834 Real estate 4,847,164 4,745,559 Common stock 20,097,789 11,039,222 Policy loans -- 2,579,308 Cash and short-term investments 1,797,230 101,578,176 -------------- -------------- Total investments 43,023,635 569,345,184 Accrued investment income 431,415 7,197,833 Other assets 4,320,909 2,427,102 Separate account assets 4,914,727,917 3,661,278,295 -------------- -------------- Total assets $4,962,503,876 $4,240,248,414 ============== ============== LIABILITIES Aggregate reserves 1,931,894 519,092,606 Transfers from separate account, net (156,458,903) (148,035,998) Borrowed money 107,865,148 100,023,562 Accrued interest on surplus note 3,248,219 1,648,219 Payable to Parent 3,033,665 -- Funds held account from reinsurers 9,000,000 12,000,000 Asset valuation reserve 2,895,914 5,536,860 Interest maintenance reserve -- 2,494,101 Bank overdraft 8,606,730 9,547,533 Amounts payable on reinsurance ceded 7,256,229 -- Payable to Parent on reinsurance ceded -- 8,577,268 Other liabilities 10,239,069 8,677,836 Separate account liabilities 4,914,727,917 3,661,278,295 -------------- -------------- Total liabilities 4,912,345,882 4,180,840,282 CAPITAL AND SURPLUS Common stock (Shares authorized: 3,000; issued and outstanding 2,600; par value $1,000) 2,600,000 2,600,000 Surplus note payable to Parent 20,000,000 20,000,000 Paid-in capital in excess of par value 110,633,000 110,633,000 Unassigned deficit (83,075,006) (73,824,868) -------------- -------------- Total capital and surplus 50,157,994 59,408,132 -------------- -------------- Total liabilities, capital and surplus $4,962,503,876 $4,240,248,414 ============== ==============
The accompanying notes are an integral part of the financial statements 2 56 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN LIFE ASSURANCE COMPANY OF NORTH YORK, CANADA) STATEMENTS OF OPERATIONS December 31, 1995, 1994 and 1993
1995 1994 1993 ---- ---- ---- Revenues Annuity considerations and deposits $ 991,551,945 $1,139,953,302 $1,255,219,443 Net investment income 35,909,722 30,559,559 27,851,126 Commissions and expense allowances on reinsurance ceded 14,676,544 7,019,266 586,983 Experience refund on reinsurance ceded 3,901,633 4,967,753 -- Reserve adjustments on reinsurance (48,222,552) (6,023,746) (23,681,983) -------------- -------------- -------------- 997,817,292 1,176,476,134 1,259,975,569 -------------- -------------- -------------- Expenses Annuity benefits 269,688,906 206,710,232 195,064,882 Increase (decrease) in reserves (517,160,712) 146,552,124 5,337,935 Increase in separate account liability 415,529,185 732,768,257 971,871,375 Commissions 73,593,478 81,981,046 82,137,269 General expenses 22,872,812 19,253,764 13,475,040 Interest expense 8,980,132 4,599,441 456,196 Recapture fee on reinsurance ceded 1,445,889 8,029,909 13,300 Initial consideration on reinsurance ceded 727,522,634 -- -- -------------- -------------- -------------- 1,002,472,324 1,199,894,773 1,268,355,997 Loss before federal income tax provision and realized capital losses (4,655,032) (23,418,639) (8,380,428) Federal income tax provision -- 6,415 193,000 -------------- -------------- -------------- Loss after federal income tax provision (4,655,032) (23,425,054) (8,573,428) Realized capital (losses) (2,632,953) (7,029,018) (2,104,462) -------------- -------------- -------------- Net loss $ (7,287,985) $ (30,454,072) $ (10,677,890) ============== ============== ==============
The accompanying notes are an integral part of the financial statements 3 57 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN LIFE ASSURANCE COMPANY OF NORTH YORK, CANADA) STATEMENTS OF CAPITAL AND SURPLUS For the years ended December 31, 1995, 1994 and 1993
1995 1994 1993 ---- ---- ---- Capital and Surplus - beginning of the year $59,408,132 $51,722,525 $35,773,897 Net loss (7,287,985) (30,454,072) (10,677,890) Change in net unrealized capital gains (losses) 636,335) 3,514,108 (1,198,895) Change in asset valuation reserve 2,640,946 1,976,033 (5,847,867) Increase in non-admitted assets (958,941) (1,859,181) (1,326,720) Issuance of common stock 600,000 458,000 Paid in capital in excess of par 29,400,000 4,542,000 Initial commission allowance on reinsurance ceded (3,007,823) 4,508,719 10,000,000 Surplus note from Parent -- -- 20,000,000 ----------- ----------- ----------- Capital and Surplus - end of the year $50,157,994 $59,408,132 $51,722,525 =========== =========== ===========
The accompanying notes are an integral part of the financial statements 4 58 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN LIFE ASSURANCE COMPANY OF NORTH YORK, CANADA) STATEMENTS OF CASH FLOWS For the years ended December 31, 1995, 1994 and 1993
1995 1994 1993 ---- ---- ---- From operating activities: Annuity considerations and deposits $991,551,945 $1,139,953,302 $1,255,219,443 Allowances & reserve adjustments on reinsurance ceded (33,546,008) 1,140,018 (20,898,549) Net investment income 32,128,833 28,230,341 27,231,438 Experience refund on reinsurance ceded 3,901,633 4,967,753 -- Surrender benefits and other fund withdrawals paid (232,650,150) (175,523,156) (171,434,721) Other benefits paid to policyholders (36,860,052) (30,555,923) (22,727,802) Commissions, other expenses & taxes paid (97,024,418) (100,210,171) (93,392,207) Net transfers to separate account (423,952,090) (768,208,239) (1,022,539,449) Other operating expenses paid (735,369,347) (13,571,986) (1,546,814) ------------ -------------- -------------- Net cash provided (used) by operating activities (531,819,654) 86,221,939 (50,088,661) ------------ -------------- -------------- From investing activities: Proceeds from investments sold, matured or repaid: Bonds 763,005,273 112,385,919 75,750,376 Stocks 5,080,010 5,805,050 5,818,725 Mortgage loans 110,791,047 14,076,659 6,294,101 Real estate 860,375 5,950,412 5,528,761 Cost of investments acquired: Bonds (441,405,890) (232,208,934) (42,169,482) Stocks (10,137,862) (488,212) (11,144,711) Mortgage loans (136,101) (4,301,717) (3,890,750) ------------ -------------- -------------- Net cash provided (used) by investing activities 428,056,852 (98,780,823) 36,187,020 ------------ -------------- -------------- Other cash provided (applied): Capital and surplus paid-in -- 30,000,000 5,000,000 Borrowed money 7,000,000 70,000,000 80,000,000 Reinsurance ceding commission and expense allowance -- -- 25,000,000 Other sources 11,380,829 17,892,210 4,771,451 Other applications (14,398,973) (103,250,950) (4,931,341) ------------ -------------- -------------- Total other cash provided (used) 3,981,856 14,641,260 109,840,110 ------------ -------------- -------------- Net change in cash and short-term investments (99,780,946) 2,082,376 95,938,469 Cash and short-term investments, beginning of year 101,578,176 99,495,800 3,557,331 ------------ -------------- -------------- Cash and short-term investments, end of year $ 1,797,230 $ 101,578,176 $ 99,495,800 ============ ============== ==============
The accompanying notes are an integral part of the financial statements 5 59 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN LIFE ASSURANCE COMPANY OF NORTH YORK, CANADA) NOTES TO FINANCIAL STATEMENTS For the year ended December 31, 1995 A. ORGANIZATION ------------ North American Security Life Insurance Company ("the Company") is a wholly-owned subsidiary of North American Life Assurance Company of North York, Canada ("NAL"). See Note O for subsequent event describing merger with the Manufacturers Life Insurance Company. The Company issues fixed and variable annuity and variable life contracts (the "Contracts"). Amounts invested in the fixed portion of the Contracts are allocated to the general account of the Company (see Note F on fixed annuity reinsurance). Amounts invested in the variable portion of the Contracts are allocated to the separate accounts of the Company. The separate account assets are invested in shares of the NASL Series Trust, a no-load, open-end management investment company organized as a Massachusetts business trust. On June 19, 1992, the Company formed First North American Life Assurance Company ("FNA"). Subsequently, on July 22, 1992, FNA was granted a license by the New York State Insurance Department. FNA issues fixed and variable annuity contracts in the State of New York. NASL Financial Services Inc. ("NASL Financial"), a wholly-owned subsidiary of the Company, acts as investment adviser to the NASL Series Trust and principal underwriter of the Contracts issued by the Company and FNA. NASL Financial has entered into a promotional agent agreement with Wood Logan Associates, an affiliate of NAL, to act as the exclusive agent for promotion of annuity and variable life contract sales. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ BASIS OF REPORTING ------------------ The Company's financial statements have been prepared on the basis of accounting practices prescribed or permitted by the Insurance Department of the State of Delaware. These practices, in the case of a wholly-owned stock life insurance subsidiary of a mutual life insurance company, are considered to be generally accepted accounting principles (GAAP). The Financial Accounting Standards Board issued Interpretation 40, Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises, and Statement of Financial Accounting Standards No. 120, Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long- Duration participating Contracts. The American Institute of Certified Public Accountants issued Statement of Position 95-1, Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises. Neither of these groups has a role in establishing regulatory accounting practices. 6 60 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- BASIS OF REPORTING, CONTINUED ----------------------------- These pronouncements will require mutual life insurance companies to modify their financial statements in order for them to continue to be in accordance with generally accepted accounting principles, effective for 1996 financial statements. The manner in which policy reserves, new business acquisition costs, asset valuations and related tax effects are recorded will change. Management has not determined the impact of such changes on its financial statements. Certain amounts in the 1994 and 1993 financial statements are presented differently than in prior years to conform with 1995 presentation guidelines. PREPARATION OF FINANCIAL STATEMENTS ----------------------------------- The preparation of financial statements 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. FINANCIAL INSTRUMENTS --------------------- Financial instruments reported on the balance sheet consist primarily of investments in cash and short-term investments, marketable securities, and debt. Fair value of financial instruments have been determined through information obtained from market sources and management estimates. At December 31, 1995, the fair value of cash and short-term investments and debt approximates the carrying value due to the short maturity and variable interest rate arrangements, respectively. Credit risk associated with concentrations can arise when changes in economic, industry, or geographical factors affect groups of counterparties with similar characteristics causing aggregate credit exposure to be significant to the Company. All of the Company's investments in mortgage loans are collaterized by real estate which is geographically dispersed throughout the United States. During 1994, the most significant concentrations existed in California (40%), Georgia (14%) and Illinois (11%). The Company had no outstanding mortgages at December 31, 1995 (see Note G). There are no other significant concentrations of credit risk (See also Note C). 7 61 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- INVESTMENTS AND INVESTMENT INCOME --------------------------------- Investments are valued in accordance with rules promulgated by the National Association of Insurance Commissioners ("NAIC"). Bonds and short-term investments, where eligible under NAIC rules, are valued at amortized cost. Investment income is recognized on the accrual basis. Unrealized gains or losses on investments are recorded in unassigned surplus. Realized gains or losses on investments sold are determined on the basis of the specific identification method. Common stocks are valued at market value except for investments in affiliates which are carried on the equity basis; and real estate acquired in satisfaction of debt which is stated at the lower of the appraised market value or the outstanding principal loan balance plus accrued interest and foreclosure costs. There are no mortgage loans outstanding at December 31, 1995 (See Note G). For the year ended December 31, 1994 mortgage loans in good standing are stated at the aggregate unpaid balance. Mortgage loans are considered to be in default if interest and principal payments are delinquent for more than 90 days. The Company writes-down mortgage loans in default to the lower of unpaid principal or the value of the underlying property. The Company maintains asset valuation reserves sufficiently in excess of minimum requirements which serve to cover the excess of the loan balance over the underlying property values on restructured loans. The maximum percentage of any one loan to the value of the property at the time of the original loan commitment, exclusive of purchase money mortgages, was 75%. Fire insurance is required on all properties covered by mortgage loans at least equal to the excess of the loan over the maximum loan which would be permitted by law on the land without the buildings. At December 31, 1995, 1994, and 1993, the Company held $0, $414,974, and $5,682,476, respectively, of mortgages in default at statement value. In 1995, 1994 and 1993, the Company wrote- down $0, $1,745,682, and $1,915,623, respectively of mortgages held at year end to reflect the carrying value at the lower of appraised value or outstanding principal plus accrued interest and foreclosure costs. In 1995, 1994 and 1993, the Company transferred, in satisfaction of debt, mortgages with statement values of $2,405,052, $6,407,174 and $4,413,889, respectively to foreclosed real estate. Subsequently, in 1995, 1994 and 1993, the Company wrote-down $1,360,620, $0, and $1,016,484, respectively, on these properties to reflect the carrying value at the lower of the current market valuation or the value transferred at the time of foreclosure. At year end, the Company held $4,847,164 of foreclosed real estate at adjusted book value which approximates market value. 8 62 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- SHORT-TERM INVESTMENTS ---------------------- Short-term investments generally consist of U.S. Treasury bills, commercial paper and money market instruments whose maturities at the time of acquisition are one year or less. Short-term investments are valued at cost, which approximates market value. ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE -------------------------------------------------------- The Asset Valuation Reserve (AVR) is designed to mitigate the effect of valuation and credit related losses on all invested assets with risk of loss including mortgages, real estate, fixed-income securities, and common stocks. Changes in the AVR are accounted for as a direct increase or decrease in unassigned surplus. The Interest Maintenance Reserve (IMR) captures realized capital gains and losses which result from changes in interest rates for all fixed income securities and amortizes these capital gains and losses into investment income over the original life of the investments sold. During 1995, $11,040,025 of cumulative net gains were released from IMR in connection with a reinsurance treaty whereby the Company reinsured all of its fixed annuity business (see Note F). This accounting was approved by the State of Delaware Department of Insurance as a permitted practice. Total net gains (losses) of $(59,933) and $1,807,018 were realized of which $541,484 and $495,672 were amortized and included in net investment income in 1994 and 1993, respectively. AGGREGATE RESERVES ------------------ The reserves, developed using accepted actuarial methods, have been established and maintained on the basis of published mortality tables and prescribed interest rates per the National Association of Insurance Commissioners' standard valuation law, as adopted by the State of Delaware. The method used for the valuation of annuities is the Commissioner's Annuity Reserve Valuation Method (CARVM). Under this method the reserve is the highest present value of all future guaranteed cash surrender values. In addition, the Company has established additional reserves during 1995 to cover the impact of guideline GGG. The method used for the valuation of Variable Life Insurance ("VLI") is the Commissioners Reserve Valuation Method (CRVM). Under this method, the VLI reserves are equal to the present value of future death benefits, with a minimum of the cash surrender value. RECOGNITION OF PREMIUM REVENUE AND RELATED EXPENSES --------------------------------------------------- Premium revenues are recognized as received. Expenses, including acquisition costs such as commissions and other costs in connection with acquiring new business, are charged to operations as incurred. 9 63 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- SEPARATE ACCOUNT ---------------- Separate account assets represent mutual funds held for the exclusive benefit of both variable annuity and variable life contractholders and are reported at fair market value. Since the contractholders receive the full benefit and bear the full risk of the separate account investments, the income, realized and unrealized gains and losses from such investments, is offset by an equivalent change in the liabilities related to the separate accounts. Transfers from separate account, net, primarily represents the difference between the contract owner's account value and the CARVM reserve. UNCONSOLIDATED SUBSIDIARIES --------------------------- The Company records its equity in the earnings of unconsolidated subsidiaries as net investment income. The Company owns 100% of the outstanding common stock of First North American Life Assurance Company and NASL Financial Services, Inc. Summarized financial data for unconsolidated subsidiaries at December 31, 1995 and 1994 is shown below:
(in thousands) 1995 1994 ---- ---- Total assets at year-end $318,326 $194,177 Total liabilities at year-end 304,409 183,777 Net income 1,220 894
INCOME TAXES ------------ The Company files a consolidated federal income tax return with its subsidiaries, FNA and NASL Financial. The Company files separate state income tax returns. The method of allocation between the companies is subject to a tax sharing agreement. Tax liability is allocated to each member on a pro rata basis based on the relationship the member's tax liability (computed on a separate return basis) bears to the tax liability of the consolidated group. 10 64 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- C. INVESTMENTS ----------- Net investment income was as follows:
1995 1994 1993 ---- ---- ---- Bonds $18,046,504 $16,182,157 $14,861,152 Common stock 137,862 498,222 125,986 Equity in undistributed income (loss) of subsidiaries (482,580) 737,688 (747,294) Short-term investments 2,642,678 1,664,563 104,719 Mortgage loans 5,420,613 12,026,724 13,830,160 Real estate 1,071,080 1,248,043 635,245 Policy loan interest (32,300) 10,658 66,228 Amortization of IMR 11,040,025 541,484 495,672 Investment expenses (1,934,160) (2,349,980) (1,520,742) ----------- ----------- ----------- Net investment income $35,909,722 $30,559,559 $27,851,126 =========== =========== ===========
Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments," requires disclosures, if practical, of fair value information about financial instruments, whether or not recognized in the balance sheet. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Presentation of the estimated fair value of assets without a corresponding revaluation of liabilities associated with insurance contracts can be misinterpreted. 11 65 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- The amortized cost and estimated fair values of investments in debt securities at December 31, 1995 and 1994 are as follows:
December 31, 1995 -------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value ---- ----- ------ ----- U.S. Treasury securities and obligations of U.S. $ 8,998 $362 $3 $ 9,357 Government agencies Corporate securities 3,672 125 3 3,794 Mortgage-backed securities 3,611 195 0 3,806 ------- ---- -- ------- Totals $16,281 $682 $6 $16,957 ======= ==== == =======
December 31, 1995 -------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value ---- ----- ------ ----- U.S. Treasury securities and $ 8,673 $ 70 $ 402 $ 8,341 obligations of U.S. Government agencies Corporate securities 294,447 939 6,185 289,201 Mortgage-backed 30,853 16 2,267 28,602 securities -------- ------ ------ -------- Totals $333,973 $1,025 $8,854 $326,144 ======== ====== ====== ========
The fair value of debt securities were determined based on quoted market prices or dealer quotes. 12 66 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- The amortized cost and estimated market value of debt securities at December 31, 1995, by the contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers or lenders may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized Fair (in thousands) Cost Value --------- ---------- Due in one year or less $ 2,162 $ 2,175 Due after one year through five years 5,336 5,553 Due after five years through ten years 4,281 4,439 Due after ten years 892 984 ------- ------- Sub-totals 12,671 13,151 Mortgage-backed securities 3,610 3,806 ------- ------- Totals $16,281 $16,957 ======= =======
Gross gains of $10,452,916, $1,600,852 and $2,015,587 and gross losses of $2,035,657, $1,660,785 and $208,569 were recognized on those sales for the years ended December 31, 1995, 1994 and 1993, respectively. Net realized gains (losses) of $8,417,259 (see Note A), $(59,933) and $1,797,140 for the years ended December 31, 1995, 1994 and 1993, respectively, were transferred to IMR. Policy loans are an integral component of insurance policies, therefore, it is not practicable to value policy loans. 13 67 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- D. FEDERAL INCOME TAXES -------------------- At December 31, 1995 and 1994 the Company had net operating loss carryforwards of approximately $33,000,000 and $21,000,000, respectively, which expire between the years 2007 and 2010. E. LIFE AND ANNUITY ACTUARIAL RESERVES ----------------------------------- The Company issues flexible premium deferred combination fixed and variable annuity contracts and variable life insurance contracts. Reserves for these contracts are established using the Commissioners Annuity Reserve Valuation Method ("CARVM") and the Commissioner's Reserve Valuation Method ("CRVM") as adopted by the State of Delaware Insurance Department. The reserves for the fixed portion of the contracts are subject to an indemnity reinsurance agreement and the reserves for the variable portion of the contracts are held in the separate account. The Company has now reinsured its Minimum Guaranteed Death Benefit risks, and accordingly, is holding no reserve for this risk, which relates to the excess of Death Benefit over policyholder Account Value. The Company does not offer surrender values in excess of the reserves. Withdrawal characteristics of Annuity Actuarial Reserves and Deposit Liabilities are as follows: Subject to discretionary withdrawal with market value adjustment $ 467,775,126 8.53% Subject to discretionary withdrawal at book value less surrender charge 228,269,135 4.16 Subject to discretionary withdrawal at market value 4,760,670,029 86.79 Subject to discretionary withdrawal at book value 11,553,562 .21 -------------- ----- Subtotal 5,468,267,852 99.69 Not subject to discretionary withdrawal provision 17,150,937 .31 -------------- ----- Total gross annuity actuarial reserves and deposit fund liabilities 5,485,418,789 100% -------------- ===== Reinsurance ceded 729,344,503 -------------- Total net annuity actuarial reserves and deposit funds liabilities $4,756,074,286 ==============
14 68 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- F. REINSURANCE ----------- Effective June 30, 1995 an indemnity coinsurance agreement was entered into between the Company and Peoples Security Life Insurance Company ("Peoples" or "the Reinsurer"), a AAA rated subsidiary of the Providian Corporation, to reinsure both in force and new fixed annuity business written by the Company. The indemnity aspects of the agreement provide that the Company remains liable for the contractual obligations whereas the Reinsurer agrees to indemnify the Company for any contractual claims incurred. The coinsurance aspects of the agreement required the Company to transfer all assets backing the fixed annuity obligations to the Reinsurer together with all future fixed premiums received by the Company for fixed annuity contracts. Once transferred, the assets belong to the Reinsurer. In exchange, the Reinsurer reimburses the Company for all claims and provides expense allowances to cover commissions and other costs associated with the fixed annuity business. The Reinsurer is responsible for investing the assets and is at risk for any potential investment gains and losses. There is no recourse back to the Company if investment losses are incurred. Under this agreement the Company will continue to administer the fixed annuity business for which it will earn an expense allowance. The Company has set up a reserve of $1,931,894 to recognize that expense allowances received from Providian under this indemnity coinsurance agreement do not fully reimburse the Company for overhead expenses allocated to the fixed annuity line of business. The reinsurance agreement required the Company to transfer to the Reinsurer a consideration of $726.7 million, in cash or securities, to cover all in force business as of June 30, 1995. The financial impact of the reinsurance agreement was as follows: (in millions) Net loss from operations: Consideration paid to reinsurer $(726.7) Net reserves reinsured 725.1 Expense gap reserve (1.9) ------- (3.5) Capital and Surplus adjustments: Release of IMR 11.0 Market loss on sale of mortgages (2.2) Release of bond and mortgage asset valuation reserve 4.7 ------- Net impact on surplus $10.0 =======
15 69 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- REINSURANCE, CONTINUED ---------------------- Effective July 1, 1995 and August 1, 1995, respectively, the Company entered into treaties with the Connecticut General Life Insurance Company ("CIGNA") and Swiss Re Life Company America companies to reinsure its Minimum Death Benefit Guarantee risks. Each company has assumed 50% of the risk. In addition, the Company reinsured 50% of its risk related to the waiving of surrender charges at death with CIGNA. The Company is paying the reinsurers an asset based premium, the level of which varies with both the amount of exposure to this risk and the realized experience. On December 7, 1995, the Company entered into a letter of intent with Transamerica Occidental Life Insurance Company. Transamerica will reinsure a 50% quota share of the variable portion of the Company's VLI contracts. In addition, Transamerica will also reinsure 80% of this product's net amount at risk in excess of the Company's retention limit of $100,000 on a YRT basis. During 1984, the Company assumed from its parent, NAL, approximately 26% of NAL's ordinary and group vested annuity contracts issued in the United States prior to 1983. In 1984, the Company received consideration from NAL relating to the agreement of $800,000. In December, 1989 the percentage assumed was increased to 90% and the Company recognized consideration of $2,325,000. On March 31, 1995, this agreement was 100% recaptured. To effect this recapture the Company paid NAL $1,445,889. At December 31, 1994, the Company's liability for future policy benefits was $1,635,097. Effective October 1, 1988, the Company ceded 18% of its variable annuity contracts (policy from 203-VA) to its parent NAL under a modified coinsurance agreement. Under this agreement, NAL provides the Company with an expense allowance on reinsured premiums which is repaid out of a portion of future profits on the business reinsured. The agreement provides full risk transfer of mortality, persistency and investment performance to the reinsurer with respect to the portion reinsured. Effective July 1, 1992, the quota share percentage was increased to 36%. On December 31, 1993 the Company entered into a modified coinsurance agreement with an ITT Lyndon Life, a non-related third party to cede the remaining 64% of the Company's variable annuity contracts (policy form 203-VA) and 95% of the Company's new variable annuity contract series issued in 1994 (policy form Ven 10). The Company received approximately $25 million in cash representing withheld premiums of $15 million and $10 million ceding commission. The amounts of withheld premiums will be repaid with interest over 5 years. The ceding commission is payable out of future profits generated by the business reinsured. 16 70 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- REINSURANCE, CONTINUED ---------------------- Effective December 31, 1994, the Company recaptured its reinsurance with NAL. Upon recapture, 1994 operating results were negatively impacted by a one-time recapture fee of approximately $6.5 million. Concurrent with this transaction, the Company ceded 31% of the recaptured contracts (policy form 203-VA) to ITT Lyndon Life bringing the portion of these contracts reinsured by ITT Lyndon to 95%. In return, the Company received consideration of $5.2 million which is reflected as a surplus adjustment and will be amortized into income in future years. Effective December 31, 1994, the Company entered into indemnity reinsurance agreement with Paine Webber Life to reinsure a portion of its policy forms 207-VA, VFA, VENTURE.001, and VENTURE.003. The quota share percentage varies between 15% and 35% depending on the policy form. The form of reinsurance is modified coinsurance and only covers the variable portion of contracts written by Paine Webber brokers. The Company received an allowance of $1,580,896 to complete this transaction. All elements of risk (including mortality, persistency, investment performance) have been transferred with the exception of the minimum death benefit guarantee. The Company receives an allowance to cover the expected cost of the minimum death benefit guarantee. G. RELATED PARTY TRANSACTIONS -------------------------- In connection with the fixed annuity indemnity coinsurance agreement (See Note F), the Company pooled its mortgage portfolio (book value of approximately $106 million) and transferred a senior participation interest to an affiliate of the reinsurer. The senior interest was transferred for a purchase price of approximately $72 million and entitles an affiliate of the reinsurer to 100% of the cash flows produced by the portfolio until they recover in full the purchase price with interest at a rate of 7.52%. The remaining residual interest was transferred to First North American Realty, Inc., a wholly-owned subsidiary of NAL for a purchase price of $33 million. As a result of the sale of the senior and residual interests in the Company's mortgages, the Company has no further economic interest in any mortgages and hence has reported zero for mortgage loan assets on its balance sheet as of December 31, 1995. 