485BPOS 1 a2183872z485bpos.txt 485BPOS File Nos. 33-44830 811-6293 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Post-Effective Amendment No. 28 REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 82 SEPARATE ACCOUNT VA-K OF COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (Exact Name of Registrant) COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (Name of Depositor) 132 Turnpike Road, Suite 210 Southborough, Massachusetts 01772 Telephone: (508) 460-2400 (Address of Depositor's Principal Executive Office Jon-Luc Dupuy, Vice President, Assistant General Counsel and Assistant Corporate Secretary Commonwealth Annuity and Life Insurance Company 132 Turnpike Road, Suite 210 Southborough, Massachusetts 01772 Telephone: (508) 460-2408 (Name and Address of Agent for Service of Process) It is proposed that this filing will become effective: |_| immediately upon filing pursuant to Paragraph (b) of Rule 485 |X| on April 30, 2008 pursuant to Paragraph (b) of Rule 485 |_| 60 days after filing pursuant to Paragraph (a) (1) of Rule 485 |_| on (date) pursuant to Paragraph (a) (1) of Rule 485 |_| this post-effective amendment designates a new effective date for a previously filed post-effective amendment VARIABLE ANNUITY CONTRACTS Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("the 1940 Act"), Registrant has registered an indefinite amount of its securities under the Securities Act of 1933 ("the 1933 Act"). The Rule 24f-2 Notice for the issuer's fiscal year ended December 31, 2007 was filed on or before March 30, 2008. CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF ITEMS CALLED FOR BY FORM N-4 FORM N-4 ITEM NO. CAPTION IN PROSPECTUS ----------------- ------------------------------------------------------------ 1 Cover Page 2 Special Terms 3 Prospectus A: Summary of Contract Features; Summary of Fees and Expenses Prospectus B: Summary of Policy Features; Summary of Fees and Expenses 4 Condensed Financial Information; Performance Information 5 Description of the Companies, the Variable Accounts, and the Underling Investment Companies 6 Charges and Deductions 7 Description of the Contract 8 Electing the Form of Annuity and the Annuity Date; Description of Variable Annuity Payout Options; Annuity Benefit Payments 9 Death Benefit 10 Payments; Computation of Values 11 Surrender; Withdrawals; Charge for Surrender and Withdrawal; Withdrawal without Surrender Charge; Texas Optional Retirement Program 12 Federal Tax Considerations 13 Legal Matters 14 Statement of Additional Information - Table of Contents 15 Cover Page 16 Table of Contents 17 General Information and History 18 Services FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION (CONT'D) ----------------- ------------------------------------------------------------ 19 Underwriters 20 Underwriters 21 Performance Information 22 Annuity Benefit Payments 23 Financial Statements COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY SOUTHBOROUGH, MASSACHUSETTS This Prospectus provides important information about the Delaware Medallion III variable annuity contracts issued by Commonwealth Annuity and Life Insurance Company ("Commonwealth Annuity") (in all jurisdictions except Hawaii and New York). The contract is a flexible payment tax-deferred combination variable and fixed annuity offered on an individual basis. As of the date of this Prospectus, the Company has ceased issuing new contracts except in connection with certain preexisting contractual plans and programs. PLEASE READ THIS PROSPECTUS CAREFULLY BEFORE INVESTING AND KEEP IT FOR FUTURE REFERENCE. A Statement of Additional Information ("SAI") dated April 30, 2008 containing more information about this annuity is on file with the Securities and Exchange Commission and is incorporated by reference into this Prospectus. A copy may be obtained free of charge by calling Annuity Client Services at 1-800-533-2124. The Table of Contents of the SAI is listed on page 3 of this Prospectus. This Prospectus and the SAI can also be obtained from the Securities and Exchange Commission's website (http://www.sec.gov). The Variable Account, known as Separate Account VA-K, is subdivided into Sub-Accounts. Each Sub-Account offered as an investment option under this contract invests exclusively in shares of one of the following funds: DELAWARE VIP TRUST Delaware VIP Balanced Series Delaware VIP Capital Reserves Series Delaware VIP Cash Reserve Series Delaware VIP Emerging Markets Series Delaware VIP Growth Opportunities Series Delaware VIP High Yield Series Delaware VIP International Value Equity Series Delaware VIP REIT Series Delaware VIP Select Growth Series Delaware VIP Small Cap Value Series Delaware VIP Trend Series Delaware VIP U.S. Growth Series Delaware VIP Value Series AIM VARIABLE INSURANCE FUNDS (SERIES I SHARES) AIM V.I. Capital Appreciation Fund AIM V.I. Core Equity Fund AIM V.I. High Yield Fund AIM V.I. International Growth Fund THE ALGER AMERICAN FUND (CLASS O) Alger American Capital Appreciation Portfolio Alger American MidCap Growth Portfolio Alger American SmallCap Growth Portfolio ALLIANCEBERNSTEIN VARIABLE PRODUCTS SERIES FUND, INC. (CLASS B) AllianceBernstein VPS Global Technology Portfolio AllianceBernstein VPS Growth and Income Portfolio AllianceBernstein VPS Growth Portfolio AllianceBernstein VPS Large Cap Growth Portfolio FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST (CLASS 2) FT VIP Franklin Small-Mid Cap Growth Securities Fund FT VIP Mutual Shares Securities Fund FT VIP Templeton Foreign Securities Fund FT VIP Templeton Growth Securities Fund PIONEER VARIABLE CONTRACTS TRUST (CLASS II) Pioneer Emerging Markets VCT Portfolio Pioneer Mid Cap Value VCT Portfolio The Fixed Account, which is part of the Company's General Account, is an investment option that pays an interest rate guaranteed for one year from the time a payment is received. Another investment option, the Guarantee Period Accounts, offers fixed rates of interest for specified periods ranging from 2 to 10 years. A Market Value Adjustment is applied to payments removed from a Guarantee Period Account before the end of the specified period. The Market Value Adjustment may be positive or negative. Payments allocated to a Guarantee Period Account GPA are held in the Company's Separate Account GPA (except in California, where they are held in the General Account). THIS ANNUITY IS NOT A BANK DEPOSIT OR OBLIGATION; IS NOT FEDERALLY INSURED; AND IS NOT ENDORSED BY ANY BANK OR GOVERNMENTAL AGENCY. ANNUITIES INVOLVE RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED THAT THE INFORMATION IN THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. DATE APRIL 30, 2008 2 TABLE OF CONTENTS SPECIAL TERMS 4 SUMMARY OF FEES AND EXPENSES 6 SUMMARY OF CONTRACT FEATURES 10 DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND THE UNDERLYING FUNDS 14 INVESTMENT OBJECTIVES AND POLICIES 15 PERFORMANCE INFORMATION 18 DESCRIPTION OF THE CONTRACT 20 DISRUPTIVE TRADING 20 PAYMENTS 21 RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY 22 RIGHT TO CANCEL ALL OTHER CONTRACTS 22 TELEPHONE TRANSACTION PRIVILEGE 22 TRANSFER PRIVILEGE 22 AUTOMATIC TRANSFERS AND AUTOMATIC ACCOUNT REBALANCING OPTIONS 23 SURRENDER 24 WITHDRAWALS 24 DEATH BENEFIT 26 THE SPOUSE OF THE OWNER AS BENEFICIARY 27 ASSIGNMENT 27 ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE 27 DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS 28 ANNUITY BENEFIT PAYMENTS 29 NORRIS DECISION 30 COMPUTATION OF VALUES 30 CHARGES AND DEDUCTIONS 32 VARIABLE ACCOUNT DEDUCTIONS 32 CONTRACT FEE 32 OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER CHARGE 33 PREMIUM TAXES 33 SURRENDER CHARGE 33 WAIVER OF SURRENDER CHARGE(S) AND ADDITIONAL AMOUNTS CREDITED 34 TRANSFER CHARGE 36 GUARANTEE PERIOD ACCOUNTS 37 FEDERAL TAX CONSIDERATIONS 39 GENERAL 39 QUALIFIED AND NON-QUALIFIED CONTRACTS 40 TAXATION OF THE CONTRACT 40 TAX WITHHOLDING 43 OTHER TAX ISSUES 43 PROVISIONS APPLICABLE ONLY TO TAX QUALIFIED PLANS 44 STATEMENTS AND REPORTS 45 LOANS (QUALIFIED CONTRACTS ONLY) 45 ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS 46 CHANGES TO COMPLY WITH LAW AND AMENDMENTS 47 VOTING RIGHTS 47 DISTRIBUTION 47 LEGAL MATTERS 48 FURTHER INFORMATION 48 3 APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT A-1 APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT B-1 APPENDIX C -- THE DEATH BENEFIT C-1 APPENDIX D -- CONDENSED FINANCIAL INFORMATION D-1 STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS GENERAL INFORMATION AND HISTORY 3 TAXATION OF THE CONTRACT, THE SEPARATE ACCOUNT AND THE COMPANY 4 SERVICES 4 UNDERWRITERS 5 ANNUITY BENEFIT PAYMENTS AND ACCUMULATION UNIT CALCULATION 6 ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM 7 DISCONTINUATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER 8 PERFORMANCE INFORMATION 10 FINANCIAL STATEMENTS F-1 4 SPECIAL TERMS ACCUMULATED VALUE: the total value of all Accumulation Units in the Sub-Accounts plus the value of all accumulations in the Fixed Account and Guarantee Period Accounts credited to the Contract on any date before the Annuity Date. ACCUMULATION UNIT: a unit of measure used to calculate the value of a Sub-Account before annuity benefit payments begin. ANNUITANT: the person designated in the Contract upon whose life annuity benefit payments are to be made. ANNUITY DATE: the date on which annuity benefit payments begin. This date may not be later than the first day of the month before the Annuitant's 90th birthday. ANNUITY UNIT: a unit of measure used to calculate the value of the periodic annuity benefit payments under the Contract. COMPANY: unless otherwise specified, any reference to the "Company" shall refer exclusively to Commonwealth Annuity and Life Insurance Company. CUMULATIVE EARNINGS: the Accumulated Value reduced by total payments not previously withdrawn. FIXED ACCOUNT: An investment option under the Contract that guarantees principal and a fixed interest rate, and which is part of the Company's General Account. FIXED ANNUITY PAYOUT: an annuity in the payout phase providing for annuity benefit payments which remain fixed in amount throughout the annuity benefit payment period selected. GENERAL ACCOUNT: all the assets of the Company other than those held in a separate account. GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is credited. GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest Rate for a specified Guarantee Period. GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily compounding, credited to a Guarantee Period Account. MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any portion of a Guarantee Period Account is withdrawn or transferred prior to the end of its Guarantee Period. OWNER (YOU): the person, persons or entity entitled to exercise the rights and privileges under the Contract. Joint Owners are permitted if one of the two is the Annuitant. SERVICE OFFICE: Security Benefit Life Insurance Company and its affiliates (collectively, "Security Benefit") provide administrative, accounting, and other services to the Company. The principal administrative offices of Security Benefit are located at One Security Benefit Place Topeka, KS 66675, Telephone 1-800-533-2124. SUB-ACCOUNT: a subdivision of the Variable Account investing exclusively in the shares of a corresponding Underlying Fund. SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after application of any applicable Contract fee, surrender charge, rider charge and Market Value Adjustment. UNDERLYING FUNDS (FUNDS): an investment portfolio of Delaware VIP Trust ("Delaware VIP"), AIM Variable Insurance Funds ("AIM"), The Alger American Fund ("Alger"), AllianceBernstein Variable Products Series Fund, Inc. ("AllianceBernstein VPS"), Franklin Templeton Variable Insurance Products Trust ("FT VIP"), and Pioneer Variable Contracts Trust ("Pioneer VCT"). VALUATION DATE: a day on which the net asset value of the shares of any of the Underlying Funds is determined and unit values of the Sub-Accounts are determined. Valuation Dates currently occur on each day on which the New York Stock Exchange is open for trading and, on such other days (other than a day during which no payment, withdrawal or surrender of a Contract was received) when there is a sufficient degree of trading in an 5 Underlying Fund's portfolio securities such that the current unit value of the Sub-Accounts may be affected materially. VALUATION PERIOD: The time span between the close of trading on the New York Stock Exchange from one Valuation Date to the next. VARIABLE ACCOUNT: Separate Account VA-K, one of the Company's separate accounts, consisting of assets segregated from other assets of the Company. The investment performance of the assets of the Variable Account is determined separately from the other assets of the Company, and are not chargeable with liabilities arising out of any other business which the Company may conduct. VARIABLE ANNUITY PAYOUT: an annuity in the payout phase providing for payments varying in amount in accordance with the investment experience of certain Underlying Funds. 6 SUMMARY OF FEES AND EXPENSES There are certain fees and expenses that you will incur directly or indirectly under the Delaware Medallion III Contract. The following tables describe the fees and expenses that you will pay when buying, owning and surrendering the contract. The purpose of the tables is to help you understand these various charges. TABLE I OWNER TRANSACTION EXPENSES TABLE I DESCRIBES THE FEES AND EXPENSES THAT YOU WILL PAY AT THE TIME THAT YOU BUY OR SURRENDER THE CONTRACT AND WHEN YOU TRANSFER VALUES AMONG THE INVESTMENT OPTIONS. (NOTE: THE COMPANY DOES NOT CHARGE A TRANSACTION CHARGE WHEN YOU PURCHASE THE CONTRACT AND DOES NOT CURRENTLY CHARGE WHEN YOU TRANSFER AMONG INVESTMENT OPTIONS.) STATE PREMIUM TAXES ARE APPLICABLE IN SOME STATES AND ARE DEDUCTED AS DESCRIBED IN "PREMIUM TAXES" UNDER CHARGES AND DEDUCTIONS. MAXIMUM CHARGE SURRENDER CHARGE(1): (as a percentage of payments withdrawn) 7.0% TRANSFER CHARGE(2): $0 on the first 12 transfers in a Contract year. Up to $25 for subsequent transfers (1) During the accumulation phase, this charge may be assessed upon surrender, withdrawal or annuitization under any commutable period certain option or a noncommutable fixed period certain option of less than ten years. The charge is a percentage ranging from 7.0% to 1.0% of payments withdrawn (in excess of any amount that is free of surrender charge) within the indicated time period. YEARS MEASURED FROM DATE OF PAYMENT CHARGE --------------------------- ------- Less than 1 7.0% Less than 2 6.0% Less than 3 5.0% Less than 4 4.0% Less than 5 3.0% Less than 6 2.0% Less than 7 1.0% Thereafter 0.0% (2) The Company currently does not charge for processing transfers and guarantees that the first 12 transfers in a Contract year will not be subject to a transfer charge. For each subsequent transfer, the Company reserves the right to assess a charge, guaranteed never to exceed $25, to reimburse the Company for the costs of processing the transfer. 7 TABLE II PERIODIC FEES AND EXPENSES OTHER THAN UNDERLYING FUND EXPENSES THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU WILL PAY PERIODICALLY DURING THE TIME THAT YOU OWN THE CONTRACT, NOT INCLUDING THE FEES AND EXPENSES OF EACH UNDERLYING FUND: ANNUAL CONTRACT FEE(1): $ 30 ANNUAL VARIABLE SUB-ACCOUNT EXPENSES: (on an annual basis as percentage of average daily net assets) Mortality and Expense Risk Charge: 1.25% Administrative Expense Charge: 0.15% ----- Total Annual Expenses: 1.40% OPTIONAL RIDER CHARGES: The charge on an annual basis as a percentage of the Accumulated Value is: Optional Minimum Guaranteed Annuity Payout (M-GAP) Rider with a ten-year waiting period:(2) 0.25% Optional Minimum Guaranteed Annuity Payout (M-GAP) Rider with a fifteen-year waiting period:(2) 0.15% (1) During the accumulation phase, the fee is deducted annually and upon surrender when Accumulated Value is less than $50,000. The fee is waived for Contracts issued to and maintained by the trustee of a 401(k) plan. (2) If you elected one of the M-GAP riders prior to their discontinuance on 1/31/02, 1/12th of the annual charge is deducted pro-rata on a monthly basis at the end of each month and, if applicable, at termination. For more information about the M-GAP Rider, see "DISCONTINUATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER" in the SAI. 8 TABLE III TOTAL ANNUAL OPERATING EXPENSES OF THE UNDERLYING FUNDS TABLE III SHOWS THE MINIMUM AND MAXIMUM TOTAL OPERATING EXPENSES CHARGED BY THE UNDERLYING FUNDS THAT YOU MAY PAY PERIODICALLY DURING THE TIME THAT YOU OWN THE CONTRACT. MORE DETAIL CONCERNING EACH UNDERLYING FUND'S FEES AND EXPENSES, INCLUDING INFORMATION ABOUT ANY EXPENSE CAPS OR REIMBURSEMENTS, IS CONTAINED IN THE PROSPECTUS FOR THE UNDERLYING FUND. TOTAL ANNUAL FUND OPERATING EXPENSES MINIMUM MAXIMUM ------------------------------------ ---------------- ---------------------- Expenses that are deducted from Annual charge of Annual charge of 1.64% Underlying Fund assets, including 0.64% of average of average daily net management fees, distribution and/or daily net assets assets service (12b-1) fees and other expenses. The table above shows the minimum and maximum expenses of the Funds during 2007. The levels of fees and expenses vary amount the Underlying Funds, and may vary from year to year. The Underlying Fund information is based on information provided by the Underlying Funds and is not independently verified by the Company. EXAMPLES THE FOLLOWING EXAMPLES ARE INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE CONTRACT WITH THE COST OF INVESTING IN OTHER VARIABLE ANNUITY CONTRACTS. THESE COSTS INCLUDE CONTRACT OWNER TRANSACTION EXPENSES, CONTRACT FEES, SEPARATE ACCOUNT ANNUAL EXPENSES, AND UNDERLYING FUND FEES AND EXPENSES. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. MAXIMUM EXPENSE EXAMPLE The following example assumes that you invest $10,000 in the Contract for the time periods indicated and that your investment has a 5% return each year. The example also assumes the maximum fees and expenses of any of the Underlying Funds and assumes that these fees and expenses remain the same in each of the 1, 3, 5, and 10-year intervals. Finally, the example assumes that you have chosen the optional rider with the maximum possible charges, which would be the Minimum Guaranteed Annuity Payout (M-GAP) Rider with a ten-year waiting period at a charge of 0.25% annually. Although your actual costs may be higher or lower, based on these assumptions your costs would be: (1) If, at the end of the applicable time period, you surrender your Contract or annuitize under any commutable period certain option or a noncommutable fixed period certain option of less than ten years: 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- Fund with the maximum total operating expenses $940 $1,468 $2,008 $3,613 (2) If you do NOT surrender your Contract or if you annuitize at the end of the applicable time period under a life option or a noncommutable fixed period certain option of ten years or longer: 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- Fund with the maximum total operating expenses $335 $1,021 $1,731 $3,613 9 MINIMUM EXPENSE EXAMPLE The following example assumes that you invest $10,000 in the Contract for the time periods indicated and that your investment has a 5% return each year. The example also assumes the minimum fees and expenses of any of the Underlying Funds and assumes that these fees and expenses remain the same in each of the 1, 3, 5, and 10-year intervals. It also assumes that you have not chosen an optional rider. Although your actual costs may be higher or lower, based on these assumptions your costs would be: (1) If, at the end of the applicable time period, you surrender your Contract or annuitize under any commutable period certain option or a noncommutable fixed period certain option of less than ten years: 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- Fund with the minimum total operating expenses $822 $1,112 $1,408 $2,400 (2) If you do NOT surrender your Contract or if you annuitize at the end of the applicable time period under a life option or a noncommutable fixed period certain option of ten years or longer: 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- Fund with the minimum total operating expenses $210 $649 $1,114 $2,400 10 SUMMARY OF CONTRACT FEATURES WHAT IS THE DELAWARE MEDALLION III VARIABLE ANNUITY? The Delaware Medallion III variable annuity contract ("Contract") is an insurance contract designed to help you, the Owner, accumulate assets for your retirement or other important financial goals on a tax-deferred basis. The Contract combines the concept of professional money management with the attributes of an annuity contract. Features available through the Contract include: - a customized investment portfolio; - experienced professional investment advisers; - tax deferral on earnings; - guarantees that can protect your family during the accumulation phase; and - income payments that you can receive for life. WHAT HAPPENS IN THE ACCUMULATION PHASE? The Contract has two phases: an accumulation phase and, if you choose to annuitize, an annuity payout phase. During the accumulation phase, you may allocate payments among the available Sub-Accounts investing in the Underlying Funds (you may utilize up to seventeen Sub-Accounts at any one time, in addition to the Delaware VIP Cash Reserve Series), to the Guarantee Period Accounts, and to the Fixed Account (collectively "the investment options.") You select the investment options most appropriate for your investment needs. As those needs change, you may also change your allocation without incurring any tax consequences. The Contract's Accumulated Value is based on the investment performance of the Underlying Funds and any accumulations in the Guarantee Period and Fixed Accounts. You do not pay taxes on any earnings under the Contract until you withdraw money. In addition, during the accumulation phase, the beneficiaries receive certain protections in the event of the Annuitant's death. See discussion below: WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE? WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE? During the annuity payout phase, the Annuitant can receive income based on several annuity payout options. You choose the annuity payout option and the date for annuity benefit payments to begin. You also decide whether you want variable annuity benefit payments based on the investment performance of certain Underlying Funds, fixed-amount annuity benefit payments with payment amounts guaranteed by the Company, or a combination of fixed-amount and variable annuity benefit payments. Among the payout options available during the annuity payout phase are: - periodic payments for the Annuitant's lifetime; - periodic payments for the Annuitant's life and the life of another person selected by you; - periodic payments for the Annuitant's lifetime with any remaining guaranteed payments continuing to your beneficiary for 10 years in the event that the Annuitant dies before the end of ten years; - periodic payments over a specified number of years (1 to 30) -- under the fixed version of this option you may reserve the right to convert remaining payments to a lump-sum payout by electing a "commutable" option. Variable period certain options are automatically commutable. 11 WHO ARE THE KEY PERSONS UNDER THE CONTRACT? The Contract is between you, (the "Owner"), and us, Commonwealth Annuity and Life Insurance Company. Each Contract has an Owner (or an Owner and a Joint Owner, in which case one of the two must be the Annuitant), an Annuitant and one or more beneficiaries. As Owner, you make payments, choose investment allocations and select the Annuitant and beneficiary. The Annuitant is the individual who receives annuity benefit payments under the Contract. The beneficiary is the person who receives any payment on the death of the Owner or Annuitant. HOW MUCH CAN I INVEST AND HOW OFTEN? The number and frequency of payments are flexible, subject only to a $5,000 minimum for the initial payment ($2,000 for IRA's) and a $50 minimum for any additional payments. A lower initial payment amount may be permitted where monthly payments are being forwarded directly from a financial institution. In addition, a minimum of $1,000 is always required to establish a Guarantee Period Account. WHAT ARE MY INVESTMENT CHOICES? Prior to the Annuity Date, you may allocate payments among one or more of the Sub-Accounts investing in the Underlying Funds (up to a total of seventeen may be utilized at any one time, in addition to the Delaware VIP Cash Reserve Series), the Guarantee Period Accounts, and the Fixed Account. Each Underlying Fund operates pursuant to different investment objectives, discussed below, and this range of investment options enables you to allocate your money among the Funds to meet your particular investment needs. For a more detailed description of the Underlying Funds, see INVESTMENT OBJECTIVES AND POLICIES. Assets supporting the guarantees under the Guarantee Period Accounts are held in the Company's Separate Account GPA, a non-unitized insulated separate account, except in California where assets are held in the Company's General Account. Values and benefits calculated on the basis of Guarantee Period Account allocations, however, are obligations of the Company's General Account. Amounts allocated to a Guarantee Period Account earn a Guaranteed Interest Rate declared by the Company. The level of the Guaranteed Interest Rate depends on the number of years of the Guarantee Period selected. The Company currently offers nine Guarantee Periods ranging from two to ten years in duration. Once declared, the Guaranteed Interest Rate will not change during the duration of the Guarantee Period. If amounts allocated to a Guarantee Period Account are transferred, surrendered or applied to any annuity option at any time other than the day following the last day of the applicable Guarantee Period, a Market Value Adjustment will apply that may increase or decrease the account's value; however, this adjustment will never be applied against your principal. In addition, earnings in the Guarantee Period Accounts after application of the Market Value Adjustment will not be less than an effective annual rate of 3%. For more information about the Guarantee Period Accounts and the Market Value Adjustment, see GUARANTEE PERIOD ACCOUNTS. THE GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN ALL STATES. The Fixed Account is part of the General Account which consists of all the Company's assets other than those allocated to the Variable Account and any other separate account. Allocations to the Fixed Account are guaranteed as to principal and a minimum rate of interest. Additional excess interest may be declared periodically at the Company's discretion. Furthermore, the initial rate in effect on the date an amount is allocated to the Fixed Account will be guaranteed for one year from that date. For more information about the Fixed Account, see APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT. 12 CAN I MAKE TRANSFERS AMONG THE INVESTMENT OPTIONS? Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts investing in the Underlying Funds, the Guarantee Period Accounts, and the Fixed Account. Transfers may be made to and among all of the available Sub-Accounts as long as no more than seventeen Sub-Accounts, in addition to the Delaware VIP Cash Reserve Series, are utilized at any one time. You will incur no current taxes on transfers while your money remains in the Contract. The first 12 transfers in a Contract year are guaranteed to be free of a transfer charge. For each subsequent transfer in the same or a subsequent Contract year, the Company does not currently charge but reserves the right to assess a processing charge guaranteed never to exceed $25. See "TRANSFER PRIVILEGE" under DESCRIPTION OF THE CONTRACT. You may also elect at no additional charge Automatic Transfers (Dollar Cost Averaging) to gradually move money to one or more of the Underlying Funds or Automatic Account Rebalancing to ensure assets remain allocated according to your designated percentage allocation mix. WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS? Before the annuity payout phase begins, you may surrender your Contract or make withdrawals any time. A 10% federal tax penalty may apply on all amounts deemed to be earnings if you are under age 59 1/2. Each calendar year, you can withdraw without a surrender charge the greatest of 100% of Cumulative Earnings, 15% of the Contract's Accumulated Value or, if you are both an Owner and the Annuitant, an amount based on your life expectancy. (Similarly, no surrender charge will apply if an amount is withdrawn based on the Annuitant's life expectancy and the Owner is a trust or other non-natural person.) Additional amounts may be withdrawn at any time but payments that have not been invested in the Contract for more than seven years may be subject to a surrender charge. (A Market Value Adjustment may apply to any withdrawal made from a Guarantee Period Account prior to the expiration of the Guarantee Period.) In addition, you may withdraw all or a portion of your money without surrender charge if, after the Contract is issued and before age 65, you become disabled. Also, except in New Jersey where not permitted by state law, you may withdraw money without a surrender charge if, after the contract is issued, you are admitted to a medical care facility or diagnosed with a fatal illness. For details and restrictions, see "Reduction or Elimination of Surrender Charge and Additional Amounts Credited" in "SURRENDER CHARGE" under CHARGES AND DEDUCTIONS. 13 WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE? If the Annuitant, Owner or Joint Owner should die before the Annuity Date, a death benefit will be paid to the beneficiary. Upon the death of the Annuitant (or an Owner who is also an Annuitant), the death benefit is equal to the greatest of: - The Accumulated Value on the Valuation Date that the Company receives proof of death and all necessary claim paperwork, increased by any positive Market Value Adjustment; - Gross payments, with interest compounding daily at an effective annual yield of 5%, starting on the date each payment is applied, and continuing throughout your investments' entire accumulation phase, decreased proportionately to reflect withdrawals; or - The death benefit that would have been payable on the most recent Contract anniversary, increased for subsequent payments and decreased proportionately for subsequent withdrawals. This guaranteed death benefit works in the following way assuming no withdrawals are made. On the first anniversary, the death benefit will be equal to the greater of (a) the Accumulated Value (increased by any positive Market Value Adjustment) or (b) gross payments compounded daily at an effective annual yield of 5%. The higher of (a) or (b) will then be locked in until the second anniversary, at which time the death benefit will be equal to the greatest of (a) the Contract's then current Accumulated Value increased by any positive Market Value Adjustment; (b) gross payments compounded daily at an effective annual yield of 5% (gross payments in Hawaii and New York) or (c) the locked-in value of the death benefit at the first anniversary. The greatest of (a), (b) or (c) will be locked in until the next Contract anniversary. This calculation will then be repeated on each anniversary while the Contract remains in force and prior to the Annuity Date. As noted above, the values of (b) and (c) will be decreased proportionately if withdrawals are taken. At the death of an Owner who is not also the Annuitant during the accumulation phase, the death benefit will equal the Accumulated Value on the Valuation Date the Company receives proof of death increased by any positive Market Value Adjustment. (If the Annuitant dies after the Annuity Date but before all guaranteed annuity benefit payments have been made, the remaining payments will be paid to the beneficiary at least as rapidly as under the annuity option in effect. See "DEATH BENEFIT.") WHAT CHARGES WILL I INCUR UNDER MY CONTRACT? If the Accumulated Value on a Contract anniversary or upon surrender is less than $50,000, the Company will deduct a $30 Contract fee from the Contract. The Contract fee is currently waived for Contracts issued to and maintained by a trustee of a 401(k) plan. Should you decide to surrender the Contract, make withdrawals, or receive payments under certain annuity payout options, you may be subject to a surrender charge. If applicable, this charge will be between 1% and 7% of payments withdrawn, based on when the payments were originally made. A deduction for state and local premium taxes, if any, may be made as described in "PREMIUM TAXES" under CHARGES AND DEDUCTIONS. The Company will deduct, on a daily basis, an annual Mortality and Expense Risk Charge and Administrative Expense Charge equal to 1.25% and 0.15%, respectively, of the average daily net assets invested in each Underlying Fund. The Funds will incur certain management fees and expenses which are more fully described in the prospectuses of the Underlying Funds which accompany this Prospectus. These charges vary among the Underlying Funds and may change from year to year. CAN I EXAMINE THE CONTRACT? Yes. The Contract will be delivered to you after your purchase. If you return the Contract to the Company within ten days of receipt, the Contract will be canceled. (There may be a longer period in certain states; see the "Right to Examine" provision on the cover of the Contract.) If you cancel the Contract, you will receive a 14 refund of any amounts allocated to the Fixed and Guarantee Period Accounts and the Accumulated Value of any amounts allocated to the Sub-Accounts (plus any fees or charges that may have been deducted.) However, if state law requires or if the Contract was issued as an Individual Retirement Annuity ("IRA"), you will generally receive a refund of your entire payment. (In certain states this refund may be the greater of (1) your payment or (2) the amounts allocated to the Fixed and Guarantee Period Accounts plus the Accumulated Value of amounts in the Sub-Accounts, plus any fees or charges previously deducted.) See "RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY," and "RIGHT TO CANCEL ALL OTHER CONTRACTS" under DESCRIPTION OF THE CONTRACT. CAN I MAKE FUTURE CHANGES UNDER THE CONTRACT? You can make several changes after receiving the Contract: - You may assign your ownership to someone else, except under certain qualified plans. - You may change the beneficiary, unless you have designated a beneficiary irrevocably. - You may change your allocation of payments. - You may make transfers of accumulated value among your current investments without any tax consequences. - You may cancel the Contract within ten days of delivery (or longer if required by state law). 