17 71 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- RELATED PARTY TRANSACTIONS, CONTINUED ------------------------------------- The Company utilizes various services administered by NAL, such as payroll and investment accounting. The charges for these services were approximately $295,000, $234,000 and $232,000, in 1995, 1994 and 1993, respectively. At December 31, 1995, the Company had a net liability to NAL for $5,928,889. The Company provides various services and personnel to FNA for accounting, actuarial, administration, and systems support. These services are allocated on a pro rata basis and charged as incurred. The total costs allocated for these services in 1995, 1994 and 1993 was approximately $456,000, $418,000 and $310,000, respectively. At December 31, 1995, the Company had a net receivable from FNA for $1,427,631. The Company's annuity and insurance contracts are distributed through NASL Financial pursuant to an underwriting agreement. At December 31, 1995, the Company had a receivable from NASL Financial for $881,119. The financial statements have been prepared from the records maintained by the Company and may not necessarily be indicative of the financial condition or results of operations that would have occurred if the Company had been operated as an unaffiliated corporation. H. INVESTMENTS ON DEPOSIT WITH REGULATORY AUTHORITIES -------------------------------------------------- Bonds and United States Treasury Notes with a carrying value of $5,600,444 at December 31, 1995, and $6,620,154 at December 31, 1994, were on deposit with, or in custody accounts on behalf of, certain state insurance departments. I. BORROWED MONEY -------------- The Company has an unsecured line of credit with State Street Bank and Trust, in the amount of $10 million, bearing interest at the bank's prime rate (8.5% at December 31, 1995). There were no outstanding balances at December 31, 1995 and 1994. Interest expense was approximately $76,000, $81,600 and $236,000 in 1995, 1994 and 1993, respectively. In December 1994, the Company entered into a $150 million revolving credit and term loan agreement (the "Loan") with the Canadian Imperial Bank of Commerce and Deutsche Bank AG ("CIBC"). The amount outstanding at December 31, 1995 was, $107 million and is payable in quarterly installments through December 31, 1999. Interest is due at the maturity of each LIBOR contract. The interest rate is determined based on LIBOR plus an interest rate margin. Accrued interest at December 31, 1995 is $865,148. 18 72 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- BORROWED MONEY, CONTINUED ------------------------- The Loan is collaterized by the mortality and expense risk charges and surrender charges due from the separate account, excluding any portion thereof subject to existing reinsurance agreements. The Loan is subordinated in every respect to the claims of the Company's contractholders as directed by the Insurance Commissioner of the State of Delaware. The Company is subject to various affirmative and negative covenants under this Loan, whereby breach of these covenants could cause an event of default. Such covenants require the Company to meet certain financial ratios and places restrictions on the incurrence of additional debt, reinsurance and capital changes. J. SURPLUS NOTES ------------- The Company received $20 million on December 20, 1994 pursuant to a surplus note agreement with NAL bearing interest at 8%. The note and accrued interest are subordinated to payments due to policyholders, and other claimants. Principal and interest payments can be made only upon prior approval of the Delaware Insurance Commissioner. Interest accrued at December 31, 1995 is $3,248,219, and was paid on January 2, 1996. K. DEFERRED COMPENSATION AND RETIREMENT PLANS ------------------------------------------ The parent, NAL, sponsors a defined benefit pension plan covering substantially all of the Company's employees. The benefits are based on years of service and the employee's compensation during the last five years of employment. NAL's funding policy is to contribute annually the normal cost up to the maximum amount that can be deducted for federal income tax purposes and to charge each subsidiary for its allocable share of such contributions based on a percentage of payroll. No pension cost was allocated to the Company in 1995, 1994, and 1993 as the plan was subject to the full funding limitation under the Internal Revenue Code. The Company sponsors a defined contribution retirement plan pursuant to regulation 401(k) of the Internal Revenue Code. All employees on September 1, 1990 were eligible to participate. Employees hired after September 1, 1990 will be eligible after one year of service and attaining age 21. The Company contributes two percent of base pay plus fifty percent of the employee savings contribution. The employee savings contribution is limited to six percent of base pay. The Company contributed $203,248, $167,148, and $89,218 in 1995, 1994 and 1993, respectively. 19 73 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- L. LEASES ------ The Company leases its office space and various office equipment under operating lease agreements. For the years ended December 31, 1995, 1994 and 1993 the Company incurred rent expense of $1,388,780 and $840,233, and $718,579, respectively. The Company negotiated a ten year lease for new office space which commenced in March 1992. In connection with the lease, the Company was required to deposit $1,500,000 in an escrow account as security toward fulfilling the future lease commitment. The balance of the escrow account at December 31, 1995 is $1,050,000. The minimum lease payments associated with the office space and various office equipment under operating lease agreements is as follows:
Minimum Year Lease Payments -------------------------------- 1996 $1,017,006 1997 1,187,665 1998 1,203,878 1999 1,203,364 2000 1,194,527 Remaining years 1,384,493 ---------- Total $7,190,933 ==========
The Company also guarantees FNA's office space lease which has an annual cost to FNA of approximately $72,000. M. INTEREST RATE SWAP CONTRACT --------------------------- The Company entered into an interest rate swap with CIBC for the purpose of minimizing exposure to fluctuations in interest rates on a portion of the outstanding debt held by the Company. The notional amount of the matched swap outstanding at December 31, 1995 was $97 million. The unexpired term at December 31, 1995 was 4 years. CIBC is a major international financial institution. The agreement subjects the Company to financial risk that will vary during the life of the agreement in relation to market interest rates. Gains or losses on the swap will be recognized in investment income when due. 20 74 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS, continued ---------- N. GUARANTEE AGREEMENT ------------------- A guarantee agreement continues in effect, whereby NAL has agreed to unconditionally guarantee that it will, on demand, make funds available to the Company for the timely payment of contractual claims made under fixed annuity and variable life contracts issued by the Company. The guarantee covers all outstanding fixed annuity contracts, including those issued prior to the date of the guarantee agreement. Following the merger (see Note O), Manufacturers Life Insurance Company has assumed all of NAL's obligations under the guarantee agreement. O. SUBSEQUENT EVENTS ----------------- MERGER ------ On January 1, 1995, NAL merged with the Manufacturers Life Insurance Company ("MLI") of Canada. The surviving company will conduct business under the name "Manufacturers Life Insurance Company". CORPORATE RESTRUCTURING ----------------------- Effective January 1, 1996, immediately following the merger, the Company experienced a corporate restructuring which resulted in the formation of a newly organized holding corporation, NAWL Holding Company, Inc. ("NAWL"). NAWL holds all of the outstanding shares of the Parent and Wood Logan Associates, Inc. ("WLA"). MLI owns all class A shares of NAWL, representing 85% of the voting shares of NAWL. Certain employees of WLA own all class B shares, which represent the remaining 15% voting interest in NAWL. 21 75 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN LIFE ASSURANCE COMPANY) ANNUAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1995 Schedule 1 - Selected Financial Data --------------- Investment Income Earned Government bonds $ 1,060,741 Other bonds (unaffiliated) 16,510,356 Common stocks of affiliates 1,287,731 Mortgages loans 5,420,613 Real estate 1,071,080 Premium notes, policy loans and liens (32,300) Short-term investments 2,642,678 Aggregate write-ins for investment income 475,407 ----------- Gross investment Income $28,436,306 =========== Real Estate Owned - Book Value less Encumbrances $ 4,847,164 =========== Bonds and Stocks of Parents, Subsidiaries and Affiliates - Book Value Common Stocks $21,282,599 =========== Bonds and Short-Term Investments by Class and Maturity: Bonds by Maturity-Statement Value Due within one year 3,957,418 Over 1 year through 5 years 5,477,162 Over 5 years through 10 years 4,645,633 Over 10 years through 20 years 127,972 Over 20 years 3,868,984 ----------- Total by Maturity $18,077,169 =========== Bonds by Class - Statement Value Class 1 $16,756,213 Class 2 1,010,956 Class 3 310,000 ----------- Total by Class $18,077,169 =========== Total Bonds Publicly Traded $17,066,213 =========== Total Bonds Privately Traded $ 1,010,956 ===========
22 76 NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF NORTH AMERICAN LIFE ASSURANCE COMPANY) ANNUAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1995 Schedule 1 - Selected Financial Data --------------- Common Stocks - Market Value $ 21,730,238 ============== Supplementary Contracts in Force Ordinary - Involving Life Contingencies Income Payable $ 24,442 ============== Ordinary - Not Involving Life Contingencies Income Payable $ 341,176 ============== Annuities: Ordinary Immediate - Amount of Income Payable $ 2,291,184 ============== Deferred - Fully Paid Account $5,267,516,243 ============== Balance Group Fully Paid Account Balance $ 374,375,752 ==============
23 77 REPORT OF INDEPENDENT ACCOUNTANTS To the Contract Owners of NASL Variable Account: We have audited the accompanying statement of assets and liabilities of the sub-accounts comprising NASL Variable Account (consisting of the Equity, Investment Quality Bond, Growth and Income, Pasadena Growth, Money Market, Global Equity, Global Government Bond, U.S. Government Securities, Conservative Asset Allocation, Moderate Asset Allocation, Aggressive Asset Allocation, Value Equity, Strategic Bond and International Growth and Income sub-accounts) of North American Security Life Insurance Company as of December 31, 1995 and the related statements of operations and changes in net assets of the Equity, Investment Quality Bond, Growth and Income, Pasadena Growth, Money Market, Global Equity, Global Government Bond, U.S. Government Securities, Conservative Asset Allocation, Moderate Asset Allocation, Aggressive Asset Allocation, Value Equity and Strategic Bond sub-accounts for the two years then ended and the related statement of operations and changes in net assets of the International Growth and Income sub-account for the period January 9, 1995 (date of commencement of operations) to December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform 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 the aforementioned sub-accounts comprising NASL Variable Account of North American Security Life Insurance Company as of December 31, 1995, and the results of their operations and the changes in their net assets for the two years then ended or the period indicated, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Boston, Massachusetts February 23, 1996 78 NASL VARIABLE ACCOUNT STATEMENT OF ASSETS AND LIABILITIES -- December 31, 1995 ASSETS Investments at market value: Sub-accounts: Equity Portfolio - 45,697,001 Shares (Cost $748,334,745) $ 950,040,654 Investment Quality Bond Portfolio - 11,175,951 Shares (Cost $126,565,276) 137,687,722 Growth and Income Portfolio - 38,987,834 Shares (Cost $516,028,619) 638,230,845 Pasadena Growth Portfolio - 23,033,499 Shares (Cost $223,563,247) 262,581,885 Money Market Portfolio - 24,720,308 Shares (Cost $247,203,082) 247,203,082 Global Equity Portfolio - 38,369,470 Shares (Cost $605,619,464) 617,748,460 Global Government Bond Portfolio - 15,639,853 Shares (Cost $209,448,407) 227,716,254 U.S. Government Securities Portfolio - 14,982,032 Shares (Cost $195,178,203) 204,504,730 Conservative Asset Allocation Portfolio - 18,951,755 Shares (Cost $199,604,166) 219,650,840 Moderate Asset Allocation Portfolio - 51,107,809 Shares (Cost $547,584,223) 633,225,754 Aggressive Asset Allocation Portfolio - 15,892,868 Shares (Cost $177,405,368) 204,223,358 Value Equity Portfolio - 25,985,404 Shares (Cost $312,465,138) 358,858,426 Strategic Bond Portfolio - 9,937,696 Shares (Cost $103,788,977) 111,898,460 International Growth and Income Portfolio - 7,976,230 Shares (Cost $81,634,511) 83,511,130 -------------- Total assets .......................................................... $4,897,081,600 ============== LIABILITIES 0 -------------- Total liabilities ................................................. 0 NET ASSETS Variable annuity contracts .............................................. $4,895,365,586 Annuity reserves ........................................................ 1,716,014 -------------- Total net assets ................................................. $4,897,081,600 ==============
The accompanying notes are an integral part of the financial 2 79 NASL VARIABLE ACCOUNT STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
Sub-Account --------------------------------------------------------------------------------- Investment Equity Quality Bond Growth and Income ------------------------- ------------------------- -------------------------- Year Ended December 31, Year Ended December 31, Year Ended December 31, ------------------------- ------------------------- -------------------------- 1995 1994 1995 1994 1995 1994 ----------- ----------- ------------ ----------- ----------- ------------- Income: Dividends................................. $ 3,952,413 $22,253,900 $ 6,801,549 $ 4,551,500 $12,295,900 $ 8,789,400 Expenses: Mortality & expense risk and administrative charges ................. 10,216,686 6,350,391 1,667,841 1,477,254 7,054,820 4,825,591 ----------- ----------- ------------ ----------- ----------- ------------ Net investment income (loss)................ (6,264,273) 15,903,509 5,133,708 3,074,246 5,241,080 3,963,809 Net realized gain (loss).................... 29,102,556 10,744,790 (1,374,226) (1,048,833) 11,439,262 4,920,481 Unrealized appreciation (depreciation) during the period....................... 208,487,783 (36,590,074) 15,585,843 (8,368,756) 101,632,851 (5,125,689) ----------- ----------- ------------ ----------- ----------- ------------ Net increase (decrease) in net assets from operations......................... 231,326,066 (9,941,775) 19,345,325 (6,343,343) 118,313,193 3,758,601 ----------- ----------- ------------ ----------- ----------- ------------ Changes from principal transactions: Purchase payments......................... 152,243,325 160,841,107 20,615,193 27,514,787 105,864,684 105,421,732 Transfers between sub-accounts and the Company......................... 91,976,289 10,527,048 610,884 (977,918) 53,438,203 24,558,952 Withdrawals............................... (41,022,073) (24,977,355) (9,834,428) (9,402,496) (30,901,300) (20,690,150) Annual contract fee....................... (453,864) (300,540) (63,118) (58,951) (286,289) (202,599) ----------- ----------- ------------ ----------- ----------- ------------ Net increase in net assets from principal transactions............. 202,743,677 146,090,260 11,328,531 17,075,423 128,115,298 109,087,934 ----------- ----------- ------------ ----------- ----------- ------------ Total increase in net assets................ 434,069,743 136,148,485 30,673,856 10,732,080 246,428,491 112,846,535 Net assets at beginning of period........... 515,970,911 379,822,426 107,013,866 96,281,786 391,802,354 278,955,819 ----------- ----------- ------------ ------------ ----------- ------------ Net assets at end of period.................$950,040,654 $515,970,911 $137,687,722 $107,013,866 $638,230,845 $391,802,354 =========== =========== ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements 3 80 NASL VARIABLE ACCOUNT STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
Sub-Account --------------------------------------------------------------------------------- Pasadena Growth Money Market Global Equity ------------------------- ------------------------- -------------------------- Year Ended December 31, Year Ended December 31, Year Ended December 31, ------------------------- ------------------------- -------------------------- 1995 1994 1995 1994 1995 1994 ----------- ----------- ------------ ----------- ----------- ------------- Income: Income: Dividends.................................$ 786,320 $ 491,100 $ 13,942,901 $ 8,915,200 $ 28,730,987 $ 7,473,600 Expenses: Mortality & expense risk and administrative charges ................. 2,893,560 1,717,075 3,608,339 3,212,553 8,281,164 7,450,951 ------------ ------------ ------------ ------------ ------------ ------------ Net investment income (loss)................ (2,107,240) (1,225,975) 10,334,562 5,702,647 20,449,823 22,649 Net realized gain (loss).................... 2,658,959 (2,357,041) 0 0 18,159,858 19,889,019 Unrealized appreciation (depreciation) during the period....................... 41,777,908 (4,009,835) 0 0 (3,640,061) (30,918,793) ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in net assets from operations......................... 42,329,627 (7,592,851) 10,334,562 5,702,647 34,969,620 (11,007,125) ------------ ------------ ------------ ------------ ------------ ------------ Changes from principal transactions: Purchase payments......................... 48,522,911 46,741,660 126,215,692 146,929,088 73,846,536 200,013,903 Transfers between sub-accounts and the Company......................... 39,579,399 9,644,387 (105,785,452) 29,195,804 (41,016,819) 61,282,270 Withdrawals............................... (9,818,260) (5,926,769) (52,028,607) (43,566,631) (39,666,888) (26,475,341) Annual contract fee....................... (124,885) (83,671) (109,865) (101,914) (410,630) (319,584) ------------ ------------ ------------ ------------ ------------ ------------ Net increase in net assets from principal transactions............. 78,159,165 50,375,608 (31,708,232) 132,456,348 (7,247,801) 234,501,249 ------------ ------------ ------------ ------------ ------------ ------------ Total increase in net assets................ 120,488,792 42,782,757 (21,373,670) 138,158,995 27,721,819 223,494,124 Net assets at beginning of period........... 142,093,093 99,310,336 268,576,752 130,417,757 590,026,641 366,532,517 ------------ ------------ ------------ ------------ ------------ ------------ Net assets at end of period.................$262,581,885 $142,093,093 $247,203,082 $268,576,752 $617,748,460 $590,026,641 ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements 4 81 NASL VARIABLE ACCOUNT STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
Sub-Account --------------------------------------------------------------------------------- Global U.S. Conservative Government Bond Government Securities Asset Allocation ------------------------- ------------------------- -------------------------- Year Ended December 31, Year Ended December 31, Year Ended December 31, ------------------------- ------------------------- -------------------------- 1995 1994 1995 1994 1995 1994 ----------- ----------- ------------ ----------- ----------- ------------- Income: Dividends.................................$ 11,134,112 $ 10,695,800 $ 11,234,073 $10,912,700 $10,694,769 $15,496,900 Expenses: Mortality & expense risk and administrative charges ................. 3,009,593 2,973,944 2,655,339 2,806,318 3,052,427 3,306,523 ------------ ------------ ------------ ----------- ----------- ----------- Net investment income (loss)................ 8,124,519 7,721,856 8,578,734 8,106,382 7,642,342 12,190,377 Net realized gain (loss).................... 2,214,020 238,463 75,470 (1,818,099) 5,148,076 2,826,007 Unrealized appreciation (depreciation) during the period....................... 31,070,281 (24,232,538) 15,587,098 (11,972,785) 19,853,900 (23,002,822) ------------ ------------ ------------ ----------- ----------- ----------- Net increase (decrease) in net assets from operations......................... 41,408,820 (16,272,219) 24,241,302 (5,684,502) 32,644,318 (7,986,438) ------------ ------------ ------------ ----------- ----------- ----------- Changes from principal transactions: Purchase payments......................... 19,314,715 70,655,674 41,695,417 67,722,255 17,444,784 32,149,383 Transfers between sub-accounts and the Company......................... (18,811,224) (32,815,445) (24,365,001) (80,123,945) (12,482,271) (27,534,113) Withdrawals............................... (15,701,657) (11,555,506) (16,213,816) (16,422,470) (31,190,237) (30,991,374) Annual contract fee....................... (127,214) (105,041) (90,102) (92,483) (146,082) (163,915) ------------ ------------ ------------ ----------- ----------- ----------- Net increase in net assets from principal transactions............. (15,325,380) 26,179,681 1,026,498 (28,916,643) (26,373,806) (26,540,020) Total increase in net assets................ 26,083,440 9,907,462 25,267,800 (34,601,145) 6,270,512 (34,526,458) Net assets at beginning of period........... 201,632,814 191,725,352 179,236,930 213,838,075 213,380,328 247,906,786 ------------ ------------ ------------ ----------- ----------- ----------- Net assets at end of period.................$227,716,254 $201,632,814 $204,504,730 $179,236,930 $219,650,840 $213,380,328 ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements 5 82 NASL VARIABLE ACCOUNT STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued) Sub-Account --------------------------------------------------------------------------------------- Moderate Aggressive Value Asset Allocation Asset Allocation Equity --------------------------- ---------------------------- --------------------------- Year Ended December 31, Year Ended December 31, Year Ended December 31, --------------------------- ---------------------------- --------------------------- 1995 1994 1995 1994 1995 1994 ------------ ------------ ------------ ------------ ------------ ------------ Income: Dividends.......................... $ 28,759,406 $ 42,041,800 $ 11,134,600 $ 11,101,500 $ 3,410,640 $ 664,100 Expenses: Mortality & expense risk and administrative charges.......... 8,527,910 8,801,780 2,650,794 2,479,359 3,916,735 1,998,342 ------------ ------------ ------------ ------------ ------------ ------------ Net investment income (loss)........ 20,231,496 33,240,020 8,483,806 8,622,141 (506,095) (1,334,242) Net realized gain (loss)............ 15,018,509 8,083,729 7,897,507 4,985,071 5,501,447 2,037,707 Unrealized appreciation (depreciation) during the period............... 70,271,801 (60,546,683) 19,421,882 (17,369,916) 45,616,955 (3,845,224) ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in net assets from operations................. 105,521,806 (19,222,934) 35,803,195 (3,762,704) 50,612,307 (3,141,759) ------------ ------------ ------------ ------------ ------------ ------------ Changes from principal transactions: Purchase payments................. 42,501,661 94,528,916 22,202,012 33,674,065 78,127,224 90,859,559 Transfers between sub-accounts and the Company................. (26,640,289) (44,720,185) (10,804,739) (764,703) 45,625,228 41,456,303 Withdrawals....................... (79,543,856) (75,763,521) (22,397,713) (20,923,967) (12,728,807) (6,039,315) Annual contract fee............... (485,596) (521,671) (195,083) (195,473) (140,801) (59,538) ------------ ------------ ------------ ------------ ------------ ------------ Net increase in net assets from principal transactions..... (64,168,080) (26,476,462) (11,195,523) 11,789,922 110,882,844 126,217,009 ------------ ------------ ------------ ------------ ------------ ------------ Total increase in net assets........ 41,353,726 (45,699,396) 24,607,672 8,027,218 161,495,151 123,075,250 Net assets at beginning of period... 591,872,028 637,571,424 179,615,686 171,588,468 197,363,275 74,288,025 ------------ ------------ ------------ ------------ ------------ ------------ Net assets at end of period......... $633,225,754 $591,872,028 $204,223,358 $179,615,686 $358,858,426 $197,363,275 ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements 6 83 NASL VARIABLE ACCOUNT STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
Sub-Account ---------------------------------------------- Strategic International Bond Growth and Income --------------------------- ----------------- Year Ended December 31, January 9, 1995 --------------------------- thru 1995 1994 December 31, 1995 ------------ ----------- ----------------- Income: Dividends ............................ $ 3,783,473 $ 1,951,613 $ 1,766,390 Expenses: Mortality & expense risk and administrative charges ............. 1,283,369 987,658 606,981 ------------ ----------- ----------- Net investment income (loss) ........... 2,500,104 963,955 1,159,409 Net realized gain (loss) ............... 41,813 119,939 502,507 Unrealized appreciation (depreciation) during the period .................. 12,274,700 (6,295,983) 1,876,619 ------------ ----------- ----------- Net increase (decrease) in net assets from operations .................... 14,816,617 (5,212,089) 3,538,535 ------------ ----------- ----------- Changes from principal transactions: Purchase payments .................... 21,970,895 36,072,168 36,977,061 Transfers between sub-accounts and the Company .................... 3,987,010 835,251 45,342,755 Withdrawals .......................... (5,783,698) (3,909,501) (2,331,931) Annual contract fee .................. (45,959) (29,888) (15,290) ------------ ----------- ----------- Net increase in net assets from principal transactions ........ 20,128,248 32,968,030 79,972,595 ------------ ----------- ----------- Total increase in net assets ........... 34,944,865 27,755,941 83,511,130 Net assets at beginning of period ...... 76,953,595 49,197,654 0 ------------ ----------- ----------- Net assets at end of period ............ $111,898,460 $76,953,595 $83,511,130 ============ =========== ===========
The accompanying notes are an integral part of the financial statements 7 84 NASL VARIABLE ACCOUNT NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION: The NASL Variable Account (the "Account") is a separate account established by North American Security Life Insurance Company (the "Company"). The Company established the Account on August 24, 1984 as a separate account under Delaware law. The Account operates as a Unit Investment Trust under the Investment Company Act of 1940, as amended, and invests in the NASL Series Trust (the "Trust"). The Account is a funding vehicle for variable annuity contracts (the "Contracts") issued by the Company. The Account includes 12 contracts, distinguished principally by the level of expenses and surrender charges. These 12 contracts are as follows: Venture Variable Annuity 1, 3, 7, 8, 17, 18, 20, 21, 22 and 23 ("VEN 1, 3, 7, 8, 17, 18, 20, 21, 22 and 23") and Venture Vision Variable Annuity 5 and 25 ("VIS 5 and 25"). The Company is a wholly-owned subsidiary of North American Life Assurance Company ("NAL"), a Canadian mutual life insurance company. NAL merged with the Manufacturers Life Insurance Company of Canada effective January 1, 1996. The surviving company will conduct business under the name "Manufacturers Life Insurance Company." 2. SIGNIFICANT ACCOUNTING POLICIES: Investments are made in the portfolios of the Trust and are valued at the reported net asset values of such portfolios. Transactions are recorded on the trade date. Income from dividends is recorded on the ex-dividend date. Realized gains and losses on the sales of investments are computed on the basis of identified cost of the investment sold. In addition to the Account, a contract holder may also allocate funds to the Fixed Account, which is part of the Company's general account. Because of exemptive and exclusionary provisions, interests in the Fixed account have not been registered under the Securities Act of 1933 and the Company's general account has not been registered as an investment company under the Investment Company act of 1940. Annuity reserves are computed for contracts in the income stage according to the 1983a Individual Annuitant Mortality Table. The assumed investment return is 4%, as regulated by the laws of the respective states. The mortality risk is fully borne by the Company and may result in additional amounts being transferred into the account by the Company. The operations of the Account are included in the federal income tax return of the Company, which is taxed as a Life Insurance Company under the provisions of the Internal Revenue Code (the "Code"). Under the current provisions of the Code, the Company does not expect to incur federal income taxes on the earnings of the Account to the extent the earnings are credited under the contracts. Based on this, no charge is being made currently to the Account for federal income taxes. The Company will review periodically the status of such decision based on changes in the tax law. Such a charge may be made in future years for any federal income taxes that would be attributable to the contract. 3. AFFILIATED COMPANY TRANSACTIONS: Administrative services necessary for the operation of the Account are borne by the Company. The Company has an underwriting agreement with its wholly-owned subsidiary, NASL Financial Services, Inc. ("NASL Financial"). NASL Financial has a promotional agent agreement with Wood Logan Associates, Inc., an affiliate of the Company, to promote the sales of annuity contracts. 8 85 NASL VARIABLE ACCOUNT NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 4. CONTRACT CHARGES: There are no deductions made from purchase payments for sales charges at the time of purchase. In the event of a surrender, a contingent deferred sales charge may be charged by the Company to cover sales expenses. An annual administrative fee of $30 is deducted from each contract owners' account on the contract anniversary date to cover contract administration costs. This charge is waived on certain contracts. Deductions from each sub-account are made daily for administrative fees and for the assumption of mortality and expense risk charges as follows: (i) Prior Contract Series (VEN 1): deductions from each sub-account are made daily for the assumption of mortality and expense risks equal to an effective annual rate of 1.30% of the contract value. (ii) Current Contract Series (VEN 3, 7, 8, 17, 18, 20, 21, 22, 23): deductions from each sub-account are made daily for administration and for the assumption of mortality and expense risks equal to an effective annual rate of 0.15% and 1.25% of the contract value, respectively. (iii) Current Contract Series (VIS 5, 25): deductions from each sub-account are made daily for distribution fees, administration and for the assumption of mortality and expense risks equal to an effective annual rate of 0.15%, 0.25% and 1.25% of the contract value, respectively. 5. PURCHASES AND SALES OF INVESTMENTS: The following table shows aggregate cost of shares purchased and proceeds from sales of each sub-account for the year ended December 31, 1995.
Purchases Sales --------- ----- Equity Portfolio $340,875,652 $144,396,247 Investment Quality Bond Portfolio $ 74,432,358 $ 57,970,119 Growth and Income Portfolio $183,109,759 $ 49,753,391 Pasadena Growth Portfolio $113,755,759 $ 37,703,834 Money Market Portfolio $427,663,905 $449,037,574 Global Equity Portfolio $172,985,538 $159,783,517 Global Government Bond Portfolio $ 70,819,330 $ 78,020,192 U.S. Government Securities Portfolio $105,546,174 $ 95,940,942 Conservative Asset Allocation Portfolio $ 32,726,129 $ 51,457,591 Moderate Asset Allocation Portfolio $ 74,018,277 $117,954,863 Aggressive Asset Allocation Portfolio $ 51,355,943 $ 54,067,658 Value Equity Portfolio $144,444,973 $ 34,068,225 Strategic Bond Portfolio $ 49,966,492 $ 27,338,139 International Growth and Income Portfolio $123,594,274 $ 42,462,270
9 86 6. UNIT VALUES: A summary of the accumulation unit values at December 31, 1994 and 1995 and the accumulation units and dollar value outstanding at December 31, 1995 are as follows:
1994 1995 ---------- --------------------------------------------- Unit Unit Value Value Units Dollars ----- ---------- ---------- ------------ Equity sub-account VEN 1 Contracts......... $24.235928 $34.164256 18,793 $ 642,039 VEN 3 Contracts......... 14.786831 20.821819 2,560,363 53,311,406 VEN 7 Contracts......... 14.786831 20.821819 30,454,576 634,119,677 VEN 8 Contracts......... 14.786831 20.821819 2,259,042 47,037,372 VIS 5 Contracts......... 10.965867 15.402975 3,171,419 48,849,281 VEN 17 Contracts........ 14.786831 20.821819 810,360 16,873,172 VEN 18 Contracts........ 14.786831 20.821819 19,532 406,683 VEN 20 Contracts........ 14.786831 20.821819 4,768,927 99,297,742 VEN 21 Contracts........ 14.786831 20.821819 1,112,879 23,172,173 VEN 22 Contracts........ 14.786831 20.821819 631,813 13,155,498 VEN 23 Contracts........ 14.786831 20.821819 129,508 2,696,591 VIS 25 Contracts........ 10.965867 15.402975 663,652 10,222,223 ---------- ----------- 46,600,864 949,783,857 Investment Quality Bond sub-account VEN 1 Contracts......... 16.377174 19.318272 13,340 257,707 VEN 3 Contracts......... 14.216516 16.751499 729,995 12,228,515 VEN 7 Contracts......... 14.216516 16.751499 5,304,008 88,850,090 VEN 8 Contracts......... 14.216516 16.751499 359,190 6,016,969 VIS 5 Contracts......... 9.713969 11.417606 798,121 9,112,627 VEN 17 Contracts........ 14.216516 16.751499 141,285 2,366,739 VEN 18 Contracts........ 14.216516 16.751499 12,139 203,342 VEN 20 Contracts........ 14.216516 16.751499 723,525 12,120,130 VEN 21 Contracts........ 14.216516 16.751499 166,381 2,787,133 VEN 22 Contracts........ 14.216516 16.751499 88,027 1,474,580 VEN 23 Contracts........ 14.216516 16.751499 30,409 509,401 VIS 25 Contracts........ 9.713969 11.417606 143,843 1,642,346 ---------- ----------- 8,510,263 137,569,578 Growth & Income sub-account VEN 3 Contracts......... 13.076664 16.660889 2,083,819 34,718,282 VEN 7 Contracts......... 13.076664 16.660889 24,593,427 409,748,356 VEN 8 Contracts......... 13.076664 16.660889 2,207,363 36,776,624 VIS 5 Contracts......... 10.436393 13.263871 3,073,294 40,763,776 VEN 17 Contracts........ 13.076664 16.660889 719,055 11,980,091 VEN 18 Contracts........ 13.076664 16.660889 22,958 382,506 VEN 20 Contracts........ 13.076664 16.660889 3,892,471 64,852,031 VEN 21 Contracts........ 13.076664 16.660889 1,044,506 17,402,406 VEN 22 Contracts........ 13.076664 16.660889 728,500 12,137,450 VEN 23 Contracts........ 13.076664 16.660889 187,608 3,125,711 VIS 25 Contracts........ 10.436393 13.263871 448,740 5,952,028 ---------- ----------- 39,001,741 637,839,262
10 87
1994 1995 ---------- --------------------------------------------- Unit Unit Value Value Units Dollars -------- ---------- ---------- ------------ Pasadena sub-account VEN 3 Contracts......... 8.837480 11.026969 677,346 7,469,070 VEN 7 Contracts......... 8.837480 11.026969 15,323,337 168,969,962 VEN 8 Contracts......... 8.837480 11.026969 1,242,713 13,703,360 VIS 5 Contracts......... 9.280989 11.551552 1,436,443 16,593,141 VEN 17 Contracts........ 8.837480 11.026969 690,555 7,614,730 VEN 18 Contracts........ 8.837480 11.026969 14,302 157,702 VEN 20 Contracts........ 8.837480 11.026969 2,684,332 29,600,048 VEN 21 Contracts........ 8.837480 11.026969 849,791 9,370,621 VEN 22 Contracts........ 8.837480 11.026969 408,845 4,508,318 VEN 23 Contracts........ 8.837480 11.026969 123,573 1,362,639 VIS 25 Contracts........ 9.280989 11.551552 274,368 3,169,379 ---------- ----------- 23,725,605 262,518,970 Money Market sub-account VEN 1 Contracts......... 14.843213 15.478376 7,969 123,341 VEN 3 Contracts......... 13.623292 14.190910 2,369,684 33,627,970 VEN 7 Contracts......... 13.623292 14.190910 9,527,103 135,198,263 VEN 8 Contracts......... 13.623292 14.190910 522,909 7,420,560 VIS 5 Contracts......... 10.290731 10.692803 1,528,995 16,349,247 VEN 17 Contracts........ 13.623292 14.190910 194,629 2,761,963 VEN 18 Contracts........ 13.623292 14.190910 7,702 109,293 VEN 20 Contracts........ 13.623292 14.190910 2,609,345 37,028,975 VEN 21 Contracts........ 13.623292 14.190910 595,446 8,449,926 VEN 22 Contracts........ 13.623292 14.190910 126,100 1,789,477 VEN 23 Contracts........ 13.623292 14.190910 92,776 1,316,578 VIS 25 Contracts........ 10.290731 10.692803 282,117 3,016,617 ---------- ----------- 17,864,775 247,192,210 Global Equity sub-account VEN 3 Contracts......... 15.500933 16.459655 2,636,403 43,394,284 VEN 7 Contracts......... 15.500933 16.459655 25,283,469 416,157,179 VEN 8 Contracts......... 15.500933 16.459655 2,108,360 34,702,882 VIS 5 Contracts......... 12.153179 12.872711 3,158,250 40,655,234 VEN 17 Contracts........ 15.500933 16.459655 664,163 10,931,896 VEN 18 Contracts........ 15.500933 16.459655 23,767 391,199 VEN 20 Contracts........ 15.500933 16.459655 2,880,706 47,415,435 VEN 21 Contracts........ 15.500933 16.459655 592,070 9,745,262 VEN 22 Contracts........ 15.500933 16.459655 486,869 8,013,700 VEN 23 Contracts........ 15.500933 16.459655 96,415 1,586,963 VIS 25 Contracts........ 12.153179 12.872711 361,285 4,650,719 ---------- ----------- 38,291,757 617,644,753
11 88
1994 1995 ---------- --------------------------------------------- Unit Unit Value Value Units Dollars -------- ---------- ---------- ------------ Global Government Bond sub-account VEN 3 Contracts......... 14.630721 17.772344 786,252 13,973,536 VEN 7 Contracts......... 14.630721 17.772344 9,225,433 163,957,577 VEN 8 Contracts......... 14.630721 17.772344 569,655 10,124,097 VIS 5 Contracts......... 10.262238 12.434811 1,299,621 16,160,540 VEN 17 Contracts........ 14.630721 17.772344 152,343 2,707,487 VEN 18 Contracts........ 14.630721 17.772344 16,954 301,319 VEN 20 Contracts........ 14.630721 17.772344 784,307 13,938,975 VEN 21 Contracts........ 14.630721 17.772344 167,849 2,983,072 VEN 22 Contracts........ 14.630721 17.772344 94,174 1,673,689 VEN 23 Contracts........ 14.630721 17.772344 23,520 418,014 VIS 25 Contracts........ 10.262238 12.434811 108,888 1,354,002 ---------- ----------- 13,228,996 227,592,308 U.S. Government Securities sub-account VEN 3 Contracts......... 14.111357 16.083213 941,636 15,144,531 VEN 7 Contracts......... 14.111357 16.083213 8,256,341 132,788,486 VEN 8 Contracts......... 14.111357 16.083213 490,958 7,896,181 VIS 5 Contracts......... 9.968713 11.333420 1,175,658 13,324,226 VEN 17 Contracts........ 14.111357 16.083213 146,130 2,350,236 VEN 18 Contracts........ 14.111357 16.083213 3,185 51,223 VEN 20 Contracts........ 14.111357 16.083213 1,418,177 22,808,847 VEN 21 Contracts........ 14.111357 16.083213 327,333 5,264,560 VEN 22 Contracts........ 14.111357 16.083213 87,885 1,413,473 VEN 23 Contracts........ 14.111357 16.083213 48,563 781,043 VIS 25 Contracts........ 9.968713 11.333420 218,997 2,481,982 ---------- ----------- 13,114,863 204,304,788 Conservative Asset Allocation sub-account VEN 3 Contracts......... 12.298940 14.320582 3,171,219 45,413,704 VEN 7 Contracts......... 12.298940 14.320582 10,063,785 144,119,262 VEN 8 Contracts......... 12.298940 14.320582 414,923 5,941,936 VIS 5 Contracts......... 10.050011 11.672867 725,547 8,469,213 VEN 17 Contracts........ 12.298940 14.320582 143,888 2,060,554 VEN 18 Contracts........ 12.298940 14.320582 1,069 15,304 VEN 20 Contracts........ 12.298940 14.320582 537,668 7,699,717 VEN 21 Contracts........ 12.298940 14.320582 178,822 2,560,828 VEN 22 Contracts........ 12.298940 14.320582 106,721 1,528,309 VEN 23 Contracts........ 12.298940 14.320582 21,236 304,117 VIS 25 Contracts........ 10.050011 11.672867 123,692 1,443,846 ---------- ----------- 15,488,570 219,556,790
12 89
1994 1995 ---------- --------------------------------------------- Unit Unit Value Value Units Dollars --------- --------- ---------- ------------ Moderate Asset Allocation sub-account VEN 3 Contracts......... 12.396295 14.752561 9,035,442 133,295,915 VEN 7 Contracts......... 12.396295 14.752561 28,124,797 414,912,783 VEN 8 Contracts......... 12.396295 14.752561 1,426,928 21,050,842 VIS 5 Contracts......... 10.156264 12.056663 1,611,982 19,435,123 VEN 17 Contracts........ 12.396295 14.752561 383,888 5,663,326 VEN 18 Contracts........ 12.396295 14.752561 8,486 125,193 VEN 20 Contracts........ 12.396295 14.752561 1,737,509 25,632,707 VEN 21 Contracts........ 12.396295 14.752561 401,708 5,926,216 VEN 22 Contracts........ 12.396295 14.752561 260,944 3,849,595 VEN 23 Contracts........ 12.396295 14.752561 51,262 756,248 VIS 25 Contracts........ 10.156264 12.056663 205,665 2,479,635 ---------- ----------- 43,248,611 633,127,583 Aggressive Asset Allocation sub-account VEN 3 Contracts......... 12.381395 14.990551 2,706,318 40,569,200 VEN 7 Contracts......... 12.381395 14.990551 8,803,203 131,964,863 VEN 8 Contracts......... 12.381395 14.990551 419,414 6,287,251 VIS 5 Contracts......... 10.303433 12.443644 439,301 5,466,506 VEN 17 Contracts........ 12.381395 14.990551 201,631 3,022,555 VEN 18 Contracts........ 12.381395 14.990551 3,497 52,427 VEN 20 Contracts........ 12.381395 14.990551 752,249 11,276,626 VEN 21 Contracts........ 12.381395 14.990551 211,506 3,170,588 VEN 22 Contracts........ 12.381395 14.990551 81,836 1,226,765 VEN 23 Contracts........ 12.381395 14.990551 21,094 316,211 VIS 25 Contracts........ 10.303433 12.443644 67,383 838,485 ---------- ----------- 13,707,432 204,191,477 Value Equity sub-account sub-account VEN 3 Contracts......... 11.107620 13.548849 810,623 10,983,011 VEN 7 Contracts......... 11.107620 13.548849 15,423,348 208,968,608 VEN 8 Contracts......... 11.107620 13.548849 1,718,375 23,282,000 VIS 5 Contracts......... 10.578121 12.870851 2,145,334 27,612,280 VEN 17 Contracts........ 11.107620 13.548849 831,496 11,265,818 VEN 18 Contracts........ 11.107620 13.548849 23,600 319,757 VEN 20 Contracts........ 11.107620 13.548849 3,323,100 45,024,178 VEN 21 Contracts........ 11.107620 13.548849 1,130,548 15,317,622 VEN 22 Contracts........ 11.107620 13.548849 686,269 9,298,148 VEN 23 Contracts........ 11.107620 13.548849 130,666 1,770,368 VIS 25 Contracts........ 10.578121 12.870851 375,816 4,837,066 ---------- ----------- 26,599,175 358,678,856
13 90
1994 1995 ---------- --------------------------------------------- Unit Unit Value Value Units Dollars --------- --------- ---------- ------------ Strategic Bond sub-account VEN 3 Contracts......... 9.965972 11.716972 207,513 2,431,421 VEN 7 Contracts......... 9.965972 11.716972 5,937,342 69,567,668 VEN 8 Contracts......... 9.965972 11.716972 656,915 7,697,049 VIS 5 Contracts......... 9.897404 11.607403 691,404 8,025,400 VEN 17 Contracts........ 9.965972 11.716972 219,646 2,573,582 VEN 18 Contracts........ 9.965972 11.716972 25,633 300,346 VEN 20 Contracts........ 9.965972 11.716972 1,009,224 11,825,045 VEN 21 Contracts........ 9.965972 11.716972 383,430 4,492,636 VEN 22 Contracts........ 9.965972 11.716972 197,193 2,310,508 VEN 23 Contracts........ 9.965972 11.716972 79,026 925,949 VIS 25 Contracts........ 9.897404 11.607403 146,877 1,704,862 ---------- ----------- 9,554,203 111,854,466 International Growth and Income sub-account VEN 3 Contracts......... -------- 10.554228 227,009 2,395,904 VEN 7 Contracts......... -------- 10.554228 4,084,598 43,109,775 VEN 8 Contracts......... -------- 10.554228 99,374 1,048,818 VIS 5 Contracts......... -------- 10.528678 274,338 2,888,415 VEN 17 Contracts........ -------- 10.554228 256,261 2,704,637 VEN 18 Contracts........ -------- 10.554228 1,101 11,622 VEN 20 Contracts........ -------- 10.554228 1,759,715 18,572,435 VEN 21 Contracts........ -------- 10.554228 628,587 6,634,250 VEN 22 Contracts........ -------- 10.554228 336,650 3,553,086 VEN 23 Contracts........ -------- 10.554228 67,146 708,670 VIS 25 Contracts........ -------- 10.528678 178,852 1,883,076 ---------- ----------- 7,913,631 83,510,688 $4,895,365,586 ==============
14 91 PART C OTHER INFORMATION 92 Item 24. Financial Statements and Exhibits (a) Financial Statements (1) Financial Statements of the Registrant, NASL Variable Account (Part B of the registration statement). (2) Financial Statements of the Depositor, North American Security Life Insurance Com- pany (Part B of the registration statement). (b) Exhibits (1) (i) Resolution of the Board of Directors of North American Security Life Insurance Company establishing the NASL Variable Account -- Incorporated by reference to Exhibit (A)(1) to Form S-6, file number 2-93435, filed September 24, 1984 on behalf of the NASL Variable Account of North American Security Life Insurance Company. (ii) Resolution of the Board of Directors of North American Security Life Insurance Company redesignating existing sub-accounts and dividing the NASL Variable Account to create additional sub-accounts, dated May 30, 1995 - Filed herewith. (2) Agreements for custody of securities and similar investments - Not Applicable. (3) (i) Underwriting Agreement between North American Security Life Insurance Company (Depositor) and NASL Financial Services, Inc. (Underwriter) -- Incorporated by reference to Exhibit (A)(3)(a) to Form S-6, file number 2-93435, filed September 24, 1984 on behalf of the NASL Variable Account of North American Security Life Insurance Company. 93 (ii) Promotional Agent Agreement between NASL Financial Services, Inc. (Underwriter), North American Security Life Insurance Company (Depositor) and Wood Logan Associates, Inc. (Promotional Agent) -- Incorporated by reference to Exhibit 3(ii) to Form N-4, file number 33-28455, filed February 15, 1991 on behalf of NASL Variable Account of North American Security Life Insurance Company. (iii) Form of broker-dealer agreement between North American Security Life Insurance Company, NASL Financial Services, Inc. (Underwriter), Wood Logan Associates, Inc. (Promotional Agent) and broker-dealers -- Incorporated by reference to Exhibit (b)(3)(iii) to pre-effective amendment no. 1 to Form N-4, file number 33-9960, filed February 2, 1987 on behalf of the NASL Variable Account of North American Security Life Insurance Company. (4) (i) Specimen Flexible Purchase Payment Individual Deferred Combination Fixed and Variable Annuity Contract, NonParticipating - Incorporated by reference to Exhibit 4 (i) Form N-4, file number 33-76162, filed March 7, 1994 on behalf of the NASL Variable Account. (ii) Specimen Endorsements to Contract - Incorporated by reference to Exhibit 4 (ii) Form N-4, file number 33-76162, filed March 7, 1994 on behalf of the NASL Variable Account. (5) Specimen Application for Flexible Purchase Payment Individual Deferred Combination Fixed and Variable Annuity Contract, Non-Participating -- Incorporated by reference to Exhibit (b)(5) on Form N-4 file number 33- 76162, filed March 2, 1995 on behalf of the NASL Variable Account. (6) (i) Certificate of Incorporation of North American Security Life Insurance Company -- Incorporated by reference to Exhibit (A)(6) to Form S-6, file number 2-93435, filed September 24, 1984 on behalf of the NASL Variable Account of North American Security Life Insurance Company. (ii) Amended and Restated By-laws of North American Security Life Insurance Company - Filed herewith. 94 (7) Contract of reinsurance in connection with the variable annuity contracts being offered - Reinsurance and Accounts Receivable Agreements between North American Security Life Insurance Company and ITT Lyndon Life, effective December 31, 1993, and Amendments thereto effective January 1, 1994 and December 31, 1994 - Incorporated by reference to Exhibit (b)(7) to Form N-4, file number 33-76162, filed March 2, 1995 on behalf of the NASL Variable Account of North American Security Life Insurance Company. (i) Contract of reinsurance in connection with variable annuity contracts being offered - Reinsurance and Guaranteed Death Benefits Agreement between North American Security Life Insurance Company and Connecticut General Life Insurance Company, effective July 1, 1995 - Filed herewith. (ii) Contract of reinsurance in connection with the variable annuity contracts being offered - Automatic Reinsurance Agreement between North American Security Life Insurance Company and Swiss Re America, effective August 1, 1995 - Filed herewith. (iii) Contract of reinsurance in connection with the variable annuity contracts being offered - Reinsurance Agreement between North American Security Life Insurance Company and PaineWebber Life Insurance Company, effective December 31, 1994 -- Filed herewith. (8) Other material contracts not made in the ordinary course of business which are to be performed in whole or in part on or after the date the registration statement is filed: (i) Service Agreement between North American Security Life Insurance Company and DST Systems, Inc., assigned by DST Systems, Inc. to TPA Systems, Inc. with North American Security Life Insurance Company's consent. -- Incorporated by reference to Exhibit (b)(8) to Form N-4, file number 33-9960, filed November 4, 1986 on behalf of the NASL Variable Account of North American Security Life Insurance Company. Addendum No. 1 to Service Agreement - Incorporated by 95 reference to Exhibit 8 Form N-4, file number 33-76162, filed March 7, 1994 on behalf of the NASL Variable Account. (ii) License and Service Agreement between North American Security Life Insurance Company and Mentap Systems, Inc. -- Incorporated by reference to Exhibit (b)(8)(ii) on Form N-4 file number 33-76162, filed March 2, 1995 on behalf of the NASL Variable Account. (9) Opinion of Counsel and consent to its use as to the legality of the securities being registered -- Incorporated by reference to Exhibit (b)(9) to pre-effective amendment No. 1 to Form N-4, file number 33-76162, filed June 29, 1994. (10) Written consent of Coopers & Lybrand, independent certified public accountants. (11) All financial statements omitted from Item 23, Financial Statements - Not Applicable. (12) Agreements in consideration for providing initial capital between or among Registrant, Depositor, Underwriter or initial contract owners - Not Applicable. (13) Schedule for computation of each performance quotation provided in the Registration Statement in response to Item 21 - Incorporated by reference to Exhibit 13 Form N-4, file number 33-76162, filed March 7, 1994 on be half of the NASL Variable Account. An additional schedule for computation is filed herewith. (14) (a) Powers of Attorney - North American Security Life Insurance Company Directors -- Incorporated by reference to Exhibit (b)(14) to Form N-4, file number 33-55712, filed March 22, 1993 on behalf of the NASL Variable Account of North American Security Life Insurance Company. (b) Power of Attorney - North American Security Life Insurance Company Treasurer (Principal Financial and Accounting Officer) -- Incorporated by reference to Exhibit (b)(14)(b) to Form N-4, file no. 33-28455, filed April 2, 1993 on behalf of (27) Financial Data Schedule is filed herewith. 96 the NASL Variable Account of North American Security Life Insurance Company. 97 Item 25. Directors and Officers of the Depositor. OFFICERS AND DIRECTORS OF NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY Name and Principal Business Position with Address Security Life Brian L. Moore Chariman of the Board of 200 Bloor Street East Directors North Tower, 11th Floor Toronto, Ontario Canada M4W-1E5 Peter S. Hutchison Director 5650 Yonge Street North York, Ontario Canada M2M 4G4 William J. Atherton President & Director 116 Huntington Avenue Boston, MA 02116 Scott L. Stolz Vice President, Annuity 116 Huntington Avenue Services Boston, MA 02116 John G. Vrysen Vice President & Chief Actuary 73 Tremont Street Boston, MA 02108 Hugh McHaffie Vice President Product 116 Huntington Avenue Management Boston, MA 02116 Richard C. Hirtle Sr. Vice President, Chief 116 Huntington Avenue Operating Officer & Treasurer Boston, MA 02116 98 James D. Gallagher Vice President, Secretary 116 Huntington Avenue & General Counsel Boston, MA 02116 Iain Scott Vice President Single Premium 116 Huntington Avenue Variable Life Insurance Boston, MA 02116 Janet Sweeney Vice President, Corporate 73 Tremont Street Services Boston, MA 02108 Item 26. Persons Controlled by or Under Common Control with Depositor or Registrant. THE MANUFACTURERS LIFE INSURANCE COMPANY (Subsidiaries Organization Chart - including certain Significant Investments) The Manufacturers Life Insurance Company (Canada) 1. ManuLife Holdings (Hong Kong) Limited - H.K. (100%) 2. ManuLife Financial Systems (Hong Kong) Limited - H.K. (100%) 3. P.T. Asuransi Jiwa Dharmala Manulife - Indonesia (51%) 4. ManuLife (International) Limited - Bermuda (100%) 5. OUB Manulife Pte. Ltd. - Singapore (50%) 6. Manulife (Malaysia) SDN. BHD. - Malaysia (100%) 7. Manulife (Thailand) Ltd. - Thailand (100%) 99 8. Young Poong Manulife Insurance Company - Korea (50%) 9. Ennal, Inc. - Ohio (100%) 10. 495603 Ontario Limited - Ontario (100%) 11. 994744 Ontario Inc. - Ontario (100%) 12. 1056416 Ontario Limited - Ontario (100%) 13. 484551 Ontario Limited - Ontario (100%) (a) 911164 Ontario Limited - Ontario (100%) 14. NAWL (North American Wood Logan Holding Company) - Delaware (85%) (a) Wood Logan Associate Inc. - Connecticut (100%) (b) North American Security Life Insurance Company - Delaware (100%) (i) NASL Financial Services, Inc. - Massachusetts (100%) (ii) First North American Life Assurance Company - New York (100%) (iii) North American Funds - Massachusetts (100%) (iv) NASL Series Trust - Massachusetts (100%) 15. Domlife Realty Limited - Canada (100%) 16. Balmoral Developments Inc. - Canada (100%) 17. Cantay Holdings Inc. - Ontario (100%) 18. 576986 Ontario Inc. - Ontario (100%) 19. KY Holding Corporation - Canada (100%) 20. 172846 Canada Limited - Canada (100%) 21. First North American Realty, Inc. - Minnesota (100%) 22. North American Capital Corporation - Ontario (100%) 23. Elliott & Page Mutual Fund Corporation - Ontario (100%) 24. TBD Life Insurance Company - Canada (100%) 100 25. The North American Group Inc. - Canada (100%) 26. Capitol Bankers Life Insurance Company - Minnesota (100%) 27. Manulife Investment Management Corporation - Canada (100%) (a) 159139 Canada Inc. - Canada (50%) i. Altamira Management Ltd. - Canada (60.96%) A. ACI2 Limited - Cayman (100%) a/ Regent Pacific Group Limited-Cayman (63.8%) a.1 Manulife Regent Investment Corporation - Barbados (100%) (50% by Regent Pacific Group Limited and 50% by Manulife Data Services Inc.) b.1 Manulife Regent Investment Asia Limited - Hong Kong (100%) B. Altamira Financial Services Inc. - Ontario (100%) a/ AIS Securities (Partnership) - Ontario (100%) (5% by Altamira Financial Services, Inc. and 95% by Altamira Investment Services Inc.) b/ Altamira Investment Services Inc. - Ontario (100%) (a) AIS Securities (Partnership) - Ontario (100%)(95% by Altamira Investments Services Inc. and 5% by Altamira Financial Services Inc.) (b) Altamira (Alberta) Ltd. - Alberta (100%) (c) Capital Growth Financial Services Inc. - Ontario (100%) 28. Manulife International Investment Management Limited - U.K. (100%) (a) Manulife International Fund Management Limited - U.K. (100%) 29. ManuCab Ltd. - Canada (100%) (a) Plazcab Service Limited - Canada (100%) 30. Manulife Data Services Inc.- Barbados (100%) (a) Manulife Regent Investment Corporation - Barbados - (100%) (50% by Manulife Data Services Inc. and 50% by Regent Pacific Group Limited) (b) Manulife Regent Investment Asia Limited - Hong Kong (100%) 31. 16351 Canada Limited - Canada (100%) 32. Manufacturers Life Capital Corporation Inc. - Canada (100%) 33. Townvest Inc. - Ontario (100%) 101 34. Manulife Financial Holdings Limited - Ontario (100%) (a) Family Financial Services Limited - Ontario (100%) i. 742166 Ontario Inc. - Ontario (100%) ii. Family Trust Corporation - Ontario (100%) A. Family Financial Mortgage Corporation - Ontario (100%) B. Family Realty Firstcorp Limited - Ontario (100%) C. Thos. N. Shea Investment Corporation Limited - Ontario (100%) (b) Manulife Bank of Canada - Canada (100%) i. Manulife Securities International Ltd. - Canada (100%) ii. Cabot Financial Services Corporation - Ontario (100%) iii. Cabot Investments Limited - Ontario (100%) 35. NALACO Mortgage Corporation - Ontario (100%) (a) Underwater Gas Developers Limited - Ontario (100%) 36. Manulife (International) Reinsurance Limited - Bermuda (100%) (a) Manulife (International) P&C Limited - Bermuda (100%) (b) Manufacturers P&C Limited - Bermuda (100%) 37. FNA Financial Inc. - Canada (100%) (a) NAL Resources Management Limited - Canada (100%) (b) First North America Insurance Company - Canada (100%) (c) NAL Trustco Inc. - Ontario (100%) (d) North American Life Financial Services Inc. - Ontario (100%) (e) Nalafund Investors Limited - Canada - (100%) (f) Seamark Asset Management Ltd. - Canada (69.175%) (g) Elliott & Page Limited - Ontario (100%) 38. NAL Resources Limited - Alberta (100%) 39. Manulife Reinsurance Corporation (U.S.A.) - Michigan (100%) (a) Manulife Reinsurance Limited - Bermuda (100%) (b) Manulife Holding Corporation - Delaware (100%) i. Manufacturers Life Mortgage Securities Corporation - Delaware (100%) ii. Underwriters International Inc. - Delaware (50%) iii. Capital Design Corporation - California - (100%) iv. ManEquity, Inc. - Colorado (100%) v. Manulife Service Corporation - Colorado (100%) (c) The Manufacturers Life Insurance Company (U.S.A.) - Michigan (100%) (d) The Manufacturers Life Insurance Company of America - Michigan (100%) i. Manulife Series Fund, Inc. - Maryland (100%) 102 ii. Manufacturers Adviser Corporation - Colorado (100%) Item 27. Number of Contract Owners. As of December 31, 1995, there were 8,119 qualified and 9,470 non-qualified contracts of the series offered hereby outstanding. Item 28. Indemnification. Section IX, paragraph D of the Promotional Agent Agreement among the Company (referred to therein as "Security Life"), NASL Financial and Wood/Logan (referred to therein as "Pro motional Agent") provides as follows: a. NASL Financial and Security Life agree to indemnify and hold harmless Promotional Agent, its officers, directors and employees against any and all losses, claims, damages or liabilities to which they may become subject under the Securities Act of 1933 ("1933 Act"), the 1934 Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact or any omission or alleged omission to state a material fact required to be stated or necessary to make the statements made not misleading in any registration statement for the Contracts filed pursuant to the 1933 Act or any prospectus included as a part thereof, as from time to time amended and supplemented, or any advertisement or sales literature approved in writing by NASL Financial or Security Life pursuant to Section VI, paragraph B of this Agreement. b. Promotional Agent agrees to indemnify and hold harmless NASL Financial and Security Life, their officers, directors and employees against any and all losses, claims, damages or liabilities to which they may become subject under the 1933 Act, the 1934 Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any oral or written misrepresentation by Promotional Agent or its officers, directors, employees or agents unless such misrepresentation is contained in any registration statement for the Contracts or Fund shares, any prospectus included as a part thereof, as from time to time amended and supplemented, or any advertisement or sales literature approved in writing by NASL Financial pursuant to Section VI, paragraph B of this Agreement or, (ii) the failure of Promotional Agent or its officers, directors, employees or agents to comply with any applicable provisions of this Agreement. 103 Notwithstanding the foregoing, Registrant hereby makes the following undertaking pursuant to Rule 484 under the Securities Act of 1933: Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event a claim for indemnification against such liabilities (other than the payment by the registrant of ex penses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Item 29. Principal Underwriters. a. North American Funds First North American Life Assurance Company b. Name and Principal Positions and Offices Business Address with Underwriter William J. Atherton** President & Director Brian L. Moore* Chairman & Director John D. DesPrez III** Director James D. Gallagher** Vice President & General Counsel John G. Vrysen**** Vice President Richard C. Hirtle** Vice President, Treasurer & Compliance Officer Brian H. Buckley** Clerk 104 Lori-Ann Herbsmann*** Assistant Clerk - New York Operations Susan E. Heffernan** Assistant Clerk E. Paige Sabine** Assistant Clerk * 200 Bloor Street East Toronto, Ontario Canada M4W-1E5 ** 116 Huntington Avenue Boston, MA 02116 *** International Corporate Center at Rye 555 Theodore Fremd Avenue Rye, New York 10580 **** 73 Tremont Street Boston, MA 02108 c. None. Item 30. Location of Accounts and Records. All books and records are maintained at 116 Huntington Avenue, Boston, MA 02116. Item 31. Management Services. None. Item 32. Undertakings. Previously furnished. 105 SIGNATURES As required by the Securities Act of 1933 the Registrant, NASL Variable Account, has caused this Amendment to the Registration Statement to be signed on its behalf, in the City of Boston, and Commonwealth of Massachusetts on this 27th day of February, 1996. NASL VARIABLE ACCOUNT ----------------------- (Registrant) By: NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY ----------------------- (Depositor) By: William J. Atherton ----------------------- William J. Atherton, President Attest: James D. Gallagher - -------------------- James D. Gallagher, Secretary Pursuant to the requirements of the Securities Act of 1933 the Depositor has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned on the 27th day of February, 1996 in the City of Boston, and Commonwealth of Massachusetts. NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY ----------------------- (Depositor) By: William J. Atherton ----------------------- William J. Atherton, President Attest: James D. Gallagher - -------------------- James D. Gallagher, Secretary 106 As required by the Securities Act of 1933, this amended Registration Statement has been signed by the following persons in the capacities with the Depositor and on the dates indicated. SIGNATURE TITLE DATE - --------- ----- ---- * Director and President 2/27/96 - ------------------- (Principal Executive (Date) William J. Atherton Officer) * Director 2/27/96 - ------------------- Peter S. Hutchison (Date) * Director and Chairman 2/27/96 - ------------------- of the Board (Date) Brian L. Moore * Vice President and 2/27/96 - ------------------- Treasurer (Principal (Date) Richard C. Hirtle Financial and Accounting Officer) *By: John G. Vrysen 2/27/96 ---------------------- (Date) John G. Vrysen Attorney-in-Fact Pursuant to Powers of Attorney