15 DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND THE UNDERLYING FUNDS THE COMPANY. Effective September 1, 2006, Allmerica Financial Life Insurance and Annuity Company was renamed Commonwealth Annuity and Life Insurance Company and the principal office was relocated to 132 Turnpike Road, Suite 210, Southborough, MA 01772, Telephone 508-460-2400. Unless otherwise specified, any reference to the "Company" refers to Commonwealth Annuity and Life Insurance Company ("Commonwealth Annuity "). Commonwealth Annuity is a life insurance company organized under the laws of Delaware in July 1974. Prior to December 31, 2002, the Company was a wholly owned subsidiary of First Allmerica Financial Life Insurance Company ("First Allmerica"), which in turn was a direct subsidiary of The Hanover Insurance Group ("THG," formerly Allmerica Financial Corporation). Effective December 31, 2002, Commonwealth Annuity became a Massachusetts domiciled insurance company and a direct subsidiary of THG. On December 30, 2005, THG completed the closing of the sale of the Company to The Goldman Sachs Group, Inc. ("Goldman Sachs"), 85 Broad Street, New York, NY 10004. As of December 31, 2006, the Company and its subsidiaries had $10 billion in assets and $12 billion of life insurance in force. The Company is subject to the laws of the Commonwealth of Massachusetts governing insurance companies and to regulation by the Commissioner of Insurance of Massachusetts. In addition, it is subject to the insurance laws and regulations of other states and jurisdictions in which it is licensed to operate. Its Principal Office is located at 132 Turnpike Road, Suite 210, Southborough, MA 01772, Telephone 508-460-2400. THE VARIABLE ACCOUNT. The Company maintains a separate account called Separate Account VA-K (the "Variable Account"). The Variable Account was authorized by vote of the Board of Directors of the Company on November 1, 1990. The Variable Account is registered with the SEC as a unit investment trust under the 1940 Act. This registration does not involve the supervision or management of investment practices or policies of the Variable Account or the Company by the SEC. Each Sub-Account invests in a corresponding investment portfolio. The assets used to fund the variable portions of the Contract are set aside in the Sub-Accounts of the Variable Account, and are kept separate and apart from the general assets of the Company. Each Sub-Account is administered and accounted for as part of the general business of the Company. The income, capital gains or capital losses of each Sub-Account, however, are allocated to each Sub-Account, without regard to any other income, capital gains or capital losses of the Company. Obligations under the Contract are obligations of the Company. Under Delaware law, the assets of the Variable Account may not be charged with any liabilities arising out of any other business of the Company. The Company offers other variable annuity contracts investing in the Variable Account which are not discussed in this Prospectus. The Variable Account also invests in other underlying funds which are not available to the Contract described in this Prospectus. UNDERLYING FUNDS. Each Sub-Account invests in a corresponding investment portfolio ("Underlying Fund") of an open-end management investment company. The Underlying Funds available through this contract are NOT publicly traded. They are only available as variable investment options in variable life insurance policies or variable annuity contracts issued by life insurance companies or, in some cases, through participation in certain qualified pension or retirement plans. The investment advisers of the Underlying Funds may manage publicly traded mutual funds with similar names and objectives. However, the Underlying Funds are NOT directly related to any publicly traded mutual fund. Consequently, the investment performance of the Underlying Funds and any similarly named publicly traded mutual fund may differ substantially. 16 A summary of investment objectives of each of the Underlying Funds is set forth below. Certain Underlying Funds have similar investment objectives and/or policies. Therefore, to choose the Sub-Accounts which best meet your needs and objectives, carefully read the prospectuses of the Underlying Funds, along with this Prospectus. There can be no assurance that the investment objectives of the Underlying Funds can be achieved. In some states, insurance regulations may restrict the availability of particular Funds. INVESTMENT OBJECTIVES AND POLICIES A summary of investment objectives of each of the Underlying Funds is set forth below. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES, RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT INFORMATION REGARDING THE UNDERLYING FUNDS MAY BE FOUND IN THEIR RESPECTIVE PROSPECTUSES, WHICH SHOULD BE READ CAREFULLY BEFORE INVESTING. THE PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION OF THE UNDERLYING FUNDS ARE AVAILABLE FROM THE SERVICE OFFICE UPON REQUEST. There can be no assurance that the investment objectives of the Underlying Funds can be achieved or that the value of the Contract will equal or exceed the aggregate amount of payments made under the Contract. Sub-Account values will fluctuate; even a Sub-Account investing in a money market fund may have negative returns, particularly if fees and charges are deducted at the Sub-Account level. DELAWARE VIP TRUST ADVISER: DELAWARE MANAGEMENT COMPANY DELAWARE VIP BALANCED SERIES -- seeks a balance of capital appreciation, income and preservation of capital by investing primarily in stocks of established companies believed to have the potential for long-term capital appreciation. The Series also invests at least 25% of its assets in various types of fixed-income securities, including U.S. government securities and corporate bonds. DELAWARE VIP CAPITAL RESERVES SERIES -- seeks a high, stable level of current income while attempting to minimize fluctuations in principal and provide maximum liquidity by investing in invests primarily in short-term securities, including securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, instruments secured by U.S. government securities and debt securities issued by U.S. corporations. Delaware VIP Capital Reserves Series is not a money market fund. DELAWARE VIP CASH RESERVE SERIES -- seeks to provide maximum current income, while preserving principal and maintaining liquidity, by investing its assets in a diversified portfolio of money market securities and managing the portfolio to maintain a constant net asset value of $1 per share. The Series is a money market fund which invests in a diversified portfolio of high-quality securities. DELAWARE VIP EMERGING MARKETS SERIES -- seeks long-term capital appreciation. The Series invests primarily in equity securities of issuers from emerging foreign countries. The Series' portfolio manager selects growth-oriented and value-oriented investments on the basis of the investment's discount to its intrinsic value. DELAWARE VIP GROWTH OPPORTUNITIES SERIES -- seeks long-term capital appreciation. The Series invests primarily in securities of medium-sized companies whose market capitalizations fall within the range represented in the Russell Midcap Growth Index at the time of the Series' investment. Management selects stocks of companies that they think will provide high and consistent earnings growth with a reasonable level of risk. DELAWARE VIP HIGH YIELD SERIES -- seeks total return and, as a secondary objective, high current income. The Series invests in high-yield corporate bonds (rated BB or lower, commonly known as "junk bonds"), foreign bonds, U.S. government securities and commercial paper. The Series will also invest in unrated bonds, judged to be of comparable quality, which may be more speculative in nature than rated bonds. 17 DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES -- seeks long-term growth without undue risk to principal. The Series invests primarily in equity securities that provide the potential for capital appreciation. At least 65% of the Series total assets will be invested in equity securities of issuers from foreign countries. DELAWARE VIP REIT SERIES -- seeks maximum long-term total return, with capital appreciation as a secondary objective. The series invests primarily in stocks of companies principally engaged in the real estate industry. Under normal circumstances, we will invest at least 80% of the Series' total assets in equity securities of real estate investment trusts (REITs). DELAWARE VIP SELECT GROWTH SERIES -- seeks long-term capital appreciation. The Series invests primarily in common stocks of companies believed to have long-term capital appreciation potential and are expected to grow faster than the U.S. economy. We consider companies of any size or market capitalization. DELAWARE VIP SMALL CAP VALUE SERIES -- seeks capital appreciation. Under normal circumstances, at least 80% of the Series' net assets will be in investments of smaller capitalization companies, defined as those having a market capitalization generally less than 3.5 times the dollar-weighted median market capitalization of the Russell 2000 Index at the time of purchase. The Series invests in companies, in the manager's opinion, that are priced low relative to their underlying value or future earning potential. Among other factors, we consider the financial strength of a company, its management, the prospects for its industry, and any anticipated changes within the company, which might suggest a more favorable outlook going forward. DELAWARE VIP TREND SERIES -- seeks long-term capital appreciation. The Series invests primarily in stocks of small growth-oriented or emerging companies that, in the management team's view, are responsive to changes within the marketplace and have the fundamental characteristics to support growth. DELAWARE VIP U.S. GROWTH SERIES -- seeks to maximize capital appreciation. The Series invests primarily in equity securities of companies we believe have the potential for sustainable free cash flow growth. Though the Series' management team has the flexibility to invest in companies of all sizes, the Series generally focuses on medium and large-size companies. The Series' goal is to own companies that are expected to grow faster than the U.S. economy. DELAWARE VIP VALUE SERIES -- seeks long-term capital appreciation. The Series invests primarily in investments of large-capitalization companies that we believe have long-term capital appreciation potential. The Series' management follows a value-oriented investment philosophy in selecting stocks for the Series using a research-intensive approach. AIM VARIABLE INSURANCE FUNDS (SERIES I SHARES) ADVISER: INVESCO AIM ADVISORS, INC. AIM V.I. CAPITAL APPRECIATION FUND -- The fund's investment objective is growth of capital. The fund seeks to meet its investment by primarily in common stocks of companies of all market capitalizations. The sub-advisers are Invesco Trimark Investment Management Inc., Invesco Global Asset Management (N.A.), Inc., Invesco Institutional (N.A.), Inc., Invesco Senior Secured Management, Inc., Invesco Hong Kong Limited, Invesco Asset Management Limited, Invesco Asset Management (Japan) Limited, Invesco Asset Management Deutschland, GmbH, and Invesco Australia Limited. AIM V.I. CORE EQUITY FUND - The fund's investment objective is growth of capital. The fund seeks to meet its objective by investing, normally, at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities including convertible securities, of established companies that have long-term above-average growth in earnings, and growth companies that the portfolio manager believes have the potential for above-average growth in earnings. The sub-advisers are Invesco Trimark Investment Management Inc., Invesco Global Asset Management (N.A.), Inc., Invesco Institutional (N.A.), Inc., Invesco Senior Secured Management, Inc., Invesco Hong Kong Limited, Invesco Asset Management Limited, Invesco Asset Management (Japan) Limited, Invesco Asset Management Deutschland, GmbH, and Invesco Australia Limited. 18 AIM V.I. HIGH YIELD FUND -- The fund's investment objective is to achieve a high level of current income. The fund seeks to meet its objective by investing, normally, at least 80% of its assets, in debt securities that are determined to be below investment grade quality because they are rated BB/Ba or lower by Standard & Poor's Ratings Services, Moody's Investors Service, Inc., or any other nationally recognized statistical rating organization (NRSRO), or are determined by the portfolio managers to be of comparable quality to such rated securities. These types of securities are commonly known as "junk bonds." The sub-advisers are Invesco Trimark Investment Management Inc., Invesco Global Asset Management (N.A.), Inc., Invesco Institutional (N.A.), Inc., Invesco Senior Secured Management, Inc., Invesco Hong Kong Limited, Invesco Asset Management Limited, Invesco Asset Management (Japan) Limited, Invesco Asset Management Deutschland, GmbH, and Invesco Australia Limited. AIM V.I. INTERNATIONAL GROWTH FUND -- The fund's investment objective is long-term growth of capital. The fund seeks to meet its objective by investing in a diversified portfolio of international equity securities.The sub-advisers are Invesco Trimark Investment Management Inc., Invesco Global Asset Management (N.A.), Inc., Invesco Institutional (N.A.), Inc., Invesco Senior Secured Management, Inc., Invesco Hong Kong Limited, Invesco Asset Management Limited, Invesco Asset Management (Japan) Limited, Invesco Asset Management Deutschland, GmbH, and Invesco Australia Limited. THE ALGER AMERICAN FUND (CLASS O) ADVISER: FRED ALGER MANAGEMENT, INC. ALGER AMERICAN CAPITAL APPRECIATION PORTFOLIO -- seeks long-term capital appreciation. Under normal circumstances, the portfolio invests in the equity securities of companies of any size the Manager believes demonstrate promising growth potential. The portfolio can leverage, that is, borrow money to buy additional securities. By borrowing money, the portfolio has the potential to increase its returns if the increase in the value of the securities purchased exceeds the cost of borrowing, including interest paid on the money borrowed. This Portfolio was formerly known as Alger American Leveraged AllCap Portfolio. ALGER AMERICAN MIDCAP GROWTH PORTFOLIO -- seeks long-term capital appreciation. It focuses on midsized companies that the Manager believes demonstrate promising growth potential. Under normal circumstances, the portfolio invests at least 80% of its net assets in the equity securities of companies that, at the time of purchase of the securities, have a market capitalization within the range of companies included in the Russell Midcap Growth Index or the S&P MidCap 400 Index, updated quarterly. Both indexes are designed to track the performance of medium-capitalization stocks. ALGER AMERICAN SMALLCAP GROWTH PORTFOLIO -- seeks long-term appreciation. It focuses on small, fast-growing companies that offer innovative products, services or technologies to a rapidly-expanding marketplace. Under normal circumstances, the portfolio invests at least 80% of its net assets in the equity securities of companies that, at the time of purchase of the securities, have a total market capitalization within the range of companies included in the Russell 2000 Growth Index or the S&P Small Cap 600 Index, updated quarterly. Both indexes are broad indexes of small-capitalization stocks. This Portfolio was formerly known as Alger American Small Capitalization Portfolio. ALLIANCEBERNSTEIN VARIABLE PRODUCTS SERIES FUND, INC. (CLASS B) ADVISER: ALLIANCEBERNSTEIN L.P. ALLIANCEBERNSTEIN VPS GLOBAL TECHNOLOGY PORTFOLIO -- seeks long-term growth of capital. ALLIANCEBERNSTEIN VPS GROWTH AND INCOME PORTFOLIO -- seeks long-term growth of capital. ALLIANCEBERNSTEIN VPS GROWTH PORTFOLIO -- seeks long-term growth of capital. ALLIANCEBERNSTEIN VPS LARGE CAP GROWTH PORTFOLIO - seeks long-term growth of capital. FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST (CLASS 2) ADVISER: FRANKLIN ADVISERS, INC. - FT VIP FRANKLIN SMALL-MID CAP GROWTH SECURITIES FUND ADVISER: FRANKLIN MUTUAL ADVISERS, LLC - FT VIP MUTUAL SHARES SECURITIES FUND ADVISER: TEMPLETON INVESTMENT COUNSEL, LLC - FT VIP TEMPLETON FOREIGN SECURITIES FUND 19 ADVISER: TEMPLETON GLOBAL ADVISORS LIMITED - FT VIP TEMPLETON GROWTH SECURITIES FUND FT VIP FRANKLIN SMALL-MID CAP GROWTH SECURITIES FUND -- seeks long-term capital growth. The Fund normally invests at least 80% of its net assets in investments of small capitalization and mid capitalization companies and normally invests predominantly in equity securities. FT VIP MUTUAL SHARES SECURITIES FUND -- seeks capital appreciation, with income as a secondary goal. The Fund normally invests primarily in U.S. and foreign equity securities that the manager believes are undervalued. The Fund also invests to a lesser extent in risk arbitrage securities and distressed companies. FT VIP TEMPLETON FOREIGN SECURITIES FUND -- seeks long-term capital growth. The Fund normally invests at least 80% of its net assets in investments of issuers located outside the U.S., including those in emerging markets, and normally invests predominantly in equity securities. FT VIP TEMPLETON GROWTH SECURITIES FUND -- seeks long-term capital growth. The Fund normally invests primarily in equity securities of companies located anywhere in the world, including those in the U.S. and in emerging markets. The sub-adviser is Templeton Asset Management, Ltd. PIONEER VARIABLE CONTRACTS TRUST (CLASS II) ADVISER: PIONEER INVESTMENT MANAGEMENT, INC. PIONEER EMERGING MARKETS VCT PORTFOLIO -- Long-term growth of capital. PIONEER MID CAP VALUE VCT PORTFOLIO -- Capital appreciation by investing in a diversified portfolio of securities consisting primarily of common. There is no assurance that the investment objectives of the Underlying Funds will be met. In the event of a material change in the investment policy of a Sub-Account or the Fund in which it invests, you will be notified of the change. No material changes in the investment policy of the Variable Account or any Sub-Accounts will be made without approval pursuant to the applicable state insurance laws. If you have amounts in that Sub-Account, the Company will transfer it without charge, on written request by you, to another Sub-Account or to the General Account. The Company must receive your written request within sixty (60) days of the later of (1) the effective date of such change in the investment policy, or (2) the receipt of the notice of your right to transfer. PERFORMANCE INFORMATION The Delaware Medallion III Contract was first offered to the public by Commonwealth Annuity and Life Insurance Company in 1996. The Company, however, may advertise "total return" and "average annual total return" performance information based on (1) the periods that the Sub-Accounts have been in existence and (2) the periods that the Underlying Funds have been in existence. Both the total return and yield figures are based on historical earnings and are not intended to indicate future performance. Performance tables are included in the SAI. The total return of a Sub-Account refers to the total of the income generated by an investment in the Sub-Account and of the changes in the value of the principal (due to realized and unrealized capital gains or losses) for a specified period, reduced by Variable Account charges, and expressed as a percentage. The average annual total return represents the average annual percentage change in the value of an investment in the Sub-Account over a given period of time. It represents averaged figures as opposed to the actual performance of a Sub-Account, which will vary from year to year. The yield of the Sub-Account investing in the Delaware VIP Cash Reserve Series refers to the income generated by an investment in the Sub-Account over a seven-day period (which period will be specified in the advertisement). This income is then "annualized" by assuming that the income generated in the specific week is generated over a 52-week period. This annualized yield is shown as a percentage of the investment. The "effective yield" calculation is similar but, when annualized, the income earned by an investment in the Sub-Account is assumed to be reinvested. Thus the effective yield will be slightly higher than the yield because of the compounding effect of this assumed reinvestment. 20 The yield of a Sub-Account investing in a Fund other than the Delaware VIP Cash Reserve Series refers to the annualized income generated by an investment in the Sub-Account over a specified 30-day or one-month period. The yield is calculated by assuming that the income generated by the investment during that 30-day or one-month period is generated each period over a 12-month period and is shown as a percentage of the investment. PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS THE PERFORMANCE OF A HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE CALCULATIONS ARE BASED AS WELL AS CONTRACT LEVEL CHARGES (IF ANY) AND WITHDRAWAL CHARGES (FOR MORE INFORMATION, SEE THE SAI). PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE UNDERLYING FUND IN WHICH THE SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT MAY BE ACHIEVED IN THE FUTURE. Performance information for a Sub-Account may be compared in reports and promotional literature to: (1) the Standard & Poor's 500 Composite Stock Price Index (S&P 500), Dow Jones Industrial Average (DJIA), Shearson Lehman Aggregate Bond Index or other unmanaged indices, so that investors may compare the Sub-Account results with those of a group of unmanaged securities widely regarded by investors as representative of the securities markets in general; or (2) other groups of variable annuity separate accounts or other investment products tracked by Lipper Analytical Services, a widely used independent research firm which ranks mutual funds and other investment products by overall performance, investment objectives, and assets, or tracked by other services, companies, publications, or persons, who rank such investment products on overall performance or other criteria; or (3) the Consumer Price Index (a measure for inflation) to assess the real rate of return from an investment in the Sub-Account. Unmanaged indices may assume the reinvestment of dividends but generally do not reflect deductions for administrative and management costs and expenses. In addition, relevant broad-based indices and performance from independent sources may be used to illustrate the performance of certain Contract features. At times, the Company may also advertise the ratings and other information assigned to it by independent rating organizations such as A.M. Best Company ("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's ratings reflect their current opinion of the Company's relative financial strength and operating performance in comparison to the norms of the life/health insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an insurance company to meet its obligations under insurance policies it issues and do not measure the ability of such companies to meet other non-policy obligations. The ratings also do not relate to the performance of the Underlying Funds. 21 DESCRIPTION OF THE CONTRACT As of the date of this Prospectus, the Company has ceased issuing new Contracts except in connection with certain pre-existing contractual plans and programs. References to issue requirements and initial payments are included as information regarding general Company procedures. This Prospectus provides only a very brief overview of the more significant aspects of the Contract and of the Company's administrative procedures for the benefit of the Company's current Owners. DISRUPTIVE TRADING This Contract is not designed for use by individuals, professional market timing organizations, or other entities that engage in short-term trading, frequent transfers, programmed transfers or transfers that are large in relation to the total assets of an Underlying Fund (collectively, "Disruptive Trading"). These activities may require the Underlying Fund to maintain undesirable large cash positions or frequently buy or sell portfolio securities. Such transfers may dilute the value of the Underlying Fund's shares, interfere with the efficient management of the Underlying Fund's portfolio, and increase brokerage and administrative costs of the Underlying Funds. As a result, Disruptive Trading may adversely affect an Underlying Fund's ability to invest effectively in accordance with its investment objectives and policies, and may harm other Contract Owners. In order to protect our Contract Owners and the Underlying Funds from potentially harmful trading activity, we utilize certain policies and procedures that are designed to detect and prevent disruptive trading among the Underlying Funds (the "Disruptive Trading Procedures"). Our Disruptive Trading Procedures consider certain factors in order to identify Disruptive Trading activity, including the following: - the number of transfers made over a period of time; - the length of time between transfers; - whether the transfers follow a pattern that appears to be designed to take advantage of short term market fluctuations, particularly within certain Underlying Funds; - the dollar amount(s) requested for transfers; and - whether the transfers are part of a group of transfers made by a third party on behalf of several individual Contract Owners; and - the investment objectives and/or size of the Underlying Funds. We may increase our monitoring of Contract Owners who engage in what we perceive to be disruptive trading, including investigating the transfer patterns within multiple contracts owned by the same Contract Owners. We may also investigate any patterns of disruptive trading identified by the Underlying Funds that may not have been captured by our Disruptive Trading Procedures. Our Disruptive Trading Procedures may vary from Sub-Account to Sub-Account. The Disruptive Trading Procedures limit the number of transfers a Contract Owner may make during a given period, limit the number of times a Contract Owner may transfer into particular funds during a given period, and place restrictions as to the time or means of transfers (for example, transfer instructions are required by a certain daily time cutoff), among other things. Subject to the terms of the Contract, the Company reserves the right to impose, without prior notice, additional or alternate restrictions on allocations and transfers that it determines, in its sole discretion, will disadvantage or potentially hurt the rights or interests of other Contract Owners or other holders of the Underlying Funds. Some of the Underlying Funds have reserved the right to temporarily or permanently refuse payments or transfer requests from the Company if, in the judgment of the Underlying Fund's investment adviser, the Underlying Fund would be unable to invest effectively in accordance with its investment objective or policies, or would otherwise potentially be adversely affected. If an Underlying Fund refuses a transfer request from 22 the Company, the Company may not be able to effect certain allocations or transfers that a Contract Owner has requested. In the future, some Underlying Funds may impose redemption fees on short-term trading (i.e., redemptions of mutual fund shares within a certain number of business days after purchase). We reserve the right to administer and collect any such redemption fees on behalf of the Underlying Funds. We will apply our Disruptive Trading Procedures consistently without special arrangement, waiver, or exception. However, the Company's ability to detect and deter Disruptive Trading and to consistently apply the Disruptive Trading Procedures may be limited by operational systems and technological limitations. Contract Owners seeking to engage in such transfer activities may employ a variety of strategies to avoid detection. Because identifying Disruptive Trading involves judgments that are inherently subjective, the Company cannot provide assurances that its Disruptive Trading Procedures will detect every Contract Owner who engages in disruptive trading. In addition, the terms of some contracts previously issued by the Company, historical practices or actions, litigation or certain regulatory restrictions may limit the Company's ability to apply transfer or other restrictions. If we are unable to detect Disruptive Trading or are unable to restrict Disruptive Trading because of contract provisions or other reasons, you may experience dilution in the value of your Underlying Fund shares. There may be increased brokerage and administrative costs within the Underlying Funds, which may result in lower long-term returns for your investments. Additionally, because other insurance companies and/or retirement plans may invest in the Underlying Funds, we cannot guarantee that the Underlying Funds will not suffer harm from disruptive trading within the variable contracts issued by other insurance companies or among investment options available to retirement plan participants. Under rules recently adopted by the Securities and Exchange Commission, effective April 16, 2007, we will be required to: (1) enter into a written agreement with each Underlying Fund or its principal underwriter that will obligate us to provide to the Underlying Fund promptly upon request certain information about the trading activity of individual Contract Owners, and (2) execute instructions from the Underlying Fund to restrict or prohibit further purchases or transfers by specific Contract Owners who violate the frequent trading policies established by the Underlying Fund. PAYMENTS The Company issues a Contract when its underwriting requirements, which include receipt of the initial payment and allocation instructions by the Company at its Service Office, are met. These requirements also may include the proper completion of an application; however, where permitted, the Company may issue a Contract without completion of an application for certain classes of annuity Contracts. Payments are to be made payable to the Company. A net payment is equal to the payment received less the amount of any applicable premium tax. The Company reserves the right to reject an application or request to issue a Contract. Any such rejection will not discriminate unfairly among purchasers. Payments are to be made payable to the Company. A net payment is equal to the payment received less the amount of any applicable premium tax. The initial net payment is credited to the Contract and allocated among the requested investment options as of the date that all underwriting requirements are properly met. If all underwriting requirements