107 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- (b)(1)(ii) Resolution redesignating existing sub-accounts and dividing the NASL Variable Account to create additional sub-accounts (b)(6)(ii) Amended and Restated Bylaws of North American Security Life Insurance Company (b)(7)(i) Reinsurance Guaranteed Death Benefit Agreement with Connecticut General Life (b)(7)(ii) Automatic Reinsurance Agreement with Swiss Re America (b)(7)(iii) Reinsurance Agreement with PaineWebber Life Insurance Company (b)(10) Consent of Coopers & Lybrand (b)(13) Schedule of Computation (b)(27) Financial Data Schedule
EX-99.B1(II) 2 RESOLUTION 1 Exhibit (b)(1)(ii) 2 SECRETARY'S CERTIFICATE NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY I, KIMBERLY S. SKIDMORE, ASSISTANT SECRETARY of NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (the "Company") does hereby certify that the following is a true and correct copy of the action taken by the Board of Directors of the Company on May 30, 1995, and that the following resolutions in pertinent part are in full force and effect on the date hereof: AUTHORIZATION FOR ADDITIONAL SUB-ACCOUNTS OF VARIABLE SEPARATE ACCOUNT VARIABLE ACCOUNT WHEREAS, pursuant to Title 18, Section 2932(a) of the Delaware Code Annotated, as amended, the Company, pursuant to a resolution dated August 24, 1984, established a separate account, designated the NASL Variable Account, and divided the separate account into three sub-accounts, designated the "Equity," "Bond" and "Money Market" sub-accounts, respectively, for use in connection with the offer and sale of variable annuity contracts, RESOLVED, that the Company does hereby redesignate the three sub-accounts as the "Equity Trust," the "Investment Quality Bond Trust" and the "Money Market Trust" and does hereby divide the separate account to create eleven additional sub-accounts, designated the "Global Equity Trust," the "Pasadena Growth Trust," the "Value Equity Trust," the "Growth and Income Trust," the "Strategic Bond Trust," the "Global Government Bond Trust," the "International Growth and Income Trust," the "US Government Securities Trust," the "Aggressive Asset Allocation Trust," the "Moderate Asset Allocation Trust" and the "Conservative Asset Allocation Trust." FURTHER RESOLVED, that, from time to time, the sub-accounts may be redesignated and the separate account divided to create additional sub-accounts without further action by the Board of Directors of the Company. DATED at Boston, Massachusetts as of January 26, 1996 /s/ KIMBERLY S. SKIDMORE ------------------------ KIMBERLY S. SKIDMORE ASSISTANT SECRETARY EX-99.B6(II) 3 AMENDED AND RESTATED BY-LAWS 1 Exhibit (b)(6)(ii) 2 AMENDED AND RESTATED BY-LAWS of NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY ARTICLE I MEETING OF STOCKHOLDERS The Annual Meeting of Stockholders shall be held each year at such time and on such date as the Board, the Chairman or the President may from time to time determine. Written notice of the Annual Meeting shall be given at least ten days prior to the date of such meeting to each stockholder whose name shall be registered as such upon the books of the Company, and such notice shall state the place, date and hour of the Meeting. Special meetings of the stockholders may be called on the order of the Chairman, the President or a majority of the Board of Directors. Such call shall be made by a written notice given at least ten days prior to the date of such meeting to each stockholder whose name shall be registered as such upon the books of the Company, and such call shall state the place, date and hour of the meeting, and the general nature of the business proposed to be transacted thereat; and no other business shall be transacted at such meeting. Annual and special meetings of stockholders shall be held at such places, within or without the United States, as may from time to time be designated by the Board of Directors and stated in the notice of meeting. The attendance in person or by proxy of a majority in interest of all stockholders entitled to vote at any meeting, whether annual or special, shall be necessary to constitute a quorum at such meeting, and each stockholder shall be entitled, either in person or by proxy at any such meeting, to as many votes as he owns shares of stock in the Company, upon all matters that come properly before the meeting. Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the Company, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Whenever, under the provision of these By-Laws, notice is required to be given to any stockholder, such provision shall not be construed to require personal notice; but the notice may be given by facsimile or by mail, to such stockholder, at such address as he or she may have registered with the Secretary of the Company or, in default of such registered address, then at his or her last known place of residence or business. Such notice shall be deemed to be given at the time when the same shall be sent via facsimile or mail. 1 3 Any stockholder may, at any time, waive any notice required to be given under the By-Laws or otherwise, either before or after the meeting or action with respect to which notice is waived. ARTICLE II ELECTION OF DIRECTORS The stockholders at their annual meeting shall elect such number of directors, not less than three nor more than ten, as shall be determined by resolution of the Board of Directors and specified in the notice of meeting, and such Directors shall hold office until the next annual meeting of the stockholders and until others are duly chosen and qualified in their stead. To be eligible for election as a Director of the Company, a person must be less than 72 years of age and of sound mental health. Directors need not be stockholders. If election of Directors is not held at the annual meeting of stockholders, the Directors shall cause the election to be held at a special meeting of stockholders as soon thereafter as conveniently may be. The number of Directors may be increased at any time and from time to time by amendment of the By-Laws or by resolution of the Board of Directors. The number of Directors may be decreased at any time and from time to time (but never to a smaller number than three) by amendment of the By-Laws or by resolution of the Directors. Any directorship to be filled by reason of an increase in the number of Directors shall be filled by election at any annual or at a special meeting of stockholders called for that purpose or by resolution of the Board of Directors. A Director elected by the Board to fill any such directorship shall hold office until the next succeeding annual meeting of stockholders and until his or her successor has been elected and qualified. Any vacancy occurring through death, resignation, disqualification or otherwise, among the Directors of the Company, may be filled by the vote of a majority of the Directors in office. A Director elected by the Board to fill any such directorship shall hold office until the next succeeding annual meeting of stockholders and until his or her successor has been elected and qualified. A Director of the Company may resign his or her office at any time by delivering his or her resignation in writing to the Company, and the acceptance of such resignation, unless required by the terms thereof, shall not be necessary to make such resignation effective. Any or all of the Directors may be removed by the stockholders for cause or without cause. ARTICLE III POWERS OF THE DIRECTORS The Board of Directors shall manage the business and affairs of the Company and, in addition to the powers and authority expressly conferred upon them by the By-Laws, may exercise all such powers and do all such 2 4 things as may be exercised or done by the Company subject, nevertheless, to the provisions of the applicable statutes, of the company's Articles of Incorporation, and of the By-Laws. ARTICLE IV MEETINGS OF DIRECTORS The Board of Directors shall hold meetings at such places, within or without the United States, and at such time and on such date as the Chairman, the President or any two Directors may request. The Secretary shall give notice of each meeting of the Board by mailing the same at least five days before the meeting or by telephoning or faxing the same at least one day before the meeting to each Director. Whenever, under the provision of these By-Laws, notice is required to be given to any Director, such provision shall not be construed to require personal notice; but the notice may be given by facsimile or by mail, to such Director, at such address as he or she may have registered with the Secretary of the Company or, in default of such registered address, then at his or her last known place of residence or business. Such notice shall be deemed to be given at the time when the same shall be sent via facsimile or mail. Any Director may at any time waive any notice required to be given under the By-Laws or otherwise, either before or after the meeting or action with respect to which notice is waived. Attendance of a Director at a meeting shall constitute waiver of notice of the meeting, except when the Director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. The attendance of a majority of the Board of Directors shall be necessary to constitute a quorum for the transaction of business; but a smaller number may meet and adjourn. When a vacancy or vacancies prevents a majority of the whole Board constituting a quorum, then a majority of the Directors in office shall constitute a quorum, provided that such majority shall constitute at least one-third (1/3) of the whole Board. Any Director may participate in a meeting of the Board by means of a conference telephone or similar communications equipment by means of which all Directors participating in the meeting can hear each other, and such participation in a meeting of the Board shall constitute presence in person at such meeting. Unless otherwise restricted by the certificate of incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. ARTICLE V STANDING COMMITTEES Section 1. The Board may appoint a Investment Committee. If appointed, the Investment Committee shall consist of two or more Directors, to be appointed annually by the Board of Directors who shall appoint one of the members of such Committee as Chairman. 3 5 If appointed, the Investment Committee shall have authority to direct and control the investment of funds and the purchase and sale of securities by the Company. A majority of the members of such Committee shall constitute a quorum. The Investment Committee, or a quorum thereof, may act from time to time on the basis of written approval without a formal meeting. Regular meetings of the Committee shall be held quarterly at dates set by vote of the Committee. Special meetings may be called at any time at the request of any member. Section 2. The Board of Directors may appoint other committees which shall have such powers and perform such duties as from time to time may be prescribed by a majority of the Board. The Board shall have the power at any time to establish, fill vacancies in, to change the membership of, or to dissolve any committee. Action taken by any committee shall be reported at the meeting of the Board next succeeding such action. ARTICLE VI OFFICERS Section 1. Executive Officers. The Board of Directors will elect or appoint a President, one or more Vice Presidents, a Treasurer and a Secretary. The Board of Directors may also elect a Chairman of the Board, a Vice Chairman and may designate Vice Presidents as Executive or Senior Vice Presidents, and may elect from time to time such other officers as it considers necessary, each of whom shall hold office for such period, have such authority, and perform such duties as the Board may from time to time determine. Any person may hold two but no more than two offices, provided the same individual shall not hold the office of Treasurer and Controller. The Chairman, the Vice Chairman, if any, and the President shall be chosen from among the Directors. Section 2. Administrative Officers. The administrative officers of the Company shall be a Chief Actuary, a Controller and a General Counsel, who shall be appointed by the President and hold office for a period of time as prescribed by the President. Additional administrative officers may be designated and appointed by the President and the authorities and duties of all administrative officers shall be generally designated by the President. Section 3. Term of Office. The executive officers shall be chosen annually by the Board of Directors at the first meeting of the Board following the stockholders' annual meeting, or as soon thereafter as is conveniently possible. Additional executive officers may be elected from time to time. Unless otherwise provided in the resolution of election or appointment, the term of office of all executive officers shall be for one year and until their respective successors are duly chosen and qualified, but any executive officer may be removed, with or without cause, at any time by the Board of Directors. Section 4. Salaries. The salaries of the executive officers of the Company shall be fixed by the Board of Directors. Section 5. Duties and Responsibilities. (a) The Chairman shall be jointly responsible with the President for the establishment of corporate policies. Except where, by law, the signature of the President is required, the Chairman shall possess the same power as the President to sign all certificates, contracts and other instruments of the Company which may be authorized by the Board of Directors. (b) The Vice Chairman, if any, shall have such powers and perform such duties as the Chairman may delegate to him or her. 4 6 (c) The President shall have such powers and perform such duties as the Board of Directors and the Chairman may delegate to him or her. In the absence of the Chairman, the President shall exercise the functions and duties of the Chairman. (d) Each Vice President shall have such powers and perform such duties as the Board of Directors, the Chairman or the President may from time to time prescribe. The Vice Presidents in the order of priority designated by the Chairman, the President or the Board of Directors, shall exercise the functions of the President in his or her absence. If no priority is designated, then by order of election. (e) The Treasurer shall have the custody and care of all the funds and securities of the Company, and shall deposit all funds to the credit of the Company in such institution or institutions as the Board of Directors may designate; he or she or an Assistant Treasurer or such other officer or officers or appointee or appointees as may be authorized by the Board of Directors shall endorse all instruments or documents requiring endorsement for or on behalf of the Company; he or she shall perform all acts incident to the position of Treasurer, subject to the control of the Board; he or she shall have such other powers and perform such other duties as the Board of Directors, the Chairman or the President may from time to time prescribe. (f) The Secretary shall keep the minutes of all meetings of the Board of Directors and of the Stockholders and shall attend to the giving of proper notices to Directors and stockholders; he or she or an Assistant Secretary or such other officer or officers or appointee or appointees as authorized by the Board of Directors may sign, with the President, all authorized contracts, instruments or documents in the name of the Company; he or she shall be the custodian of the seal of the Company and shall attest such seal when required; he or she shall perform all the duties incident to the office of Secretary, subject to the control of the Board of Directors; he or she shall have custody of the stock registers and transfer books of the Company; he or she shall have such other powers and perform such other duties as the Board of Directors, the Chairman or the President may from time to time prescribe or as may be prescribed by these By-Laws. (g) The Chairman, or the Vice Chairman, if any, or the President or any Vice President, jointly with the Secretary, shall have power and is hereby authorized to do all acts and things necessary to comply with the laws of any state, territory, foreign government or other jurisdiction to secure the right of the Company to do or continue the business of insurance in such jurisdiction, and to act in the name of the Company to appoint from time to time such person or persons as may be necessary and under such terms and conditions as may be necessary, as the true and lawful attorney or attorneys of the Company in and for such jurisdiction upon whom all lawful processes of any description in any suit, action or proceeding against the Company may be served in like manner and with the same effect as if served upon the Company and as if the Company were organized under the laws of the jurisdiction for which such attorney or attorneys are appointed; and the Company hereby empowers and authorizes said officers for it and its name to agree that any lawful process against the Company which may be served on its attorneys so appointed shall be of the same legal force, effect and validity as if served on the Company. (h) In case of the absence or disability of any officer of the Company and of any persons hereby authorized to act in his or her place during such period of absence or disability, the Board of Directors may from time to time delegate the powers and duties of such officer to any other officer, or any Director, or any other person whom it may select. Section 6. Bonding of Officers. All officers shall be bonded under a blanket bond, upon undertaking the duties of their respective offices, with a surety company authorized to transact business in the state of Delaware, as surety, and in such sum as may be specified by resolution of the Board of Directors, conditioned for the faithful 5 7 discharge of their duties. The Board of Directors may at any time, by resolution, increase or decrease the amount of bond as hereinabove provided. Section 7. Deaths, Resignations and Vacancies. An officer of the Company may resign his or her office at any time by delivering his or her resignation in writing to the Company, and the acceptance of such resignation, unless required by the terms thereof, shall not be necessary to make such resignation effective. Any vacancy occurring through death, resignation, disqualification or otherwise, among the Executive Officers of the Company, may be filled by the vote of a majority of the Directors in office. Any person so chosen shall hold office until the annual election of executive officers at the first meeting of the Board of Directors following the stockholders' annual meeting, or as soon thereafter as is conveniently possible. ARTICLE VII OFFICES The Company may have offices and transact business at such other place than its registered office in the State of Delaware as from time to time the business of the Company may require. ARTICLE VIII INVESTMENTS AND MONEYS Investment of the funds of the Company and the purchase and sale of securities by the Company shall be made only as authorized or approved by the Board of Directors or the Investment Committee or by some other committee appointed by the Board of Directors and charged with the duty of supervising or making such investments, purchases or sales. All investments requiring registration shall be registered in the name of the Company except in such cases as the Board of Directors or the Investment Committee may specially direct otherwise. Securities representing the invested funds of the Company shall be placed for safekeeping in safe deposit vaults in the name of the Company, or pursuant to a custodian account, in such Banks, Trust or Safe Deposit Companies as shall be approved by the Board of Directors. Access to the vaults shall be in accordance with procedures approved by resolution of the Board of Directors and such resolution shall be effective upon a copy thereof being provided to the Bank, Trust or Safe Deposit Company in which the securities are held. In the event that the Board of Directors shall determine to establish a custodian account with a Bank or Trust Company and shall provide that all or any part of the securities now or hereafter representing the invested funds of the Company shall be delivered to such Bank or Trust Company approved by the Board of Directors; then, and in that event, such Bank or Trust Company shall hold such securities so delivered in the custodian account in accordance with the procedure and under the authority of the resolution approved by the Board of Directors. Any two of the following: the Chairman, Vice Chairman, if any, President, or any Vice President acting jointly, or any one of them acting jointly with any Vice President or the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer is authorized and empowered to sell, assign, exchange and transfer any and all 6 8 shares of stock, bonds and other securities owned by or standing in the name of the Company, and to make, execute and deliver in the name and as the act of the Company under its corporate seal any and all instruments in writing necessary or proper to carry such sales, assignments, exchanges and transfers into effect, but the Board of Directors or the Investment Committee may from time to time adopt resolutions authorizing other methods for accomplishing same. The Chairman, or the Vice Chairman, if any, or the President or any Vice President or the Treasurer shall have authority to vote in person or by proxy any of the stock of any other company in which the Company may hold and to execute any and all consents or other documents relating to such stocks. Moneys received by the Company may be deposited to its credit in such Trust Companies or Banks as the Board of Directors may designate and checks thereon shall be signed by two officers, one of whom shall be the Chairman or the Vice Chairman, if any, or the President or Vice President; but the Board of Directors may from time to time adopt resolutions authorizing other methods for drawing checks, including the use of facsimile signatures, and such resolutions shall be effective upon a copy thereof being provided to the Trust Company or Bank upon which the check is drawn. ARTICLE IX FISCAL YEAR Except as from time to time otherwise provided by the Board of Directors, the fiscal year of the Company shall be the calendar year. ARTICLE X DIVIDENDS Dividends may be declared and paid at such times as may be determined by the Board of Directors. Before declaring payment of any dividends or making any other distribution of the surplus or profits of the Company, the Directors of the Company may, according to their discretion, set aside such sum or sums as they think proper as a reserve fund to meet contingencies or to meet the statutory requirements of any State or country in which they may be transacting business, or for equalizing dividends, or for any other purpose which they shall think conducive to the interest of the Company. ARTICLE XI STOCK CERTIFICATES, TRANSFER AND RECORD DATES All certificates of stock of the Company shall be signed by the Chairman or the Vice Chairman, if any, or the President or a Vice President and by the Secretary or an Assistant Secretary. 7 9 ARTICLE XII EMERGENCY AUTHORITY The Board of Directors, by resolution adopted by a majority of the whole Board, may make advance provision for the continuity and authority of the Company's management in the event of a major catastrophe or force majeure resulting in the loss or unavailability of members of the Board of Directors, whether by death, incapacity, isolation or otherwise, or in loss or unavailability of officers of the Company, and, in the event of such major catastrophe, the terms of any such resolution shall have the same effect as if included in these By-Laws and shall supersede the terms of these By-Laws to the extent that they may be inconsistent therewith. ARTICLE XIII COMPENSATION OF DIRECTORS, ETC. The Directors shall receive such compensation for their services as Directors as may be prescribed by the Board of Directors and shall be reimbursed by the Company for ordinary and reasonable expenses incurred in the performance of their duty. Each member of the Investment or other committees, if any, and each alternate member thereof, if any, shall receive such compensation as may be deemed just and reasonable by a majority of the Board of Directors, which may be a fee for attendance at meetings or on an annual basis. No officers of the Company, however, shall be eligible to receive compensation for serving on any of the foregoing committees. ARTICLE XIV INDEMNIFICATION OF DIRECTORS AND OFFICERS Each Director or officer, whether or not then in office, shall be indemnified by the Company against all costs and expenses reasonably incurred by or imposed upon him or her, including legal fees, in connection with or resulting from any claim, action, suit or proceeding, whether civil, criminal or administrative, in which he or she may become involved as a party or otherwise, by reason of his or her being or having been a Director or officer of the Company. (1) Indemnity will not be granted to any Director or officer with respect to any claim, action, suit or proceeding which shall be brought against such Director or officer by or in the right of the Company, and (2) Indemnification for amounts paid and expenses incurred in settling such action, claim, suit or proceeding, will not be granted, until it shall be determined by a disinterested majority of the Board of Directors or by a majority of any disinterested committee or group of persons to whom the question may be referred by the Board, that said Director or officer did 8 10 indeed act in good faith and in a manner he or she reasonably believed to be in, or not adverse, to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonably cause to believe that his or her conduct was legal, and that the payment of such costs, expenses, penalties or fines is in the interest of the Company, and not contrary to public policy or other provisions of law. The termination of any action, suit or proceeding by judgement, order, settlement, conviction or upon a plea of nolo contendre or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in, or not adverse, to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Indemnification shall be made by the corporation upon determination by a disinterested majority of the Board of Directors or of a majority of any disinterested committee or group or persons to whom the question may be referred to by said Board, that the person did indeed act in good faith and in a manner he or she reasonably believed to be in, or not adverse, to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonably cause to believe that his or her conduct was legal. The foregoing right to indemnity shall not be exclusive of any other rights to which such Director or officer may be entitled as a matter of law. The foregoing right to indemnity shall also extend to the estate of any deceased Director or officer with respect to any such claim, action, suit or proceeding in which such Director or officer or his or her estate may become involved by reason of his or her having been a Director or officer of the Company, and subject to the same conditions outlined above. ARTICLE XV BY-LAWS These By-Laws or any articles thereof may be altered, amended or repealed or further By-Laws may be adopted by a vote of a majority of the Directors then in office at any regular or special meeting of the Board of Directors, or by written consent, provided five days' notice in writing shall be given to each of the Directors of the proposed alteration, amendment or repeal of an existing By-Law or the proposed adoption of a new By-Law. Any ByLaw made by the Directors under this Article may be altered, amended or repealed by the stockholders. AMENDED and RESTATED by the Board on the 5th day of January, 1995. ------------------------------------- Secretary 9 EX-99.B7(I) 4 REINSURANCE GUARANTEED DEATH BENEFIT 1 Exhibit (b)(7)(i) 2 VARIABLE ANNUITY GUARANTEED DEATH BENEFIT REINSURANCE Effective JULY 1, 1995 between NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (BOSTON, MA) and CONNECTICUT GENERAL LIFE INSURANCE COMPANY CIGNA REINSURANCE (Hartford, Connecticut) 3 REINSURANCE AGREEMENT, Effective JULY 1, 1995 between NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (BOSTON, MA) and CONNECTICUT GENERAL LIFE INSURANCE COMPANY CIGNA REINSURANCE (Hartford, Connecticut) INDEX
ARTICLE PAGE ------- ---- Access to Records XI 8 Amounts at Risk II 2 Arbitration XVI 11 Automatic Excess Reinsurance III 3 Claims VII 6 Currency XIII 9 DAC Tax Regulation Election XVII 12 Delays, Errors, or Omissions XII 9 Effective Date; Term and Termination XVIII 13 Extra Contractual Obligations VIII 7 Hold Harmless XIV 9 Insolvency XV 10 Liability of Connecticut General IV 3 Litigation IX 8 Notices XIX 16 Offset X 8 Parties to the Agreement I 1 Premium Accounting VI 6 Reinsurance Premiums V 4
1 4 SCHEDULES A Maximum Limits of Reinsurance in Connecticut General B Policy Forms and Funds Subject to this Reinsurance Agreement C Limits and Rules of NASL D Reinsurance Premium Rates E Reporting Format Description REINSURANCE AGREEMENT (hereinafter called Agreement) between NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY (hereinafter called NASL) and CONNECTICUT GENERAL LIFE INSURANCE COMPANY (hereinafter called Connecticut General or Reinsurer) It is agreed by the two companies as follows: ARTICLE I PARTIES TO THE AGREEMENT This Agreement shall be binding upon and shall inure solely to the benefit of NASL and Connecticut General. This Agreement shall not and is not intended to create any right or interest in any third party and shall not and is not intended to create any legal relationship between either party and any third party, including, without limitation, annuitants, insureds, certificate holders, employees, dependents, beneficiaries, policy owners, applicants or assignees under any policy or contract issued by NASL. 2 5 ARTICLE II AMOUNTS AT RISK ALL FORMS BEGINNING WITH VENTURE A. The reinsurance death benefit is 50% of the excess of the guaranteed minimum death benefit over the contract value. The death benefit is paid upon the death of any owner. If any Owner dies on or prior to their 85th birthday and the oldest Owner had an attained age of less than 81 years on the Contract Date, the Death Benefit during the first Contract Year, will be the greater of: the Contract Value, or the sum of all Payments made, less any amount deducted in connection with partial withdrawals. During any subsequent Contract Year, the Death Benefit will be the greater of: the Contract Value, or the Death Benefit on the last day of the previous Contract Year plus any Payments made and less any amounts deducted in connection with partial withdrawals, since then. Death Benefits payable after age 85 are not covered under this treaty. If any Owner dies and the oldest Owner had an attained age of 81 or greater on the Contract Date, the policy does not provide a minimum death benefit and is not covered under this treaty. Please refer to Schedule C for a detailed discussion of the guaranteed minimum death benefit. B. The contract value represents the owner's invested assets in the funds in Schedule B as it appears in the records of NASL before application of any surrender charges, on any given date. C. In determining the amount at risk, the guaranteed minimum death benefit and the contract value are calculated as the average of the values at the end of the current calendar quarter and the end of the prior calendar quarter. The amount at risk cannot fall below zero. 3 6 ARTICLE III AUTOMATIC EXCESS REINSURANCE A. On and after the Effective Date of this Agreement, subject to the limit of Reinsurer's liability set forth in Schedule A and all other terms, conditions and limitations set forth in this Agreement and the Schedules attached to and made a part hereof, NASL shall cede and the Reinsurer shall accept 50% of NASL'S guaranteed death benefit liability under the Variable Annuity Contracts, as described in Article II A. B. This Agreement covers only NASL'S liability for claims paid under Variable Annuity Contracts written on forms and investment in funds which were reviewed by the Reinsurer prior to their issuance. Forms, as supplemented by additional materials, and funds available as of the date of this Agreement are listed on Schedule B, attached hereto and made a part hereof. If NASL intends to cede to Reinsurer liability with respect to a new form or fund, or a revised version of an approved form or fund, it must provide to the Reinsurer written notice of such intention together with a copy of the proposed form, fund or revision, and a revised Schedule B. C. NASL shall provide written notice to Connecticut General of any changes in its published limits and rules identified on Schedule C, and Connecticut General shall have no liability pursuant to revised limits and rules unless and until Connecticut General provides written notice to NASL that such revised limits and rules are acceptable. ARTICLE IV LIABILITY OF CONNECTICUT GENERAL Connecticut General's liability for reinsurance under this Agreement shall follow that of NASL in every case, and be subject in all respects to the general stipulations, terms, clauses, conditions, waivers and modifications of the Variable Annuity Contracts. In no event shall Connecticut General have any reinsurance liability unless the Variable Annuity Contract issued by NASL is in force and the underwriting and issuance of coverage by NASL constitutes the doing of business in a state of the United States of America in which NASL is properly licensed and authorized to do business. 4 7 ARTICLE V REINSURANCE PREMIUMS The calendar quarterly premiums for reinsurance subject to the terms and conditions of this Agreement shall be determined by application of the rates set forth in Schedule D to the amount of reinsurance coverage provided for each annuity insured by NASL, subject to the following: 1. The reinsurance shall be based on the owner's age at the end of each calendar quarter. If the contract has more than one owner, the reinsurance premiums shall be based on the age listed on the records of NASL. NASL shall determine the owner's age at the time it prepares the quarterly exposure data submission for the variable annuity guaranteed death benefit, as set forth in Schedule E, attached hereto. 2. The reinsurance premiums shall be calculated separately for funds identified as variable and guaranteed in Schedule B. 3. The Age Adjusted Aggregate Contract Value is the sum of the contract values in all of NASL's variable annuities subject to this Agreement, minus contract values attributable to amounts in excess of the maximum purchase amounts listed in Schedule A. 4. For funds identified as variable in Schedule B, and for attained ages less than 70, the premium over each calendar year will be at least equivalent to 50% of the Age Adjusted Aggregate Contract Values times 1.2 BASIS POINTS (.00012) for year one (1); and 1.6 BASIS POINTS (.00016) thereafter. For attained ages 70 and older the premium over each calendar year will be at least equivalent to 50% of the Age Adjusted Aggregate Contract Values times 3.6 BASIS POINTS (.00036) for year one (1); and 4.8 BASIS POINTS (.00048) thereafter. 5. For funds identified as guaranteed in Schedule B, there will be no minimum premium regardless of attained age. 6. For all funds identified in Schedule B, and for ages less than 70, the premium over each calendar year will not exceed 50% of the Age Adjusted Aggregate Contract Values times 6.0 BASIS POINTS (.0006) for year one (1); and 6.8 BASIS POINTS (.00068) thereafter. For attained ages 70 and older the premium over each calendar year will not exceed 50% of the Age Adjusted Aggregate Contract Values times 11.2 BASIS POINTS (.00112) for year one (1); and 13.6 BASIS POINTS (.00136) thereafter. 7. 50% of the Age Adjusted Aggregate Contract Values times one fourth (1/4) of the minimum premium rate will be remitted to Connecticut General in advance for the current calendar quarter, at the time of settlement for the prior calendar quarter. 5 8 ARTICLE VI PREMIUM ACCOUNTING NASL shall forward to Connecticut General within thirty (30) days of the end of the reporting period a quarterly statement as set forth in Schedule E. NASL shall also remit any premium due for the prior quarter along with an advance premium for the current quarter, in accordance with Article V. In the event of any over payment by NASL of premiums or advance premiums, Connecticut General shall remit to NASL the excess amount within thirty (30) days following receipt of the quarterly reinsurance statement. If the amounts described in Article V cannot be determined by the dates set forth in the above paragraph, on an exact basis, such payments will be made with a generally agreed upon formula which will approximate the actual payments. Adjustments will then be made to reflect actual amounts when they become available. ARTICLE VII CLAIMS A. NASL is solely responsible for payment of its claims under the Underlying Annuity Contracts, policies, master contracts or certificates identified on Schedule B. NASL shall provide Connecticut General with proof of claim, proof of claim payment and any other claim documentation requested by Connecticut General on a quarterly basis. Payment of reinsurance shall be made by Connecticut General in one sum regardless of the method of payment by NASL and within thirty (30) days following receipt of the quarterly reinsurance statement, as set forth in Schedules E-1 and E-2. B. NASL shall notify Connecticut General of NASL'S intention to contest, or deny a claim which may involve the reinsurance coverage under this Agreement before any notice of contest or denial is provided to the claimant. Connecticut General shall then have thirty (30) days within which to advise NASL whether it agrees that the claim should be contested or denied. If Connecticut General does not agree that the claim should be contested or denied, then it shall pay to NASL the full amount of the reinsurance on the risk reinsured, as set forth in Article II, and Connecticut General shall have no further obligation in respect to such claim. If Connecticut General agrees that the claim should be contested or denied, then Connecticut General shall pay its share of the following in accordance with its share of liability set forth in Article II: - Expenses incurred by NASL in investigating, contesting, or litigating or otherwise resisting the claim, excluding salaries and expenses of employees, officers and agents of NASL and ordinary overhead expenses of NASL, and costs of third party administrators acting on behalf of NASL; and - Interest which is paid by NASL in respect of the claim. 6 9 ARTICLE VIII EXTRA CONTRACTUAL OBLIGATIONS A. In no event shall Connecticut General be liable for extra contractual damages (whether they constitute Compensatory damages, Statutory penalties, Exemplary or Punitive damages) which are awarded against NASL as a result of an act, omission or course of conduct by NASL in connection with policies subject to this Agreement, unless the Reinsurer shall have received notice of and concurred with the actions taken or not taken by NASL which led to its liability, in which case the Reinsurer shall pay its share of such liability. For this purpose, the Reinsurer's share shall be proportionate with its risk under the business reinsured hereunder. B. The following definitions shall apply: (1) Punitive damages and Exemplary damages are those damages awarded as a penalty, the amount of which is not governed nor fixed by statute. (2) Statutory penalties are those amounts which are awarded as a penalty but fixed in amount by statute. (3) Compensatory damages are those amounts awarded to compensate for the actual damages sustained and are not awarded as a penalty nor fixed in amount by statute. 7 10 ARTICLE IX LITIGATION A. In the event of any action brought against NASL under any Underlying Annuity Contract that is subject to the terms and conditions of this Agreement, NASL shall provide to Connecticut General a copy of such action within ten (10) business days following NASL'S direct receipt of the service process. If Connecticut General is a party to action brought against NASL, NASL shall counsel with Connecticut General on the selection and appointment of local counsel to represent NASL in such action. B. If NASL pursues any litigation where Connecticut General is not a party or where Connecticut General is a party but does not agree to pursue litigation, NASL and Connecticut General agree that all litigation costs, excluding the salaries of employees of NASL and Connecticut General, shall be borne by NASL. However, if NASL and Connecticut General agree to jointly defend any litigation, or if Connecticut General agrees that NASL should pursue litigation, litigation costs will be borne in proportion to the net liability borne by each party. ARTICLE X OFFSET Either party shall have, and may exercise at any time and from time to time, the right to offset any balance or amounts whether on account of premiums or on account of losses or otherwise, due from one party to the other under the terms of this Agreement. However, in the event of insolvency of NASL subject to the provisions of Article XV, offset shall only be allowed in accordance with the statutes and/or regulations of the state having jurisdiction over the insolvency. ARTICLE XI ACCESS TO RECORDS NASL and Connecticut General (or its duly authorized representative) each shall have the right during normal business and at reasonable intervals, to audit at the office of the other, all records relating to this reinsurance. Books and records shall be maintained in accordance with prudent standards of insurance company record keeping and must be retained for a period of at least seven (7) years from the date of creation. Within one hundred and fifty (150) days following the end of each calendar year, NASL and Connecticut General will provide each office with copies of their respective audited financial statements. 8 11 ARTICLE XII DELAYS, ERRORS OR OMISSIONS No accidental delay, errors or omissions on the part of NASL shall relieve Connecticut General of liability provided such delay, errors or omissions are rectified as soon as possible after discovery. However, Connecticut General shall not be liable with respect to any reinsurance which may have been inadvertently included in the premium computation but which ought not to have been included by reason of the terms and conditions of this Agreement. It is expressly understood and agreed that if failure to comply with any terms of this Agreement is hereby shown to be unintentional or the result of misunderstanding or oversight on the part of either party, both parties shall be restored to the position they would have occupied had no such error or oversight occurred, subject always to the correction of the error or oversight. ARTICLE XIII CURRENCY All retentions and limits hereunder are expressed in United States dollars and all premium and loss payments shall be made in United States currency. For the purposes of this Agreement, amounts paid or received by Connecticut General in any other currency shall be converted into United States dollars at the rates of exchange on the date such transactions are entered on the books of Connecticut General. ARTICLE XIV HOLD HARMLESS A. Connecticut General shall indemnify and hold NASL harmless from any and all liability, loss, damage, fines, punitive damages, penalties and costs, including expenses and attorney's fees, which results from any negligence or willful misconduct of Connecticut General in fulfilling its duties and obligations under this Agreement or which results from any action which exceeds its authority under this Agreement. B. NASL shall indemnify and hold Connecticut General harmless from any and all liability, loss, damage, fines, punitive damages, penalties and costs, including expenses and attorney's fees, which results from any negligence or willful misconduct of NASL in fulfilling its duties and obligations under this Agreement or which results from any action which exceeds its authority under this Agreement. 9 12 ARTICLE XV INSOLVENCY In the event of insolvency of NASL, the reinsurance under this Agreement shall be payable directly by Connecticut General to NASL or to its liquidator, receiver, conservator or statutory successor on the basis of Connecticut General's liability to NASL without diminution because of the insolvency of NASL or because the liquidator, receiver, conservator or statutory successor of NASL has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of NASL shall give prompt written notice to Connecticut General of the pendency of a claim against NASL within a reasonable time after such claim is filed in the receivership, conservation, insolvency or liquidation proceeding and that during the pendency of such claim, Connecticut General may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to NASL or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by Connecticut General shall be chargeable, subject to the approval of the Court, against NASL as part of the expense of conservation or liquidation to the extent of a pro-rata share of the benefit which may accrue to NASL solely as a result of the defense undertaken by Connecticut General. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by NASL. 10 13 ARTICLE XVI ARBITRATION A. As a condition precedent to any right of action hereunder, any dispute between the parties with respect to the interpretation of this Agreement or any right, obligation or liability of either party, whether such dispute arises before or after termination of this Agreement, shall be submitted to arbitration upon the written request of either party. Each party shall select an arbitrator within thirty (30) days of the written request for arbitration. If either party refuses or neglects to appoint an arbitrator within thirty (30) days of the written request for arbitration, the other party may appoint the second arbitrator. The two arbitrators shall select an umpire within thirty (30) days of the appointment of the second arbitrator. If the two arbitrators fail to agree on the selection of the umpire within thirty (30) days of the appointment of the second arbitrator, each arbitrator shall submit to the other a list of three umpire candidates, each arbitrator shall select one name from the list submitted by the other and the umpire shall be selected from the two names chosen by a lot drawing procedure to be agreed upon by the arbitrators. B. The arbitrators and the umpire all shall be active or retired, disinterested executive officers of insurance or reinsurance companies. C. The arbitration panel shall interpret this Agreement as an honorable engagement rather than merely as a legal obligation and shall make its decision considering the custom and practice of the applicable insurance and reinsurance business. The arbitration panel is released from judicial formalities and shall not be bound by strict rules of procedure and evidence. D. The decision of the arbitration panel shall be final and binding on both parties. The arbitration panel may, at its discretion, award costs and expenses as it deems appropriate, including, but not limited to, attorneys' fees and interest. Judgment may be entered upon the final decision of the arbitration panel in any court of competent jurisdiction. E. All meetings and hearings before the arbitration panel shall take place in Worcester, Massachusetts unless some other place is mutually agreed upon by the parties. F. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expenses of the umpire and of the arbitration. 11 14 ARTICLE XVII DAC TAX REGULATION ELECTION Connecticut General and NASL hereby agree to make an election pursuant to Internal Revenue Code Regulation Section 1.848-2(g)(8). This election shall be effective for all taxable years for which the Reinsurance Agreement remains in effect. The terms used in this article are defined by reference to Regulation Section 1.848-2 promulgated on December 28, 1992. Connecticut General and NASL agree that the entity with net positive consideration for the reinsurance agreement for each taxable year will capitalize specified policy acquisition expenses with respect to the reinsurance agreement without regard to the general deductions limitation of Section 848(c)(1) of the Internal Revenue Code of 1986, as amended. Connecticut General and NASL agree to exchange information pertaining to the amount of net consideration under the reinsurance agreement each year to ensure consistency. To achieve this, NASL shall provide Connecticut General with a schedule of its calculation of the net consideration for all reinsurance agreements in force between them for a taxable year by no later than April 30 of the succeeding year. Connecticut General shall advise NASL if it disagrees with the amounts provided by no later than May 31, otherwise the amounts will be presumed correct and shall be reported by both parties in their respective tax returns for such tax year. If Connecticut General contests NASL's calculation of the net consideration, the Parties agree to act in good faith to resolve any differences within thirty (30) days of the date Connecticut General submits its alternative calculation and report the amounts agreed upon in their respective tax returns for such tax year. Connecticut General represents and warrants that it is subject to U.S. taxation under either Subchapter L or Subpart F of Part III of Subchapter N of the Internal Revenue Code of 1986, as amended. 12 15 ARTICLE XVIII EFFECTIVE DATE; TERM AND TERMINATION A. The effective date of this Agreement is JULY 1, 1995. This Agreement remains effective for all annuity contracts subject to this Agreement written by NASL through JUNE 30, 1998, unless terminated pursuant to the paragraphs listed below: B. Either Connecticut General or NASL shall have the option of terminating this agreement with one hundred and eighty (180) days written notice to the other party for new business anytime on or after June 30, 1998. C. Once each calendar year, NASL shall have the option to recapture existing contracts beginning with the fifteenth (15) anniversary of their reinsurance hereunder. If NASL elects to recapture, 1/3 of the contracts can be recaptured in the first year eligible, 1/2 of the remaining contracts can be recaptured in the second year, and the balance of the contracts can be recaptured in the third year. Recapture must be made on an issue year basis beginning with the earliest issue year. Recapture cannot occur on contracts with later issue years until all contracts with earlier issue dates have been recaptured. D. Upon delivery of sixty (60) days written notice to NASL, Connecticut General shall have the option of terminating this Agreement for new business within sixty (60) days of the happening of any of the following events: (1) NASL'S A. M. Best rating is reduced to a "C" or lower. (2) NASL'S parent company is placed upon a "watch list" by its domiciliary state's insurance regulators; (3) An order appointing a receiver, conservator or trustee for management of NASL is entered or a proceeding is commenced for rehabilitation, liquidation, supervision or conservation of NASL; (4) NASL is merged, purchased or there is any other material change (in whole or in part) in the ownership of NASL other than is currently contemplated by the following agreement: An agreement and plan of reorganization dated September 5, 1995 among North American Life Assurance Company, NASL, Wood Logan Associates, Inc., H. Douglas Wood, A. Scott Logan and NAWL Holding Co., Inc., and an Amalgamation Agreement dated September 15, 1995 between The Manufacturers Life Insurance Company and North American Life Assurance Company; (5) The Securities and Exchange Commission revokes the licenses of NASL to conduct business. 13 16 (6) Failure by NASL to pay premium in accordance with Article V and Article VI. If, during the sixty (60) days notice period, the Reinsurer receives all premiums in arrears and all premiums which may become due within the sixty (60) days notice period, the notice of termination shall be deemed withdrawn. In the event of termination under this paragraph, this Agreement may be reinstated upon the written consent of the Reinsurer if, at any time within sixty (60) days of termination, NASL pays and the Reinsurer receives all premiums due with interest thereon and payable up to the date of reinstatement. (Please refer to paragraph J below for the interest calculation description) E. Upon delivery of sixty (60) days written notice to Connecticut General, NASL shall have the option of terminating this Agreement for new business within sixty (60) days of the happening of any of the following events: (1) Connecticut General's A. M. Best rating is reduced to a "C" or lower; (2) Connecticut General is placed upon a "watch list" by its domiciliary states's insurance regulators; (3) An order appointing a receiver, conservator or trustee for management of Connecticut General is entered or a proceeding is commenced for rehabilitation, liquidation, supervision or conservation of Connecticut General; (4) Connecticut General is merged, purchased or there is any other material change (in whole or in part) in the ownership of Connecticut General; (5) Failure by Connecticut General to pay reinsurance death benefits in accordance with Article II. If, during the sixty (60) days notice period, NASL receives all reinsurance death benefits in arrears, the notice of termination shall be deemed withdrawn. In the event of termination under this paragraph, this Agreement may be reinstated upon the written consent of NASL if, at any time within sixty (60) days of termination, the Reinsurer pays and NASL receives all reinsurance death benefits due with interest thereon and payable up to the date of reinstatement. (Please refer to paragraph J below for the interest calculation description) F. If this Agreement is terminated for new and existing business, Connecticut General shall be relieved of all liability to NASL for claims incurred following the termination date of this Agreement under such Underlying Annuity Contracts issued by NASL, and G. If this Agreement is terminated for new business only, Connecticut General will remain liable, after termination, in accordance with the terms and conditions of this Agreement, with respect to all reinsurance effective prior to termination of the Agreement. H. Both parties shall continue to be entitled to all offset credits provided by Article X up to the effective date of termination. 14 17 I. NASL shall not have the right to assign or transfer any portion of the rights, duties and obligations of NASL under the terms and conditions of this Agreement without the written approval of Connecticut General. J. In the event of reinstatement as described in paragraph D and E above, there will be an interest charge at the three (3) month LIBOR Rate (as published in the Wall Street Journal), plus .01, determined on the first business day following the end of the 60 day notice period. The settlement is considered overdue at the end of the 60 day notice period and interest shall commence from the overdue date. 15 18 ARTICLE XIX NOTICES All notices required to be given hereunder shall be in writing and shall be deemed delivered if personally delivered, sent via facsimile, or dispatched by certified or registered mail, return receipt requested, postage prepaid, addressed to the parties as follows: RICHARD C. HIRTLE VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY P.O. BOX 9230 BOSTON, MA 02205-9230 PHONE NO. (617) 266-6008 (X253) FAX NO. (617) 437-6849 TIMOTHY J. RUARK, FSA ASSISTANT VICE PRESIDENT AND ACTUARY CIGNA REINSURANCE, R26 900 COTTAGE GROVE ROAD HARTFORD, CT 06152-4026 PHONE NO. (860) 726-4053 FAX NO. (860) 726-3153 Notice shall be deemed given on the date it is deposited in the mail or sent via facsimile in accordance with the foregoing. Any party may change the address to which to send notices by notifying the other party of such change of address in writing in accordance with the foregoing. This Agreement constitutes the entire contract between the parties and shall be deemed to have been made under and governed by the laws of the State of Connecticut. Any amendment or modification hereto shall be in writing, endorsed upon or attached hereto and signed by both NASL and Connecticut General. In witness whereof, the parties hereto have caused this Agreement to be signed in duplicate on the dates indicated to be effective as of the date specified above. NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY Date: , 19 By: ------------------ -- ----------------------------- Date: , 19 By: ------------------ -- ----------------------------- CONNECTICUT GENERAL LIFE INSURANCE COMPANY Date: , 19 By: ------------------ -- ----------------------------- 16 19 SCHEDULE A Maximum Limits of Reinsurance in Connecticut General The maximum purchase amount issued on the life of each insured: $3,500,000 The maximum purchase amount is the sum of all premium contributions less withdrawals in the contract. For purchase amounts in excess of the maximum, Connecticut General's death benefit liability will be reduced by the ratio of purchase amounts in excess of the maximum to the total purchase amounts. SCHEDULE A 20 SCHEDULE B Contracts and Funds Subject to this Reinsurance Agreement
Form Number* Policy Description Date - ------- ------------------ ---- All contracts with form Flexible Purchase Payment August 15, 1994 numbers: Individual Deferred Fixed and VENTURE.001 Variable Annuity Contract VENTURE.001.94 Non Participating VENTURE.005 All certificates with form number: VENTURE.003