are not completed within five business days of the Company's receipt of the initial payment, the payment will be returned immediately unless the applicant authorizes the Company to retain it pending completion of all issue requirements. Subsequent payments will be credited as of the Valuation Date received at the Service Office on the basis of accumulation unit value next determined after receipt. Payments may be made to the Contract at any time prior to the Annuity Date, or prior to payment of the death benefit, subject to certain minimums. - Currently, the initial payment must be at least $5,000 ($2,000 for IRA's). A lower minimum amount may be permitted if monthly automatic payments are being forwarded directly from a financial institution. - Each subsequent payment must be at least $50. - Where the contribution on behalf of an employee under an employer-sponsored retirement plan is less 23 than $600 but more than $300 annually, the Company may issue a Contract on the employee if the plan's average annual contribution per eligible plan participant is at least $600. - The minimum allocation to a Guarantee Period Account is $1,000. If less than $1,000 is allocated to a Guarantee Period Account, the Company reserves the right to apply that amount to the Delaware VIP Cash Reserve Series. Generally, unless otherwise requested, all payments will be allocated among investment options in the same proportion that the initial net payment is allocated or, if subsequently changed, according to the most recent allocation instructions. Prior to the Annuity Date, you may utilize up to seventeen variable Sub-Accounts at any one time, in addition to the Delaware VIP Cash Reserve Series. RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY An individual purchasing a Contract intended to qualify as an IRA may cancel the Contract at any time within ten days after receipt of the Contract and receive a refund. In order to cancel the Contract, the Owner must mail or deliver the Contract to the agent through whom the Contract was purchased, to the Service Office, Security Benefit Life Insurance Company, located at One Security Benefit Place, Topeka, KS 66675, Telephone 1-800-533-2124, or to any local agency of the Company. Mailing or delivery must occur within ten days after receipt of the Contract for cancellation to be effective. Within seven days the Company will provide a refund equal to gross payment(s) received. In some states, however, the refund may equal the greater of (a) gross payments, or (b) the amounts allocated to the Fixed and Guarantee Period Accounts plus the Accumulated Value of amounts in the Sub-Accounts plus any amounts deducted under the Contract or by the Underlying Funds for taxes, charges or fees. At the time the Contract is issued, the "Right to Examine" provision on the cover of the Contract will specifically indicate whether the refund will be equal to gross payments or equal to the greater of (a) or (b) as set forth above. The liability of the Variable Account under this provision is limited to the Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any additional amounts refunded to the Owner will be paid by the Company. RIGHT TO CANCEL ALL OTHER CONTRACTS An Owner may cancel the Contract at any time within ten days after receipt of the Contract (or longer if required by state law) and receive a refund. In most states, the Company will pay the Owner an amount equal to the sum of (1) the difference between the payment received, including fees, and any amount allocated to the Variable Account, and (2) the Accumulated Value of amounts allocated to the Variable Account as of the date the request is received. If the Contract was purchased as an IRA or issued in a state that requires a full refund of the initial payment(s), the IRA cancellation right described above will be used. At the time the Contract is issued, the "Right to Examine" provision on the cover of the Contract will specifically indicate what the refund will be and the time period allowed to exercise the right to cancel. TELEPHONE TRANSACTIONS PRIVILEGE Subject to state law, you, or anyone you authorize, may initiate transactions over the telephone, unless you notify the Company of your election not to have this privilege. The policy of the Company and its agents and affiliates is that they will not be responsible for losses resulting from acting upon telephone requests reasonably believed to be genuine. The Company will employ reasonable procedures to confirm that instructions communicated by telephone are genuine; otherwise, the Company may be liable for any losses due to unauthorized or fraudulent instructions. Such procedures may include, among other things, requiring some form of personal identification prior to acting upon instructions received by telephone. All telephone instructions are tape-recorded. The Company reserves the right to modify or discontinue this privilege at any time without prior notice. The Company cannot guarantee that you, or any other person you authorize, will always be able to reach us to complete a telephone transaction. Under these circumstances, you should submit your request in writing or other form acceptable to us. 24 TRANSFER PRIVILEGE At any time prior to the Annuity Date and subject to the Disruptive Trading limitations described above under DESCRIPTION OF THE CONTRACT, an Owner may transfer amounts among investment options upon written or, in most jurisdictions, telephone request to the Company. Transfers may be made to or among all of the available Sub-Accounts as long as no more than seventeen Sub-Accounts, in addition to the Delaware VIP Cash Reserve Series, are utilized at any one time. Transfer values will be based on the Accumulated Value next computed after receipt of the transfer request. Transfers to a Guarantee Period Account must be at least $1,000. If the amount to be transferred to a Guarantee Period Account is less than $1,000, the Company may transfer that amount to the Delaware VIP Cash Reserve Series. Transfers from a Guarantee Period Account prior to the expiration of the Guarantee Period will be subject to a Market Value Adjustment. If an Owner requests a transfer of an amount from a Sub-Account that is higher than the amount in the Sub-Account on the Valuation Date (for example, if a request is made to transfer $100 from a Sub-Account but the Accumulated Value in the Sub-Account on the Valuation Date is only $98), the Company will transfer all of the Accumulated Value in the Sub-Account. The first twelve transfers in a Contract year are guaranteed to be free of any transfer charge. The Company does not currently charge for additional transfers in a Contract year, but reserves the right to assess a charge, guaranteed never to exceed $25, to reimburse it for the expense of processing these additional transfers. The first automatic transfer or rebalancing under an Automatic Transfer (Dollar Cost Averaging) program, or Automatic Account Rebalancing program counts as one transfer for purposes of the 12 transfers guaranteed to be free of a transfer charge in each Contract year. Each subsequent automatic transfer or rebalancing under that request in the same or a subsequent Contract year is without charge and does not reduce the remaining number of transfers which may be made free of charge in that Contract year. AUTOMATIC TRANSFERS AND AUTOMATIC ACCOUNT REBALANCING OPTIONS. AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) OPTION. The Owner may elect automatic transfers of a predetermined dollar amount, not less than $100, on a periodic basis (monthly, bi-monthly, quarterly, semi-annually or annually) from either the Fixed Account, the Sub-Account investing in the Delaware VIP Capital Reserves Series, the Sub-Account investing in the Delaware VIP Strategic Income Series or the Sub-Account investing in the Delaware VIP Cash Reserve Series (the "source accounts") to one or more of the available Sub-Accounts. Automatic transfers may not be made into the Fixed Account, the Guarantee Period Accounts or, if applicable, the Fund being used as the source account. If an automatic transfer would reduce the balance in the source account to less than $100, the entire balance will be transferred proportionately to the chosen Sub-Accounts. Automatic transfers will continue until the amount in the source account on a transfer date is zero or the Owner's request to terminate the option is received by the Company. If additional amounts are allocated to the source account after its balance has fallen to zero, this option will not restart automatically and the Owner must provide a new request to the Company. To the extent permitted by law, the Company reserves the right, from time to time, to credit an enhanced interest rate to certain initial and/or subsequent payments which are deposited into the Fixed Account when it is being used as the source account from which to process automatic transfers. For more information, see "Enhanced Automatic Transfer (Dollar Cost Averaging) Program" in the SAI. AUTOMATIC ACCOUNT REBALANCING OPTION. The Owner may request automatic rebalancing of Sub-Account allocations on a monthly, bi-monthly, quarterly, semi-annual or annual basis in accordance with percentage allocations specified by the Owner. As frequently as specified by the Owner, the Company will review the percentage allocations in the Funds and, if necessary, transfer amounts to ensure conformity with the designated percentage allocation mix. If the amount necessary to re-establish the mix on any scheduled date is less than $100, no transfer will be made. Automatic Account Rebalancing will continue in accordance with the most recent percentage allocation mix received until the Owner's request to terminate or change the option is received by the Company. As such, subsequent payments allocated in a manner different from the percentage allocation mix in effect on the date the payment is received will be reallocated in accordance with the existing 25 mix on the next scheduled date unless the Owner's request to change the mix is received by the Company. LIMITATIONS. The Company reserves the right to limit the number of Sub-Accounts that may be used for automatic transfers and rebalancing, and to discontinue either option upon advance written notice. Currently, Dollar Cost Averaging and Automatic Account Rebalancing may not be in effect simultaneously. Either option may be elected at no additional charge when the Contract is purchased or at a later date. SURRENDER At any time prior to the Annuity Date, an Owner may surrender the Contract and receive its Surrender Value, less any tax withholding. The request for surrender must be made on Company forms. You may obtain Company forms by calling 1-800-533-2124. The Owner must return the Contract and a signed, written request for surrender on a Company surrender form to the Service Office. The Surrender Value will be calculated based on the Contract's Accumulated Value as of the Valuation Date on which the request and the Contract are received at the Service Office. Before the Annuity Date, a surrender charge may be deducted if a Contract is surrendered and payments have been credited to the Contract during the last full seven years. See CHARGES AND DEDUCTIONS. The Contract fee may also be deducted. After the Annuity Date, only Contracts annuitized under a commutable period certain option may be surrendered. The amount payable is the commuted value of any unpaid installments, computed on the basis of the assumed interest rate incorporated in such annuity benefit payments. No surrender charge is imposed after the Annuity Date. Any amount surrendered is normally payable within seven days following the Company's receipt of the surrender request. The Company reserves the right to defer surrenders and withdrawals of amounts in each Sub-Account in any period during which (1) trading on the New York Stock Exchange is restricted as determined by the SEC or such Exchange is closed for other than weekends and holidays, (2) the SEC has by order permitted such suspension, or (3) an emergency, as determined by the SEC, exists such that disposal of portfolio securities or valuation of assets of each separate account is not reasonably practicable. The Company reserves the right to defer surrenders and withdrawals of amounts allocated to the Company's Fixed Account and Guarantee Period Accounts for a period not to exceed six months. The surrender rights of Owners who are participants under Section 403(b) plans or who are participants in the Texas Optional Retirement Program ("Texas ORP") are restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement Program". For important tax consequences which may result from surrender, see FEDERAL TAX CONSIDERATIONS. WITHDRAWALS At any time prior to the Annuity Date, an Owner may withdraw a portion of the Accumulated Value of his or her Contract, subject to the limits stated below. The request for surrender must be made on Company forms. You may obtain Company forms by calling 1-800-533-2124. You may also obtain a Company withdrawal form at our Company web site, https://cwannuity.se2.com. The Owner must submit to the Service Office a signed, written request for withdrawal on a Company withdrawal form. The written request must indicate the dollar amount the Owner wishes to receive and the investment options from which such amount is to be withdrawn. Each withdrawal must be a minimum of $100. The amount withdrawn equals the amount requested by the Owner plus any applicable surrender charge, as described under CHARGES AND DEDUCTIONS. In addition, amounts withdrawn from a Guarantee Period Account prior to the end of the applicable Guarantee Period will be subject to a Market Value Adjustment, as described under GUARANTEE PERIOD ACCOUNTS. Where allocations have been made to more than one investment option, a percentage of the withdrawal may be allocated to each option. A withdrawal from a Sub-Account will result in cancellation of a number of units 26 equivalent in value to the amount withdrawn, computed as of the Valuation Date that the request is received at the Service Office. Withdrawals will be paid in accordance with the time limitations described under "SURRENDER" under DESCRIPTION OF THE CONTRACT. After the Annuity Date, withdrawals are permitted only if the Contract is annuitized under a commutable period certain option. Annuity Units equivalent in value to the amount withdrawn will be cancelled. For important restrictions on withdrawals which are applicable to Owners who are participants under Section 403(b) plans or under the Texas ORP, see "Tax-Sheltered Annuities" and "Texas Optional Retirement Program." For important tax consequences which may result from withdrawals, see FEDERAL TAX CONSIDERATIONS. SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of withdrawals ("systematic withdrawals") from amounts in the Sub-Accounts and/or the Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis. Systematic withdrawals from Guarantee Period Accounts are not available. The minimum amount of each automatic withdrawal is $100, and will be subject to any applicable withdrawal charges. If elected at the time of purchase, the Owner must designate in writing the specific dollar amount of each withdrawal and the percentage of this amount which should be taken from each designated Sub-Account and/or the Fixed Account. Systematic withdrawals then will begin on the date indicated on the application. If elected after the issue date, the Owner may elect, by written request, a specific dollar amount and the percentage of this amount to be taken from each designated Sub-Account and/or the Fixed Account, or the Owner may elect to withdraw a specific percentage of the Accumulated Value calculated as of the withdrawal dates, and may designate the percentage of this amount which should be taken from each account. The first withdrawal will take place on the date the written request is received at the Service Office or, if later, on a date specified by the Owner. If a withdrawal would cause the remaining Accumulated Value to be less than $1,000, systematic withdrawals may be discontinued. Systematic withdrawals will cease automatically on the Annuity Date. The Owner may change or terminate systematic withdrawals only by written request to the Service Office. LIFE EXPECTANCY DISTRIBUTIONS. Each calendar year prior to the Annuity Date, an Owner who also is the Annuitant may take without surrender charge a series of systematic withdrawals from the Contract according to the Company's life expectancy distribution ("LED") option. The Owner must return a properly signed LED request form to the Service Office. The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or annual LED distributions, and may terminate the LED option at any time. If an Owner elects the Company's LED option, (based on the applicable IRS table), in each calendar year a fraction of the Accumulated Value is withdrawn without a surrender charge based on the Owner's then life expectancy (or the joint life expectancy of the Owner and a beneficiary.) The numerator of the fraction is 1 (one) and the denominator of the fraction is the remaining life expectancy of the Owner, as determined annually by the Company. The resulting fraction, expressed as a percentage, is applied to the Accumulated Value at the beginning of the year to determine the amount to be distributed during the year. Under the Company's LED option, the amount withdrawn from the Contract changes each year, because life expectancy changes each year that a person lives. For example, actuarial tables indicate that a person age 70 has a life expectancy of 16 years, but a person who attains age 86 has a life expectancy of another 6.5 years. Where the Owner is a trust or other nonnatural person, the Owner may elect the LED option based on the Annuitant's life expectancy. NOTE: this option may not produce annual distributions that meet the definition of "substantially equal periodic payments" as defined under Code Section 72(t). As such, the withdrawals may be treated by the Internal Revenue Service (IRS) as premature distributions from the Contract and may be subject to a 10% federal tax penalty. Owners seeking distributions over their life under this definition should consult their tax advisor. For more information, see FEDERAL TAX CONSIDERATIONS, "TAXATION OF THE CONTRACT." In addition, if the amount necessary to meet the substantially equal periodic payment definition is greater than the Company's LED amount, a surrender charge may apply to the amount in excess of the LED amount. 27 The Company may discontinue or change the LED option at any time, but not with respect to election of the option made prior to the date of any change in the LED option. DEATH BENEFIT DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE. At the death of the Annuitant (including an Owner who is also the Annuitant), the death benefit is equal to the greatest of: (a) the Accumulated Value as of the Valuation Date that the Company receives proof of death and any necessary claim paperwork, increased by any positive Market Value Adjustment; (b) gross payments compounded daily at an effective annual yield of 5% starting on the date each payment is applied and continuing throughout the payment's entire accumulation phase, decreased proportionately to reflect withdrawals; or (c) the death benefit that would have been payable on the most recent contract anniversary, increased for subsequent payments and decreased proportionately for subsequent withdrawals. For each withdrawal, the proportionate reduction is calculated as the death benefit under this option immediately prior to the withdrawal multiplied by the withdrawal amount and divided by the Accumulated Value immediately prior to the withdrawal. This guaranteed death benefit works in the following way assuming no withdrawals are made. On the first anniversary, the death benefit will be equal to the greater of: (a) the Accumulated Value as of the Valuation Date that the Company receives proof of death (increased by any positive Market Value Adjustment); or (b) gross payments compounded daily at an effective annual yield of 5%. The higher of (a) or (b) will then be locked in until the second anniversary, at which time the death benefit will be equal to the greatest of: (a) the Contract's then current Accumulated Value increased by any positive Market Value Adjustment; (b) gross payments compounded daily at an effective annual yield of 5%; or (c) the locked-in value of the death benefit at the first anniversary. The greatest of (a), (b) or (c) will be locked in until the next Contract anniversary. This calculation will then be repeated on each anniversary while the Contract remains in force and prior to the Annuity Date. As noted above, the values of (b) and (c) will be decreased proportionately if withdrawals are taken. See APPENDIX C -- THE DEATH BENEFIT for specific examples of death benefit calculations. DEATH OF AN OWNER WHO IS NOT ALSO THE ANNUITANT PRIOR TO THE ANNUITY DATE. If an Owner who is not also the Annuitant dies before the Annuity Date, the death benefit will be the Accumulated Value increased by any positive Market Value Adjustment. The death benefit never will be reduced by a negative Market Value Adjustment. PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit generally will be paid to the beneficiary in one sum within seven business days of the receipt of due proof of death at the Service Office. Instead of payment in one sum, the beneficiary may, by written request, elect to: (1) defer distribution of the death benefit for a period not more than five years from the date of death; or (2) receive distributions over the life of the beneficiary for a period certain not extending beyond the beneficiary's life expectancy, with annuity benefit payments beginning one year from the date of death. However, if the Owner has specified a death benefit annuity option, the death benefit will be paid out accordingly. Any death benefit annuity option specified by the Owner must comply with the requirements set forth in paragraph (2) above. 28 If distribution of the death benefit is deferred under (1) or (2), any value in the Guarantee Period Accounts will be transferred to the Sub-Account investing in the Delaware VIP Cash Reserve Series. The excess, if any, of the death benefit over the Accumulated Value also will be added to the Sub-Account investing in the Delaware VIP Cash Reserve Series. The beneficiary may, by written request, effect transfers and withdrawals during the deferral period and prior to annuitization under (2), but may not make additional payments. The death benefit will reflect any earnings or losses experienced during the deferral period. If there are multiple beneficiaries, the consent of all is required. With respect to the death benefit, the Accumulated Value will be based on the unit values next computed after due proof of the death has been received. DEATH OF THE ANNUITANT ON OR AFTER THE ANNUITY DATE. If the Annuitant's death occurs on or after the Annuity Date but before completion of all guaranteed annuity benefit payments, any unpaid amounts or installments will be paid to the beneficiary. The Company must pay out the remaining payments at least as rapidly as under the payment option in effect on the date of the Annuitant's death. THE SPOUSE OF THE OWNER AS BENEFICIARY The Owner's spouse, if named as the sole beneficiary, may by written request continue the Contract rather than receiving payment of the death benefit. The spouse will then become the Owner and Annuitant subject to the following: (1) any value in the Guarantee Period Accounts will be transferred to the Sub-Account investing in the Delaware VIP Cash Reserve Series; (2) the excess, if any, of the death benefit over the Contract's Accumulated Value also will be added to the Sub-Account investing in the Delaware VIP Cash Reserve Series. The resulting value will never be subject to a surrender charge when withdrawn. The new Owner may also make additional payments; however, a surrender charge will apply to these amounts if they are withdrawn before they have been invested in the Contract for at least seven years. All other rights and benefits provided in the Contract will continue, except that any subsequent spouse of such new Owner will not be entitled to continue the Contract when the new Owner dies. ASSIGNMENT The Contract, other than one sold in connection with certain qualified plans, may be assigned by the Owner at any time prior to the Annuity Date and while the Annuitant is alive. The Company will not be deemed to have knowledge of an assignment unless it is made in writing and filed at the Service Office. The Company will not assume responsibility for determining the validity of any assignment. If an assignment of the Contract is in effect on the Annuity Date, the Company reserves the right to pay to the assignee, in one sum, that portion of the Surrender Value of the Contract to which the assignee appears to be entitled. The Company will pay the balance, if any, in one sum to the Owner in full settlement of all liability under the Contract. The interest of the Owner and of any beneficiary will be subject to any assignment. For important tax consequences which may result from assignments, see FEDERAL TAX CONSIDERATIONS. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE The Owner selects the Annuity Date. To the extent permitted by law, the Annuity Date may be the first day of any month (1) before the Annuitant's 85th birthday, if the Annuitant's age on the issue date of the Contract is 75 or under; or (2) within ten years from the issue date of the Contract and before the Annuitant's 90th birthday, if the Annuitant's age on the issue date is between 76 and 90. The Owner may elect to change the Annuity Date by sending a request to the Service Office at least one month before the Annuity date. The new Annuity Date must be the first day of any month occurring before the Annuitant's 90th birthday, and must be within the life expectancy of the Annuitant. The Company shall determine such life expectancy at the time a change in Annuity Date is requested. In no event will the latest possible annuitization age exceed 90. If the Annuity Date under a non-qualified Contract is deferred until the Owner reaches an age that is significantly beyond the Owner's life expectancy, it is possible that the Contract will not be considered an annuity for federal tax purposes. In addition, the Internal Revenue Code ("the Code") and the terms of qualified plans impose limitations on the age at which annuity benefit payments may commence and the type 29 of annuity option selected. The Owner should carefully review the selection of the Annuity Date with his/her tax adviser. See FEDERAL TAX CONSIDERATIONS for further information. Subject to certain restrictions described below, the Owner has the right (1) to select the annuity option under which annuity benefit payments are to be made, and (2) to determine whether payments are to be made on a fixed basis, a variable basis, or a combination fixed and variable basis. Certain annuity options may be commutable or noncommutable. A commutable option provides the Owner with the right to request a lump sum payment of any remaining balance after annuity payments have commenced. Under a noncommutable option, the Owner may not request a lump sum payment. Annuity benefit payments are determined according to the annuity tables in the Contract, by the annuity option selected, and by the investment performance of the account(s) selected. See "Annuity Benefit Payments" in the SAI. To the extent a fixed annuity is selected, Accumulated Value will be transferred to the Fixed Account of the Company, and the annuity benefit payments will be fixed in amount. See APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT. Under a variable annuity payout option, a payment equal to the value of the fixed number of Annuity Units in the Sub-Accounts is made monthly, quarterly, semi-annually or annually. Since the value of an Annuity Unit in a Sub-Account will reflect the investment performance of the Sub-Account, the amount of each annuity benefit payment will vary. The annuity payout option selected must produce an initial payment of at least $50 (a lower amount may be required under some state laws). The Company reserves the right to increase these minimum amounts. If the annuity payout option selected does not produce an initial payment which meets this minimum, a single payment will be made. Once the Company begins making annuity benefit payments, the Annuitant cannot make withdrawals or surrender the annuity except in the case where a commutable period certain option has been elected. Beneficiaries entitled to receive remaining payments under either a commutable or noncom-mutable period certain option may elect instead to receive a lump sum settlement. If the Owner does not elect an option, a variable life annuity with periodic payments guaranteed for ten years will be purchased. Changes in either the Annuity Date or annuity option can be made up to one month prior to the Annuity Date. If the Owner exercises the M-GAP Rider, annuity benefit payments must be made under a fixed annuity payout option involving a life contingency and must occur at the Company's guaranteed fixed annuity option rates listed under the Annuity Option Tables in the Contract. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS The Company provides the variable annuity payout options described below. Currently, variable annuity options may be funded through the Delaware VIP Balanced Series, the Delaware VIP Capital Reserves Series and the Delaware VIP Large Cap Value Series. The Company also provides these same options funded through the Fixed Account (fixed annuity payout option). Regardless of how payments were allocated during the accumulation period, any of the variable annuity payout options or the fixed payout options may be selected, or any of the variable annuity payout options may be selected in combination with any of the fixed annuity payout options. Other annuity options may be offered by the Company. VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS -- This is a variable annuity payable periodically during the lifetime of the Annuitant with the guarantee that if he or she should die before all payments have been made, the remaining annuity benefit payments will continue to the beneficiary. VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING THE LIFETIME OF THE ANNUITANT ONLY -- This variable annuity is payable during the Annuitant's life. It would be possible under this option for the Annuitant to receive only one annuity benefit payment if he or she dies prior to the due date of the second annuity benefit payment, two annuity benefit payments if he or she dies before the due date of the third annuity benefit payment, and so on. Payments will continue, however, during the Annuitant's lifetime, no matter how long he or she lives. UNIT REFUND VARIABLE LIFE ANNUITY -- This is a variable annuity payable periodically during the lifetime of 30 the Annuitant with the guarantee that if (1) exceeds (2), then periodic variable annuity benefit payments will continue to the beneficiary until the number of such payments equals the number determined in (1). Where: (1) is the dollar amount of the Accumulated Value at annuitization divided by the dollar amount of the first payment, and (2) is the number of payments paid prior to the death of the Annuitant. JOINT AND SURVIVOR VARIABLE LIFE ANNUITY -- This variable annuity is payable jointly to the Annuitant and another individual during their joint lifetime, and then continuing during the lifetime of the survivor. The amount of each payment to the survivor is based on the same number of Annuity Units that applied during the joint lifetime of the two payees. One of the payees must be either the person designated as the Annuitant under the Contract or the beneficiary. There is no minimum number of payments under this option. JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY -- This is a variable annuity payable jointly to the Annuitant and another individual during their joint lifetime, and then continuing thereafter during the lifetime of the survivor. The amount of each periodic payment to the survivor, however, is based upon two-thirds of the number of Annuity Units, which applied during the joint lifetime of the two payees. One of the payees must be the person designated as the Annuitant under the Contract or the beneficiary. There is no minimum number of payments under this option. PERIOD CERTAIN VARIABLE ANNUITY (PAYMENTS GUARANTEED FOR A SPECIFIC NUMBER OF YEARS) -- This variable annuity provides periodic payments for a stipulated number of years ranging from one to 30. If the Annuitant dies before the end of the period, remaining payments will continue to be paid. A fixed period certain annuity may be either commutable or noncommutable. A variable period certain annuity is automatically commutable. The period certain option does not involve a life contingency. In the computing payments under this option, the Company deducts a charge for annuity rate guarantees, which includes a factor for mortality risks. Although not contractually required to do so, the Company currently follows a practice of permitting persons receiving payments under the period certain option to elect to convert to a variable annuity involving a life contingency. The Company may discontinue or change this practice at any time, but not with respect to elections made prior to the date of any change in this practice. See FEDERAL TAX CONSIDERATIONS for a discussion of the possible adverse tax consequences of selecting a period certain option. ANNUITY BENEFIT PAYMENTS DETERMINATION OF THE FIRST VARIABLE ANNUITY BENEFIT PAYMENT. The amount of the first monthly payment depends upon the selected variable annuity option, the sex (however, see "NORRIS DECISION" below) and age of the Annuitant, and the value of the amount applied under the annuity option ("annuity value"). The Contract provides annuity rates that determine the dollar amount of the first periodic payment under each variable annuity option for each $1,000 of applied value. From time to time, the Company may offer its Owners both fixed and variable annuity rates more favorable than those contained in the Contract. Any such rates will be applied uniformly to all Owners of the same class. The dollar amount of the first periodic annuity benefit payment is calculated based upon the type of annuity option chosen, as follows: - For life annuity options and noncommutable fixed period certain options of ten years or more, the dollar amount is determined by multiplying (1) the Accumulated Value applied under that option (after application of any Market Value Adjustment and less premium tax, if any) divided by $1,000, by (2) the applicable amount of the first monthly payment per $1,000 of value. - For commutable period certain options, any noncommutable fixed period certain option of less than ten years and all variable period certain options, the dollar amount is determined by multiplying (1) the Surrender Value less premium taxes, if any, applied under that option (after application of any Market Value Adjustment and less premium tax, if any) divided by $1,000, by (2) the applicable amount of the first monthly payment per $1,000 of value. 