* Includes all state variations Fund Date Fund Description VARIABLE FUNDS: January 9, 1995 International Growth & Income Trust February 19, 1993 Value Equity Trust May 1, 1989 U.S. Government Securities Trust February 19, 1993 Strategic Bond Trust April 23, 1991 Growth & Income Trust June 18, 1985 Investment Quality Bond Trust June 18, 1985 Money Market Trust June 18, 1985 Equity Trust August 3, 1989 Conservative Asset Allocation Trust August 3, 1989 Moderate Asset Allocation Trust August 3, 1989 Aggressive Asset Allocation Trust December 11, 1992 Pasadena Growth Trust March 18, 1988 Global Equity Trust March 18, 1988 Global Government Bond Trust March 1, 1996 International Small Cap Trust March 1, 1996 Small\Mid Cap Trust SCHEDULE B 21 FIXED FUNDS: August 8, 1989 One Year August 8, 1989 Three Year August 8, 1989 Five Year August 15, 1994 Seven Year SCHEDULE B 22 SCHEDULE C Limits and Rules of NASL 1) NASL will determine the Guaranteed Minimum Death Benefit for each deceased within seven (7) working days of due proof of death. 2) The maximum purchase payment allowed without company approval is $1,000,000. 3) The minimum purchase payment is $300. MINIMUM DEATH BENEFIT ALL CONTRACTS WITH FORM NUMBERS: VENTURE.001, VENTURE.001.94, VENTURE DEATH BENEFIT BEFORE MATURITY DATE A Death Benefit will be determined as of the date on which written notice and proof of death and all required claim forms are received at the Company's Annuity Service Office as follows: 1) If any Owner dies on or prior to their 85th birthday and the oldest Owner had an attained age of less than 81 years on the Contract Date, the Death Benefit will be determined as follows: a) During the first Contract Year, the Death Benefit will be the greater of: (i) the Contract Value, or (ii) the sum of all Payments made, less any amount deducted in connection with partial withdrawals. b) During any subsequent Contract Year, the Death Benefit will be the greater of: (i) the Contract Value, or (ii) the Death Benefit on the last day of the previous Contract Year plus any Payments made and less any amounts deducted in connection with partial withdrawals, since then. 2) If any Owner dies after their 85th birthday and the oldest Owner had an attained age of less than 81 years on the Contract Date, the Death Benefit will be determined as the greater of: SCHEDULE C-1 23 SCHEDULE C (continued) a) the Contract Value, or b) the excess of (i) over (ii) where: (i) equals the sum of all Payments. (ii) equals the sum of any amounts deducted in connection with partial withdrawals. 3) If any Owner dies and the oldest Owner had an attained age of 81 or greater on the Contract Date, the Death Benefit will be the Contract Value less any applicable Withdrawal Charges at the time of payment of benefits. If there is any Debt, the Death Benefit equals the amount described above less the Debt under the Contract. MINIMUM DEATH BENEFIT ALL CERTIFICATES WITH FROM NUMBER VENTURE.003 DEATH BENEFIT BEFORE MATURITY DATE A Death Benefit will be determined as of the date on which written notice and proof of death and all required claim forms are received at the Company's Annuity Service Office as follows: 1) If any Owner dies on or prior to their 85th birthday and the oldest Owner had an attained age of less than 81 years on the Certificate Date, the Death Benefit will be determined as follows: (a) During the first Certificate Year, the Death Benefit will be the greater of: (i) the Contract Value, or (ii) the sum of all Payments less any amount deducted in connection with partial withdrawals made by or on behalf of the Owner. (b) During any subsequent certificate Year, the Death Benefit will be the greater of: (i) the Contract Value, or SCHEDULE C-1 24 SCHEDULE C (continued) (ii) the Death Benefit on the last day of the previous Certificate Year plus any Payments and less any amount deducted in connection with partial withdrawals, since then, made by or on behalf of the Owner. 2) If any Owner dies after their 85th birthday and the oldest Owner had an attained age of less than 81 years on the Certificate Date, the Death Benefit will be determined as the greater of: (a) the Contract Value, or (b) the excess of (i) over (ii) where: (i) equals the sum of all payments made by or on behalf of the Owner. (ii) equals the sum of any amounts deducted in connection with partial withdrawals made by or on behalf of the Owner. 3) If any Owner dies and the oldest Owner had an attained age of 81 or greater on the Certificate Date, the Death Benefit will be the Contract Value less any applicable Withdrawal Charges at the time of payment of the benefits. If there is any Debt, the Death Benefit equals the amount described above less the Debt under this Certificate. SCHEDULE C-2 25 SCHEDULE D Quarterly Reinsurance Premium Rates Exposure Based Per $1,000 Exposed
Ages Unisex ---- ------ less than 35 .19 35-39 .25 40-44 .37 45-49 .63 50-54 1.15 55-59 2.02 60-64 3.21 65-69 5.52 70-74 9.54 75-79 15.40 80-84 25.20
SCHEDULE D 26 SCHEDULE E Quarterly Reporting Format 1. Following the end of each calendar quarter, the Quarterly Detail Page, Fund/Exposure-Based exhibit (attached) must be prepared for each Qualified plan and Non-Qualified plan separately. 2. The tabulation should be on an Adjusted Basis, which requires omission of excess contract values due to an issue amount in excess of $3.5 million. 3. The tabulation is on a seriatim basis, with each contract contributing toward the totals for both exposure and aggregate contract value. 4. An exhibit demonstrating the aggregate allocation of contract values by fund shall be provided each calendar quarter. 5. At year end reporting, a tabulation of exposures by age based on a percentage decrease in account value by fund type as specified by the NAIC must be submitted for reserve purposes. SCHEDULE E EX-99.B7(II) 5 AUTOMATIC REINSURANCE AGREEMENT 1 Exhibit (b)(7)(ii) 2 AUTOMATIC REINSURANCE AGREEMENT Between NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY Boston, Massachusetts And SWISS RE LIFE COMPANY AMERICA New York, New York 3 AUTOMATIC REINSURANCE AGREEMENT Contents ARTICLE I Scope of Agreement ARTICLE II Commencement & Termination of Liability ARTICLE III Oversights - Clerical Errors ARTICLE IV Mortality Net Amount At Risk ARTICLE V Reinsurance Premiums ARTICLE VI Experience Refund ARTICLE VII Reinsurance Administration ARTICLE VIII Settlement of Claims ARTICLE IX Tax Credits ARTICLE X Regulatory Compliance ARTICLE XI Inspection of Records ARTICLE XII Insolvency ARTICLE XIII Arbitration ARTICLE XIV Rights of Offsetting Balances Due ARTICLE XV Contract and Program Changes ARTICLE XVI Federal Taxes ARTICLE XVII Parties to Agreement ARTICLE XVIII Entire Agreement ARTICLE XIX Duration of Agreement Signature Page EXHIBIT A - Variable Annuities Covered Under This Agreement EXHIBIT B - Sub-Accounts EXHIBIT C - Experience Refund Definitions and Formulae 4 AUTOMATIC REINSURANCE AGREEMENT THIS AGREEMENT between the NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY, a corporation organized under the laws of the State of Delaware, hereinafter referred to as the "Company", and SWISS RE LIFE COMPANY AMERICA, a corporation organized under the laws of the State of New York, hereinafter referred to as "Swiss Re America", WITNESSETH AS FOLLOWS: ARTICLE I Scope of Agreement 1. On and after the 1st day of August, l995, the Company will automatically reinsure with Swiss Re America, and Swiss Re America will automatically accept, the following quota shares of the mortality net amount at risk, as defined in Article IV, generated prior to annuitization, by the Variable Annuity Contracts issued by the Company, as set forth in Exhibit A, on or after that date: a) a 50% quota share of the variable net amount at risk, as defined in Article IV, generated prior to annuitization, by the variable annuity contract forms listed in Exhibit A; and inforce as of the 1st day of August, 1995, and b) a 50% quota share of the variable net amount at risk, as defined in Article IV, generated prior to annuitization by the variable annuity contract forms listed in Exhibit A; issued by the Company with effective dates on and after the 1st day of August, 1995. 2. Swiss Re America's maximum liability in any one calendar year shall not exceed 3% (300 basis points) of the average aggregate Account Value over each respective calendar year of coverage. This average shall be calculated by totaling the aggregate Account Value of reinsured contracts as of the end of each calendar quarter and dividing the result by the number of quarters. 3. Swiss Re America's maximum liability on any one life reinsured hereunder shall be One Million Dollars ($1,000,000), as specified in Article IV of this Agreement. 4. This Agreement covers only the Company's liability for claims paid under Variable Annuity Contracts written on forms and investment in funds which were reviewed by Swiss Re America prior to their issuance. Forms as supplemented by additional materials and funds available as of the date of this Agreement are to be attached hereto and made part of this Agreement. If the Company intends to cede to Swiss Re America liability with respect to - 1 - 5 a new form or fund, it must provide Swiss Re America written notice of such intention together with a copy of the proposed form, fund or revision, and Exhibit A or Exhibit B shall be revised accordingly. - 2 - 6 ARTICLE II Commencement & Termination of Liability 1. On reinsurance ceded under the terms of this Agreement, the liability of Swiss Re America shall commence simultaneously with that of the Company, and will terminate upon the earliest of re-registration, annuitization, surrender or termination in accordance with Article XIX and Exhibit A. Re-registration is a term used to describe a process in which the Beneficiary continues the Variable Annuity Contract as the new Owner upon death of the original Owner. - 3 - 7 ARTICLE III Oversights - Clerical Errors 1. Should either the Company or Swiss Re America fail to comply with any of the terms of this Agreement, and if this is shown to be unintentional and the result of a misunderstanding, oversight or clerical error on the part of either the Company or Swiss Re America, then this Agreement shall not be deemed abrogated thereby, but both companies shall be restored to the position they would have occupied had no such oversight, misunderstanding, or clerical error occurred. Such conditions are to be reported and corrected promptly after discovery. - 4 - 8 ARTICLE IV Mortality Net Amount At Risk 1. The variable net amount at risk for each variable annuity contract reinsured hereunder shall be calculated as of the last day of each calendar month and shall be determined as follows, up to a maximum of One Million Dollars ($1,000,000) per life. The contractual death benefit shall be as described in the contract forms specified in Exhibit A. VNAR = 50% of [(Contractual GMDB - Fixed Account Assets) - Separate Account CSV] = 50% of [Variable GMDB - Separate Account CSV] where: Separate Account CSV = Separate Account CV - (SASC% x SC) SASC% = SA / (SA + FA), an aggregate measure recalculated monthly. SA = Separate Account Assets. FA = Fixed Account Assets. SC = Total surrender charges under all contracts reinsured. - 5 - 9 ARTICLE V Reinsurance Premiums 1. Except as provided in paragraph 6, below, the reinsurance premiums shall be calculated monthly and shall be a function of the reinsured portion of (a) the average aggregate account values and (b) the average aggregate guaranteed minimum death benefits (GMDB) over each calendar month for all variable annuities reinsured hereunder. The monthly premium rates are defined in Exhibit C. 2. The reinsurance premium due for the first calendar month during which this Agreement commences shall be equal to the minimum monthly premium rate multiplied by the greater of the average aggregate account values or the average aggregate GMDB, as set forth in Exhibit C. 3. The reinsurance premium due for all subsequent months shall be equal to 150% of the prior month's reinsured death claims, subject to calculated minimum and maximum limits, as set forth in Exhibit C. 4. The total reinsurance premium shall be reduced by the ratio of the sum of Swiss Re America's share of the variable net amount at risk in excess of $1 million on any one life reinsured hereunder to Swiss Re America's share of the total variable net amount at risk on all annuity contracts. 5. The monthly reinsurance premium shall be remitted on a calendar quarterly basis, as described in Article VII. 6. The monthly reinsurance premium described above shall remain in effect as long as the death benefit design, the contract fees, the mortality and expense charges, the administration fees, and the surrender charges in effect at the inception of this Agreement remain unchanged. - 6 - 10 ARTICLE VI Experience Refund 1. Swiss Re America shall pay the Company an experience refund equal to 50% of the Adjusted Profit, as defined in Exhibit C, for all products covered under this Agreement as set forth in Exhibit A. 2. The refund shall be calculated each calendar quarter by Swiss Re America and settled annually on July 31st of each year. - 7 - 11 ARTICLE VII Reinsurance Administration 1. Within 30 days of the end of each calendar quarter, the Company will furnish Swiss Re America a separate electronic report for each GMDB design and tax status combination specified in Exhibit A, valued as of the last day of that calendar quarter. Each report will indicate for all inforce annuities reinsured hereunder: a) Annuitant's name, sex, date of birth and social security number b) Owner's name, sex, date of birth and social security number c) Contract number d) Contract date e) Contract form number f) Current contract separate account value g) Current contract fixed account value h) Cumulative net considerations i) Current contract minimum guaranteed death benefit j) Current contract death benefit k) Current contract cash surrender value l) Current variable net amount at risk 2. Additionally, within 30 days of the end of each calendar quarter, the Company will furnish Swiss Re America a separate paper report for each GMDB design and tax status combination specified in Exhibit A, summarizing the following data: a) Reinsurance premiums due Swiss Re America b) Death claim reimbursements due the Company c) Total number of contracts reinsured d) Total current contract separate account value e) Total current fixed account value f) Total cumulative net considerations g) Total current guaranteed minimum death benefit h) Total current death benefit - 8 - 12 i) Total current cash surrender value j) Total current variable risk amount 3. If the net balance is due Swiss Re America, the amount due shall be remitted with the report statement. If the net balance is due the Company, Swiss Re America shall remit the amount to the Company within 10 days of the receipt of the report. - 9 - 13 ARTICLE VIII Settlement of Claims 1. The claims that are eligible for reimbursement are only those that the Company is required to pay on deaths that occur on or after the effective date of this Agreement. 2. Provided the Company provides satisfactory proof of claim to Swiss Re America, claim settlements made by the Company shall be unconditionally binding on Swiss Re America. 3. Within 30 days of the end of each calendar quarter, the Company shall notify Swiss Re America of the reinsured death benefits paid in that calendar quarter and Swiss Re America will reimburse the Company, as provided in Article VII, for the reinsured benefits. 4. Settlements by Swiss Re America shall be in a lump sum regardless of the mode of payment made by the Company to the beneficiary. - 10 - 14 ARTICLE IX Tax Credits 1. Swiss Re America shall not reimburse the Company for state premium taxes. - 11 - 15 ARTICLE X Regulatory Compliance 1. Swiss Re America agrees to comply with all regulatory directives required to permit the Company to receive statutory reserve credit for the reinsurance ceded under this Agreement. 2. The Company warrants that it has secured all necessary federal and state licenses and approvals, and that it is operating in compliance with federal investment laws and state investment and insurance laws and regulations. - 12 - 16 ARTICLE XI Inspection of Records 1. Swiss Re America shall have the right at all reasonable times and for any reasonable purpose to inspect at the office of the Company all records pertaining to reinsurance ceded to Swiss Re America. 2. Likewise, the Company shall have the right at all reasonable times and for any reasonable purpose to inspect at the office of Swiss Re America all records pertaining to reinsurance ceded to Swiss Re America by the Company. Swiss Re America will also provide reasonable access, during regular business hours, to records pertaining to such reinsurance to any regulator having authority over the Company's products and operations. - 13 - 17 ARTICLE XII Insolvency 1. In the event of the insolvency of the Company, all reinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall be payable by Swiss Re America directly to the Company or to its liquidator, receiver, or statutory successor on the basis of the liability of the Company under the contract or contracts reinsured without diminution because of the insolvency of the Company. It is understood, however, that in the event of the insolvency of the Company, the liquidator, receiver or statutory successor of the insolvent Company shall give written notice of the pendency of a claim against the insolvent Company on the policy reinsured within a reasonable time after such claim is filed in the insolvency proceeding and that, during the pendency of such claim, Swiss Re America may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or to its liquidator, receiver or statutory successor. 2. It is further understood that the expense thus incurred by Swiss Re America shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by Swiss Re America. Where two or more assuming insurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of the Reinsurance Agreement as though such expense had been incurred by the Company. 3. In the event of the insolvency of Swiss Re America and the appointment of receivers therefor, the liability of Swiss Re America shall not terminate but shall continue with respect to the reinsurance ceded to Swiss Re America by the Company prior to the date of such insolvency or appointment, and the Company shall have a security interest in any and all sums held by or under deposit in the name of Swiss Re America. - 14 - 18 ARTICLE XIII Arbitration 1. In the event of any difference arising hereafter between the contracting parties with reference to any transaction under this Agreement, the same shall be referred to three arbitrators who must be current or former executive officers of life insurance or life reinsurance companies other than the two parties to this Agreement or their affiliates, each of the contracting companies to appoint one of the arbitrators and such two arbitrators to select the third. If either party refuses or neglects to appoint an arbitrator within 60 days after receipt of the written request for arbitration, the other party may appoint a second arbitrator. 2. If the two arbitrators fail to agree on the selection of a third arbitrator within 60 days of their appointment, each of them shall name three individuals, of whom the other shall decline two, and the decision shall be made by drawing lots. 3. The arbitrators shall consider this Reinsurance Agreement not merely as a legal document but also as a gentlemen's agreement. In resolving the dispute, the arbitrators will give full consideration to the customs and practices of the life insurance and life reinsurance industry, insofar as they are not in conflict with the specific terms of this Agreement. The arbitrators shall decide by a majority vote. There shall be no appeal from their written decision. 4. Unless the arbitrators decide otherwise, each party shall bear the expense of its own arbitration, including its arbitrator and outside attorney fees, and shall jointly and equally bear with the other party the expense of the third arbitrator. Any remaining costs of the arbitration proceedings shall be apportioned by the Board of Arbitrators. - 15 - 19 ARTICLE XIV Right of Offsetting Balances Due 1. The Company and Swiss Re America shall have, and may exercise at any time, the right to offset any balance or balances due one party to the other, its successors or assigns, against balances due the other party under this Agreement or under any other Agreements or Contracts previously or subsequently entered into between the Company and Swiss Re America. This right of offset shall not be affected or diminished because of insolvency of either party to this Agreement. - 16 - 20 ARTICLE XV Contract and Program Changes 1. The Company may amend, substitute, add or delete separate accounts or underlying investment funds to the annuity contract as described in the contract general provisions. No such change will be made by the Company without prior notification to Swiss Re America and without any required action by the Securities and Exchange Commission. The Company agrees to maintain at all times a satisfactory selection of core sub-accounts with characteristics similar to the original sub-accounts listed in Exhibit B. 2. The Company shall also give Swiss Re America advance notice of any other changes to its annuity product, its fees and charges, or its distribution approaches. - 17 - 21 ARTICLE XVI Federal Taxes 1. The Company and Swiss Re America hereby agree to the following pursuant to Section 1.848-2(g)(8) of the Income Tax Regulation issued December 1992, under Section 848 of the Internal Revenue Code of 1986, as amended. This election shall be effective as of the Effective Date of this Agreement and for all subsequent taxable years for which this Agreement remains in effect. (a) The term "party" will refer to either the Company or Swiss Re America as appropriate. (b) The terms used in this Article are defined by reference to Regulation 1.848-2 in effect December 1992. (c) The party with the net positive consideration for this Agreement for each taxable year will capitalize specified policy acquisition expenses with respect to this Agreement without regard to the general deductions limitation of Section 848(c)(1). (d) Both parties agree to exchange information pertaining to the amount of net consideration under this Agreement each year to ensure consistency or as otherwise required by the Internal Revenue Service. (e) The Company will submit a schedule to Swiss Re America by May 1 of each year of its calculation of the net consideration for the preceding calendar year. This schedule of calculations will be accompanied by a statement stating that the Company will report such net consideration in its tax return for the preceding calendar year. (f) Swiss Re America may contest such calculation by providing an alternative calculation to the Company by June 1. If Swiss Re America does not so notify the Company, the Company will report the net consideration as determined by the Company in the Company's tax return for the previous calendar year. (g) If Swiss Re America contests the Company's calculation of the net consideration, the parties will act in good faith to reach an agreement as to the correct amount by July 1. If the Company and Swiss Re America reach agreement on an amount of the net consideration, each party shall report such amount in their respective tax returns for the previous calendar year. - 18 - 22 2. Swiss Re America and the Company represent and warrant that they are subject to U.S. taxation under Subchapter L of Chapter 1 of the Internal Revenue Code. - 19 - 23 ARTICLE XVII Parties to Agreement 1. This Agreement is an indemnity reinsurance agreement solely between the Company and Swiss Re America. The acceptance of reinsurance hereunder shall not create any right or legal relation whatever between Swiss Re America and the annuitant, owner, beneficiary or any other party under any contracts of the Company which may be reinsured hereunder, and the Company shall be and remain solely liable to the annuitant, owner or the beneficiary under such contracts reinsured hereunder. - 20 - 24 ARTICLE XVIII Entire Agreement 1. This Agreement shall constitute the entire agreement between the parties with respect to business reinsured hereunder. There are no understandings between the parties other than as expressed in this Agreement and any change or modification of this Agreement shall be null and void unless made by amendment to the Agreement and signed by both parties. - 21 - 25 ARTICLE XIX Duration of Agreement 1. This Agreement shall be unlimited as to its duration but may be reduced or terminated as provided in this Article, below. 2. Upon 180 days written notice, either the Company or Swiss Re America may cancel this Agreement for new business any time on or after the third anniversary of this Agreement. The reinsurance facility is renewable for another three year period, subject to mutually acceptable terms. 3. Upon election, the reinsurance shall be recaptured at a constant rate by reducing the quota share percentages set forth in Article I, paragraph 1, by 1.389% per month. The reduction shall begin in the month of election and continue for 36 months. The quota share percentages will then be equal to 0% and the reinsurance ceded hereunder will be fully recaptured. - 22 - 26 IN WITNESS WHEREOF, the Company and Swiss Re America have caused their names to be subscribed and duly attested hereunder by their respective Authorized Officers. NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY By: Attest: ------------------------------------- -------------------------- Title: Title: ---------------------------------- --------------------------- Date: Date: ----------------------------------- ---------------------------- SWISS RE LIFE COMPANY AMERICA By: Attest: ------------------------------------- -------------------------- Title: Title: ---------------------------------- --------------------------- Date: Date: ----------------------------------- ---------------------------- - 23 - 27 EXHIBIT B Sub-Accounts NASL Variable Account FUND NAME FUND INCEPTION DATE International Growth & Income Trust January 9, 1995 Value Equity Trust February 19, 1993 U.S. Government Securities Trust May 1, 1989 Strategic Bond Trust February 19, 1993 Growth & Income Trust April 23, 1991 Investment Quality Bond Trust June 18, 1995 Money Market Trust June 18, 1995 Equity Trust June 18, 1995 Conservative Asset Allocation Trust August 3, 1989 Moderate Asset Allocation Trust August 3, 1989 Aggressive Asset Allocation Trust August 3, 1989 Pasadena Growth Trust December 11, 1992 Global Equity Trust March 18, 1988 Global Government Bond Trust March 18, 1988 Small\Mid Cap Trust March 1, 1996 International Small Cap Trust March 1, 1996 28
EXHIBIT C Experience Refund Definitions and Formulae t = current month q = current quarter SAV (t) = Sum total of account values at end of month (t) Avg. AV(t) = 50% of (SAV (t-1) + SAV(t)) SGMDB(t) = Sum total of guaranteed minimum death benefits at end of month (t) Avg. GMDB(t) = 50% of (SGMDB(t-1) + SGMDB(t)) APR = annualized premium rate for each product combination, = 3.0 basis points for VEN3, tax qualified, 5 year ratchet 3.0 basis points for VEN3, tax qualified, 1 year ratchet 3.0 basis points for VEN7, tax qualified, 6 year ratchet 3.0 basis points for VEN7, tax qualified, 1 year ratchet 4.0 basis points for VEN20, tax qualified, 1 year ratchet 9.0 basis points for VIS5, tax qualified, 5% boost 9.0 basis points for VIS25, tax qualified, 5% boost 5.0 basis points for VEN3, non-qualified, 5 year ratchet 8.0 basis points for VEN3, non-qualified, 1 year ratchet 5.0 basis points for VEN7, non-qualified, 6 year ratchet 9.0 basis points for VEN7, non-qualified, 1 year ratchet 9.0 basis points for VEN20, non-qualified, 1 year ratchet 23.0 basis points for VIS5, non-qualified, 5% boost 23.0 basis points for VIS25, non-qualified, 5% boost MPR = Monthly premium rate for each product combination = (APR., 12) RP(t) = Reinsurance premiums due at end of month (t) = 150% DBR(t-1), subject to: Min. = MPR x Minimum multiple x greater of (Avg. AV(t)) or (100% of Avg. GMDB(t)) Max. = MPR x Maximum multiple x greater of (Avg. AV(t))or (50% of Avg. GMDB(t)) Min. Multiple = 1.0000 for all product combinations Max. Multiple = 1.6667 for VEN3, tax qualified, 5 year ratchet 2.0000 for VEN3, tax qualified, 1 year ratchet 1.6667 for VEN7, tax qualified, 6 year ratchet 2.0000 for VEN7, tax qualified, 1 year ratchet 1.5000 for VEN20, tax qualified, 1 year ratchet 2.0000 for VIS5, tax qualified, 5% boost 2.0000 for VIS25, tax qualified, 5% boost
29 EXHIBIT C, CONTINUED 2.0000 for VEN3, non-qualified, 5 year ratchet 1.8750 for VEN3, non-qualified, 1 year ratchet 2.2000 for VEN7, non-qualified, 6 year ratchet 1.6111 for VEN7, non-qualified, 1 year ratchet 1.6111 for VEN20, non-qualified, 1 year ratchet 1.5652 for VIS5, non-qualified, 5% boost 1.5652 for VIS25, non-qualified, 5% boost RP(1) = MPR x greater of (Avg. AV(1,)) or (Avg. GMDB(1)) DBR(t) = Death benefit recoveries in month (t) = Sum of individual reinsured variable net risk amounts reimbursed upon death DBR(o) = 0 AdjP(t) = Adjusted profit for all products reinsured hereunder for month (t) = RP(t)-DBR(t)-MEC(t)-CHGRES(t)+CFWD(t) AdjP(o) = 0 AdjP(y) = Adjusted profit for calendar year (y) CHGRES(t) = Change in reinsurance reserves for month (t) MEC(t) = Monthly expense charge for month (t), applied to average aggregate account value over the month = (2.0 basis points, 12) x Avg. AV(t) CFWD(t) = Carryforward from month (t-1), adjusted for interest = AdjP(t-1) x (1+CIR(t)) CIR(t) = Carryforward interest rate for month (t) = (Avg. U.S. Treasury bill rate for month (t) + 2.0%), 12 PR(y) = Payout ratio for year (y) = 1.0 if AdjP(y) greater than 0, otherwise 0 Refund(y) = 50% of adjusted profit for year (y), provided it is positive = 50% x AdjP(y) x PR(y)
30
EXHIBIT A Variable Annuities Covered Under This Agreement FORM COVERED PRODUCT CODE DEATH BENEFIT PROVISION All contracts beginning with 203 and endorsed with 301- VEN 3 5 year ratcheting death benefit VER 9/89 payable on the death of the last annuitant. All contracts beginning with 203 and endorsed with VEN 3 ENHANCED 1 year ratcheting death benefit ENDORSEMENT.008 payable on the death of the last annuitant. All contracts beginning with 207, except: VEN 7, 8, 17, 18 6 year ratcheting death benefit i) exclude form 207-VFA-NY payable on the death of the last ii) include form VFA-MN annuitant. iii) include all certificates beginning with form VFA-CERT Reinsurance coverage is excluded upon the annuitant's attainment of age 85. All contracts beginning with 207, which have form VEN 7, 17 1 year ratcheting death benefit ENDORDSEMENT.005 attached, except: ENHANCED payable on the death of the last i) exclude form 207-VFA-NY annuitant. ii) include contracts issued in Montana which use form ENDORSEMENT.005.94 Reinsurance coverage is excluded upon the annuitant's attainment of age 85. All contracts beginning with form VFA-MN with form VEN 8, 18 1 year ratcheting death benefit ENDORSEMENT.005 attached ENHANCED payable on the death of the last annuitant. Reinsurance coverage is excluded upon the annuitant's attainment of age 85. All certificates beginning with form VFA-CERT with form VEN 8, 18 1 year ratcheting death benefit ENDORSEMENT.007 attached ENHANCED payable on the death of the last annuitant. Reinsurance coverage is excluded upon the annuitant's attainment of age 85. All contracts with VENTURE.001, VENTURE001.94 VEN 20,21,22,23 1 year ratcheting death benefit VENTURE.005 payable on the death of the first owner. All certificates with VENTURE.003 Reinsurance coverage is excluded upon the owner's attainment of age 85 or if the oldest owner at issue is age 81 or greater.
31 EXHIBIT A CONTINUED VEN 10 VIS 5 5% roll up death benefit payable on the death of the last annuitant. Reinsurance coverage is excluded upon the annuitant's attainment of age 85 or if the oldest annuitant at issue is age 81 or greater. VISION.001 VIS 25 5% roll up death benefit payable on the death of the first owner. Reinsurance coverage is excluded upon the owner's attainment of age 85 or if the oldest owner at issue is age 81 or greater.
EX-99.B7(III) 6 REINSURANCE AGREEMENT WITH PAIN WEBBER 1 Exhibit (b)(7)(iii) 2 REINSURANCE AGREEMENT BETWEEN NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY BOSTON, MASSACHUSETTS referred to as the "Ceding Company" AND PAINEWEBBER LIFE INSURANCE COMPANY WEEHAWKEN, NEW JERSEY referred to as the "Reinsurer" February 29, 1996 3 TABLE OF CONTENTS
Page ---- ARTICLE I GENERAL PROVISIONS 3 ARTICLE II REINSURANCE PREMIUMS 7 ARTICLE III COMMISSIONS AND ALLOWANCES 8 ARTICLE IV BENEFIT PAYMENTS 11 ARTICLE V RESERVE ADJUSTMENTS 13 ARTICLE VI ADJUSTMENT FOR TRANSFERS INVOLVING FIXED ACCOUNT 14 ARTICLE VII ACCOUNTING AND SETTLEMENTS 15 ARTICLE VIII DURATION AND RECAPTURE 18 ARTICLE IX TERMINAL ACCOUNTING AND SETTLEMENT 21 ARTICLE X ARBITRATION 22 ARTICLE XI INSOLVENCY 23 ARTICLE XII EXECUTION AND EFFECTIVE DATE 24 SCHEDULE A ANNUITIES AND RISKS REINSURED 25 SCHEDULE B QUARTERLY REPORT OF ACTIVITY AND SETTLEMENTS 28 SCHEDULE C MODIFIED COINSURANCE RESERVE INVESTMENT CREDIT 33 SCHEDULE D COMMISSION SCHEDULES 34
1 4 REINSURANCE AGREEMENT This Agreement is made and entered into by and between North American Security Life Insurance Company (hereinafter referred to as the "Ceding Company") and Paine Webber Life Insurance Company (hereinafter referred to as the "Reinsurer"). The Ceding Company and the Reinsurer mutually agree to reinsure on the terms and conditions stated herein. This Agreement is an indemnity reinsurance agreement solely between the Ceding Company and the Reinsurer, and performance of the obligations of each party under this Agreement will be rendered solely to the other party. In no instance will anyone other than the Ceding Company or the Reinsurer have any rights under this Agreement, and the Ceding Company will be and remains the only party hereunder that is liable to any insured, policy owner or beneficiary under any annuity reinsured hereunder. 2 5 ARTICLE I GENERAL PROVISIONS 1. ANNUITIES AND RISKS REINSURED. The Reinsurer agrees to indemnify the Ceding Company for, and the Ceding Company agrees to reinsure with the Reinsurer, according to the terms and conditions hereof, the portion of the risks under the annuities described in Schedule A attached hereto. 2. COVERAGES AND EXCLUSIONS. Only the variable annuities described in Schedule A are reinsured under this Agreement. 3. PLAN OF REINSURANCE. This indemnity reinsurance will be on a modified-coinsurance basis. The Ceding Company will retain, control and own all assets held in relation to the Modified Coinsurance Reserve. 4. EXPENSES. The Reinsurer will bear no part of the expenses incurred in connection with the annuities reinsured hereunder, except as otherwise provided herein. 5. ANNUITY CHANGES. The Ceding Company must provide written notification to the Reinsurer of any change which affects the original terms or conditions of any annuity reinsured hereunder not later than thirty (30) days after the change takes effect. The Reinsurer will provide written notification to the Ceding Company as to the Reinsurer's acceptance or rejection of the change within thirty (30) days after receipt of notice of the change. If the Reinsurer accepts any such change, the Reinsurer will (a) assume that portion of any increase in the Ceding Company's liability, resulting from the change, which corresponds to the portion of the annuities reinsured hereunder, and (b) receive credit for that portion of any decrease in the Ceding Company's liability, resulting from the change, which corresponds to the portion of the annuities reinsured hereunder. If the Reinsurer rejects any such change, the Reinsurer's liability under this Agreement will be determined as if no such change had occurred. 6. NO EXTRACONTRACTUAL DAMAGES. The Reinsurer does not indemnify the Ceding Company for, and will not be liable for, any extracontractual damages or extracontractual liability of any kind whatsoever resulting from fraud, oppression, bad faith, strict liability, or negligent, reckless or intentional wrongs on the part of the Ceding Company or its directors, officers, employees and agents. The following types of damages are examples of damages that would be excluded under this Agreement for the conduct described above: actual damages, damages for emotional distress, and punitive or exemplary damages. 3 6 7. ANNUITY ADMINISTRATION. The Ceding Company will administer the annuities reinsured hereunder and will perform all accounting for such annuities; provided, however, that the Reinsurer reserves the right to participate in claims administration. 8. INSPECTION. At any reasonable time, the Reinsurer or its representatives may inspect, during normal business hours, at the principal office of the Ceding Company, the original papers and any and all other books or documents relating to or affecting reinsurance under this Agreement. The Reinsurer or its representatives will not use any information obtained through any inspection pursuant to this Paragraph for any purpose not relating to reinsurance hereunder. 9. TAXES. The allowance for any premium taxes paid in connection with the annuities reinsured hereunder is included in the Commissions and Allowances, described in Article III. The Reinsurer will not reimburse the Ceding Company for any other taxes paid by the Ceding Company in connection with the annuities reinsured hereunder. 10. PROXY TAX REIMBURSEMENT. Pursuant to IRC Section 848, insurance companies are required to capitalize and amortize specified policy acquisition expenses. The amount capitalized is determined by proxy based on a percentage of "reinsurance premiums" as defined in the IRS regulations relating to IRC Section 848. The Reinsurer and the Ceding Company agree that any costs which would result from IRC Section 848 are not subject to reimbursement hereunder. 11. ELECTION TO DETERMINE SPECIFIED POLICY ACQUISITION EXPENSES. The Ceding Company and the Reinsurer agree that the party with net positive consideration under this Agreement will capitalize specified policy acquisition expenses with respect to annuities reinsured under this Agreement without regard to the general deductions limitation of Section 848(c)(1) of the Internal Revenue Code of 1986, as amended. The Ceding Company and the Reinsurer will exchange information pertaining to the amount of net consideration under this Agreement each year to ensure consistency. The Ceding Company will submit a schedule to the Reinsurer by May 1 of each year presenting its calculation of the net consideration for the preceding taxable year. The Reinsurer may contest the calculation in writing within thirty (30) days of receipt of the Ceding Company's schedule. Any differences will be resolved between the parties so that consistent amounts are reported on the respective tax returns for the preceding taxable year. This election to capitalize specified policy acquisition expenses without regard to the general deductions limitation is effective for all taxable years during which this Agreement remains in effect. 4 7 12. CONDITION. The reinsurance hereunder is subject to the same limitations and conditions as the annuities issued by the Ceding Company which are reinsured hereunder, except as otherwise provided in this Agreement. 13. MISUNDERSTANDINGS AND OVERSIGHTS. If any failure to pay amounts due or to perform any other act required by this Agreement is unintentional and caused by misunderstanding or oversight, the Ceding Company and the Reinsurer will adjust the situation to what it would have been had the misunderstanding or oversight not occurred. 14. ADJUSTMENTS. If the Ceding Company's liability under any of the annuities reinsured hereunder is changed because of a misstatement of age, sex or any other material fact, the Reinsurer will (a) assume that portion of any increase in the Ceding Company's liability, resulting from the change, which corresponds to the portion of the annuities reinsured hereunder, and (b) receive credit for that portion of any decrease in the Ceding Company's liability, resulting from the change, which corresponds to the portion of the annuities reinsured hereunder. 15. REINSTATEMENTS. If an annuity reinsured hereunder is surrendered or annuitized, and is subsequently reinstated while this Agreement is in force, the reinsurance for such annuity will be reinstated automatically. The Ceding Company will pay the Reinsurer the Reinsurer's proportionate share of all amounts received by the Ceding Company in connection with the reinstatement of the annuity, plus any amounts previously refunded to the Ceding Company by the Reinsurer in connection with the lapse of the annuity. 16. ASSIGNMENT. The Ceding Company may not assign any of its rights, duties or obligations under this Agreement without prior written consent of the Reinsurer. The Reinsurer may not assign any of its rights, duties, or obligations under this Agreement without prior written consent of the Ceding Company. 17. AMENDMENTS AND WAIVER. Any change or modification to this Agreement will be null and void unless made by amendment to the Agreement and signed by both parties. Any waiver will constitute a waiver only in the circumstances for which it was given and will not be a waiver of any future circumstances. 18. ENTIRE AGREEMENT. The terms expressed herein constitute the entire agreement between the parties with respect to the annuities reinsured hereunder. There are no understandings between the parties with respect to the annuities reinsured hereunder other than as expressed in this Agreement. 5 8 19. CURRENT PRACTICES. The Ceding Company will not materially change, alter or otherwise compromise its underwriting, claims paying or administrative practices with respect to the annuities reinsured hereunder without prior written consent of the Reinsurer. 6 9 ARTICLE II REINSURANCE PREMIUMS 1. INITIAL CONSIDERATION. The Ceding Company will pay the Reinsurer an Initial Consideration equal to the quota share, as defined in Schedule A, of the Account Value on all annuities reinsured under this Agreement, calculated as of the Effective Date of this Agreement. 2. REINSURANCE PREMIUMS. The Ceding Company will pay the Reinsurer Reinsurance Premiums on all annuities reinsured under this Agreement in an amount equal to a quota share, as defined in Schedule A, of the gross premiums collected and deposited into the Separate Account during the Accounting Period by the Ceding Company. The Reinsurance Premiums paid to the Reinsurer by the Ceding Company will be remitted to the Reinsurer at the end of the Accounting Period during which the gross premiums were collected and deposited by the Ceding Company. 7 10 ARTICLE III COMMISSIONS AND ALLOWANCES 1. INITIAL COMMISSION. Simultaneous with the payment of the Initial Consideration, the Reinsurer will pay an Initial Commission to the Ceding Company equal to a percentage of the Initial Consideration, as follows:
- ------------------------------------------------------------- Initial Commission as a Category as Described Percentage of Initial in Schedule A Consideration - ------------------------------------------------------------- A & B 6.69% - ------------------------------------------------------------- C & D 7.71% - ------------------------------------------------------------- E 7.35% - ------------------------------------------------------------- F 7.95% - -------------------------------------------------------------
2. PREMIUM TAX. The Reinsurer shall reimburse the Ceding Company for all premium taxes incurred on the Reinsurance Premiums. 3. COMMISSIONS. The Reinsurer shall reimburse the Ceding Company for all commissions, wholesaler overrides and costs of special promotions incurred on the Reinsurance Premiums and on that portion of the Account Value of the annuities reinsured hereunder which corresponds to the portion of the annuities reinsured hereunder as of the end of the current Accounting Period. Commissions will be net of a quota share of commission chargebacks on policies reinsured hereunder. Schedule D shows the current commission schedules for the annuities reinsured hereunder. 4. ALLOWANCE FOR EXPENSES. The Reinsurer will pay the Ceding Company an Allowance for Expenses for each Accounting Period equal to (i) plus (ii) plus (iii) plus (iv) plus (v), where: (i) For policy maintenance, equals (a) times (b), where: (a) equals $14.60 times the quota share percentage of the Venture annuities reinsured hereunder, as described in Schedule A; and (b) equals the number of Venture annuities reinsured hereunder and described in Schedule A, that are inforce at the end of the current Accounting Period; 8 11 (ii) For policy issuance, equals (a) times (b), where: (a) equals $112.50 times the quota share percentage of the Venture annuities reinsured hereunder, as described in Schedule A; and (b) equals the number of Venture annuities reinsured hereunder and described in Schedule A, that were issued during the current Accounting Period; (iii) For DAC proxy tax, equals (a) times (b), where (a) equals 0.0036; and (b) equals that amount of the Reinsurance Premiums received on non-qualified policies; (iv) For other costs and risks, an allowance of (a) times (b), where: (a) equals .0005125; and (b) equals the quota share of the account values at the end of the Accounting Period on the annuities reinsured hereunder. (v) (a) minus (b), times (c), where: (a) equals the quota share of the account value at the end of the Accounting Period of the annuities reinsured hereunder. (b) equals the Modified Coinsurance Reserve at the end of the Accounting Period of the annuities reinsured hereunder. (c) equals the LIBOR Rate divided by 4, where the LIBOR Rate equals the 3 month LIBOR rate (as published in the Wall Street Journal), plus .01, determined on the first business day of the Accounting Period. (vi) Amounts in (i)(a) and (ii)(a) above are for 1994. They will be adjusted annually on January 1, for inflation at the change in the Consumer Price Index (CPI- U as determined by Department of Labor and published in the Wall Street Journal). 9 12 5. MINIMUM DEATH BENEFIT GUARANTEE COSTS: The Reinsurer will pay the Ceding Company an allowance for each Accounting Period for the costs of the minimum death benefit guarantee. The allowance equals (a) times (b), where (a) and (b) equal:
------------------------------------------------------------------------------------------------- Category as Described in Schedule A (a) (b) ------------------------------------------------------------------------------------------------- A & C .0002 Quota share of the account values at the end of the Accounting Period on Category A & C annuities ------------------------------------------------------------------------------------------------- B, D, E & F .00045 Quota share of the account values at the end of the Accounting Period on Category B, D, E & F annuities -------------------------------------------------------------------------------------------------
10 13 ARTICLE IV BENEFIT PAYMENTS 1. BENEFIT PAYMENTS. Benefit Payments, as referred to in this Agreement, means the Reinsurer's quota share of (i) Claims, as described in Paragraph 2 below, (ii) Cash Surrenders, as described in Paragraph 3 below, (iii) Partial Withdrawals, as described in Paragraph 4 below, and (iv) Annuity Benefits, as described in Paragraph 5 below. 2. CLAIMS. The Reinsurer will pay the Ceding Company Claims. The term "Claims," as used in this Agreement, means that portion of the death benefits paid by the Ceding Company on annuities reinsured hereunder which is equal to the Reinsurer's quota share of the cash surrender value as of the date the death benefit is payable. 3. CASH SURRENDERS. The Reinsurer will pay the Ceding Company that portion of the Cash Surrenders paid by the Ceding Company on annuities reinsured hereunder which corresponds to the portion of the annuities reinsured hereunder. 4. PARTIAL WITHDRAWALS. The Reinsurer will pay the Ceding Company that portion of Partial Withdrawals paid by the Ceding Company on annuities reinsured hereunder which corresponds to the portion of the annuities reinsured hereunder. 5. ANNUITY BENEFITS. The Reinsurer will pay the Ceding Company that portion of Annuity Benefits paid by the Ceding Company on annuities reinsured hereunder which corresponds to the portion of the annuities reinsured hereunder. The Reinsurer s obligation will be satisfied in full by the payment to the Ceding Company of that portion of the Account Value, as of the date of annuitization, which corresponds to the portion of the annuities reinsured hereunder. 6. ADJUSTMENT FOR ANNUITY BENEFITS. For any Accounting Period in which the calculation of (i) divided by (ii) is greater than 0.0025, the Ceding Company will pay the Reinsurer an amount equal to (iii) times (iv) where: (i) equals the account value of annuites reinsured hereunder that annuitized during the current Accounting Period. (ii) the average account value of annuities reinsured hereunder during the current Accounting Period. For the purposes of this calculation, the average account value of annuities reinsured hereunder is calculated as one-half the sum of the account values of annuities reinsured hereunder as of the 11 14 beginning of the current accounting period and the account value of annuities reinsured hereunder as of the end of the current Accounting Period. (iii) equals a quota share of the Account Value at the time of annuitization, grouped by policy duration at the time of annuitization; for the annuities reinsured that annuitized during the current Accounting Period; (iv) equals the applicable Annuity Benefit Factor for each policy duration described below.