31 - For a death benefit annuity, the annuity value will be the amount of the death benefit. The first periodic annuity benefit payment is based upon the Accumulated Value as of a date not more than four weeks preceding the date that the first annuity benefit payment is due. The Company transmits variable annuity benefit payments for receipt by the payee by the first of a month. Variable annuity benefit payments are currently based on unit values as of the 15th day of the preceding month. THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure of the value of the monthly annuity benefit payments under a variable annuity option. The value of an Annuity Unit in each Sub-Account initially was set at $1.00. The value of an Annuity Unit under a Sub-Account on any Valuation Date thereafter is equal to the value of such unit on the immediately preceding Valuation Date, multiplied by the net investment factor of the Sub-Account for the current Valuation Period and divided by the assumed interest rate for the current Valuation Period. The assumed interest rate, discussed below, is incorporated in the variable annuity options offered in the Contract. DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first variable annuity benefit payment is divided by the value of an Annuity Unit of the selected Sub-Account(s) to determine the number of Annuity Units represented by the first payment. This number of Annuity Units remains fixed under all annuity options except the joint and two-thirds survivor annuity option. DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. The dollar amount of each periodic variable annuity benefit payment after the first will vary with the value of the Annuity Units of the selected Sub-Account(s). The dollar amount of each subsequent variable annuity benefit payment is determined by multiplying the fixed number of Annuity Units (derived from the dollar amount of the first payment, as described above) with respect to a Sub-Account by the value of an Annuity Unit of that Sub-Account on the applicable Valuation Date. The variable annuity options offered by the Company are based on a 3.5% assumed interest rate, which affects the amounts of the variable annuity benefit payments. Variable annuity benefit payments with respect to a Sub-Account will increase over periods when the actual net investment result of the Sub-Account exceeds the equivalent of the assumed interest rate. Variable annuity benefit payments will decrease over periods when the actual net investment results are less than the equivalent of the assumed interest rate. For an illustration of a calculation of a variable annuity benefit payment using a hypothetical example, see "ANNUITY BENEFIT PAYMENTS AND ACCUMULATION UNIT CALCULATION" in the SAI. NORRIS DECISION In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme Court ruled that, in connection with retirement benefit options offered under certain employer-sponsored employee benefit plans, annuity options based on sex-distinct actuarial tables are not permissible under Title VII of the Civil Rights Act of 1964. The ruling requires that benefits derived from contributions paid into a plan after August 1, 1983 be calculated without regard to the sex of the employee. Annuity benefits attributable to payments received by the Company under a Contract issued in connection with an employer-sponsored benefit plan affected by the NORRIS decision will be based on the greater of (1) the Company's unisex Non-Guaranteed Current Annuity Option Rates, or (2) the guaranteed unisex rates described in such Contract, regardless of whether the Annuitant is male or female. COMPUTATION OF VALUES THE ACCUMULATION UNIT. Each net payment is allocated to the investment options selected by the Owner. Allocations to the Sub-Accounts are credited to the Contract in the form of Accumulation Units. Accumulation Units are credited separately for each Sub-Account. The number of Accumulation Units of each Sub-Account credited to the Contract is equal to the portion of the net payment allocated to the Sub-Account, divided by the dollar value of the applicable Accumulation Unit as of the Valuation Date the payment is received at the Service Office. The number of Accumulation Units resulting from each payment will remain fixed unless changed by a subsequent split of Accumulation Unit value, a transfer, a withdrawal, or surrender. The dollar value of an Accumulation Unit of each Sub-Account varies from Valuation Date to Valuation Date based on 32 the investment experience of that Sub-Account, and will reflect the investment performance, expenses and charges of its Underlying Funds. The value of an Accumulation Unit was set at $1.00 on the first Valuation Date for each Sub-Account. Allocations to Guarantee Period Accounts and the Fixed Account are not converted into Accumulation Units, but are credited interest at a rate periodically set by the Company. See GUARANTEE PERIOD ACCOUNTS and APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT. The Accumulated Value under the Contract is determined by (1) multiplying the number of Accumulation Units in each Sub-Account by the value of an Accumulation Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3) adding the amount of the accumulations in the Fixed Account, if any. NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the investment performance of a Sub-Account from one Valuation Period to the next. This factor is equal to 1.000000 plus the result from dividing (1) by (2) and subtracting the sum of (3) and (4) where: (1) is the investment income of a Sub-Account for the Valuation Period, including realized or unrealized capital gains and losses during the Valuation Period, adjusted for provisions made for taxes, if any; (2) is the value of that Sub-Account's assets at the beginning of the Valuation Period; (3) is a charge for mortality and expense risks equal to 1.25% on an annual basis of the daily value of the Sub-Account's assets, and (4) is an administrative charge equal to 0.15% on an annual basis of the daily value of the Sub-Account's assets. The dollar value of an Accumulation Unit as of a given Valuation Date is determined by multiplying the dollar value of the corresponding Accumulation Unit as of the immediately preceding Valuation Date by the appropriate net investment factor. For an illustration of an Accumulation Unit calculation using an hypothetical example see the SAI. Subject to compliance with applicable state and federal law, the Company reserves the right to change the methodology for determining the net investment factor. CHARGES AND DEDUCTIONS Deductions under the Contract and charges against the assets of the Sub-Accounts are described below. Other deductions and expenses paid out of the assets of the Underlying Funds are described in the prospectuses and the SAIs of the Underlying Funds. VARIABLE ACCOUNT DEDUCTIONS MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a charge against the assets of each Sub-Account to compensate for certain mortality and expense risks it has assumed. The charge is imposed during both the accumulation phase and the annuity payout phase. The mortality risk arises from the Company's guarantee that it will make annuity benefit payments in accordance with annuity rate provisions established at the time the Contract is issued for the life of the Annuitant (or in accordance with the annuity payout option selected), no matter how long the Annuitant (or other payee) lives, and no matter how long all Annuitants as a class live. Therefore, the mortality charge is deducted during the annuity payout phase on all Contracts, including those that do not involve a life contingency, even though the Company does not bear direct mortality risk with respect to variable annuity settlement options that do not involve life contingencies. The expense risk arises from the Company's guarantee that the charges it makes will not exceed the limits described in the Contract and in this Prospectus. If the charge for mortality and expense risks is not sufficient to cover actual mortality experience and expenses, the Company will absorb the losses. If expenses are less than the amounts provided to the Company by the charge, the difference will be a profit to the Company. To the extent this charge results in a profit to the Company, such profit will be available for use by the Company for, among other things, the payment of distribution, sales and other expenses. 33 The mortality and expense risk charge is assessed daily at an annual rate of 1.25% of each Sub-Account's assets. This charge may not be increased. Since mortality and expense risks involve future contingencies which are not subject to precise determination in advance, it is not feasible to identify specifically the portion of the charge which is applicable to each. The Company estimates that a reasonable allocation might be 0.80% for mortality risk and 0.45% for expense risk. ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a daily charge at an annual rate of 0.15% of the average daily net assets of the Sub-Account. This charge may not be increased. The charge is imposed during both the accumulation phase and the annuity payout phase. The daily administrative expense charge is assessed to help defray administrative expenses actually incurred in the administration of the Sub-Account, without profits. There is no direct relationship, however, between the amount of administrative expenses imposed on a given Contract and the amount of expenses actually attributable to that Contract. Deductions for the Contract fee (described below under "CONTRACT FEE") and for the administrative expense charge are designed to reimburse the Company for the cost of administration and related expenses and are not expected to be a source of profit. The administrative functions and expense assumed by the Company in connection with the Variable Account and the Contract include, but are not limited to, clerical, accounting, actuarial and legal services, rent, postage, telephone, office equipment and supplies, expenses of preparing and printing registration statements, expense of preparing and typesetting prospectuses, and the cost of printing prospectuses not allocable to sales expense, filing and other fees. OTHER CHARGES. Because the Sub-Accounts purchase shares of the Funds, the value of the net assets of the Sub-Accounts will reflect the investment advisory fee and other expenses incurred by the Underlying Funds. Management fee waivers and/or reimbursements may be in effect for certain or all of the Underlying Funds. The prospectuses and SAIs of the Underlying Funds contain additional information concerning expenses of the Underlying Funds and should be read in conjunction with the Prospectus. CONTRACT FEE A $30 Contract fee is deducted on the Contract anniversary date and upon full surrender of the Contract if the Accumulated Value on any of these dates is less than $50,000. The Contract fee is currently waived for a Contract issued to and maintained by the trustee of a 401(k) plan. The Company reserves the right to impose a Contract fee up to $30 on Contracts issued to 401(k) plans but only with respect to Contracts issued after the date the waiver is no longer available. Where amounts have been allocated to more than one investment option, a percentage of the total Contract fee will be deducted from the value in each. The portion of the charge deducted from each investment option will be equal to the percentage which the value in that option bears to the Accumulated Value under the Contract. The deduction of the Contract fee from a Sub-Account will result in cancellation of a number of Accumulation Units equal in value to the percentage of the charge deducted from that investment option.. Where permitted by law, the Contract fee also may be waived for Contracts where, on the issue date, either the Owner or the Annuitant is within the class of "eligible persons" as defined in "Reduction or Elimination of Surrender Charge and Additional Amounts Credited" in "SURRENDER CHARGE" under CHARGES AND DEDUCTIONS. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER CHARGE If you elected one of the following riders prior to their discontinuance on 1/31/02, a separate monthly charge is made through a pro-rata reduction of the Accumulated Value of the Sub-Accounts, the Fixed Account and the Guarantee Period Accounts (based on the relative value that the Accumulation Units of the Sub-Account, the dollar amounts in the Fixed Account and the dollar amounts in the Guarantee Period Accounts bear to the total Accumulated Value.) The applicable charge is equal to the Accumulated Value on the last day of each month within which the rider has been in effect and, if applicable, on the date the Rider is terminated, multiplied by 1/12th of the following annual percentage rates: Minimum Guaranteed Annuity Payout (M-GAP) Rider with ten-year waiting period 0.25% Minimum Guaranteed Annuity Payout (M-GAP) Rider with fifteen-year waiting period 0.15% 34 For more information about the M-GAP Rider, see "DISCONTINUATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER" in the SAI. PREMIUM TAXES Some states and municipalities impose a premium tax on variable annuity contracts. State premium taxes currently range up to 3.5%. The Company makes a charge for state and municipal premium taxes, when applicable, and deducts the amount paid as a premium tax charge. The current practice of the Company is to deduct the premium tax charge in one of two ways: (1) if the premium tax was paid by the Company when payments were received, the premium tax charge may be deducted on a pro-rata basis when withdrawals are made, upon surrender of the Contract, or when annuity benefit payments begin (the Company reserves the right instead to deduct the premium tax charge for the Contract at the time the payments are received); or (2) the premium tax charge is deducted in total when annuity benefit payments begin. In no event will a deduction be taken before the Company has incurred a tax liability under applicable state law. If no amount for premium tax was deducted at the time the payment was received, but subsequently tax is determined to be due prior to the Annuity Date, the Company reserves the right to deduct the premium tax from the Contract's Accumulated Value at the time such determination is made. SURRENDER CHARGE No charge for sales expense is deducted from payments at the time the payments are made. A surrender charge, however, is deducted from the Accumulated Value of the Contract in the case of surrender and/or withdrawal of the Contract or at the time annuity benefit payments begin, within certain time limits described below. For purposes of determining the surrender charge, the Accumulated Value is divided into three categories: (1) New Payments - payments received by the Company during the seven years preceding the date of the surrender; (2) Old Payments - accumulated payments invested in the Contract for more than seven years; and (3) the amount available under the Withdrawal Without Surrender Charge provision. See "Withdrawal Without Surrender Charge" below. For purposes of determining the amount of any, surrenders will be deemed to be taken first from amounts available as a Withdrawal Without Surrender Charge, if any, then from Old Payments, and then from New Payments. Amounts available as a Withdrawal Without Surrender Charge followed by Old Payments may be withdrawn from the Contract at any time without the imposition of a surrender charge. If a withdrawal is attributable all or in part to New Payments, a surrender charge may apply. CHARGE FOR SURRENDER AND WITHDRAWAL. If the Contract is surrendered, or if New Payments are withdrawn, while the Contract is in force and before the Annuity Date, a surrender charge may be imposed. The amount of the charge will depend upon the number of years that any New Payments, to which the withdrawal is attributed have remained credited under the Contract. Amounts withdrawn are deducted first from Old Payments. Then, for the purpose of calculating surrender charges for New Payments, all amounts withdrawn are assumed to be deducted first from the oldest New Payment and then from the next oldest New Payment and so on, until all New Payments have been exhausted pursuant to the first-in-first-out ("FIFO") method of accounting. (See FEDERAL TAX CONSIDERATIONS for a discussion of how withdrawals are treated for income tax purposes.) 35 The surrender charge is as follows: COMPLETE CHARGE AS YEARS FROM PERCENTAGE OF DATE OF NEW PAYMENTS PAYMENT WITHDRAWN ----------- ------------- Less than 1 7% Less than 2 6% Less than 3 5% Less than 4 4% Less than 5 3% Less than 6 2% Less than 7 1% Thereafter 0% The amount withdrawn equals the amount requested by the Owner plus the charge, if any. The charge is applied as a percentage of the New Payments withdrawn, but in no event will the total surrender charge exceed a maximum limit of 7% of total gross New Payments. Such total charge equals the aggregate of all applicable surrender charges for surrender, withdrawals and annuitization. WAIVER OF SURRENDER CHARGE(S) AND ADDITIONAL AMOUNTS CREDITED PHYSICAL DISABILITY OR ADMISSION TO MEDICAL CARE FACILITY. Where permitted by state law, the Company will waive the surrender charge in the event that the Owner (or the Annuitant, if the Owner is not an individual) becomes physically disabled after the issue date of the Contract and before attaining age 65. The Company may require proof of such disability and continuing disability, including written confirmation of receipt and approval of any claim for Social Security Disability Benefits and reserves the right to obtain an examination by a licensed physician of its choice and at its expense. In addition, except in New Jersey (where not permitted by state law), the Company will waive the surrender charge in the event that an Owner (or the Annuitant, if the Owner is not an individual) is: (1) admitted to a medical care facility after the issue date and remains confined there until the later of one year after the issue date or 90 consecutive days or (2) first diagnosed by a licensed physician as having a fatal illness after the issue date of the Contract. For purposes of the above provision, "medical care facility" means any state-licensed facility (or, in a state that does not require licensing a facility that is operating pursuant to state law), providing medically necessary inpatient care which is prescribed by a licensed "physician" in writing and based on physical limitations which prohibit daily living in a non-institutional setting; "fatal illness" means a condition diagnosed by a licensed physician which is expected to result in death within two years of the diagnosis; and "physician" means a person other than the Owner, Annuitant or a member of one of their families who is state licensed to give medical care or treatment and is acting within the scope of that license. Where surrender charges have been waived under any of the situations discussed above, no additional payments under the Contract will be accepted unless required by state law. OTHER REDUCTIONS OR ELIMINATIONS OF SURRENDER CHARGES. From time to time the Company may allow a reduction in or elimination of the surrender charges, the period during which the charge applies, or both, and/or credit additional amounts on the Contract when the Contract is sold to individuals or groups of individuals in a manner that reduces sales expenses. The Company will consider factors such as the following: (1) the size and type of group or class, and the persistency expected from that group or class; (2) the total amount of payments to be received and the manner in which payments are remitted; (3) the purpose for which the Contract is being purchased and whether that purpose makes it likely that costs and expenses will be reduced; (4) other transactions where sales expenses are likely to be reduced; or (5) the level of commissions paid to selling broker-dealers or certain financial institutions with respect to 36 Contracts within the same group or class (for example, broker-dealers who offer the Contract in connection with financial planning services offered on a fee-for-service basis). The Company also may reduce or waive the contingent sales charge and/or credit additional amounts on the Contract where either the Owner or the Annuitant on the issue date are within the following classes of individuals ("eligible persons"): (1) employees and registered representatives of any broker-dealer which has entered into a sales agreement with the Company to sell the Contract; (2) an employee of the Company, its affiliates or subsidiaries; (3) officers, directors, trustees and employees of any of the Underlying Funds, investment managers or Sub-Advisers of the Underlying Funds; (4) and the spouses of and immediate family members residing in the same household with such eligible persons. "Immediate family members" means children, siblings, parents and grandparents. Finally, if permitted under state law, surrender charges may be waived under Section 403(b) Contracts where the amount withdrawn is being contributed to a life insurance policy issued by the Company as part of the individual's Section 403(b) plan. Any reduction or elimination in the amount or duration of the surrender charge will not discriminate unfairly among purchasers of the Contract. The Company will not make any changes to the charge where prohibited by law. WITHDRAWAL WITHOUT SURRENDER CHARGE. In each calendar year, the Company will waive the surrender charge, if any, on an amount ("Withdrawal Without Surrender Charge Amount") equal to the greatest of (1), (2) or (3): Where (1) is: 100% of Cumulative Earnings (calculated as the Accumulated Value as of the Valuation Date coincident with or next following the date of receipt of the request for withdrawal, reduced by total gross payments not previously withdrawn); Where (2) is: 15% of the Accumulated Value as of the Valuation Date coincident with or next following the date of receipt of the request for withdrawal, reduced by the total amount of any prior withdrawals made in the same calendar year to which no surrender charge was applied; and Where (3) is: The amount calculated under the Company's life expectancy distribution Option (see "Life Expectancy Distributions" above) whether or not the withdrawal was part of such distribution (applies only if Annuitant is also an Owner). 37 For example, an 81-year-old Owner/Annuitant with an Accumulated Value of $15,000, of which $1,000 is Cumulative Earnings, would have a Withdrawal Without Surrender Charge Amount of $2,250, which is equal to the greatest of: (1) Cumulative Earnings ($1,000); (2) 15% of Accumulated Value ($2,250); or (3) LED of 10.2% of Accumulated Value ($1,530). The Withdrawal Without Surrender Charge Amount will be deducted first from Cumulative Earnings. If the Withdrawal Without Surrender Charge Amount exceeds Cumulative Earnings, the excess amount will be deemed withdrawn from payments not previously withdrawn on a LIFO (last-in/first-out) basis. This means that the last payments credited to the Contract will be withdrawn first. If more than one withdrawal is made during the year, on each subsequent withdrawal the Company will waive the surrender charge, if any, until the entire Withdrawal Without Surrender Charge Amount has been withdrawn. Amounts withdrawn from a Guarantee Period Account prior to the end of the applicable Guarantee Period will be subject to a Market Value Adjustment. SURRENDERS. In the case of a complete surrender, the amount received by the Owner is equal to the entire Surrender Value, net of any applicable tax withholding. Subject to the same rules that are applicable to withdrawals, the Company will not assess a surrender charge on an amount equal to the greatest Withdrawal Without Surrender Charge Amount available. Where an Owner who is trustee under a pension plan surrenders, in whole or in part, a Contract on a terminating employee, the trustee will be permitted to reallocate all or a part of the Accumulated Value under the Contract to other contracts issued by the Company and owned by the trustee, with no deduction for any otherwise applicable surrender charge. Any such reallocation will be at the Accumulation Unit values for the Sub-Accounts as of the valuation date on which a written, signed request is received at the Service Office. CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If the Owner chooses any commutable period certain option or a non-commutable fixed period certain option for less than ten years, a surrender charge will be deducted from the Accumulated Value of the Contract if the Annuity Date occurs at any time when the surrender charge would still apply had the Contract been surrendered on the Annuity Date. No surrender charge is imposed at the time of annuitization in any Contract year under an option involving a life contingency or for any noncommutable fixed period certain option for ten years or more. A Market Value Adjustment, however, may apply. See GUARANTEE PERIOD ACCOUNTS. If an owner of an existing fixed annuity contract issued by the Company wishes to elect a variable annuity option, the Company may permit such owner to exchange, at the time of annuitization, the fixed contract for the Contract offered in this Prospectus. The proceeds of the fixed contract, minus any surrender charge applicable under the fixed contract if a period certain option is chosen, will be applied towards the variable annuity option desired by the Owner. The number of Annuity Units under the option will be calculated using the Annuity Unit values as of the 15th of the month preceding the Annuity Date. TRANSFER CHARGE The Company currently makes no charge for processing transfers. The Company guarantees that the first 12 transfers in a Contract year will be free of transfer charge, but reserves the right to assess a charge, guaranteed never to exceed $25, for each subsequent transfer in a Contract year to reimburse it for the expense of processing transfers. For more information, see "TRANSFER PRIVILEGE" under DESCRIPTION OF THE CONTRACT. 38 GUARANTEE PERIOD ACCOUNTS Due to certain exemptive and exclusionary provisions in the securities laws, interests in the Guarantee Period Accounts and the Company's Fixed Account are not registered as an investment company under the provisions of the Securities Act of 1933 ("the 1933 Act") or the 1940 Act. Accordingly, the staff of the SEC has not reviewed the disclosures in this Prospectus relating to the Guarantee Period Accounts or the Fixed Account. Nevertheless, disclosures regarding the Guarantee Period Accounts and the Fixed Account of this annuity Contract or any benefits offered under these accounts may be subject to the provisions of the 1933 Act relating to the accuracy and completeness of statements made in this Prospectus. INVESTMENT OPTIONS. In most jurisdictions, there currently are nine Guarantee Periods available under the Contract with durations of two, three, four, five, six, seven, eight, nine and ten years. Each Guarantee Period established for the Owner is accounted for separately in a non-unitized segregated account, except in California where it is accounted for in the Company's General Account. Each Guarantee Period Account provides for the accumulation of interest at a Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or transferred to a Guarantee Period Account is determined from time to time by the Company in accordance with market conditions; however, once an interest rate is in effect for a Guarantee Period Account, the Company may not change it during the duration of the Guarantee Period. In no event will the Guaranteed Interest Rate be less than 3%. To the extent permitted by law, the Company reserves the right at any time to offer Guarantee Periods with durations that differ from those which were available when the Contract initially was issued, and to stop accepting new allocations, transfers or renewals to a particular Guarantee Period. Owners may allocate net payments or make transfers from any of the Sub-Accounts, the Fixed Account or an existing Guarantee Period Account to establish a new Guarantee Period Account at any time prior to the Annuity Date (subject to the Fixed Account limitations in some states; see APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT). Transfers from a Guarantee Period Account on any date other than on the day following the expiration of that Guarantee Period will be subject to a Market Value Adjustment. The Company establishes a separate investment account each time the Owner allocates or transfers amounts to a Guarantee Period except that amounts allocated to the same Guarantee Period on the same day will be treated as one Guarantee Period Account. The minimum that may be allocated to establish a Guarantee Period Account is $1,000. If less than $1,000 is allocated, the Company reserves the right to apply that amount to the Cash Reserve Series. The Owner may allocate amounts to any of the Guarantee Periods available. At least 45 days, but not more than 75 days, prior to the end of a Guarantee Period, the Company will notify the Owner in writing of the expiration of that Guarantee Period. At the end of a Guarantee Period the Owner may transfer amounts to the Sub-Accounts, the Fixed Account or establish a new Guarantee Period Account of any duration then offered by the Company without a Market Value Adjustment. If reallocation instructions are not received at the Service Office before the end of a Guarantee Period, the account value automatically will be applied to a new Guarantee Period Account with the same duration, unless (1) less than $1,000 would remain in the Guarantee Period Account on the expiration date, or (2) the Guarantee Period would extend beyond the Annuity Date, or is no longer available. In such cases, the Guarantee Period Account value will be transferred to the Sub-Account investing in the Cash Reserve Series. Where amounts automatically have been renewed in a new Guarantee Period, the Company currently gives the Owner an additional 30 days to transfer out of the Guarantee Period Account without application of a Market Value Adjustment. This practice may be discontinued or changed with notice at the Company's discretion. MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to transfers, withdrawals, or a surrender from a Guarantee Period Account on the expiration of its Guarantee Period. No Market Value Adjustment applies to deductions taken for Contract fees or rider charges. In addition, no negative Market Value Adjustment will be applied to a death benefit although a positive Market Value Adjustment, if any, will be applied to increase the value of the death benefit when based on the Contract's Accumulated Value. See "DEATH BENEFIT" under DESCRIPTION OF THE CONTRACT. A Market Value Adjustment will apply 39 to all other transfers, withdrawals, or a surrender. Amounts applied under an annuity option are treated as withdrawals when calculating the Market Value Adjustment. The Market Value Adjustment will be determined by multiplying the amount taken from each Guarantee Period Account before deduction of any surrender charge by the market value factor. The market value factor for each Guarantee Period Account is equal to: [(1+i)/(1+j)](TO THE POWER OF n/365) - 1 where: i is the Guaranteed Interest Rate expressed as a decimal (for example: 3% = 0.03) being credited to the current Guarantee Period; j is the new Guaranteed Interest Rate, expressed as a decimal, for a Guarantee Period with a duration equal to the number of years remaining in the current Guarantee Period, rounded to the next higher number of whole years. If that rate is not available, the Company will use a suitable rate or index allowed by the Department of Insurance; and n is the number of days remaining from the Effective Valuation Date to the end of the current Guarantee Period. Based on the application of this formula, if the then current market rates are lower than the rate being credited to the Guarantee Period Account, the value of a Guarantee Period Account will INCREASE after the Market Value Adjustment is applied. If the then current market rates are higher than the rate being credited to the Guarantee Period Account, the value of a Guarantee Period Account will DECREASE after the Market Value Adjustment is applied. The Market Value Adjustment is limited, however, so that even if the account value is decreased after application of a Market Value Adjustment, it will equal or exceed the Owner's principal plus 3% earnings per year less applicable Contract fees. Conversely, if the then current market rates are lower and the account value is increased after the Market Value Adjustment is applied, the increase in value also is affected by the minimum guaranteed rate of 3%. In this situation, the amount that will be added to the Guarantee Period Account is limited to the difference between the amount earned and the 3% minimum guaranteed earnings. For examples of how the Market Value Adjustment works, see APPENDIX B --SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT. PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL. Under this feature, the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company will then compute the proportion of the initial payment that must be allocated to the Guarantee Period selected, assuming no transfers or withdrawals, in order to ensure that the value in the Guarantee Period Account on the last day of the Guarantee Period will equal the amount of the initial payment, LESS ANY CONTRACT FEES OR CHARGES THAT ARE APPLICABLE TO THE GUARANTEE PERIOD ACCOUNTS. The required amount then will be allocated to the pre-selected Guarantee Period Account and the remaining balance to the other investment options selected by the Owner in accordance with the procedures described in "PAYMENTS" under DESCRIPTION OF THE CONTRACT. Unless the Company is notified otherwise, if a subsequent payment is made after the Program to Protect Principal and Provide Growth Potential has been selected and during the Guarantee Period, such payment will be allocated among the selected Sub-Accounts only. If you want the subsequent payment to be allocated to a new Guarantee Period Account while enrolled in the Program, you must provide payment allocation instructions to the Company that include (1) the Guarantee Period and (2) the dollar or percentage amount you want allocated to that Guarantee Period Account. WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of amounts held in the Guarantee Period Accounts. Withdrawals from these accounts will be made in the same manner and be subject to the same rules as set forth under "SURRENDER" and "WITHDRAWALS" under DESCRIPTION OF THE CONTRACT. In addition, the following provisions also apply to withdrawals from a Guarantee Period Account: (1) a Market Value Adjustment will apply to all withdrawals, including Withdrawals without Surrender Charge, unless made at the end of the Guarantee Period; and (2) the Company reserves the right to defer payments of amounts withdrawn from a Guarantee Period Account for up to six months from the date it receives the withdrawal request. If deferred for 30 days or more, the Company will pay interest on the amount 40 deferred at a rate of at least 3%. In the event that a Market Value Adjustment applies to a withdrawal of a portion of the value of a Guarantee Period Account, it will be calculated on the amount requested and deducted or added to the amount remaining in the Guarantee Period Account. If the entire amount in a Guarantee Period Account is requested, the adjustment will be made to the amount payable. If a surrender charge applies to the withdrawal, it will be calculated as set forth under "SURRENDER CHARGE" under CHARGES AND DEDUCTIONS after application of the Market Value Adjustment. FEDERAL TAX CONSIDERATIONS The effect of federal income taxes on the value of a Contract, on withdrawals or surrenders, on annuity benefit payments, and on the economic benefit to the Owner, Annuitant, or beneficiary depends upon a variety of factors. The following discussion is based upon the Company's understanding of current federal income tax laws as they are interpreted as of the date of this Prospectus. No representation is made regarding the likelihood of continuation of current federal income tax laws or of current interpretations by the IRS. In addition, this discussion does not address state or local tax consequences that may be associated with the Contract. IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX ASPECTS OF AMOUNTS PAID INTO AND RECEIVED FROM A CONTRACT IS NOT EXHAUSTIVE, DOES NOT PURPORT TO COVER ALL SITUATIONS, AND IS NOT INTENDED AS TAX ADVICE. A QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION OF LAW TO INDIVIDUAL CIRCUMSTANCES. GENERAL THE COMPANY. The Company is taxed as a life insurance company under Subchapter L of the Code. The Company files a consolidated tax return with its affiliates. The Variable Account is considered a part of and taxed with the operations of the Company and is not taxed as a separate entity. As of the date of this Prospectus, the Variable Account and Sub-Accounts are not subject to tax, but the Company reserves the right to make a charge for any future tax liability it may incur as a result of the existence of the Contract, the Variable Account or the Sub-Accounts or for any tax imposed on the Company with respect to the income or assets of the Contract, the Variable Account or the Sub-Accounts held by the Company. Any such charge for taxes will be assessed against the Variable Account or the Sub-Accounts on a fair and equitable basis in order to preserve equity among classes of Owners and with respect to each Sub-Account account as though that Sub-Account were a separate taxable entity. DIVERSIFICATION REQUIREMENTS. Section 817(h) of Code provides that the underlying investments held under a non-qualified annuity contract must satisfy certain diversification requirements in order for the contract to be treated as an annuity contract. If these requirements are not met, the Owner will be taxed each year on the annual increase in Accumulated Valued unless a waiver of the diversification failure is obtained from the IRS. The IRS has issued regulations under Section 817(h) of the Code relating to the diversification requirements for variable annuity and variable life insurance contracts. The regulations prescribed by the Treasury Department provide that the investments of a segregated asset account underlying a variable annuity contract are adequately diversified if no more than 55% of the value of the assets of such account is represented by any one investment, no more than 70% by any two investments, no more than 80% by any three investments, and no more than 90% by any four investments. These diversification requirements must be applied separately to each Sub-Account. The Company believes that the Underlying Portfolios will comply with the current diversification requirements so that a non-qualified Contract that invests in one or more of those Portfolios will not be disqualified from annuity contract treatment by Section 817(h) of the Code. In the event that future IRS regulations and/or rulings would require Contract modifications in order to remain in compliance with the 41 diversification standards, the Company will make reasonable efforts to comply, and it reserves the right to make such changes as it deems appropriate for that purpose. OWNER CONTROL. In some circumstances, owners of variable contracts who retain excessive control over the investment of the underlying separate account assets may be treated as the owners of those assets and may be subject to tax on income produced by those assets. Although published guidance in this area does not address certain aspects of the Contracts, we believe that the Owner of a Contract should not be treated as the owner of any assets in the Separate Account. We reserve the right to modify the Contracts to bring them into conformity with applicable standards should such modification be necessary to prevent Owners of the Policies from being treated as the owners of the underlying Separate Account assets. In order for a non-qualified variable annuity contract to qualify for tax deferral, assets in the segregated accounts underlying the contract must be considered to be owned by the insurance company and not by the contract owner. In three Revenue Rulings issued before the enactment of Section 817(h) of the Code in 1984, the IRS held that where a variable contract owner had certain forms of actual or potential control over the investments held under the variable annuity contract, the contract owner, rather than the issuing insurance company, would be treated as the owner and would be taxable on the income and gains produced by those assets. QUALIFIED AND NON-QUALIFIED CONTRACTS From a federal tax viewpoint there are two broad categories of variable annuity contracts: "qualified" contracts and "non-qualified" contracts. A qualified contract is one that is purchased in connection with a tax-qualified retirement plan or program eligible for special tax treatment under the Code. A non-qualified contract is one that is not purchased in connection with a retirement plan or program eligible for special tax treatment. The tax treatment for certain withdrawals or surrenders will vary, depending on whether they are made from a qualified contract or a non-qualified contract. For more information on the tax provisions applicable to qualified contracts, see "PROVISIONS APPLICABLE ONLY TO TAX QUALIFIED PLANS" below. TAXATION OF THE CONTRACT IN GENERAL. The Company believes that the Contract described in this Prospectus, with certain exceptions (see "Nonnatural Owner" below), will be considered an annuity contract under Section 72 of the Code which governs the taxation of annuities, and, if the Contract is a qualified contract, certain other provisions of the Code that will apply to it. Please note, however, if the Owner of a non-qualified Contract chooses an Annuity Date beyond the Owner's life expectancy, it is possible that the Contract may not be considered an annuity for tax purposes because there is no reasonable basis for expecting that annuity payments will ever be made under the Contract. In that event, the Owner would be taxed on the annual increase in Accumulated Value under the Contract. The Owner should consult a qualified tax adviser for more information. The following discussion assumes that a Contract will be treated as an annuity contract subject to Section 72 and, in the case of a qualified Contract, any other applicable provisions of the Code. MANDATORY DISTRIBUTION REQUIREMENTS FOR QUALIFIED CONTRACTS. Under Section 401(a)(9) of the Code, qualified Contracts will generally be subject both to mandatory minimum distribution requirements upon attainment of age 70 1/2 by the Owner and to mandatory death benefit distribution requirements upon the death of the Owner, either before or after the commencement of benefit payments. (Note: the rules for Roth IRAs do not currently require distributions to begin during the Owner's lifetime.) To comply with Section 401(a)(9), tax-qualified plans must include a provision for the commencement of benefits when a participant attains age 70 1/2 (or under certain plans when the participant retires, if later.) The regulations under Section 401(a)(9) provide that if the minimum distribution requirements are applicable to an annuity contract for any year in which annuity payments have not yet commenced on an irrevocable basis, except for acceleration, the required minimum distribution for that year must be computed by determining the entire interest of the Owner in the Contract as of the prior December 31 and dividing that amount by the applicable distribution period as determined under the regulations. The regulations further provide that if the minimum distribution requirements are applicable to an annuity contract for any year in which annuity payments have commenced on an irrevocable basis, payments under 42 such contract must generally be non-increasing. According to the regulations, payments will not fail to satisfy the non-increasing payment requirement merely because payments are increased in one or more of the following ways: (1) By a constant percentage, applied not less frequently than annually; (2) To provide a final payment upon the death of the employee that does not exceed the excess of the total value being annuitized over the total payments before the death of the employee; (3) As a result of dividend payments or other payments that result from actuarial gains, but only if actuarial gain is measured no less frequently than annually and the resulting dividend payments or other payments are either paid no later than the year following the year for which the actuarial experience is measured or paid in the same form as the payment of the annuity over the remaining period of the annuity, beginning no later than the year following the year for which the actuarial experience is measured; and (4) An acceleration of payments under the annuity which is defined as a shortening of the payment period with respect to an annuity or a full or partial commutation of the future annuity payments. An increase in the payment amount will be treated as an acceleration of payments in the annuity only if the total future expected payments under the annuity (including the amount of any payment made as a result of the acceleration) is decreased as a result of the change in payment period. Some forms of annuity payments permitted under the Contract may not meet the requirements under the final regulations issued pursuant to Section 401(a)(9). In the event that future IRS regulations and/or rulings would require Contract modifications in order for distributions to the Owner to remain in compliance with these distribution requirements, the Company will make reasonable efforts to comply and it reserves the right to make such changes as it deems appropriate for that purpose. To comply with Section 401(a)(9) of the Code, tax-qualified plans must also include provisions for the distribution of plan benefits after the death of the participant. If the surviving spouse of the participant is the beneficiary subject to the terms of such a plan, Section 401(a)(9) permits the surviving spouse to defer the commencement of benefits until he or she reaches age 70 1/2, at which time the minimum distribution requirements will apply as though the spouse were a plan participant. If the beneficiary of a qualified Contract is not the participant's surviving spouse, the operation of the death benefit distribution requirements of Section 401(a)(9) will depend upon whether annuity payments have commenced. If the participant dies and annuity payments have commenced, the entire remaining interest must be distributed to the beneficiary at least as rapidly as under the method of distribution being used as of the date of the participant's death. If the participant dies before annuity payments have commenced, the entire interest must be distributed to the beneficiary either (i) within five years after the participant's death and/or (ii) in distributions that commence within one year after the date of death and are made in substantially equal amounts over a period not extending beyond the life or life expectancy of the beneficiary. If a beneficiary intends to comply with the substantially equal payment requirements without electing annuity payments, the required minimum distribution for any year must be computed by determining the entire interest of the owner in the Contract as of the prior December 31 and dividing that amount by the life expectancy of the owner and beneficiary as determined under the regulations. If the beneficiary intends to comply with the requirement by electing to receive annuity payments, these payments must satisfy the "nonincreasing payment" requirement discussed above. Some forms of annuity payments offered under the Contract may not satisfy these requirements. In the event that future IRS regulations and/or rulings would require Contract modifications in order for distributions to a beneficiary to remain in compliance with these distribution requirements, the Company will make reasonable efforts to comply, and it reserves the right to make such changes as it deems appropriate for that purpose. MANDATORY DISTRIBUTION REQUIREMENTS FOR NON-QUALIFIED CONTRACTS. Under Section 72(s) of the Code, a non-qualified annuity contract must contain specified provisions with respect to the distribution of the amounts held under the contract following the death of the contract owner. If this requirement is not met, the owner 43 will be taxed each year on the annual increase in Accumulated Value. This Contract contains provisions that are designed to meet the requirements of Section 72(s). Under Section 72(s), if the deceased Owner's surviving spouse is the beneficiary, the surviving spouse may retain the contract and continue deferral during his or her lifetime. If the beneficiary of the Contract is not the deceased Owner's surviving spouse, the specific distribution requirement applicable under Section 72(s) will depend upon whether annuity payments have commenced. If any Owner dies after annuity payments have commenced, the entire remaining interest under the Contract must be distributed at least as rapidly as under the method of distribution being used as of the date of the Owner's death. If any Owner dies before annuity payments have commenced, then the entire amount held under the Contract must be distributed (1) within five years after the death of the Owner; and/or (2) in distributions that commence within one year after the date of death and are made in substantially equal amounts over a period not extending beyond the life or life expectancy of the beneficiary. In a private letter ruling issued in 2001, the IRS held that distributions made to the designated beneficiary under a non-qualified variable annuity contract under a procedure that provided for payments over the life expectancy of the beneficiary would qualify under the "substantially equal" procedure described in (ii) above, even though the beneficiary had the right to accelerate payments under the distribution procedure so long as the payments continued automatically unless and until such an acceleration occurred. In the event that future IRS regulations and/or rulings would require Contract modification in order to remain in compliance with these distribution requirements, the Company will make reasonable efforts to comply and it reserves the right to make such changes as it deems appropriate for that purpose. WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, increases in the Contract's Accumulated Value are not taxable to the Owner until withdrawn from the Contract. Under the current provisions of the Code, amounts received or deemed to have been received under an annuity contract prior to annuitization (including payments made upon the death of the annuitant or owner), generally are first allocable to any investment gains credited to the contract over the taxpayer's "investment in the contract" and, to that extent, are treated as ordinary income subject to federal income taxation. For this purpose, the "investment in the contract" is the total of all payments to the Contract that were not excluded from the Owner's income less any amounts previously withdrawn from the Contract which were excluded from income as recovery of the investment in the Contract. For purposes of computing the taxable amount of any distribution under these rules, Section 72(e)(11)(A)(ii) requires that all non-qualified deferred annuity contracts issued by the same insurance company to the same owner during a single calendar year be treated as one contract. Different rules may apply to Qualified Contracts. ANNUITY PAYOUTS AFTER ANNUITIZATION. After annuity benefit payments begin under the Contract, a portion of each such payment received may generally be excluded from income as a recovery of the investment in the Contract. Different formulas apply to the computation of the excludable portion with respect to fixed annuity payments and with respect to variable annuity payments, but the general effect of both formulas is to allocate the exclusion from income for the investment in the Contract ratably over the period during which annuity payments will be received. All annuity payments received in excess of this excludable amount are taxable as ordinary income. Once the investment in the Contract is fully recovered, because payments under the Contract have continued for longer than expected, the entire amount of all future payments will be taxable. If the annuitant dies before the entire investment in the Contract is recovered, a deduction for the remaining amount is generally allowed on the annuitant's final tax return. PENALTY ON EARLY DISTRIBUTIONS. Under Section 72(q) of the Code, a 10% penalty tax may be imposed on the withdrawal of investment gains from a non-qualified Contract if the withdrawal is made prior to age 59 1/2. A similar 10% penalty tax is imposed under Section 72(t) of the Code on withdrawals or distributions of investment gains from a qualified Contract prior to age 59 1/2. The penalty tax will not be imposed on withdrawals: - taken on or after age 59 1/2; or 44 - if the withdrawal follows the death of the Owner (or, if the Owner is not an individual, the death of the primary Annuitant, as defined in the Code); or in the case of the Owner's "total disability" (as defined in the Code); or - if withdrawals from a qualified Contract are made to an employee who has terminated employment after reaching age 55; or - irrespective of age, if the amount received is one of a series of "substantially equal" periodic payments made at least annually for the life or life expectancy of the payee or the payee and a beneficiary. Some forms of annuity payments permitted under the Contracts may not meet the "substantially equal" payment requirements under Section 72(q) or Section 72(s). Because of the uncertainties regarding these issues, a qualified tax adviser should be consulted prior to any request for a withdrawal from a Contract prior to age 59 1/2. ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract without receiving adequate and full consideration for the transfer, Section 72 of the Code generally requires the Owner to report taxable income equal to any investment gain in value over the Owner's cost basis at the time of the transfer. This acceleration rule applies to a transfer to another individual (other than the Owner's spouse) or to a nonnnatural person, such as a trust. If the transfer is to a charity, the Owner may be allowed a deduction for some or all of the value of the Contract transferred. If the transfer is not to a charity, the Owner may also be subject to gift tax on some or all of the value of the Contract transferred without adequate and full consideration. NONNATURAL OWNERS. As a general rule, deferred annuity contracts owned by "nonnatural persons" (e.g., a corporation) are not treated as annuity contracts for federal tax purposes, and the investment income attributable to contributions made after February 28, 1986 is taxed as ordinary income that is received or accrued by the owner during the taxable year. This rule does not apply to annuity contracts purchased with a single payment when the annuity date is no later than a year from the Issue Date (an immediate annuity) or to deferred annuities owned by qualified employer plans, estates, employers with respect to a terminated pension plan, and entities other than employers, such as a trust, holding an annuity as an agent for a natural person. This exception, however, will not apply in cases of any employer who is the owner of an annuity contract under a non-qualified deferred compensation plan. TAX WITHHOLDING The Code requires withholding with respect to payments or distributions from non-qualified contracts and IRAs, unless a taxpayer elects not to have withholding. A mandatory 20% withholding requirement applies to distributions from most other qualified contracts if such distribution would have been eligible to be rolled over into another qualified plan. In addition, the Code requires reporting to the IRS of the amount of income received with respect to payment or distributions from annuities. OTHER TAX ISSUES FEDERAL ESTATE TAXES. While no attempt is being made to discuss the federal estate tax implications of the Contract, you should keep in mind that the value of an annuity contract owned by a decedent and payable to a beneficiary by virtue of surviving the decedent is included in the decedent's gross estate. Depending on the terms of the annuity contract, the value of the annuity included in the gross estate may be the value of the lump sum payment payable to the designated beneficiary or the actuarial value of the payments to be received by the beneficiary. Consult an estate planning advisor for more information. GENERATION-SKIPPING TRANSFER TAX. Under certain circumstances, the Code may impose a "generation skipping transfer tax" when all or part of an annuity contract is transferred to, or a death benefit is paid to, an individual two or more generations younger than the Owner. Regulations issued under the Code may require us to deduct the tax from your Contract, or from any applicable payment, and pay it directly to the IRS. ANNUITY PURCHASES BY RESIDENTS OF PUERTO RICO. The Internal Revenue Service has ruled that income received by residents of Puerto Rico under life insurance or annuity contracts issued by a Puerto Rico branch of a United States life insurance company is U.S.-source income that is generally subject to United States federal income tax. 45 ANNUITY PURCHASES BY NONRESIDENT ALIENS AND FOREIGN CORPORATIONS. The discussion above provides general information regarding U.S. federal income tax consequences to annuity owners that are U.S. citizens or residents. Owners that are not U.S. citizens or residents will generally be subject to U.S. federal withholding tax on taxable distributions from annuity contracts at a 30% rate, unless a lower treaty rate applies. In addition, Owners may be subject to state and/or municipal taxes and taxes that may be imposed by the Owner's country of citizenship or residence. Consult with a qualified tax adviser regarding U.S. state, and foreign taxation with respect to an annuity contract. FOREIGN TAX CREDITS. We may benefit from any foreign tax credits attributable to taxes paid by certain Funds to foreign jurisdictions to the extent permitted under federal tax law. POSSIBLE TAX LAW CHANGES. Although the likelihood of legislative changes is uncertain, there is always the possibility that the tax treatment of the Contract could change by legislation or otherwise. Consult a tax adviser with respect to legislative developments and their effect on the Contract. We have the right to modify the contract in response to legislative changes that could otherwise diminish the favorable tax treatment that annuity contract Owners currently receive. We make no guarantee regarding the tax status of any contact and do not intend the above discussion as tax advice. PROVISIONS APPLICABLE ONLY TO TAX QUALIFIED PLANS Federal income taxation of assets held inside a qualified retirement plan and of earnings on those assets is deferred until distribution of plan benefits begins. As such, it is not necessary to purchase a variable annuity contract solely to obtain its tax deferral feature. However, other features offered under this Contract and described in this Prospectus -- such as the minimum guaranteed death benefit, the guaranteed fixed annuity rates and the wide variety of investment options -- may make this Contract a suitable investment for your qualified retirement plan. The tax rules applicable to qualified retirement plans, as defined by the Code, are complex and vary according to the type of plan. Benefits under a qualified plan may be subject to that plan's terms and conditions irrespective of the terms and conditions of any annuity contract used to fund such benefits. As such, the following is simply a general description of various types of qualified plans that may use the Contract. Before purchasing any annuity contract for use in funding a qualified plan, more specific information should be obtained. Qualified Contracts may include special provisions (endorsements) changing or restricting rights and benefits otherwise available to owners of non-qualified Contracts. Individuals purchasing a qualified Contract should carefully review any such changes or limitations that may include restrictions to ownership, transferability, assignability, contributions, and distributions. CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers and certain associations to establish various types of tax-favored retirement plans for employees, including self-employed individuals. Employers intending to use qualified Contracts in connection with such plans should seek competent advice as to the suitability of the Contract to their specific needs and as to applicable Code limitations and tax consequences. INDIVIDUAL RETIREMENT ANNUITIES. Sections 408 and 408A of the Code permit eligible individuals to contribute to an individual retirement program known as an Individual Retirement Annuity ("IRA"). Note: This term covers all IRAs permitted under Sections 408 and 408A of the Code, including Roth IRAs. 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. In addition, certain distributions from other types of retirement plans may be "rolled over," on a tax-deferred basis, to an IRA. Purchasers of an IRA Contract will be provided with supplementary information as may be required by the IRS or other appropriate agency, and will have the right to cancel the Contract as described in this Prospectus. See "RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY" under DESCRIPTION OF THE CONTRACT. The Contract, including all available riders, was filed with the IRS and its form approved as a prototype. Such an approval is an approval as to the form of the Contract and does not represent a determination of its merits. 