POLICY DURATION (YEARS) ANNUITY BENEFIT FACTOR 1 0.06 2 0.05 3 0.04 4 0.03 5 0.02 6 0.01 7 0.01 8+ 0.01
7. NOTICE. The Ceding Company will notify the Reinsurer at the end of each Accounting Period regarding Benefit Payments on annuities reinsured hereunder. The reinsurance claim and copies of notification, claim papers, and proofs will be furnished to the Reinsurer upon request. 8. LIABILITY AND PAYMENT. The Reinsurer will accept the decision of the Ceding Company with respect to Benefit Payments on annuities reinsured hereunder. The Reinsurer will pay its proportionate share of Benefit Payments in a lump sum to the Ceding Company without regard to the form of settlement by the Ceding Company. 9. CONTESTED CLAIMS. The Ceding Company will advise the Reinsurer of its intention to contest, compromise or litigate Benefit Payments involving annuities reinsured hereunder. The Reinsurer will pay its share of the expenses of such contests, in addition to its share of Benefit Payments, or it may choose not to participate. If the Reinsurer chooses not to participate, it will discharge its liability by payment to the Ceding Company of the full amount of its liability, prior to any contests, on the annuity reinsured hereunder. 12 15 ARTICLE V RESERVE ADJUSTMENTS 1. INITIAL RESERVE ADJUSTMENT. Simultaneous with the payment of the Initial Consideration described in Article II, Paragraph 1, by the Ceding Company to the Reinsurer, the Reinsurer will pay the Ceding Company an Initial Reserve Adjustment in an amount that is equal to the Modified Coinsurance Reserve determined in accordance with Paragraph 3 below, on the Effective Date of this Agreement. 2. MODIFIED COINSURANCE RESERVE ADJUSTMENT. A. The Modified Coinsurance Reserve Adjustment will be computed each Accounting Period equal to (i) minus (ii) minus (iii), where: 1. equals the Modified Coinsurance Reserve, determined in accordance with Paragraph 3 below, at the end of the current Accounting Period; 2. equals the Modified Coinsurance Reserve, determined in accordance with Paragraph 3 below, at the end of the preceding Accounting Period; 3. equals the Modified Coinsurance Reserve Investment Credit, as described in Schedule C. With respect, however, to the Accounting Period during which the Effective Date of this Agreement occurs, the reference in (ii) above to the end of the preceding Accounting Period refers to the Effective Date of this Agreement immediately after the Initial Reserve Adjustment, as described in Paragraph 1 above, has occurred. B. For any Accounting Period in which the amount computed in A. above is positive, the Reinsurer will pay the Ceding Company such amount. For any Accounting Period in which the amount computed in A. above is negative, the Ceding Company will pay the Reinsurer the absolute value of such amount. 3. MODIFIED COINSURANCE RESERVE. The term "Modified Coinsurance Reserve," as used in this Agreement, means a quota share of the statutory reserve held by the Ceding Company with respect to that portion of the annuities reinsured hereunder. The statutory reserve will be determined by the Commissioners Annuity Reserve Valuation Method, excluding any reserve for the minimum guaranteed death benefit. 13 16 ARTICLE VI ADJUSTMENT FOR TRANSFERS INVOLVING THE FIXED ACCOUNT 1. The Reinsurer will pay the Ceding Company an amount equal to a quota share of the amount transferred from the Separate Account to the fixed account for the annuities reinsured hereunder during the current Accounting Period 2. The Ceding Company will pay the Reinsurer an amount equal to a quota share of the amount transferred from the fixed account to the Separate Account for the annuities reinsured hereunder during the current Accounting Period. 3. The Reinsurer will pay the Ceding Company an amount equal to (i) times (ii) where: (i) equals a quota share of the amount transferred from the fixed account to the Separate Account grouped by policy duration at the time of transfer; for the annuities reinsured hereunder during the current Accounting Period; (ii) equals the applicable Exchange Factor for each policy duration described in Paragraph 5 below. 4. The Ceding Company will pay the Reinsurer an amount equal to (i) times (ii) where: (i) equals a quota share of the amount transferred from the Separate Account to the fixed account, grouped by policy duration at the time of transfer; for the annuities reinsured hereunder during the current Accounting Period; (ii) equals the applicable Exchange Factor for each policy duration described in Paragraph 5 below. 5. The exchange factors for each policy duration are shown below:
POLICY DURATION (YEARS) EXCHANGE FACTOR 1 0.08 2 0.07 3 0.06 4 0.05 5 0.04 6 0.03 7 0.03 8+ 0.03
14 17 ARTICLE VII ACCOUNTING AND SETTLEMENTS 1. QUARTERLY ACCOUNTING PERIOD. Each Accounting Period under this Agreement will be a calendar quarter, except that: (a) the initial Accounting Period runs from the Effective Date of this Agreement through the last day of the calendar quarter during which the Effective Date of this Agreement falls, and (b) the final Accounting Period runs from the end of the preceding Accounting Period until the terminal accounting date of this Agreement as described in Article IX, Paragraph 2. The amount in Article III, paragraph 4 (i) (a) will be adjusted on a pro-rata basis for time periods less than a calendar quarter. 2. QUARTERLY ACCOUNTING REPORTS. Quarterly accounting reports in the form of Schedule B will be submitted to the Reinsurer by the Ceding Company for each Accounting Period not later than fifteen (15) days after the end of each Accounting Period. Such reports will include information on the amount of Reinsurance Premiums, Allowance for Commissions and Expenses, Benefit Payments, Modified Coinsurance Reserve, and Modified Coinsurance Reserve Adjustment. 3. INITIAL QUARTERLY SETTLEMENT. Within twenty-five (25) days after the initial Accounting Period, the Ceding Company will pay the Reinsurer the Initial Consideration determined in accordance with Article II, Paragraph 1. Simultaneously, the Reinsurer will pay the Ceding Company the sum of: (i) the Initial Reserve Adjustment determined in accordance with Article V, Paragraph 1, plus (ii) the Initial Commission determined in accordance with Article III, Paragraph 1. 4. QUARTERLY SETTLEMENTS. A. Within twenty-five (25) days after the end of each Accounting Period, the Ceding Company will pay the Reinsurer the sum of: (i) Reinsurance Premiums, determined in accordance with Article II, plus (ii) any Modified Coinsurance Reserve Adjustment payable to the Reinsurer, etermined in accordance with Article V, Paragraph 2, plus (iii) any Adjustment for Transfers Involving the Fixed Account payable to the Reinsurer, determined in accordance with Article VI, plus (iv) any Adjustments for Annuity Benefits payable to the Reinsurer, determined in accordance with Article IV, paragraph 6. B. Simultaneously, the Reinsurer will pay the Ceding Company the sum of: (i) the amount of Benefit Payments, as described in Article IV, plus 15 18 (ii) the Allowance for Commissions and Expenses, determined in accordance with Article III, plus (iii) any Modified Coinsurance Reserve Adjustment payable to the Ceding Company, determined in accordance with Article V, Paragraph 2, plus (iv) any Adjustment for Transfers Involving the Fixed Account payable to the Ceding Company, determined in accordance with Article VI. 5. AMOUNTS DUE QUARTERLY. Except as otherwise specifically provided in this Agreement, all amounts due to be paid to either the Ceding Company or the Reinsurer under this Agreement will be determined on a net basis as of the last day of each Accounting Period and will be due as of such date and payable within twenty-five (25) days after the end of the Accounting Period. 6. ANNUAL ACCOUNTING REPORTS. The Ceding Company will provide the Reinsurer with annual accounting reports within fifteen (15) days after the end of the calendar year for which such reports are prepared. These reports will contain sufficient information about the annuities reinsured hereunder to enable the Reinsurer to prepare its annual financial reports and to verify the information reported in Schedule B, and will include Page 7, Page 27 and Schedule S of the Annual Statement. 7. ESTIMATIONS. If the amounts, as described in Paragraph 4 above, cannot be determined by the dates described in Paragraph 5 above, on an exact basis, such payments will be paid in accordance with a mutually agreed upon formula which will approximate the actual payments. Adjustments will then be made to reflect actual amounts when they become available. 8. DELAYED PAYMENTS. For purposes of Paragraph 5 above, if there is a delayed settlement of a payment due, there will be an interest penalty, at the LIBOR Rate, as defined in Article III, paragraph 4(v)(c). For purposes of this Paragraph, a payment will be considered overdue thirty (30) days after the date such payment is payable, and interest shall commence from the overdue date. 9. OFFSET OF PAYMENTS. All moneys due either the Ceding Company or the Reinsurer under this Agreement will be offset against each other, dollar for dollar, regardless of any insolvency of either party. 16 19 ARTICLE VIII DURATION AND RECAPTURE 1. DURATION. Except as otherwise provided herein, this Agreement is unlimited in duration. 2. REINSURER'S LIABILITY. The liability of the Reinsurer with respect to any annuity reinsured hereunder will begin simultaneously with that of the Ceding Company, but not prior to the Effective Date of this Agreement. The Reinsurer's liability with respect to any annuity reinsured hereunder will terminate on the earliest of: (i) the date such annuity is recaptured in accordance with paragraph 4 below; (ii) the date the Ceding Company's liability on such annuity is terminated; or (iii) the date this Agreement is terminated under paragraph 3 below. Termination of the Reinsurer's liability is subject to payments in respect of such liability in accordance with the provisions of Article IX of this Agreement. In no event should the interpretation of this Paragraph imply a unilateral right of the Reinsurer to terminate this Agreement. However, the Reinsurer and/or the Ceding Company may, upon thirty (30) days prior written notice to the other party, terminate this Agreement as to annuities not yet written by the Ceding Company as of the effective date of such termination. 3. TERMINATION FOR NONPAYMENT OF REINSURANCE PREMIUMS OR OTHER AMOUNTS DUE. If the Ceding Company fails to pay the Reinsurance Premiums or any other amounts due to the Reinsurer pursuant to this Agreement within sixty (60) days after the end of any Accounting Period, the Reinsurer may terminate this Agreement, subject to thirty (30) days prior written notice to the Ceding Company. If the Reinsurer fails to pay any amounts due to the Ceding Company pursuant to this Agreement within sixty (60) days after the end of any Accounting Period, the Ceding Company may terminate this Agreement, subject to thirty (30) days prior written notice to the Reinsurer. 4. RECAPTURE. Annuities reinsured hereunder will be eligible for recapture, at the option of the Ceding Company as described below: (i) On any January 1, all reinsured annuities where the reinsurance under this Agreement has been in effect for 20 years or longer, subject to ninety (90) days prior written notice. (ii) on any other date which is mutually agreed to in writing. If the Ceding Company opts to recapture, then the Ceding Company must recapture all of the annuities reinsured hereunder that are eligible for recapture. In no event may the Ceding Company recapture anything other than 100 percent of all annuities reinsured hereunder that are eligible for recapture. 17 20 5. INTERNAL REPLACEMENTS. Should the Ceding Company, its affiliates, successors or assigns, initiate a formal program of Internal Replacement that would include any of the annuities reinsured hereunder, the Ceding Company will immediately notify the Reinsurer. For purposes of this Agreement, the term "Internal Replacement" means any instance in which an annuity or any portion of the cash value of an annuity which is written by the Ceding Company, its affiliates, successors, or assigns is exchanged for another policy or annuity. The Reinsurer will participate on a quota share basis in any expenses associated with that program provided reinsurance coverage will continue under this Agreement for the new policy. The quota share percentage for the new policy will be same as for the replaced policy, except when the new policy is otherwise covered by this Agreement, and the quota share on the old and new policies are different. In that case, the quota share will be that of the new policy which would otherwise be applicable under this Agreement, and an amount will be paid which is equal to (i) minus (ii) where: (i) equals the account value in the Separate Account of the new policy times the quota share percentage of the new policy times the Internal Replacement Exchange Factor below; (ii) equals the account value in the Separate Account of the old policy times the quota share percentage of the old policy times the Internal Replacement Exchange Factor below;
POLICY DURATION OF INTERNAL REPLACEMENT REPLACED POLICY EXCHANGE FACTOR (YEARS) 1 0.08 2 0.07 3 0.06 4 0.05 5 0.04 6 0.03 7 0.03 8+ 0.03
If the amount calculated above is positive, it will be paid to the Ceding Company by the Reinsurer. If the amount calculated above is negative, it will be paid to the Reinsurer by the Ceding Company. The Ceding Company, its affiliates, successors or assigns, will not initiate a program of internal replacement that includes any of the annuities reinsured hereunder, to policies or annuities that are not covered by this Agreement, without the Reinsurers consent unless the volume of such internal replacements is incidental. The Reinsurer and the Ceding Company must mutually agree to the volume of internal replacements to be considered incidental. 18 21 Any incidental internal replacement to an annuity not covered under this Agreement will cause the reinsurance coverage under this agreement to terminate for that policy. In that case, the Ceding Company will pay the Reinsurer an amount equal to (i) times (ii) where: (i) equals the account value in the Separate Account recaptured by the Ceding Company; (ii) equals the recapture factors below:
POLICY DURATION OF INTERNAL REPLACEMENT REPLACED POLICY RECAPTURE FACTOR (YEARS) 1 0.08 2 0.07 3 0.06 4 0.05 5 0.04 6 0.03 7 0.03 8+ 0.03
The Reinsurer will not participate nor reinsure Internal Replacements, where the original policy was not covered by this Agreement. 19 22 ARTICLE IX TERMINAL ACCOUNTING AND SETTLEMENT 1. TERMINAL ACCOUNTING. In the event that this Agreement is terminated in accordance with Article VIII, Paragraphs 3 or 4, or Article XI, a Terminal Accounting and Settlement will take place. 2. DATE. The terminal accounting date will be the earliest of: (1) the effective date of recapture pursuant to any notice of recapture given under this Agreement, (2) the effective date of termination pursuant to any notice of termination given under this Agreement, or (3) any other date mutually agreed to in writing. 3. SETTLEMENT. The Terminal Accounting and Settlement will consist of: A. The quarterly settlement as provided in Article VII, Paragraph 4, computed as of the terminal accounting date as if the treaty were still in effect; and B. payment by the Ceding Company to the Reinsurer of a Terminal Reserve equal to the Modified Coinsurance Reserve on the annuities reinsured hereunder as of the terminal accounting date; C. payment by the Reinsurer to the Ceding Company of a Terminal Reserve Adjustment equal to the Modified Coinsurance Reserve on the annuities reinsured hereunder as of the terminal accounting date; If the calculation of the Terminal Accounting and Settlement produces an amount owing to the Ceding Company, such amount will be paid by the Reinsurer to the Ceding Company. If the calculation of the Terminal Accounting and Settlement produces an amount owing to the Reinsurer, such amount will be paid by the Ceding Company to the Reinsurer. 4. SUPPLEMENTARY ACCOUNTING AND SETTLEMENT. In the event that, subsequent to the Terminal Accounting and Settlement as provided above, a change is made with respect to any amounts due, a supplementary accounting will take place pursuant to Paragraph 3 above. Any amount owed to the Ceding Company or to the Reinsurer by reason of such supplementary accounting will be paid promptly upon the completion thereof. 20 23 ARTICLE X ARBITRATION 1. GENERAL. All disputes and differences between the Ceding Company and the Reinsurer on which an agreement cannot be reached will be decided by arbitration. The arbitrators will construe this Agreement from the standpoint of practical business and equitable principles and the customs and practices of the insurance and reinsurance business, rather than from the standpoint of strict law. The parties intend that the arbitrators will make their decision with a view to effecting the intent of this Agreement. 2. METHOD. Three arbitrators will decide any differences. They must be impartial and present or former officers of life insurance companies other than the parties to this Agreement or any company owned by, or affiliated with, either party. One of the arbitrators will be appointed by the Reinsurer, another by the Ceding Company, and the two arbitrators thus selected will select a third arbitrator before arbitration begins. Should one of the parties decline to select an arbitrator within thirty (30) days after the date of a written request to do so, or should the two arbitrators selected by the parties not be able to agree upon the choice of a third, the appointment(s) will be left to the President of the American Arbitration Association or its successor. The arbitrators will decide by a majority of votes and their decision will be final and binding upon the parties. The costs of arbitration, including the fees of the arbitrators, will be shared equally by the parties unless the arbitrators decide otherwise. Any counsel fees incurred by a party in the conduct of arbitration will be paid by the party incurring the fees. 3. ARBITRATION SITE. In event of arbitration, the arbitration hearing shall take place in New York, New York, unless agreed to in writing by both the Ceding Company and the Reinsurer. 21 24 ARTICLE XI INSOLVENCY INSOLVENCY. In the event of the Ceding Company's insolvency, any payments due the Ceding Company from the Reinsurer pursuant to the terms of this Agreement will be made directly to the Ceding Company or its conservator, liquidator, receiver or statutory successor. The reinsurance will be payable by the Reinsurer on the basis of the liability of the Ceding Company under the annuities reinsured without diminution because of the insolvency of the Ceding Company. The conservator, liquidator, receiver or statutory successor of the Ceding Company will give the Reinsurer written notice of the pendency of a claim against the Ceding Company on any annuity reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of any such claim, the Reinsurer may investigate such claim and interpose in the Ceding Company's name (or in the name of the Ceding Company's conservator, liquidator, receiver or statutory successor), in the proceeding where such claim is to be adjudicated, any defense or defenses which the Reinsurer may deem available to the Ceding Company or its conservator, liquidator, receiver or statutory successor. The expense thus incurred by the Reinsurer will be chargeable, subject to court approval, against the Ceding Company as a part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Ceding Company solely as a result of the defense undertaken by the Reinsurer. In the event of the Reinsurer's insolvency, this treaty will terminate, and the terminal accounting and settlement described in Article IX will occur. Any payments due the Reinsurer from the Ceding Company pursuant to the terms of this Agreement will be made directly to the Reinsurer or its conservator, liquidator, receiver or statutory successor. Any amounts owed by the Reinsurer to the Ceding Company will be payable without diminution because of the insolvency of the Reinsurer. The conservator, liquidator, receiver or statutory successor of the Reinsurer will give the Ceding Company written notice of the pendency of a claim against the Reinsurer on any annuity reinsured within a reasonable time after such claim is filed in the insolvency proceeding. 22 25 ARTICLE XII EXECUTION AND EFFECTIVE DATE In witness of the above, this Agreement is executed in duplicate on the dates indicated below with an Effective Date of December 31, 1994. NORTH AMERICAN SECURITY LIFE PAINE WEBBER INSURANCE COMPANY LIFE INSURANCE COMPANY ("Ceding Company") ("Reinsurer") on March 29, 1995 on March 30, 1995 By: John G. Vrysen By: Richard J. Tucker - ------------------------------ ---------------------------------- Title: VP & Actuary Title: Senior Vice President By: Richard C. Hirtle By: Gerianne J. Silva - ------------------------------ ---------------------------------- Title: VP Treasurer & CFO Title: Vice Prsident
23 26 SCHEDULE A ANNUITIES AND RISKS REINSURED ANNUITIES AND RISKS REINSURED. The amount of reinsurance under this Agreement will be a percent quota share of the Ceding Company's net liability, with respect to the separate account, on those variable annuities and the corresponding state and group variations thereof listed below that are issued by the Ceding Company and sold by the PaineWebber Affiliates listed below. Policies included in the Initial Consideration calculation of Article II, paragraph 1, will be included in this Agreement if the agency of record as of the Effective Date of this Agreement is one of the PaineWebber Affiliates listed below, instead of if it was sold by the PaineWebber Affiliates listed below. Any policies covered by this Agreement will continue to be covered even if the agency of record is changed subsequent to the Effective Date of this Agreement. VENTURE VARIABLE ANNUITY PLANS
- ------------------------------------------------------------------------------------------------------------- Description Policy Form Numbers Quota Share - ------------------------------------------------------------------------------------------------------------- CATEGORY A - Individual All contracts beginning with form number 207, except: 15% Contracts with a 6 year (i) exclude form 207-VFA-NY surrender charge and a 6 (ii) include form VFA-MN year step-up death benefit - ------------------------------------------------------------------------------------------------------------- CATEGORY B - Individual All contracts beginning with form number 207 which have form 15% Contracts with a 6 year ENDORSEMENT.005 attached, except: surrender charge and (i) exclude form 207-VFA-NY yearly step-up death (ii) include contracts issued in Montana which use form benefit ENDORSEMENT.005.94 All contracts beginning with form VFA-MN with form ENDORSEMENT.005 attached. - -------------------------------------------------------------------------------------------------------------
24 27
- ------------------------------------------------------------------------------------------------------------- Description Policy Form Numbers Quota Share - ------------------------------------------------------------------------------------------------------------- CATEGORY C - Group All certificates beginning with form VFA-CERT. 15% Contracts with a 6 year surrender charge and a 6 year step-up death benefit - ------------------------------------------------------------------------------------------------------------- CATEGORY D - Group All certificates beginning with form VFA-CERT which have 15% Contracts with a 6 year ENDORSEMENT.007 attached. surrender charge and yearly step-up death benefit - ------------------------------------------------------------------------------------------------------------- CATEGORY E - Individual All contracts with form numbers VENTURE.001, VENTURE.001.94, 35% Contracts with a 7 year and VENTURE.005. surrender charge and yearly step-up death benefit - ------------------------------------------------------------------------------------------------------------- CATEGORY F - Group All certificates with form number VENTURE.003. 35% Contracts with a 7 year surrender charge and yearly step-up death benefit - -------------------------------------------------------------------------------------------------------------
25 28
PAINEWEBBER AFFILIATES TAX ID NUMBER ---------------------- ------------- PWJC Agency, Inc. 51-0120742 PWJC Sales Agency 13-2769203 PWJC Insurance Agency Massachusetts 04-2535723 PWJC Insurance Sales Arizona 13-3103027 PWJC Agency Illinois 13-3117185 PWJC Insurance Agency Oklahoma 73-1065402 PWJC Insurance Sales Wyoming 63-0242350 PWJC Insurance Sales Montana, Inc. 81-0368992 PW Insurance Agency of Ohio 13-3432079 PW Insurance Agency Arkansas 13-3432081 PWJC Insurance Agency Texas 74-1976248 Rotan Mosle Insurance Agency, Inc 74-181-3848
"Net liability," as used in this Agreement, means the Ceding Company's liability on the annuities reinsured hereunder, less amounts recoverable from other reinsurance. 26 29 SCHEDULE B QUARTERLY REPORT OF ACTIVITY AND SETTLEMENTS FROM CEDING COMPANY TO REINSURER Accounting Period: ________________ Calendar Year: ____________________ Date Report Completed: ____________ 1. Reinsurance Premiums (Article II) ________ 2. Benefit Payments (Article IV) a. Claims ________ b. Cash Surrender Values ________ c. Partial Withdrawals ________ d. Annuity Benefits ________ Benefit Payments = a + b + c + d ________ 3. Modified Coinsurance Reserve Adjustment (Article V) a. Modco Reserve end of current Accounting Period ________ b. Modco Reserve end of preceding Accounting Period ________ c. Equals a - b ________ d. Modco Reserve Investment Credit (Schedule C) ________ Modified Coinsurance Reserve Adjustment = c - d ________ 4. Allowance for Expenses and Death Benefit Guarantees (Article III) ________ 5. Transfers Involving the Fixed Account (Article VI) a. Quota share of transfers from Fixed Account to Separate Account dring the current Accounting Period (paragraph 1) ________ b. Quota share of transfers from Separate Account to Fixed Account dring the current Accounting Period (paragraph 2) ________ Transfers Involving the Fixed Account = a - b _______ 6. Adjustment for Transfers Involving the Fixed Account (Article VI) a. Adjustment for transfers from the Fixed Account to the Separate Account (paragraph 3) ________ b. Adjustment for transfers from the Separate Account to the Fixed Account (paragraph 4) ________ Adjustment for Transfers Involving the Fixed Account = a - b ________ 7. Adjustment for Annuity Benefits (Article IV, paragraph 6) ________ 8. Adjustment for Internal Replacements (Article VIII, paragraph 5) a. Quota share of replaced policy account value in Separate Account _________ b. Adjustment for replaced reinsured policy _________ c. Quota share of new policy account value in Separate Account _________ d. Adjustment for new reinsured policy _________ Adjustment for Internal Replacements = (a-b-c+d) ________ 9. Cash Settlement = 1 -2 -3 - 4 + 5 - 6 + 7 - 8 ========
27 30 SUPPLEMENTAL INFORMATION
TOTAL VARIABLE NUMBER ANNUITY TOTAL PREMIUM RECEIVED DURING OF FUND FUND PERIOD ANNUITIES VALUE VALUE QUALIFIED NON-QUALIFIED ------------------------------- ------------------------- Beginning of Period _____ _____ _____ ________ ________ + NewIssues _____ _____ _____ - Terminations _____ _____ _____ End of Period ===== ===== =====
NUMBER OF VENTURE VARIABLE VARIABLE ANNUITIES ACCOUNT RESERVE ------------------ --------------- Beginning of Period ________________ ______________ + New Issues ________________ ______________ - Terminations ________________ ______________ End of Period ================ ==============
ALLOWANCE FOR COMMISSION AND EXPENSE (Article III) a. quota share of premium taxes paid on annuities reinsured hereunder ________ b. quota share of commissions paid on annuities reinsured hereunder ________ c. $14.60 x quota share of Venture annuities reinsured hereunder ________ d. Number of Venture annuities reinsured hereunder ________ e. $112.50 x quota share of Venture annuities reinsured hereunder ________ f. Number of Venture annuities issues during the current Accounting Period ________ g. 0.0036 ________ h. Reinsurance Premiums received from non-qualified contracts ________ i. .0005125 x quota share of the account values at the end of the Accounting Period on annuities reinsured hereunder ________ j. LIBOR Rate / 4 ________ k. Difference between quota share of account value, and Modified Coinsurance Reserve at end of the Accounting Period on annuities reinsured hereunder ________ l. .0002 x quota share of the account values at the end of the Accounting Period on Category A & C annuities ________ m. .00045 x quota share of the account values at the end of the Accounting Period on Category B, D, E & F annuities ________ n. Commission and Expense Allowance = a+b+(c x d)+(e x f)+(g x h)+i + j + k + l + m ========
28 31 DATA FOR CALCULATING ADJUSTMENT FOR TRANSFERS INVOLVING THE FIXED ACCOUNT VENTURE ------------------------------------------------------------------- TRANSFERS ADJUSTMENT FOR ADJUSTMENT FOR TO FIXED TRANSFERS TO TRANSFER FROM TRANSFERS FROM DURATION ACCOUNT FIXED ACCOUNT FIXED ACCOUNT FIXED ACCOUNT - ---------------------------------------- ---------------------------------- 1 ------------------------------ ---------------------------------- 2 ------------------------------ ---------------------------------- 3 ------------------------------ ---------------------------------- 4 ------------------------------ ---------------------------------- 5 ------------------------------ ---------------------------------- 6 ------------------------------ ---------------------------------- 7 ------------------------------ ---------------------------------- 8+ ------------------------------ ---------------------------------- DATA FOR CALCULATING ADJUSTMENT FOR INTERNAL REPLACEMENTS VENTURE ------------------------------------------------------------------- REINSURED REINSURED SEPARATE SEPARATE ACCOUNT VALUE ACCOUNT OF REPLACED ADJUSTMENT FOR VALUE OF NEW ADJUSTMENT DURATION POLICY REPLACED POLICY POLICY NEW POLICY - --------------------------------------------- ----------------------------- 1 ----------------------------------- ----------------------------- 2 ----------------------------------- ----------------------------- 3 ----------------------------------- ----------------------------- 4 ----------------------------------- ----------------------------- 5 ----------------------------------- ----------------------------- 6 ----------------------------------- ----------------------------- 7 ----------------------------------- ----------------------------- 8+ ----------------------------------- ----------------------------- 29 32 DATA FOR CALCULATING ADJUSTMENT FOR ANNUITY BENEFITS
(1) (2) (3) ACCOUNT VALUE ACCOUNT VALUE ACCOUNT VALUE (4) (5) BEGINNING OF END OF ANNUITIZED ANNUITIZATION EXCESS ACCOUNTING ACCOUNTING CURRENT RATE ANNUITIZATION RATE DURATION PERIOD PERIOD PERIOD (3)/{[(1)+(2)]/2} MAX{0,(4)-.0025} - -------------------------------------------------------------------------------------------------------------------------- 1 2 3 4 5 6+
(6) (9) ACCT VALUE (7) (8) ANNUITY BENEFITS ANNUITIZED (6)x{(5)/ ADJUSTMENT ADJUSTMENT DURATION CURRENT PERIOD [(5)+.0025)]} FACTOR (7)X(8) - -------------------------------------------------------------------------------------------------------------------------- 1 .06 2 .05 3 .04 4 .03 5 .02 6+ .01
30 33 SUPPLEMENTAL DATA PROVIDED BY THE CEDING COMPANY A. Reinsurer's portion of M & E charges collected during the current accounting period on the policies reinsured hereunder. B. Reinsurer's portion of Administrative Charges collected during the current accounting period on the policies reinsured hereunder. C. Reinsurer's portion of Surrender Charges collected during the current accounting period on the policies reinsured hereunder. D. Reinsurer's portion of First Year Commissions paid during the current accounting period on the policies reinsured hereunder. E. Reinsurer's portion of Renewal Commissions paid during the current accounting period on the policies reinsured hereunder. 31 34 SCHEDULE C MODIFIED COINSURANCE RESERVE INVESTMENT CREDIT MODIFIED COINSURANCE RESERVE INVESTMENT CREDIT. The Modified Coinsurance Reserve Investment Credit is equal to the portion of the sum of all accrued investment income and capital gains and losses, realized and unrealized, on the mutual funds underlying the Ceding Company's Separate Account for the current Accounting Period which corresponds to the portion of the variable annuities reinsured hereunder. For Venture Annuities reinsured hereunder, the Modified Coinsurance Reserve Investment Credit will be adjusted for income taxes or changes in any provision for taxes. It will be reduced for investment management fees in excess of 45 basis points and any other fund level charges. It will not be reduced for mortality and expense risk charges or administrative charges as defined in the annuity contracts. 32 35 SCHEDULE D COMMISSION SCHEDULES SCHEDULE 1 Commission as percent of premium payable in all policy durations 7.0% Commission as percent of account value payable in all durations 0.28% SCHEDULE 2 Commission as percent of premium payable in all policy durations 8.0% Commission as percent of account value payable in all durations 0.03% 33 EX-99.B10 7 CONSENT OF COOPERS & LYBRAND 1 EXHIBIT (b)(10) 2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in Post Effective Amendment No. 2 under the Securities Act of 1933 to this Registration Statement on Form N-4 (File No. 33-76162 ) in Part B of the Registration Statement of (i) our report dated February 23, 1996, on our audit of the financial statements of North American Security Life Insurance Company and (ii) our report dated February 23, 1996, on our audit of the financial statements of NASL Variable Account. We also consent to the reference to our firm under the caption "Independent Accountants." Coopers & Lybrand L.L.P. Boston, Massachusetts February 28, 1996 EX-99.B13 8 SCHEDULE OF COMPUTATION 1 EXHIBIT (b)(13) 2 EXHIBIT 13 TOTAL RATE OF RETURN CALCULATION FORMULA P(1 + T)(to the nth power) = ERV P = A hypothetical payment of $1,000 T = Average annual total return n = Number of years T = (ERV/P)(to the power of one divided by n) - 1 EX-27 9 FINANCIAL DATA SCHEDULE
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS FROM NASL VARIABLE ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000753892 NASL VARIABLE ACCOUNT 1 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 4,294,423,426 4,897,081,600 0 0 0 4,897,081,600 2,079,887 0 4,895,001,713 4,897,081,600 0 0 342,457,710 302,110,785 0 0 0 0 0 4,897,081,600 148,427,533 0 0 (62,120,336) 89,001,975 96,385,758 579,817,560 765,205,293 0 0 0 0 91,313,079 24,456,322 158,116,326 1,241,543,327 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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