46 Eligible employers that meet specified criteria may establish simplified employee pension plans (SEP-IRAs) for their employees using IRAs. Employer contributions that may be made to such plans are larger than the amounts that may be contributed to regular IRAs and may be deductible to the employer. TAX-SHELTERED ANNUITIES ("TSAs"). Under the provisions of Section 403(b) of the Code, payments made to annuity Contracts purchased for employees under annuity plans adopted by public school systems and certain organizations which are tax exempt under Section 501(c)(3) of the Code are excludable from the gross income of such employees to the extent that total annual payments do not exceed the maximum contribution permitted under the Code. Purchasers of TSA contracts should seek competent advice as to eligibility, limitations on permissible payments and other tax consequences associated with the contracts. Withdrawals or other distributions attributable to salary reduction contributions (including earnings thereon) made to a TSA contract after December 31, 1988, may not begin before the employee attains age 59 1/2, separates from service, dies or becomes disabled. In the case of hardship, an Owner may withdraw amounts contributed by salary reduction, but not the earnings on such amounts. Even though a distribution may be permitted under these rules (e.g., for hardship or after separation from service), it may be subject to a 10% penalty tax as a premature distribution, in addition to income tax. For Contracts issued after December 31, 2008, amounts attributable to contributions other than salary reduction contributions generally may not be distributed before severance of employment or occurrence of an event specified in the employer's Section 403(b) plan. DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans established by governmental and certain other tax-exempt employers for their employees may invest in annuity contracts. Contributions and investment earnings are not taxable to employees until distributed; however, with respect to payments made after February 28, 1986, a Contract owned by a state or local government or a tax-exempt organization will not be treated as an annuity under Section 72 as well. TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA contract issued to participants in the Texas Optional Retirement Program may not be received except in the case of the participant's death, retirement or termination of employment in the Texas public institutions of higher education. These additional restrictions are imposed under the Texas Government Code and a prior opinion of the Texas Attorney General. STATEMENTS AND REPORTS An Owner is sent a report semi-annually which provides certain financial information about the Underlying Funds. At least annually, the Company will furnish a statement to the Owner containing information about his or her Contract, including Accumulation Unit Values and other information as required by applicable law, rules and regulations. The Company will also send a confirmation statement to the Owner each time a transaction is made affecting the Contract's Accumulated Value. (Certain transactions made under recurring payment plans such as Dollar Cost Averaging may in the future be confirmed quarterly rather than by immediate confirmations.) The Owner should review the information in all statements carefully. All errors or corrections must be reported to the Company immediately to assure proper crediting to the Contract. The Company will assume that all transactions are accurately reported on confirmation statements and other statements unless the Owner notifies the Service Office in writing within 30 days after receipt of the statement. LOANS (QUALIFIED CONTRACTS ONLY) Loans are available to owners of TSA Contracts (i.e., Contracts issued under Section 403(b) of the Code) and to Contracts issued to plans qualified under Sections 401(a) and 401(k) of the Code. You must use a Company form to request a loan. You may obtain Company forms by calling 1-800-533-2124. Loans are subject to provisions of the Code and to applicable qualified retirement plan rules. Tax advisors and plan fiduciaries should be consulted prior to exercising loan privileges. Loaned amounts will be withdrawn first from Sub-Account and Fixed Account values on a pro-rata basis until exhausted. Thereafter, any additional amounts will be withdrawn from the Guarantee Period Accounts (pro 47 rata by duration and LIFO within each duration), subject to any applicable Market Value Adjustments. The maximum loan amount will be determined under the Company's maximum loan formula. The minimum loan amount is $1,000. Loans will be secured by a security interest in the Contract and the amount borrowed will be transferred to a loan asset account within the Company's General Account, where it will accrue interest at a specified rate below the then-current loan rate. Generally, loans must be repaid within five years or less, and repayments must be made quarterly and in substantially equal amounts. Repayments will be allocated pro rata in accordance with the most recent payment allocation, except that any allocations to a Guarantee Period Account will be allocated instead to the Cash Reserve Sub-Account. ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS The Company reserves the right, subject to applicable law, to make additions to, deletions from, or substitutions for, the shares of a fund that are held in the Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any Underlying Fund no longer are available for investment or if, in the Company's judgment further investment in any Underlying Fund should become inappropriate in view of the purposes of the Variable Account or the affected Sub-Account, the Company may redeem the shares of that Underlying Fund and substitute shares of another registered open-end management company. The Company will not substitute any shares attributable to a Contract interest in a Sub-Account without notice to the Owner and prior approval of the SEC and state insurance authorities, to the extent required by the 1940 Act or other applicable law. The Variable Account may, to the extent permitted by law, purchase other securities for other Contracts or permit a conversion between Contracts upon request by an Owner. The Company also reserves the right to establish additional Sub-Accounts of the Variable Account, each of which would invest in shares corresponding to a new underlying fund or in shares of another investment company having a specified investment objective. Subject to applicable law and any required SEC approval, the Company may, in its sole discretion, establish new Sub-Accounts or eliminate one or more Sub-Accounts if marketing needs, tax considerations or investment conditions warrant. Any new Sub-Accounts may be made available to existing Owners on a basis to be determined by the Company. Shares of the Underlying Funds also are issued to separate accounts of the Company and its affiliates which issue variable life contracts ("mixed funding"). Shares of the Funds also are issued to other unaffiliated insurance companies which issue variable annuities and variable life contracts ("shared funding"). It is conceivable that in the future such mixed funding or shared funding may be disadvantageous for variable life owners or variable annuity owners. Although currently the Company and the underlying investment companies do not foresee any such disadvantages to either variable life insurance owners or variable annuity owners, they intend to monitor events in order to identify any material conflicts between such Owners and to determine what action, if any, should be taken in response thereto. If it were concluded that separate funds should be established for variable life and variable annuity separate accounts, the Company will bear the attendant expenses. The Company reserves the right, subject to compliance with applicable law, to: (1) transfer assets from the Variable Account or any of its Sub-Accounts to another of the Company's separate accounts or Sub-Accounts having assets of the same class, (2) to operate the Variable Account or any Sub-Account as a management investment company under the 1940 Act or in any other form permitted by law, (3) to deregister the Variable Account under the 1940 Act in accordance with the requirements of the 1940 Act, (4) to substitute the shares of any other registered investment company for the Underlying Fund shares held by a Sub-Account, in the event that Underlying Fund shares are unavailable for investment, or if the Company determines that further investment in such Underlying Fund shares is inappropriate in view of the purpose of the Sub-Account, 48 (5) to change the methodology for determining the net investment factor, (6) to change the names of the Variable Account or of the Sub-Accounts, and (7) to combine with other Sub-Accounts or other Separate Accounts of the Company. If any of these substitutions or changes are made, the Company may endorse the Contract to reflect the substitution or change, and will notify Owners of all such changes. In no event will the changes described above be made without notice to Owners in accordance with the 1940 Act. CHANGES TO COMPLY WITH LAW AND AMENDMENTS The Company reserves the right, without the consent of Owners, to suspend sales of the Contract as presently offered, and to make any change to provisions of the Contract to comply with, or give Owners the benefit of, any federal or state statute, rule or regulation, including but not limited to requirements for annuity contracts and retirement plans under the Code and pertinent regulations or any state statute or regulation. Any such changes will be applied uniformly to all Contracts that are affected. VOTING RIGHTS The Company will vote Underlying Fund shares held by each Sub-Account in accordance with instructions received from Owners and, after the Annuity Date, from the Annuitants. Each person having a voting interest in a Sub-Account will be provided with proxy materials of the Underlying Fund, together with a form with which to give voting instructions to the Company. Shares for which no timely instructions are received will be voted in proportion to the instructions which are received. The Company also will vote shares in a Sub-Account that it owns and which are not attributable to the Contract in the same proportion. If the 1940 Act or any rules thereunder should be amended, or if the present interpretation of the 1940 Act or such rules should change, and as a result the Company determines that it is permitted to vote shares in its own right, whether or not such shares are attributable to the Contract, the Company reserves the right to do so. The number of votes which an Owner or Annuitant may cast will be determined by the Company as of the record date established by the Underlying Fund. During the accumulation period, the number of Underlying Fund shares attributable to each Owner will be determined by dividing the dollar value of the Accumulation Units of the Sub-Account credited to the Contract by the net asset value of one Underlying Fund share. 49 During the annuity payout phase, the number of Underlying Fund shares attributable to each Annuitant will be determined by dividing the reserve held in each Sub-Account for the Annuitant's variable annuity by the net asset value of one Underlying Fund share. Ordinarily, the Annuitant's voting interest in the Underlying Fund will decrease as the reserve for the variable annuity is depleted. DISTRIBUTION Effective May 1, 2008, Epoch Securities, Inc. ("Epoch" or "Principal Underwriter"), a Delaware corporation located at 132 Turnpike Road, Southborough, Massachusetts 01772, became principal underwriter for the Contracts. Epoch is a wholly-owned subsidiary of The Goldman Sachs Group, Inc. The Company paid commissions not to exceed 7.0% of payments to broker-dealers that sold the Contract. The Company currently does not pay direct commissions on additional payments to the Contracts. However, alternative commission schedules may be in effect with lower initial commission amounts plus ongoing annual compensation of up to 1% of the Contract's Accumulated Value. To the extent permitted by NASD rules, overrides and promotional incentives or payments also may be provided to independent marketing organizations and broker-dealers based on the Contract's Accumulated Value, sales volumes, the performance of wholesaling functions, or other sales-related criteria. Additional payments may be made for other services not directly related to the sale of the Contract. The Company intends to recoup commissions and other sales expenses through a combination of anticipated surrender charges and profits from the Company's General Account, which may include amounts derived from mortality and risk charges. Commissions paid on the Contract, including additional incentives or payments, do not result in any additional charge to Owners or to the Variable Account. The Company will retain any surrender charges assessed on a Contract. LEGAL MATTERS There are no legal proceedings to which we, the Separate Account or the Principal Underwriter is a party, or to which the assets of the Separate Account are subject, that are likely to have a material adverse effect on: - the Separate Account; or - the ability of the principal underwriter to perform its contract with the Separate Account; or - on our ability to meet our obligations under the variable annuity contracts funded through the Separate Account. FURTHER INFORMATION A Registration Statement under the 1933 Act relating to this offering has been filed with the SEC. Certain portions of the Registration Statement and amendments have been omitted in this Prospectus pursuant to the rules and regulations of the SEC. The omitted information may be obtained from the SEC's principal office in Washington, DC, upon payment of the SEC's prescribed fees. APPENDIX A MORE INFORMATION ABOUT THE FIXED ACCOUNT Because of exemption and exclusionary provisions in the securities laws, interests in the Fixed Account generally are not subject to regulation under the provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed portion of the annuity Contract and the Fixed Account may be subject to the provisions of the 1933 Act concerning the accuracy and completeness of statements made in the Prospectus. The disclosures in this APPENDIX A have not been reviewed by the SEC. The Fixed Account is part of the Company's General Account which is made up of all of the general assets of the Company other than those allocated to a separate account. Allocations to the Fixed Account become part of the assets of the Company and are used to support insurance and annuity obligations. A portion or all of net 50 purchase payments may be allocated to accumulate at a fixed rate of interest in the Fixed Account. Such net amounts are guaranteed by the Company as to principal and a minimum rate of interest. Currently, the Company will credit amounts allocated to the Fixed Account with interest at an effective annual rate of at least 3%, compounded daily. Additional "Excess Interest" may or may not be credited at the sole discretion of the Company. If a Contract is surrendered, or if an amount in excess of the Withdrawal Without Surrender Charge is withdrawn, while the Contract is in force and before the Annuity Date, a surrender charge is imposed if such event occurs before the payments attributable to the surrender or withdrawal have been credited to the Contract for at least seven full Contract years. In Massachusetts, payments and transfers to the Fixed Account are subject to the following restrictions: If a Contract is issued prior to the Annuitant's 60th birthday, allocations to the Fixed Account will be permitted until the Annuitant's 61st birthday. On and after the Annuitant's 61st birthday, no additional Fixed Account allocations will be accepted. If a Contract is issued on or after the Annuitant's 60th birthday up through and including the Annuitant's 81st birthday, Fixed Account allocations will be permitted during the first Contract year. On and after the first Contract anniversary, no additional allocations to the Fixed Account will be permitted. If a Contract is issued after the Annuitant's 81st birthday, no payments to the Fixed Account will be permitted at any time. In Oregon, if the Contract is issued after the Annuitant's 81st birthday, no payments or transfers to the Fixed Account will be permitted. If an allocation designated as a Fixed Account allocation is received at the Service Office during a period when the Fixed Account is not available due to the limitations outlined above, the monies will be allocated to the Cash Reserve Series. 51 APPENDIX B SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT PART 1: SURRENDER CHARGES FULL SURRENDER -- Assume a payment of $50,000 is made on the issue date and no additional payments are made. Assume there are no withdrawals and that the Withdrawal Without Surrender Charge Amount is equal to the greater of 15% of the Accumulated Value or the accumulated earnings in the Contract. The table below presents examples of the surrender charge resulting from a full surrender based on hypothetical Accumulated Values: HYPOTHETICAL WITHDRAWAL SURRENDER CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER YEAR VALUE CHARGE AMOUNT PERCENTAGE CHARGE -------- ------------ ----------------- ---------- --------- 1 $54,000.00 $ 8,100.00 7% $3,213.00 2 58,320.00 8,748.00 6% 2,974.32 3 62,985.60 12,985.60 5% 2,500.00 4 68,024.45 18,024.45 4% 2,000.00 5 73,466.40 23,466.40 3% 1,500.00 6 79,343.72 29,343.72 2% 1,000.00 7 85,691.21 35,691.21 1% 500.00 8 92,546.51 45,546.51 0% 0.00 WITHDRAWALS -- Assume a payment of $50,000 is made on the issue date and no additional payments are made. Assume that the Withdrawal Without Surrender Charge Amount is equal to the greater of 15% of the current Accumulated Value or the accumulated earnings in the Contract and there are withdrawals as detailed below. The table below presents examples of the surrender charge resulting from withdrawals of the Owner's account, based on hypothetical Accumulated Values. WITHDRAWAL HYPOTHETICAL WITHOUT SURRENDER CONTRACT ACCUMULATED SURRENDER CHARGE SURRENDER YEAR VALUE WITHDRAWALS CHARGE AMOUNT PERCENTAGE CHARGE -------- ------------ ----------- ------------- ---------- --------- 1 $54,000.00 $ 0.00 $ 8,100.00 7% $ 0.00 2 58,320.00 0.00 8,748.00 6% 0.00 3 62,985.60 0.00 12,985.60 5% 0.00 4 68,024.45 30,000.00 18,024.45 4% 479.02 5 41,066.40 10,000.00 6,159.96 3% 115.20 6 33,551.72 5,000.00 5,032.76 2% 0.00 7 30,835.85 10,000.00 4,625.38 1% 53.75 8 22,502.72 15,000.00 3,375.41 0% 0.00 B-1 PART 2: MARKET VALUE ADJUSTMENT The market value factor is: [(1+i)/(1+j)](TO THE POWER OF n/365) - 1 For purposes of the examples below: i = the guaranteed interest rate being credited to the guarantee period. j = the guaranteed interest rate on the date of surrender for the guarantee period with a duration equal to the number of years remaining in the current guarantee period, rounded to the next higher number of whole years. n = the number of days from the date of surrender to the expiration date of the guarantee period. The following examples assume: 1. The payment was allocated to a ten-year Guarantee Period Account with a Guaranteed Interest Rate of 8%. 2. The date of surrender is seven years (2,555 days) from the expiration date. 3. The value of the Guarantee Period Account is equal to $62,985.60 at the end of three years. 4. No transfers or withdrawals affecting this Guarantee Period Account have been made. 5. Surrender charges, if any, are calculated in the same manner as shown in the examples in Part I. NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED) * Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11 The market value factor = [(1+i)/(1+j)](TO THE POWER OF n/365) - 1 = [(1+.08)/(1+.11)](TO THE POWER OF 2555/365) - 1 = (.97297)(TO THE POWER OF 7) - 1 = -.17452 The Market Value Adjustment = Maximum of the market value factor multiplied by the withdrawal or the negative of the excess interest earned over 3% = Maximum (-.17452 X $62,985.60 or -$8,349.25) = Maximum (-$10,992.38 or -$8,349.25) = -$8,349.25
* Capped takes into account the excess interest part of the Market Value Adjustment formula when the value produced is greater than the cap. B-2 NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)** Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10 The market value factor = [(1+i)/(1+j)](TO THE POWER OF n/365) - 1 = [(1+.08)/(1+.10)](TO THE POWER OF 2555/365) - 1 = (.98182)(TO THE POWER OF 7) - 1 = -.12054 The Market Value Adjustment = the market value factor multiplied by the withdrawal = -.12054 X $62,985.60 = -$7,592.11
** Uncapped is a straight application of the Market Value Adjustment formula when the value produced is less than the cap. POSITIVE MARKET VALUE ADJUSTMENT (CAPPED) * Assume that on the date of surrender, the current rate (j) is 5.00% or 0.05 The market value factor = [(1+i)/(1+j)](TO THE POWER OF n/365) - 1 = [(1+.08)/(1+.05)](TO THE POWER OF 2555/365) - 1 = (1.02857)(TO THE POWER OF 7) - 1 = .21798 The Market Value Adjustment = Minimum of the market value factor multiplied by the withdrawal or the excess interest earned over 3% = Minimum of (.21798 X $62,985.60 or $8,349.25) = Minimum of ($13,729.78 or $8,349.25) = $8,349.25
* Capped takes into account the excess interest part of the Market Value Adjustment formula when the value produced is greater than the cap. B-3 POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)** Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07 The market value factor = [(1+i)/(1+j)](TO THE POWER OF n/365) - 1 = [(1+.08)/(1+.07)](TO THE POWER OF 2555/365) - 1 = (1.00935)(TO THE POWER OF 7) - 1 = .06728 The Market Value Adjustment = the market value factor multiplied by the withdrawal = .06728 X $62,985.60 = $4,237.90
** Uncapped is a straight application of the Market Value Adjustment formula when the value produced is less than the cap. B-4 APPENDIX C THE DEATH BENEFIT PART 1: DEATH OF THE ANNUITANT DEATH BENEFIT ASSUMING NO WITHDRAWALS Assume a payment of $50,000 is made on the issue date and no additional payments are made. Assume there are no withdrawals and that the Death Benefit Effective Annual Yield is equal to 5%. The table below presents examples of the Death Benefit based on the Hypothetical Accumulated Values.
HYPOTHETICAL HYPOTHETICAL MARKET CONTRACT ACCUMULATED VALUE DEATH DEATH DEATH HYPOTHETICAL YEAR VALUE ADJUSTMENT BENEFIT (a) BENEFIT (b) BENEFIT (c) DEATH BENEFIT -------- ------------ ------------ ----------- ------------ ------------ ------------- 1 $53,000.00 $ 0.00 $53,000.00 $52,500.00 $50,000.00 $53,000.00 2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00 3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00 4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31 5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08 6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78 7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95 8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54 9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49 10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
Death BenefFit (a) is the Accumulated Value increased by any positive Market Value Adjustment. Death Benefit (b) is the gross payments accumulated daily at the Death Benefit Effective Annual Yield of 5%, reduced proportionately to reflect withdrawals. Death Benefit (c) is the death benefit that would have been payable on the most recent Contract anniversary, increased for subsequent payments, and decreased proportionately for subsequent withdrawals. The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a), (b), or (c). DEATH BENEFIT ASSUMING WITHDRAWALS Assume a payment of $50,000 is made on the issue date and no additional payments are made. Assume there are withdrawals as detailed in the table below and that the Death Benefit Effective Annual Yield is equal to 5%. The table below presents examples of the Death Benefit based on the Hypothetical Accumulated Values.
HYPOTHETICAL HYPOTHETICAL MARKET CONTRACT ACCUMULATED VALUE DEATH DEATH DEATH HYPOTHETICAL YEAR VALUE WITHDRAWALS ADJUSTMENT BENEFIT (a) BENEFIT (b) BENEFIT (c) DEATH BENEFIT -------- ------------ ----------- ------------ ------------ ----------- ----------- ------------- 1 $53,000.00 $ 0.00 $ 0.00 $53,000.00 $52,500.00 $50,000.00 $53,000.00 2 53,530.00 0.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00 3 3,883.00 50,000.00 0.00 3,883.00 4,171.13 3,972.50 4,171.13 4 3,494.70 0.00 500.00 3,994.70 4,379.68 4,171.13 4,379.68 5 3,844.17 0.00 0.00 3,844.17 4,598.67 4,379.68 4,598.67 6 4,228.59 0.00 500.00 4,728.59 4,828.60 4,598.67 4,828.60 7 4,651.45 0.00 0.00 4,651.45 5,070.03 4,828.60 5,070.03 8 5,116.59 0.00 500.00 5,616.59 5,323.53 5,070.03 5,616.59 9 5,628.25 0.00 0.00 5,628.25 5,589.71 5,616.59 5,628.25 10 691.07 5,000.00 0.00 691.07 712.70 683.44 712.70
C-1 Death Benefit (a) is the Accumulated Value increased by any positive Market Value Adjustment. Death Benefit (b) is the gross payments accumulated daily at the Death Benefit Effective Annual Yield of 5% reduced proportionately to reflect withdrawals. Death Benefit (c) is the death benefit that would have been payable on the most recent Contract anniversary, increased for subsequent payments, and decreased proportionately for subsequent withdrawals. The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a), (b), or (c). PART 2: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT Assume a payment of $50,000 is made on the issue date and no additional payments are made. Assume there are no withdrawals. The table below presents examples of the death Benefit based on the Hypothetical Accumulated Values. HYPOTHETICAL HYPOTHETICAL MARKET CONTRACT ACCUMULATED VALUE HYPOTHETICAL YEAR VALUE ADJUSTMENT DEATH BENEFIT -------- ------------- ------------ ------------- 1 $53,000.00 $ 0.00 $53,000.00 2 53,530.00 500.00 54,030.00 3 58,883.00 0.00 58,883.00 4 52,994.70 500.00 53,494.70 5 58,294.17 0.00 58,294.17 6 64,123.59 500.00 64,623.59 7 70,535.95 0.00 70,535.95 8 77,589.54 500.00 78,089.54 9 85,348.49 0.00 85,348.49 10 93,883.34 0.00 93,883.34 The Hypothetical Death Benefit is the Accumulated Value increased by any positive Market Value Adjustment. C-2 APPENDIX D CONDENSED FINANCIAL INFORMATION COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY SEPARATE ACCOUNT VA-K
YEAR ENDED DECEMBER 31st -------------------------------------------------------------------------------------- SUB-ACCOUNT 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 ------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ DELAWARE VIP BALANCED SERIES Unit Value: Beginning of Period 2.209 1.928 1.886 1.807 1.538 1.863 2.046 2.142 2.357 2.015 1.616 End of Period 2.186 2.209 1.928 1.886 1.807 1.538 1.863 2.046 2.142 2.357 2.015 Number of Units Outstanding at End of Period (in thousands) 11,722 15,151 18,570 22,624 27,725 33,436 45,918 56,070 76,644 81,359 58,759 DELAWARE VIP CAPITAL RESERVES SERIES Unit Value: Beginning of Period 1.803 1.749 1.742 1.705 1.652 1.565 1.466 1.371 1.386 1.317 1.241 End of Period 1.858 1.803 1.749 1.742 1.705 1.652 1.565 1.466 1.371 1.386 1.317 Number of Units Outstanding at End of Period (in thousands) 6,926 9,337 12,123 13,988 19,026 24,104 18,284 17,506 25,020 28,066 20,234 DELAWARE VIP CASH RESERVE SERIES Unit Value: Beginning of Period 1.373 1.332 1.316 1.323 1.334 1.336 1.304 1.248 1.207 1.165 1.124 End of Period 1.418 1.373 1.332 1.316 1.323 1.334 1.336 1.304 1.248 1.207 1.165 Number of Units Outstanding at End of Period (in thousands) 13,564 14,297 16,512 21,315 30,325 35,311 30,794 36,106 42,241 32,501 24,014 DELAWARE VIP EMERGING MARKETS SERIES Unit Value: Beginning of Period 2.422 1.932 1.537 1.168 0.694 0.670 0.645 0.856 0.586 0.880 1.000 End of Period 3.316 2.422 1.932 1.537 1.168 0.694 0.670 0.645 0.856 0.586 0.880 Number of Units Outstanding at End of Period (in thousands) 2,702 3,580 4,816 5,992 7,491 9,237 11,020 12,964 10,078 6,662 4,545
D-1
YEAR ENDED DECEMBER 31st ------------------------------------------------------------------------------------- SUB-ACCOUNT 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 ---------------------------------------- ----- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ DELAWARE VIP GROWTH OPPORTUNITIES SERIES Unit Value: Beginning of Period 3.394 3.237 2.947 2.657 1.911 2.581 3.109 3.447 2.145 1.831 1.616 End of Period 3.781 3.394 3.237 2.947 2.657 1.911 2.581 3.109 3.447 2.145 1.831 Number of Units Outstanding at End of Period (in thousands) 7,224 10,245 13,275 18,320 23,502 30,520 43,380 55.376 60,264 58,454 57,025 DELAWARE VIP HIGH YIELD SERIES Unit Value: Beginning of Period 1.949 1.758 1.721 1.528 1.204 1.199 1.268 1.536 1.599 1.652 1.474 End of Period 1.976 1.949 1.758 1.721 1.528 1.204 1.199 1.268 1.536 1.599 1.652 Number of Units Outstanding at End of Period (in thousands) 6,445 8,634 11,446 14,897 19,708 22,327 30,489 37,456 59,311 70,679 56,733 DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES Unit Value: Beginning of Period 3.486 2.861 2.570 2.140 1.513 1.713 1.993 2.011 1.762 1.619 1.540 End of Period 3.617 3.486 2.861 2.570 2.140 1.513 1.713 1.993 2.011 1.762 1.619 Number of Units Outstanding at End of Period (in thousands) 6,626 9,146 11,555 14,786 18,812 24,451 33,259 41,323 49,478 51,715 48,813 DELAWARE VIP REIT SERIES Unit Value: Beginning of Period 2.929 2.240 2.120 1.636 1.238 1.202 1.120 0.865 0.901 1.000 N/A End of Period 2.486 2.929 2.240 2.120 1.636 1.238 1.202 1.120 0.865 0.901 N/A Number of Units Outstanding at End of Period (in thousands) 2,304 3,040 3,971 5,051 5,710 6,728 5,170 4,864 2,775 1,235 N/A
D-2
YEAR ENDED DECEMBER 31st ----------------------------------------------------------------------------------------- SUB-ACCOUNT 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- DELAWARE VIP SELECT GROWTH SERIES Unit Value: Beginning of Period 0.919 0.915 0.795 0.744 0.541 0.813 1.082 1.416 1.000 N/A N/A End of Period 0.993 0.919 0.915 0.795 0.744 0.541 0.813 1.082 1.416 N/A N/A Number of Units Outstanding at End of Period (in thousands) 12,035 15,715 19,758 25,157 30,396 36,491 50,616 62,339 36,671 N/A N/A DELAWARE VIP SMALL CAP VALUE SERIES Unit Value: Beginning of Period 4.199 3.665 3.397 2.836 2.026 2.177 1.974 1.694 1.806 1.923 1.467 End of Period 3.866 4.199 3.665 3.397 2.836 2.026 2.177 1.974 1.694 1.806 1.923 Number of Units Outstanding at End of Period (in thousands) 6,359 8,892 11,927 15,826 20,733 26,208 33,222 37,075 47,718 55,136 43,269 DELAWARE VIP TREND SERIES Unit Value: Beginning of Period 3.390 3.196 3.062 2.758 2.070 2.622 3.142 3.422 2.036 1.779 1.486 End of Period 3.702 3.390 3.196 3.062 2.758 2.070 2.622 3.142 3.422 2.036 1.779 Number of Units Outstanding at End of Period (in thousands) 7.142 10,237 13,209 18,024 22,361 27,704 37,136 46,252 42,570 36,571 33,256 DELAWARE VIP U.S. GROWTH SERIES Unit Value: Beginning of Period 0.736 0.729 0.645 0.633 0.519 0.744 0.999 1.057 1.000 N/A N/A End of Period 0.816 0.736 0.729 0.645 0.633 0.519 0.744 0.999 1.057 N/A N/A Number of Units Outstanding at End of Period (in thousands) 7,113 9,503 10,958 14,803 17,918 18,012 22,188 26,693 5,522 N/A N/A DELAWARE VIP VALUE SERIES Unit Value: Beginning of Period 3.909 3.195 3.056 2.697 2.132 2.659 2.806 2.556 2.672 2.433 1.883 End of Period 3.750 3,909 3.195 3.056 2.697 2.132 2.659 2.806 2.556 2.672 2.433 Number of Units Outstanding at End of Period (in thousands) 17,596 24,200 31,766 41,264 52,358 58,096 78,509 97,656 136,760 146,009 113,507
D-3
YEAR ENDED DECEMBER 31st -------------------------------------------------------------------------------- SUB-ACCOUNT 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 --------------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ---- ---- ---- AIM V.I. CAPITAL APPRECIATION FUND Unit Value: Beginning of Period 0.502 0.477 0.450 0.421 0.326 0.478 0.734 1.000 N/A N/A N/A End of Period 0.555 0.502 0.477 0.450 0.421 0.326 0.478 0.734 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 4,730 6,556 7,337 8,720 10,038 10,733 11,289 8,987 N/A N/A N/A AIM V.I. CORE EQUITY FUND Unit Value: Beginning of Period 0.722 0.635 0.610 0.585 0.474 0.689 0.800 1.000 N/A N/A N/A End of Period 0.769 0.722 0.635 0.610 0.585 0.474 0.689 0.800 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 7,993 10,372 12,618 15,357 20,127 24,265 30,221 26,552 N/A N/A N/A AIM V.I. HIGH YIELD FUND Unit Value: Beginning of Period 1.093 1.001 0.988 0.901 0.714 0.769 0.820 1.000 N/A N/A N/A End of Period 1.091 1.093 1.001 0.988 0.901 0.714 0.769 0.820 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 1,175 1,583 1,685 1,914 2,574 2,004 2,363 1,183 N/A N/A N/A AIM V.I. INTERNATIONAL GROWTH FUND Unit Value: Beginning of Period 1.138 0.900 0.774 0.633 0.497 0.598 0.793 1.000 N/A N/A N/A End of Period 1.287 1.138 0.900 0.774 0.633 0.497 0.598 0.793 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 4,105 4,461 4,891 5,594 6,026 7,061 8,940 8,731 N/A N/A N/A ALGER AMERICAN CAPITAL APPRECIATION PORTFOLIO Unit Value: Beginning of Period 0.760 0.646 0.572 0.537 0.404 0.620 0.748 1.000 N/A N/A N/A End of Period 1.000 0.760 0.646 0.572 0.537 0.404 0.620 0.748 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 4,915 6.341 7,959 8,754 9,381 8,890 7,309 5,213 N/A N/A N/A
D-4
YEAR ENDED DECEMBER 31st -------------------------------------------------------------------------------- SUB-ACCOUNT 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 ------------------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ---- ---- ---- ALGER AMERICAN MIDCAP GROWTH PORTFOLIO Unit Value: Beginning of Period 1.163 1.071 0.989 0.887 0.609 0.876 0.951 1.000 N/A N/A N/A End of Period 1.508 1.163 1.071 0.989 0.887 0.609 0.876 0.951 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 4,772 5,592 7,311 8,839 9,783 9,749 11,470 8,095 N/A N/A N/A ALGER AMERICAN SMALLCAP GROWTH PORTFOLIO Unit Value: Beginning of Period 0.836 0.707 0.613 0.534 0.380 0.523 0.752 1.000 N/A N/A N/A End of Period 0.967 0.836 0.707 0.613 0.534 0.380 0.523 0.752 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 2,090 1,929 1,886 1,986 2,149 2,132 2,529 2,165 N/A N/A N/A ALLIANCEBERNSTEIN VPS GLOBAL TECHNOLOGY PORTFOLIO Unit Value: Beginning of Period 0.437 0.409 0.400 0.387 0.273 0.475 0.646 1.000 N/A N/A N/A End of Period 0.517 0.437 0.409 0.400 0.387 0.273 0.475 0.646 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 4,908 6,142 7,137 9,738 11,310 12,420 16,283 14,525 N/A N/A N/A ALLIANCEBERNSTEIN VPS GROWTH AND INCOME PORTFOLIO Unit Value: Beginning of Period 1.385 1.200 1.164 1.061 0.814 1.062 1.076 1.000 N/A N/A N/A End of Period 1.432 1.385 1.200 1.164 1.061 0.814 1.062 1.076 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 12,234 15,738 18,286 22,195 25,414 26,455 30,272 14,169 N/A N/A N/A
D-5
YEAR ENDED DECEMBER 31st ------------------------------------------------------------------------------- SUB-ACCOUNT 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 ------------------------------------------------- ----- ------ ------ ------ ------ ------ ------ ------ ---- ---- ---- ALLIANCEBERNSTEIN VPS GROWTH PORTFOLIO Unit Value: Beginning of Period 0.697 0.716 0.650 0.576 0.433 0.613 0.814 1.000 N/A N/A N/A End of Period 0.774 0.697 0.716 0.650 0.576 0.433 0.613 0.814 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 3,876 5,049 6,316 6,982 6,639 6,246 6,471 5,441 N/A N/A N/A ALLIANCEBERNSTEIN VPS LARGE CAP GROWTH PORTFOLIO Unit Value: Beginning of Period 0.629 0.642 0.567 0.531 0.436 0.640 0.786 1.000 N/A N/A N/A End of Period 0.705 0.629 0.642 0.567 0.531 0.436 0.640 0.786 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 9,173 10,824 12,386 15,025 19,247 21,686 25,485 21,392 N/A N/A N/A FT VIP FRANKLIN SMALL-MID CAP GROWTH SECURITIES FUND Unit Value: Beginning of Period 0.805 0.751 0.727 0.662 0.489 0.695 0.832 1.000 N/A N/A N/A End of Period 0.883 0.805 0.751 0.727 0.662 0.489 0.695 0.832 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 3,085 3,751 4,510 5,656 6,276 6,845 5,509 4,420 N/A N/A N/A FT VIP MUTUAL SHARES SECURITIES FUND Unit Value: Beginning of Period 1.754 1.503 1.379 1.241 1.006 1.157 1.096 1.000 N/A N/A N/A End of Period 1.790 1.754 1.503 1.379 1.241 1.006 1.157 1.096 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 6,154 6,929 7,333 8,016 9,851 9,725 7,523 1,180 N/A N/A N/A
D-6
YEAR ENDED DECEMBER 31st ------------------------------------------------------------------------------- SUB-ACCOUNT 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 ------------------------------------------------- ----- ------ ------ ------ ------ ------ ------ ------ ---- ---- ---- FT VIP TEMPLETON FOREIGN SECURITIES FUND Unit Value: Beginning of Period 1.345 1.123 1.034 0.885 0.679 0.845 1.021 1.000 N/A N/A N/A End of Period 1.532 1.345 1.123 1.034 0.885 0.679 0.845 1.021 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 3,183 3,829 4,256 4,440 4,508 3,902 3,655 2,125 N/A N/A N/A FT VIP TEMPLETON GROWTH SECURITIES FUND Unit Value: Beginning of Period 1.571 1.308 1.219 1.065 0.818 1.017 1.046 1.000 N/A N/A N/A End of Period 1.586 1.571 1.308 1.219 1.065 0.818 1.017 1.046 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 2,752 3,366 4,198 4,386 4,155 3,434 2,329 771 N/A N/A N/A PIONEER EMERGING MARKETS VCT PORTFOLIO Unit Value: Beginning of Period 1.985 1.485 1.095 0.936 0.601 0.618 0.677 1.000 N/A N/A N/A End of Period 2.788 1.985 1.485 1.095 0.936 0.601 0.618 0.677 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 1,506 1,630 1,770 1,799 1,633 1,573 869 611 N/A N/A N/A PIONEER MID CAP VALUE VCT PORTFOLIO Unit Value: Beginning of Period 1.959 1.770 1.668 1.389 1.028 1.176 1.123 1.000 N/A N/A N/A End of Period 2.035 1.959 1.770 1.668 1.389 1.028 1.176 1.123 N/A N/A N/A Number of Units Outstanding at End of Period (in thousands) 2,900 3,428 4,669 5,342 5,230 4,914 4,268 1,722 N/A N/A N/A
D-7 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY STATEMENT OF ADDITIONAL INFORMATION OF FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS FUNDED THROUGH SUB-ACCOUNTS OF SEPARATE ACCOUNT VA-K INVESTING IN SHARES OF THE UNDERLYING FUNDS THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH THE DELAWARE MEDALLION PROSPECTUS OF SEPARATE ACCOUNT VA-K, DATED APRIL 30, 2008 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM ANNUITY CLIENT SERVICES, COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY, PO BOX 758554, TOPEKA, KS 66675, TELEPHONE 1-800-533-2124. DATED APRIL 30, 2008 Commonwealth Annuity Delaware Medallion III TABLE OF CONTENTS GENERAL INFORMATION AND HISTORY 3 TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY 4 SERVICES 4 UNDERWRITERS 5 ANNUITY BENEFIT PAYMENTS AND ACCUMULATION UNIT CALCULATION 6 ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM 7 DISCONTINUATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER 8 PERFORMANCE INFORMATION 10 FINANCIAL STATEMENTS F-1
2 GENERAL INFORMATION AND HISTORY Effective September 1, 2006, Allmerica Financial Life Insurance and Annuity Company was renamed Commonwealth Annuity and Life Insurance Company (the "Company"). The Company is a life insurance company organized under the laws of Delaware in July 1974. Prior to December 31, 2002, the Company was a wholly owned subsidiary of First Allmerica Financial Life Insurance Company ("First Allmerica)", which in turn was a direct subsidiary of Allmerica Financial Corporation ("AFC"). Effective December 31, 2002, the Company became a Massachusetts domiciled insurance company and a direct wholly-owned subsidiary of The Hanover Insurance Group ("THG," formerly Allmerica Financial Corporation). On December 30, 2005, THG completed the closing of the sale of the Company to The Goldman Sachs Group, Inc. ("Goldman Sachs"), 85 Broad Street, New York, NY 10004. The Company's principal office (the "Principal Office") was relocated to 132 Turnpike Road, Suite 210, Southborough, MA 01772, Telephone 508-460-2400. The Company is subject to the laws of the Commonwealth of Massachusetts governing insurance companies and to regulation by the Commissioner of Insurance of Massachusetts. In addition, the Company is subject to the insurance laws and regulations of other states and jurisdictions in which it is licensed to operate. As of December 31, 2007, the Company and its subsidiaries had $10 billion in assets and $12 billion of life insurance in force. In connection with its purchase of the Company in December 2005, Goldman Sachs provided certain written assurances to the Commissioner of the Massachusetts Division of Insurance (the "Commissioner"). More specifically, Goldman Sachs agreed to make capital contributions to the Company, subject to a maximum of $350 million, if necessary to ensure that the Company maintains a risk-based capital ratio of at least 100%, pursuant to Massachusetts Insurance Law. Such assurances have been provided solely to the Commissioner by Goldman Sachs. These assurances are not evidence of indebtedness or an obligation or liability of Goldman Sachs, and do not provide Contract Owners with any specific rights or recourse against Goldman Sachs. Separate Account VA-K (the "Variable Account") is a separate investment account of Commonwealth Annuity and Life Insurance Company authorized by vote of its Board of Directors on November 1, 1990. Several Sub-Accounts of the Variable Account are available under the Delaware Medallion III contract (the "Contract"). Each Sub-Account invests exclusively in shares of one of the following funds: DELAWARE VIP TRUST Delaware VIP Balanced Series Delaware VIP Capital Reserves Series Delaware VIP Cash Reserve Series Delaware VIP Emerging Markets Series Delaware VIP Growth Opportunities Series Delaware VIP High Yield Series Delaware VIP International Value Equity Series Delaware VIP REIT Series Delaware VIP Select Growth Series Delaware VIP Small Cap Value Series Delaware VIP Trend Series Delaware VIP U.S. Growth Series Delaware VIP Value Series AIM VARIABLE INSURANCE FUNDS (SERIES I SHARES) AIM V.I. Capital Appreciation Fund AIM V.I. Core Equity Fund AIM V.I. High Yield Fund AIM V.I. International Growth Fund THE ALGER AMERICAN FUND (CLASS O) Alger American Capital Appreciation Portfolio Alger American MidCap Growth Portfolio Alger American Small-Cap Growth Portfolio ALLIANCEBERNSTEIN VARIABLE PRODUCTS SERIES FUND, INC. (CLASS B) AllianceBernstein VPS Global Technology Portfolio AllianceBernstein VPS Growth and Income Portfolio AllianceBernstein VPS Growth Portfolio AllianceBernstein VPS Large Cap Growth Portfolio FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST (CLASS 2) FT VIP Franklin Small-Mid Cap Growth Securities Fund FT VIP Mutual Shares Securities Fund FT VIP Templeton Foreign Securities Fund FT VIP Templeton Growth Securities Fund PIONEER VARIABLE CONTRACTS TRUST (CLASS II) Pioneer Emerging Markets VCT Portfolio Pioneer Mid Cap Value VCT Portfolio 3 TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY The Company currently imposes no charge for taxes payable in connection with the Contract, other than for state and local premium taxes and similar assessments when applicable. The Company reserves the right to impose a charge for any other taxes that may become payable in the future in connection with the Contract or the Variable Account. The Variable Account is considered to be a part of and taxed with the operations of the Company. The Company is taxed as a life insurance company under subchapter L of the Internal Revenue Code (the "Code"), and files a consolidated tax return with its parent and affiliated companies. The Company reserves the right to make a charge for any effect which the income, assets or existence of the Contract or the Variable Account may have upon its tax. Such charge for taxes, if any, will be assessed on a fair and equitable basis in order to preserve equity among classes of Contract Owners ("Owners"). The Variable Account presently is not subject to tax. SERVICES SERVICE PROVIDERS CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the Variable Account. Underlying Fund shares owned by the Sub-Accounts are held on an open account basis. A Sub-Account's ownership of Underlying Fund shares is reflected on the records of the Underlying Fund and is not represented by any transferable stock certificates. MAIL ROOM AND ADMINISTRATIVE SERVICES. Goldman Sachs and the Company have retained Security Benefit Life Insurance Company and its affiliates (collectively, "Security Benefit") to provide systems, administrative, accounting, mailroom and lockbox services and other services to the Company. The principal administrative offices of Security Benefit are located at One Security Benefit Place, Topeka, Kansas, 66636. EXPERTS. The financial statements of the Company as of December 31, 2007 and 2006 and for each of the three years in the period ended December 31, 2007, and the financial statements of Separate Account VA-K of the Company as of December 31, 2007 and for the periods indicated, included in this Statement of Additional Information constituting part of this Registration Statement, have been so included in reliance on the reports of PricewaterhouseCoopers LLP, the Company's independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. The financial statements of the Company included herein should be considered only as bearing on the ability of the Company to meet its obligations under the Contract. OTHER SERVICE ARRANGEMENTS The Company may enter into certain arrangements under which the Company (or its affiliates) are compensated by the investment advisers, distributors and/or affiliates of the underlying funds for the distribution and/or administrative services which we provide to the underlying funds. The amount of payments the Company receives from the Fund's service providers is based on a percentage of the assets of the particular Fund attributable to the Contract as well as certain other variable insurance products that the Company and/or our affiliates may issue or administer. These percentages are negotiated and vary with each Fund. (These payments may be derived, in whole or in part, from the investment advisory fee deducted from Fund assets. Contract Owners, through their indirect investment in the Funds, bear the costs of these investment advisory fees; see the Funds' prospectuses for more information.) Some service providers may pay the Company significantly more than others and the amount the Company receives may be substantial. The percentages that we receive under these arrangements currently range from 0.10% to 0.45%. 4 Certain of the Funds may also make payments to us or to Epoch under their distribution plans (12b-1 plans). The payment rates currently range up to 0.25% based on the amount of assets invested in those Funds. Payments made out of the assets of the Funds will reduce the amount of assets that otherwise would be available for investment, and will reduce the return on your investment. The dollar amount of future asset-based fees is not predictable because these fees are a percentage of the Fund's average net assets, which can fluctuate over time. If, however, the value of the Funds goes up, then so would the dollar amount of payment to the Company or to Epoch. Conversely, if the value of the Fund goes down, payments to the Company or to Epoch would decrease. The Company (and our affiliates) may profit from these payments. As of the date of this prospectus, we were receiving payments from each Fund's service providers. The Company and/or the Epoch also may directly or indirectly receive additional amounts or different percentages of assets under management from some of the Funds' service providers with regard to other variable insurance products the Company or our affiliates may issue or administer. UNDERWRITERS Effective May 1, 2008, Epoch Securities, Inc., a Delaware corporation located at 132 Turnpike Road, Southborough, MA 01772 ("Epoch" or "Underwriter"), became principal underwriter for the Contracts. Epoch is a corporation organized and existing under the laws of the state of Delaware, and is a wholly-owned subsidiary of Goldman Sachs. Epoch is a registered broker-dealer with the SEC and a member of the Financial Industry Regulatory Authority ("FINRA"). Epoch replaced Security Distributors, Inc., located at One Security Benefit Place, Topeka, Kansas 66636, ("SDI"), which had served as principal underwriter from January 1, 2007. SDI had replaced VeraVest Investments, Inc., located at 440 Lincoln Street, Worcester, MA 01653 ("VeraVest," formerly Allmerica Investments, Inc.), which had served as principal underwriter and general distributor until December 31, 2006. The Company has effectively ceased issuing new contracts except in connection with certain pre-existing contractual plans and programs. The Company paid commissions not to exceed 7.0% of payments to broker-dealers that sold the Contract. The Company currently does not pay direct commissions on additional payments to the Contracts. However, alternative commission schedules may be in effect with lower initial commission amounts plus ongoing annual compensation of up to 1.0% of the Contract's Accumulated Value. To the extent permitted by NASD rules, overrides and promotional incentives or payments also may be provided to independent marketing organizations and broker-dealers based on the Contract's Accumulated Value, sales volumes, the performance of wholesaling functions, or other sales-related criteria. Additional payments may be made for other services not directly related to the sale of the Contract. Commissions paid by the Company do not result in any charge to Owners or to the Variable Account in addition to the charges described under "CHARGES AND DEDUCTIONS" in the Prospectus. The Company intends to recoup the commission and other sales expense through a combination of anticipated surrender, withdrawal and/or annuitization charges, profits from the Company's general account, including the investment earnings on amounts allocated to accumulate on a fixed basis in excess of the interest credited on fixed accumulations by the Company, and the profit, if any, from the mortality and expense risk charge. The aggregate amounts of commissions paid to VeraVest (2005 and 2006) and SDI (2007) for sales of all Delaware contracts funded by Separate Account VA-K (including contracts not described in the Prospectus) for the years 2005, 2006 and 2007 were $1655.11, $6,794.21 and $780,594.79, respectively. No commissions were retained by VeraVest or SDI for sales of all Delaware contracts funded by Separate Account VA-K (including contracts not described in the Prospectus) for the years 2005, 2006 and 2007. No commissions or other compensation were received by Epoch, directly or indirectly, from the Registrant during the Registrant's last fiscal year. 5 ANNUITY BENEFIT PAYMENTS AND ACCUMULATION UNIT CALCULATION The method by which the Accumulated Value under the Contract is determined is described in detail under "Computation of Values" in the Prospectus. ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The Accumulation Unit calculation for a daily Valuation Period may be illustrated by the following hypothetical example: Assume that the assets of a Sub-Account at the beginning of a one-day Valuation Period were $5,000,000; that the value of an Accumulation Unit on the previous date was $1.135000; and that during the Valuation Period, the investment income and net realized and unrealized capital gains exceed net realized and unrealized capital losses by $1,675. The Accumulation Unit Value at the end of the current Valuation Period would be calculated as follows: (1) Accumulation Unit Value -- Previous Valuation Period $ 1.135000 (2) Value of Assets -- Beginning of Valuation Period $5,000,000 (3) Excess of Investment Income and Net Gains Over Capital losses $ 1,675 (4) Adjusted Gross Investment Rate for the Valuation Period (3) divided by (2) 0.000335 (5) Annual Charge (one-day equivalent of 1.40% per annum) 0.000039 (6) Net Investment Rate (4) - (5) 0.000296 (7) Net Investment Factor 1.000000 + (6) 0.000296 (8) Accumulation Unit Value -- Current Period (1) x (7) $ 1.135336
Conversely, if unrealized capital losses and charges for expenses and taxes exceeded investment income and net realized capital gains by $1,675, the Accumulation Unit Value at the end of the Valuation Period would have been $1.134576. The method for determining the amount of annuity benefit payments is described in detail under "Annuity Benefit Payments" in the Prospectus. ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING HYPOTHETICAL EXAMPLE. The determination of the Annuity Unit value and the variable annuity benefit payment may be illustrated by the following hypothetical example: Assume an Annuitant has 40,000 Accumulation Units in a Variable Account, and that the value of an Accumulation Unit on the Valuation Date used to determine the amount of the first variable annuity benefit payment is $1.120000. Therefore, the Accumulated Value of the Contract is $44,800 (40,000 x $1.120000). Assume also that the Owner elects an option for which the first monthly payment is $6.57 per $1,000 of Accumulated Value applied. Assuming no premium tax or surrender charge, the first monthly payment would be $44.80 ($44,800 divided by $1,000) multiplied by $6.57, or $294.34. Next, assume that the Annuity Unit value for the assumed interest rate of 3.5% per annum for the Valuation Date as of which the first payment was calculated was $1.100000. Annuity Unit values will not be the same as Accumulation Unit Values because the former reflect the 3.5% assumed interest rate used in the annuity rate calculations. When the Annuity Unit value of $1.100000 is divided into the first monthly payment the number of Annuity Units represented by that payment is determined to be 267.5818. The value of this same number of Annuity Units will be paid in each subsequent month under most options. Assume further that the net investment factor for the Valuation Period applicable to the next annuity benefit payment is 1.000190. Multiplying this factor by .999906 (the one-day adjustment factor for the assumed interest rate of 3.5% per 6 annum) produces a factor of 1.000096. This then is multiplied by the Annuity Unit value on the immediately preceding Valuation Date (assumed here to be $1.105000). The result is an Annuity Unit value of $1.105106 for the current monthly payment. The current monthly payment then is determined by multiplying the number of Annuity Units by the current Annuity Unit value, or 267.5818 times $1.105106, which produces a current monthly payment of $295.71. METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN OPTIONS AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers both commutable and non-commutable fixed period certain annuity options and commutable variable period certain options. A commutable option gives the Annuitant the right to exchange any remaining payments for a lump sum payment based on the commuted value. The Commuted Value is the present value of remaining payments calculated at 3.5% interest. The determination of the Commuted Value may be illustrated by the following hypothetical example. Assume a commutable period certain option is elected. The number of Annuity Units upon which each payment is based would be calculated using the Surrender Value less any premium tax rather than the Accumulated Value. Assume this results in 250.0000 Annuity Units. Assume the Commuted Value is requested with 60 monthly payments remaining and a current Annuity Unit Value of $1.200000. Based on these assumptions, the dollar amount of remaining payments would be $300 a month for 60 months. The present value at 3.5% of all remaining payments would be $16,560.72. ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM To the extent permitted by law, the Company reserves the right to offer an Enhanced Automatic Transfer (Dollar Cost Averaging) Program from time to time. If an Owner elects automatic transfers while the enhanced program is in effect, the Company will credit an enhanced interest rate to eligible payments made to the Enhanced Automatic Transfer Program. Eligible payments: - must be new payments to the Contract, including the initial payment, - must be allocated to the Fixed Account, which will be the source account, - must be automatically transferred out of the Fixed Account to one or more Sub-Accounts over a specified time period and - will receive the enhanced rate while they remain in the Fixed Account. Any new eligible payments made to an existing Enhanced Automatic Transfer program will start a new Enhanced Automatic Transfer program. In this case, the following rules apply: - The money remaining in the Fixed Account from the original program will be combined with the new eligible payment to determine the new monthly transfer amount. - The new monthly transfer amount will be transferred out of the Fixed Account in accordance with the allocation instructions specified for the new payment. If no allocation instructions are specified with the new eligible payment, the allocation instructions for the original eligible payment will be used. The new monthly transfer amount will be transferred out of the Fixed Account on a LIFO (last-in, first-out basis) to the selected Sub-Accounts on the date designated for the new eligible payment. - A new enhanced interest rate may be applied to the new eligible payment, while the money remaining in the Fixed Account from the original program will continue to receive the enhanced rate in effect at the time the older payment was received. 7 DISCONTINUATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER Effective January 31, 2002, the Company terminated the availability of the optional Minimum Guaranteed Annuity Payout (M-GAP) Rider. This termination does not affect M-GAP Riders issued prior to January 31, 2002 except that Owners who have previously elected the M-GAP Rider will not be able to purchase a new M-GAP Rider under the repurchase feature. The M-GAP Rider provides a guaranteed minimum amount of fixed annuity lifetime income during the annuity payout phase, after a ten year or fifteen year waiting period, subject to the conditions described below. On each Contract anniversary a Minimum Guaranteed Annuity Payout Benefit Base (less any applicable premium taxes) is determined. The Minimum Guaranteed Annuity Payout Benefit Base is the value that will be annuitized should you exercise the Rider. In order to exercise the Rider, a fixed annuitization option involving a life contingency must be selected. Annuitization under this Rider will occur at the Company's guaranteed annuity option rates listed under the Annuity Option Tables in the Contract. The Minimum Guaranteed Annuity Payout Benefit Base is equal to the greatest of: (a) the Accumulated Value increased by any positive Market Value Adjustment, if applicable, on the Contract Anniversary that the M-GAP Benefit Base is being determined; (b) the Accumulated Value on the effective date of the Rider accumulated daily at an effective annual yield of 5% plus gross payments made thereafter accumulated daily at an effective annual yield of 5%, starting on the date each payment is applied, proportionately reduced to reflect withdrawals; or (c) the highest Accumulated Value on any Contract anniversary since the Rider effective date, as determined after being increased for subsequent payments and any positive Market Value Adjustment, if applicable, and proportionately reduced for subsequent withdrawals. For each withdrawal described in (b) and (c) above, the proportionate reduction is calculated by multiplying the (b) or (c) value, whichever is applicable, determined immediately prior to the withdrawal by the following fraction: Amount of the withdrawal ---------------------------------------------------------------- Accumulated Value determined immediately prior to the withdrawal EXERCISING THE M-GAP RIDER. - The Owner may only exercise the M-GAP Rider within thirty days after any Contract anniversary following the expiration of a ten or fifteen-year waiting period from the effective date of the Rider. - The Owner may only annuitize under a fixed annuity payout option involving a life contingency as provided under "DESCRIPTION OF ANNUITY PAYOUT OPTIONS" in the Prospectus. - The Owner may only annuitize at the Company's guaranteed fixed annuity option rates listed under the Annuity Option Tables in the Contract. TERMINATING THE M-GAP RIDER. The Owner may not terminate the M-GAP Rider prior to the seventh Contract anniversary after the effective date of the Rider. The Owner may terminate the Rider at any time after the seventh Contract anniversary following the effective date of the Rider. The Rider will terminate automatically upon surrender of the Contract or the date that a death benefit is payable if the Contract is not continued under "THE SPOUSE OF THE OWNER AS BENEFICIARY" under DESCRIPTION OF THE CONTRACT in the Prospectus. 8 From time to time the Company may illustrate minimum guaranteed income amounts under the M-GAP Rider for individuals based on a variety of assumptions, including varying rates of return on the value of the Contract during the accumulation phase, annuity payout periods, annuity payout options and M-GAP Rider waiting periods. Any assumed rates of return are for purposes of illustration only and are not intended as a representation of past or future investment rates of return. For example, the illustration below assumes an initial payment of $100,000 for an Annuitant age 60 (at issue) and exercise of an M-GAP Rider with a ten-year waiting period. The illustration assumes that no subsequent payments or withdrawals are made and that the annuity payout option is a Life Annuity With Payments Guaranteed for 10 Years. The values below have been computed based on a 5% net rate of return and are the guaranteed minimums that would be received under the M-GAP Rider. The minimum guaranteed benefit base amounts are the values that will be annuitized. Minimum guaranteed annual income values are based on a fixed annuity payout.
MINIMUM CONTRACT MINIMUM GUARANTEED ANNIVERSARY GUARANTEED ANNUAL AT EXERCISE BENEFIT BASE INCOME(1) ----------- ------------ ---------- 10 $162,889 $12,153 15 $207,892 $17,695
(1) Other fixed annuity options involving a life contingency other than Life Annuity With Payments Guaranteed for 10 Years. See "DESCRIPTION OF ANNUITY PAYOUT OPTIONS" in the Prospectus. The M-GAP Rider does not create Accumulated Value or guarantee performance of any investment option. Because this Rider is based on guaranteed actuarial factors, the level of lifetime income that it guarantees may often be less than the level that would be provided by applying the then current annuity factors. Therefore, the Rider should be regarded as providing a guarantee of a minimum amount of annuity income. As described above, withdrawals will reduce the benefit base. 9 PERFORMANCE INFORMATION Performance information for a Sub-Account may be compared, in reports and promotional literature, to certain indices described in the Prospectus under PERFORMANCE INFORMATION. In addition, the Company may provide advertising, sales literature, periodic publications or other material information on various topics of interest to Owners and prospective Owners. These topics may include the relationship between sectors of the economy and the economy as a whole and its effect on various securities markets, investment strategies and techniques (such as value investing, market timing, dollar cost averaging, asset allocation, constant ratio transfer and account rebalancing), the advantages and disadvantages of investing in tax-deferred and taxable investments, customer profiles and hypothetical purchase and investment scenarios, financial management and tax and retirement planning, and investment alternatives to certificates of deposit and other financial instruments, including comparisons between the Contract and the characteristics of and market for such financial instruments. Total return data and supplemental total return information may be advertised based on the period of time that an Underlying Fund and/or an underlying Sub-Account have been in existence, even if longer than the period of time that the Contract has been offered. The results for any period prior to a Contract being offered will be calculated as if the Contract had been offered during that period of time, with all charges assumed to be those applicable to the Contract. TOTAL RETURN "Total Return" refers to the total of the income generated by an investment in a Sub-Account and of the changes of value of the principal invested (due to realized and unrealized capital gains or losses) for a specific period, reduced by the Sub-Account's asset charge and any applicable surrender charge which would be assessed upon complete withdrawal of the investment. Total Return figures are calculated by standardized methods prescribed by rules of the Securities and Exchange Commission (the "SEC"). The quotations are computed by finding the average annual compounded rates of return over the specified periods that would equate the initial amount invested to the ending redeemable values, according to the following formula: P(1 + T)(TO THE POWER OF (n)) = ERV Where: P = a hypothetical initial payment to the Variable Account of $1,000 T = average annual total return n = number of years ERV = the ending redeemable value of the $1,000 payment at the end of the specified period The calculation of Total Return includes the annual charges against the assets of the Sub-Account. This charge is 1.40% on an annual basis. The calculation of ending redeemable value assumes (1) the Contract was issued at the beginning of the period, and (2) a complete surrender of the Contract at the end of the period. The deduction of the surrender charge, if any, applicable at the end of the period is included in the calculation, according to the following schedule: 10 CONTRACT FORM A3025-96 (DELAWARE MEDALLION III) ---------------------------------------------- (WITH GUARANTEE PERIOD ACCOUNT OPTIONS)
YEARS FROM DATE OF CHARGE AS PERCENTAGE OF PAYMENT TO DATE OF NEW PURCHASE PAYMENTS WITHDRAWAL WITHDRAWN* ------------------ ----------------------- 0-1 7% 2 6% 3 5% 4 4% 5 3% 6 2% 7 1% Thereafter 0%
* Subject to the maximum limit described in the Prospectus. No surrender charge is deducted upon expiration of the periods specified above. In each calendar year, a certain amount (withdrawal without surrender charge amount, as described in the Prospectus) is not subject to the surrender charge. The calculations of Total Return include the deduction of the $30 annual Contract fee. SUPPLEMENTAL TOTAL RETURN INFORMATION The Supplemental Total Return Information in this section refers to the total of the income generated by an investment in a Sub-Account and of the changes of value of the principal invested (due to realized and unrealized capital gains or losses) for a specified period reduced by the Sub-Account's asset charges. It is assumed, however, that the investment is NOT withdrawn at the end of each period. The quotations of Supplemental Total Return are computed by finding the average annual compounded rates of return over the specified periods that would equate the initial amount invested to the ending values, according to the following formula: P(1 + T) (TO THE POWER OF (n)) = EV Where: P = a hypothetical initial payment to the Variable Account of $1,000 T = average annual total return n = number of years EV = the ending value of the $1,000 payment at the end of the specified period The calculation of Supplemental Total Return reflects the 1.40% annual charge against the assets of the Sub-Accounts. The ending value assumes that the Contract is NOT surrendered at the end of the specified period, and therefore there is no adjustment for the surrender charge that would be applicable if the Contract was surrendered at the end of the period. The calculation of supplemental total return does not include the deduction of the $30 annual Contract fee. 11 PERFORMANCE TABLES. Quotations of average annual total return as shown in Table 1A are calculated in the manner prescribed by the SEC and show the percentage rate of return of a hypothetical initial investment of $1,000 for the most recent one, five and ten year period or for a period covering the time the Sub-Account has been in existence, if less than the prescribed periods. The calculation is adjusted to reflect the deduction of the annual Sub-Account asset charge of 1.40%, the $30 annual Contract fee, the Underlying Fund charges and the surrender charge which would be assessed if the investment were completely withdrawn at the end of the specified period. The calculation is not adjusted to reflect the deduction of a Minimum Guaranteed Annuity Payout Rider (M-GAP) Charge. Quotations of supplemental average total returns, as shown in Table 1B, are calculated in exactly the same manner and for the same periods of time except that they do not reflect the Contract fee and assume that the Contract is not surrendered at the end of the periods shown. The performance shown in Tables 2A and 2B is calculated in exactly the same manner as that in Tables 1A and 1B; however, the period of time is based on the Underlying Fund's lifetime, which may predate the Sub-Account's inception date. These performance calculations are based on the assumption that the Sub-Account corresponding to the applicable Underlying Fund was actually in existence throughout the stated period and that the contractual charges and expenses during that period were equal to those currently assessed under the Contract. 12 PERFORMANCE TABLES COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY DELAWARE MEDALLION III TABLE 1A AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING DECEMBER 31, 2007 SINCE INCEPTION OF SUB-ACCOUNT (ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
10 YEARS (OR TOTAL RETURN SINCE SUB-ACCOUNT FOR YEAR INCEPTION IF INCEPTION DATE ENDED 12/31/07 5 YEARS LESS) -------------- -------------- ------- ------------ Delaware VIP Balanced Series 4/30/92 -7.18 6.63 0.55 Delaware VIP Capital Reserves Series 4/30/92 -3.19 1.78 3.45 Delaware VIP Cash Reserve Series 4/22/92 -2.91 0.65 1.94 Delaware VIP Emerging Markets Series 5/1/97 29.87 36.51 14.15 Delaware VIP Growth Opportunities Series 4/9/92 4.44 14.05 7.27 Delaware VIP High Yield Series 4/27/92 -4.82 9.89 1.60 Delaware VIP International Value Equity Series 10/29/92 -2.66 18.57 8.13 Delaware VIP REIT Series 5/7/98 -20.22 14.59 9.88 Delaware VIP Select Growth Series 5/3/99 1.54 12.44 -0.26 Delaware VIP Small Cap Value Series 1/2/94 -13.65 13.26 7.00 Delaware VIP Trend Series 12/30/93 2.39 11.70 7.39 Delaware VIP U.S. Growth Series 11/16/99 4.33 9.02 -2.54 Delaware VIP Value Series 4/27/92 -10.24 11.22 3.95 AIM V.I. Capital Appreciation Fund 5/1/00 3.85 10.84 -7.44 AIM V.I. Core Equity Fund 5/1/00 0.20 9.71 -3.46 AIM V.I. High Yield Fund 5/1/00 -6.12 8.42 1.13 AIM V.I. International Growth Fund 5/1/00 6.36 20.64 3.31 Alger American Capital Appreciation Portfolio 5/1/00 24.64 19.57 -0.03 Alger American MidCap Growth Portfolio 5/1/00 22.68 19.58 5.47 Alger American SmallCap Growth Portfolio 5/1/00 8.72 20.24 -0.45 AllianceBernstein VPS Global Technology Portfolio 5/1/00 11.19 13.27 -8.31 AllianceBernstein VPS Growth and Income Portfolio 5/1/00 -2.83 11.50 4.72 AllianceBernstein VPS Growth Portfolio 5/1/00 4.46 11.90 -3.31 AllianceBernstein VPS Large Cap Growth Portfolio 5/1/00 5.31 9.60 -4.56 FT VIP Franklin Small-Mid Cap Growth Securities Fund 5/1/00 3.14 12.17 -1.63 FT VIP Mutual Shares Securities Fund 5/1/00 -4.08 11.80 7.86 FT VIP Templeton Foreign Securities Fund 5/1/00 7.06 17.35 5.70 FT VIP Templeton Growth Securities Fund 5/1/00 -5.10 13.80 6.19 Pioneer Emerging Markets VCT Portfolio 5/1/00 33.45 35.73 14.30 Pioneer Mid Cap Value VCT Portfolio 5/1/00 -2.33 14.28 9.69
13 TABLE 1B SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING DECEMBER 31, 2007 SINCE INCEPTION OF SUB-ACCOUNT (ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
10 YEARS (OR TOTAL RETURN SINCE SUB-ACCOUNT FOR YEAR INCEPTION INCEPTION DATE ENDED 12/31/07 5 YEARS IF LESS) -------------- -------------- ------- ------------ Delaware VIP Balanced Series 4/30/92 -1.07 7.29 0.82 Delaware VIP Capital Reserves Series 4/30/92 3.00 2.37 3.50 Delaware VIP Cash Reserve Series 4/22/92 3.30 1.24 1.99 Delaware VIP Emerging Markets Series 5/1/97 36.91 36.71 14.19 Delaware VIP Growth Opportunities Series 4/9/92 11.37 14.62 7.52 Delaware VIP High Yield Series 4/27/92 1.36 10.42 1.80 Delaware VIP International Value Equity Series 10/29/92 3.76 19.04 8.37 Delaware VIP REIT Series 5/7/98 -15.14 14.95 9.89 Delaware VIP Select Growth Series 5/3/99 8.11 12.92 -0.08 Delaware VIP Small Cap Value Series 1/2/94 -7.93 13.80 7.23 Delaware VIP Trend Series 12/30/93 9.20 12.33 7.60 Delaware VIP U.S. Growth Series 11/16/99 10.99 9.48 -2.47 Delaware VIP Value Series 4/27/92 -4.09 11.96 4.42 AIM V.I. Capital Appreciation Fund 5/1/00 10.45 11.25 -7.39 AIM V.I. Core Equity Fund 5/1/00 6.60 10.17 -3.36 AIM V.I. High Yield Fund 5/1/00 -0.17 8.86 1.14 AIM V.I. International Growth Fund 5/1/00 13.11 20.94 3.34 Alger American Capital Appreciation Portfolio 5/1/00 31.67 19.88 0.00 Alger American MidCap Growth Portfolio 5/1/00 29.72 19.90 5.50 Alger American SmallCap Growth Portfolio 5/1/00 15.60 20.52 -0.44 AllianceBernstein VPS Global Technology Portfolio 5/1/00 18.21 13.66 -8.24 AllianceBernstein VPS Growth and Income Portfolio 5/1/00 3.39 11.94 4.79 AllianceBernstein VPS Growth Portfolio 5/1/00 11.09 12.30 -3.28 AllianceBernstein VPS Large Cap Growth Portfolio 5/1/00 12.02 10.06 -4.46 FT VIP Franklin Small-Mid Cap Growth Securities Fund 5/1/00 9.68 12.56 -1.61 FT VIP Mutual Shares Securities Fund 5/1/00 2.03 12.21 7.89 FT VIP Templeton Foreign Securities Fund 5/1/00 13.84 17.67 5.72 FT VIP Templeton Growth Securities Fund 5/1/00 0.91 14.16 6.20 Pioneer Emerging Markets VCT Portfolio 5/1/00 40.46 35.91 14.30 Pioneer Mid Cap Value VCT Portfolio 5/1/00 3.87 14.65 9.71
14 TABLE 2A AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING DECEMBER 31, 2007 SINCE INCEPTION OF UNDERLYING FUND(1) (ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
10 YEARS (OR TOTAL RETURN SINCE UNDERLYING FUND FOR YEAR INCEPTION INCEPTION DATE ENDED 12/31/07 5 YEARS IF LESS) --------------- -------------- ------- ------------ Delaware VIP Balanced Series 7/28/88 -7.18 6.63 0.55 Delaware VIP Capital Reserves Series 7/28/88 -3.19 1.78 3.45 Delaware VIP Cash Reserve Series 7/28/88 -2.91 0.65 1.94 Delaware VIP Emerging Markets Series 5/1/97 29.87 36.51 14.15 Delaware VIP Growth Opportunities Series 7/12/91 4.44 14.05 7.27 Delaware VIP High Yield Series 7/28/88 -4.82 9.89 1.60 Delaware VIP International Value Equity Series 10/29/92 -2.66 18.57 8.13 Delaware VIP REIT Series 5/1/98 -20.22 14.59 9.87 Delaware VIP Select Growth Series 5/3/99 1.54 12.44 -0.26 Delaware VIP Small Cap Value Series 12/27/93 -13.65 13.26 7.00 Delaware VIP Trend Series 12/27/93 2.39 11.70 7.39 Delaware VIP U.S. Growth Series 11/16/99 4.33 9.02 -2.54 Delaware VIP Value Series 7/28/88 -10.24 11.22 3.95 AIM V.I. Capital Appreciation Fund 5/3/93 3.85 10.84 0.43 AIM V.I. Core Equity Fund 5/5/93 0.20 9.71 3.04 AIM V.I. High Yield Fund 5/1/98 -6.12 8.42 0.59 AIM V.I. International Growth Fund 5/5/93 6.36 20.64 7.42 Alger American Capital Appreciation Portfolio 1/25/95 24.64 19.57 10.47 Alger American MidCap Growth Portfolio 5/3/93 22.68 19.58 11.04 Alger American SmallCap Growth Portfolio 9/21/88 8.72 20.24 4.05 AllianceBernstein VPS Global Technology Portfolio* 1/11/96 11.19 13.27 5.56 AllianceBernstein VPS Growth and Income Portfolio* 01/14/91 -2.83 11.50 6.83 AllianceBernstein VPS Growth Portfolio* 09/15/94 4.46 11.90 2.58 AllianceBernstein VPS Large Cap Growth Portfolio* 6/26/92 5.31 9.60 3.34 FT VIP Franklin Small-Mid Cap Growth Securities Fund* 11/1/95 3.14 12.17 5.36 FT VIP Mutual Shares Securities Fund* 11/8/96 -4.08 11.80 7.87 FT VIP Templeton Foreign Securities Fund* 1/27/92 7.06 17.35 6.56 FT VIP Templeton Growth Securities Fund* 3/15/94 -5.10 13.80 6.86 Pioneer Emerging Markets VCT Portfolio* 10/30/98 33.45 35.73 18.92 Pioneer Mid Cap Value VCT Portfolio* 3/1/95 -2.33 14.28 8.24
(1) Many of the Underlying Funds in which the Sub-Accounts invest existed prior to the date the Sub-Accounts commenced operations. In this table, the specified period is based on the inception date of each Underlying Fund rather than the inception date of the Sub-Account. As such, the table represents what the performance of a Sub-Account would have been if the Sub-Account had been both in existence and invested in the corresponding Underlying Fund since the date indicated. In that respect, these numbers are hypothetical and are not the actual performance numbers for the Sub-Accounts or the Contract. 15 * These funds include a charge for 12b-1 fees. For periods beyond the inception date of the Sub-Accounts, these hypothetical performance figures are based upon the historical performance of the non 12b-1 class of shares, but adjusted to reflect the effect of the 12b-1 fee on performance. TABLE 2B SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING DECEMBER 31, 2007 SINCE INCEPTION OF UNDERLYING FUND(1) (ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
10 YEARS (OR TOTAL RETURN SINCE UNDERLYING FUND FOR YEAR INCEPTION IF INCEPTION DATE ENDED 12/31/07 5 YEARS LESS) --------------- -------------- ------- ------------- Delaware VIP Balanced Series 7/28/88 -1.07 7.29 0.82 Delaware VIP Capital Reserves Series 7/28/88 3.00 2.37 3.50 Delaware VIP Cash Reserve Series 7/28/88 3.30 1.24 1.99 Delaware VIP Emerging Markets Series 5/1/97 36.91 36.71 14.19 Delaware VIP Growth Opportunities Series 7/12/91 11.37 14.62 7.52 Delaware VIP High Yield Series 7/28/88 1.36 10.42 1.80 Delaware VIP International Value Equity Series 10/29/92 3.76 19.04 8.37 Delaware VIP REIT Series 5/1/98 -15.14 14.95 9.88 Delaware VIP Select Growth Series 5/3/99 8.11 12.92 -0.08 Delaware VIP Small Cap Value Series 12/27/93 -7.93 13.80 7.23 Delaware VIP Trend Series 12/27/93 9.20 12.33 7.60 Delaware VIP U.S. Growth Series 11/16/99 10.99 9.48 -2.47 Delaware VIP Value Series 7/28/88 -4.09 11.96 4.42 AIM V.I. Capital Appreciation Fund 5/3/93 10.45 11.25 0.45 AIM V.I. Core Equity Fund 5/5/93 6.60 10.17 3.08 AIM V.I. High Yield Fund 5/1/98 -0.17 8.86 0.60 AIM V.I. International Growth Fund 5/5/93 13.11 20.94 7.44 Alger American Capital Appreciation Portfolio 1/25/95 31.67 19.88 10.48 Alger American MidCap Growth Portfolio 5/3/93 29.72 19.90 11.06 Alger American SmallCap Growth Portfolio 9/21/88 15.60 20.52 4.05 AllianceBernstein VPS Global Technology Portfolio* 01/11/96 18.21 13.66 5.58 AllianceBernstein VPS Growth and Income Portfolio* 01/14/91 3.39 11.94 6.86 AllianceBernstein VPS Growth Portfolio* 09/15/94 11.09 12.30 2.59 AllianceBernstein VPS Large Cap Growth Portfolio* 06/26/92 12.02 10.06 3.38 FT VIP Franklin Small-Mid Cap Growth Securities Fund * 11/1/95 9.68 12.56 5.37 FT VIP Mutual Shares Securities Fund* 11/8/96 2.03 12.21 7.88 FT VIP Templeton Foreign Securities Fund* 5/1/92 13.84 17.67 6.56 FT VIP Templeton Growth Securities Fund* 3/15/94 0.91 14.16 6.87 Pioneer Emerging Markets VCT Portfolio* 10/30/98 40.46 35.91 18.93 Pioneer Mid Cap Value VCT Portfolio* 3/1/95 3.87 14.65 8.25
(1) Many of the Underlying Funds in which the Sub-Accounts invest existed prior to the date the Sub-Accounts commenced operations. In this table, the specified period is based on the inception date of each Underlying Fund rather than the inception date of the Sub-Account. As such, the table represents what the performance of a Sub-Account would have been if the Sub-Account had been both in existence and invested in the 16 corresponding Underlying Fund since the date indicated. In that respect, these numbers are hypothetical and are not the actual performance numbers for the Sub-Accounts or the Contract. * These funds include a charge for 12b-1 fees. For periods beyond the inception date of the Sub-Accounts, these hypothetical performance figures are based upon the historical performance of the non 12b-1 class of shares, but adjusted to reflect the effect of the 12b-1 fee on performance. YIELD AND EFFECTIVE YIELD - THE DELAWARE VIP CASH RESERVE SUB-ACCOUNT Set forth below is yield and effective yield information for the Delaware VIP Cash Reserve Sub-Account investing in the Delaware VIP Cash Reserve Series for the seven-day period ended December 31, 2007: Yield 5.30% Effective Yield 5.44%
The yield and effective yield figures are calculated by standardized methods prescribed by rules of the SEC. Under those methods, the yield quotation is computed by determining the net change (exclusive of capital changes) in the value of a hypothetical pre-existing account having a balance of one accumulation unit of the Sub-Account at the beginning of the period, subtracting a charge reflecting the annual deduction for mortality and expense risk and the administrative charge, dividing the difference by the value of the account at the beginning of the same period to obtain the base period return, and then multiplying the return for a seven-day base period by (365/7), with the resulting yield carried to the nearest hundredth of one percent. The Delaware VIP Cash Reserve Sub-Account computes effective yield by compounding the unannualized base period return by using the formula: Effective Yield = [(base period return + 1)(TO THE POWER OF (365/7))] - 1 The calculations of yield and effective yield reflect the $30 annual Contract fee. FINANCIAL STATEMENTS Financial Statements are included for Commonwealth Annuity and Life Insurance Company and for its Separate Account VA-K. 17 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Commonwealth Annuity and Life Insurance Company: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholder's equity, comprehensive income and cash flows present fairly, in all material respects, the financial position of Commonwealth Annuity and Life Insurance Company at December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Hartford, Connecticut April 17, 2008 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) CONSOLIDATED BALANCE SHEETS
SUCCESSOR SUCCESSOR DECEMBER 31, 2007 2006 -------------------------------------------------------------------------------------- (In millions) ASSETS Investments: Fixed maturities at fair value (amortized cost of $967.2 and $1,075.4 in 2007 and 2006, respectively) $ 965.7 $ 1,071.1 Equity securities at fair value (cost of $108.1 and $64.4 in 2007 and 2006, respectively) 102.7 65.7 Policy loans 106.1 117.0 --------- --------- Total investments 1,174.5 1,253.8 --------- --------- Cash and cash equivalents 57.4 58.9 Accrued investment income 11.3 12.9 Reinsurance receivable on paid and unpaid losses, benefits, unearned premiums and modified coinsurance 2,070.0 2,174.8 Value of business acquired (intangible) 220.4 274.4 Deferred policy acquisition costs 153.3 103.6 Deferred federal income taxes 129.7 157.9 Derivative instruments receivable 29.1 2.8 Other assets 31.9 15.1 Separate account assets 6,906.7 7,894.5 --------- --------- Total assets $10,784.3 $11,948.7 ========= ========= LIABILITIES Policy liabilities and accruals: Future policy benefits $ 3,133.2 $ 3,411.0 Outstanding claims and losses 9.2 12.9 Contractholder deposit funds and other policy liabilities 46.3 53.7 --------- --------- Total policy liabilities and accruals 3,188.7 3,477.6 --------- --------- Derivative instruments payable 33.7 28.5 Accrued expenses and other liabilities 56.4 61.2 Reinsurance payable 21.4 4.5 Separate account liabilities 6,906.7 7,894.5 --------- --------- Total liabilities $10,206.9 $11,466.3 --------- --------- Commitments and contingencies (Notes 19 and 20) SHAREHOLDER'S EQUITY Common stock, $1,000 par value, 10,000 shares authorized, 2,526 shares issued and outstanding $ 2.5 $ 2.5 Additional paid-in capital 416.9 416.9 Accumulated other comprehensive loss (3.2) (1.2) Retained earnings 161.2 64.2 --------- --------- Total shareholder's equity 577.4 482.4 --------- --------- Total liabilities and shareholder's equity $10,784.3 $11,948.7 ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 1 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) CONSOLIDATED STATEMENTS OF INCOME
SUCCESSOR SUCCESSOR PREDECESSOR FOR THE YEARS ENDED DECEMBER 31, 2007 2006 2005 ----------------------------------------------------------------------------------------- (In millions) REVENUES Premiums $ -- $ -- $ 36.9 Universal life and investment product policy fees 239.6 233.0 244.6 Net investment income 137.5 114.5 192.6 Net realized investment gains/(losses) 5.9 (7.3) 22.9 Other income 19.9 16.7 33.0 ------ ------ ------ Total revenues 402.9 356.9 530.0 ------ ------ ------ BENEFITS, LOSSES AND EXPENSES Policy benefits, claims, losses and loss adjustment expenses 141.7 105.2 239.4 Policy acquisition expenses 52.7 39.0 111.8 Interest on trust instruments supported by funding obligations -- -- 19.6 Losses on derivative instruments 6.8 46.7 2.3 Other operating expenses 70.1 74.9 148.6 ------ ------ ------ Total benefits, losses and expenses 271.3 265.8 521.7 ------ ------ ------ Income before federal income taxes 131.6 91.1 8.3 ------ ------ ------ FEDERAL INCOME TAX EXPENSE (BENEFIT) Current -- -- (34.1) Deferred 34.6 26.2 1.1 ------ ------ ------ Total federal income tax expense (benefit) 34.6 26.2 (33.0) ------ ------ ------ Net income $ 97.0 $ 64.9 $ 41.3 ====== ====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. SEE NOTE 5 FOR PROFORMA 2005 SUCCESSOR INCOME STATEMENT. 2 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
ADDITIONAL ACCUMULATED OTHER TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S (IN MILLIONS) STOCK CAPITAL EARNINGS LOSS EQUITY ------------------------------------------------------------------------------------------------ BALANCE AT JANUARY 1, 2005 $2.5 $1,000.0 $130.7 $(21.1) $1,112.1 Net income 41.3 41.3 Other comprehensive income: Net unrealized losses (24.1) (24.1) Minimum pension liability (38.3) 24.9 (13.4) Distribution of subsidiaries (385.8) (72.8) 26.4 (432.2) ---- -------- ------ ------ -------- BALANCE AT DECEMBER 30, 2005 $2.5 $ 575.9 $ 99.2 $ 6.1 $ 683.7 ==== ======== ====== ====== ======== Purchase accounting adjustments (246.0) (99.9) (6.1) (352.0) ---- -------- ------ ------ -------- BALANCE AT DECEMBER 31, 2005 $2.5 $ 329.9 $ (0.7) $ -- $ 331.7 ==== ======== ====== ====== ======== Net income 64.9 64.9 Other comprehensive income: Net unrealized losses (1.2) (1.2) Capital contribution 87.0 87.0 ---- -------- ------ ------ -------- BALANCE AT DECEMBER 31, 2006 $2.5 $ 416.9 $ 64.2 $ (1.2) $ 482.4 ==== ======== ====== ====== ======== Net income 97.0 97.0 Other comprehensive income: Net unrealized losses (2.0) (2.0) ---- -------- ------ ------ -------- BALANCE AT DECEMBER 31, 2007 $2.5 $ 416.9 $161.2 $ (3.2) $ 577.4 ==== ======== ====== ====== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 3 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
SUCCESSOR SUCCESSOR PREDECESSOR FOR THE YEARS ENDED DECEMBER 31, 2007 2006 2005 ---------------------------------------------------------------------------------------------------- (In millions) Net income $97.0 $64.9 $41.3 Other comprehensive income (loss): Available-for-sale securities, net of policyholder amounts: Net depreciation during the period (3.0) (2.0) (84.0) Benefit for deferred federal income taxes 1.0 0.8 29.4 ----- ----- ----- Total available-for-sales securities (2.0) (1.2) (54.6) ----- ----- ----- Derivative instruments: Net (depreciation) appreciation during the period -- -- 77.8 (Provision) benefit for deferred federal income taxes -- -- (27.2) ----- ----- ----- Total derivative instruments -- -- 50.6 ----- ----- ----- Net unrealized (depreciation) appreciation (2.0) (1.2) (4.0) ----- ----- ----- Minimum pension liability: Decrease (increase) in minimum pension liability -- -- 48.0 (Provision) benefit for deferred federal income taxes -- -- (16.8) ----- ----- ----- Total minimum pension liability -- -- 31.2 ----- ----- ----- Other comprehensive (loss) income (2.0) (1.2) 27.2 ----- ----- ----- Purchase accounting adjustments -- -- (6.1) ----- ----- ----- Comprehensive income $95.0 $63.7 $62.4 ===== ===== =====
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS 4 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS
SUCCESSOR SUCCESSOR PREDECESSOR FOR THE YEARS ENDED DECEMBER 31, 2007 2006 2005 ------------------------------------------------------------------------------------------------------------------- (In millions) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 97.0 $ 64.9 $ 41.3 Adjustments to reconcile net income to net cash used in operating activities: Net realized investment (gains) losses (5.9) 7.3 (22.9) Losses on derivative instruments -- -- 0.3 Non cash derivative activity (7.4) 28.5 -- Net accretion of premiums on investment 0.7 (0.8) -- Net amortization and depreciation 52.7 39.0 20.9 Interest credited to contractholder deposit funds and trust instruments supported by funding obligations -- -- 21.1 Deferred federal income taxes 34.6 26.2 1.1 Change in deferred acquisition costs (53.0) (110.0) 163.9 Change in premiums and notes receivable, net of reinsurance premiums payable 16.9 (2.6) 1.6 Change in accrued investment income 1.6 7.9 19.7 Change in policy liabilities and accruals, net (281.5) 1,053.6 (330.3) Change in reinsurance receivable and modified coinsurance 104.8 (1,362.9) (84.4) Change in expenses and taxes payable (4.4) (5.6) 16.2 Other, net (17.0) (5.6) 15.3 ------- --------- -------- Net cash used in operating activities (60.9) (260.1) (136.2) ------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals and maturities of fixed maturities 773.9 2,206.0 1,561.0 Proceeds from disposals of equity securities -- -- 1.7 Proceeds from disposals of other investments 19.3 0.6 25.7 Proceeds from mortgages sold, matured or collected -- -- 9.6 Purchase of available-for-sale fixed maturities (662.4) (2,012.1) (686.0) Purchase of equity securities (43.7) (64.4) (0.1) Purchase of other investments (20.3) (1.4) (8.8) Capital expenditures -- (1.5) (7.7) Net payments related to margin deposits on derivative instruments -- (0.1) (39.7) Other investing activities, net -- -- 0.3 ------- --------- -------- Net cash provided by investing activities 66.8 127.1 856.0 ------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Withdrawals from contractholder deposit funds (7.4) (17.6) (1.7) Withdrawals from trust instruments supported by funding obligations -- -- (651.5) Change in collateral related to securities lending program -- -- (109.6) Capital contribution (dividend) -- 86.3 (114.7) ------- --------- -------- Net cash (used in) provided by financing activities (7.4) 68.7 (877.5) ------- --------- -------- Net change in cash and cash equivalents (1.5) (64.3) (157.7) Cash and cash equivalents, beginning of period 58.9 123.2 280.9 ------- --------- -------- Cash and cash equivalents, end of period $ 57.4 $ 58.9 $ 123.2 ======= ========= ======== SUPPLEMENTAL CASH FLOW INFORMATION Income tax refunds $ -- $ -- $ 42.5
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS 5 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 1. ORGANIZATION Commonwealth Annuity and Life Insurance Company ("the Company") is a stock life insurance company organized under the laws of Massachusetts, and is a wholly-owned subsidiary of The Goldman Sachs Group, Inc. ("Goldman Sachs"). At December 31, 2007, the Company manages blocks of variable annuity, variable universal life and minor blocks of group retirement products. In 2007, the Company began issuance of 403(b) variable annuity products. This requires the Company to have an affiliated broker dealer to act as principal underwriter and distributor. The Company signed an agreement with Epoch Securities Inc. ("Epoch"), a Delaware corporation, and a Financial Industry Regulatory Authority ("FINRA") member firm, to serve as principal underwriter for several of the Company's variable products. Epoch is a wholly-owned subsidiary of Goldman Sachs (see Note 21 - Related Party Transactions). On September 1, 2006, the Company changed its name from Allmerica Financial Life Insurance and Annuity Company ("AFLIAC") to the current name. On December 30, 2005, Goldman Sachs acquired all outstanding common shares of the Company from The Hanover Insurance Group ("THG") (the "Transaction"). Prior to December 1, 2005 THG was named Allmerica Financial Corporation. Immediately preceding the Transaction, the Company distributed its ownership in certain wholly-owned subsidiaries, First Allmerica Financial Life Insurance Company ("FAFLIC"), VeraVest Investments, Inc. ("VeraVest"), and Allmerica Financial Investment Management Services, Inc ("AFIMS") directly to THG as a dividend to shareholders. The Company's remaining non-insurance subsidiaries were distributed to FAFLIC as a capital contribution prior to the Transaction. Concurrent with the Transaction, the Company entered into several servicing agreements to provide certain support of its business. Transitional service agreements with THG provided operational support, system and policy conversion support, accounting and other services until December 31, 2006. An operational servicing agreement was executed with Security Benefit Life Insurance Company ("Se2") on December 30, 2005, to provide customer and agent support and perform other key policy administration and operational functions. As of December 31, 2006, these operational functions were transferred to Se2. 2. BASIS OF PRESENTATION The accompanying audited financial statements have been prepared in accordance with generally accepted accounting principles ("US GAAP"). The Transaction was accounted for using the purchase method under Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") and purchase accounting adjustments were "pushed down" to the Company's financial statements. Under the purchase method of accounting, assets acquired and liabilities assumed were recorded at estimated fair value at the date of purchase, and updated as of December 31, 2007 and December 31, 2006. Consequently, the Company experienced decreased amortization of acquisition expenses as compared to historical experience when it was owned by THG. See Note 5 - Proforma, for a proforma income statement containing the changes. Prior to December 30, 2005, the consolidated accounts of the Company included the accounts of FAFLIC and certain wholly-owned non-insurance subsidiaries (principally brokerage and investment advisory subsidiaries). In the accompanying financial statements, "predecessor" information includes these subsidiaries, while "successor" information represents the Company on a stand-alone basis and includes purchase accounting adjustments as indicated in Note 4 - Purchase Accounting. The preparation of financial statements in conformity with US GAAP requires the Company to make estimates and assumptions and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. 6 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. VALUATION OF INVESTMENTS The Company accounts for its investments in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", ("SFAS No. 115"). At the time of purchase, fixed maturity securities are classified based on the Company's intent as either held-to-maturity, trading or available-for-sale. Fixed maturities and equity securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a separate component of shareholder's equity. The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Policy loans are carried primarily at unpaid principal balances. Realized investment gains and losses, other than those related to separate accounts for which the Company does not bear the investment risk and that meet the conditions for separate account reporting under American Institute of Certified Public Accountants ("AICPA") Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional Long-Duration Contract and for Separate Accounts" ("SOP 03-1"), are reported as a component of revenues based upon specific identification of the investment assets sold. When an other-than-temporary decline in value of a specific investment is deemed to have occurred, the Company reduces the cost basis of the investment to fair value. This reduction is permanent and is recognized as a realized investment loss. Realized investment gains and losses related to separate accounts that meet the conditions for separate account reporting under SOP 03-1 accrue to and are borne by the contract holder. B. CLOSED BLOCK The predecessor Consolidated Statements of Operations include the activity of the FAFLIC Closed Block of participating policies. The FAFLIC Closed Block consists of certain individual life insurance participating policies, individual deferred annuities and supplemental contracts not involving life contingencies, which were in force as of the October 16, 1995 demutualization. The purpose of the Closed Block is to protect the policy dividend expectations of such FAFLIC dividend paying policies and contracts. Unless the Massachusetts Commissioner of Insurance consents to an earlier termination, the Closed Block will continue to be in effect until the date none of the Closed Block policies are in force. FAFLIC allocated to the Closed Block assets in an amount that is expected to produce cash flows which, together with future revenues from the Closed Block business, are reasonably sufficient to support the Closed Block business. Following the Transaction, there was no impact to the successor financial statements as the Closed Block remains with FAFLIC. C. FINANCIAL INSTRUMENTS Financial instruments are reflected in the balance sheet on a trade-date basis. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). The Company evaluates and monitors each financial instrument individually and, when appropriate, obtains collateral or other security to minimize losses. Fair value measurements are not adjusted for transaction costs. In the normal course of business, the Company enters into transactions involving various types of financial instruments, including U.S. government and agency securities, liquid mortgage products, investment-grade corporate bonds, money market securities, state, municipal and provincial obligations, swap contracts, option contracts, futures contracts and high yield mutual funds. The high yield fund invests in high yield, fixed income securities that, at the time of purchase, are non-investment grade. This is classified as Equity Securities on the Company's balance sheet. 7 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. FINANCIAL INSTRUMENTS (CONTINUED) The Company adopted SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), as of the beginning of 2007. SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under SFAS No. 157 are described below: BASIS OF FAIR VALUE MEASUREMENT Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2 Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. See "Note 3O - New and Adopted Accounting Pronouncements" for a discussion of the impact of adopting SFAS No. 157. In determining fair value, the Company separates its financial instruments into two categories: cash instruments and derivative contracts. See "Note 3D - Cash Instruments" and "Note 3E - Derivatives and Hedging Activities" below. D. CASH INSTRUMENTS The Company's cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, many other sovereign government obligations, and most money market securities. Such instruments are generally classified within level 1 of the fair value hierarchy. The Company does not adjust the quoted price for such instruments, even in situations where the company holds a large position and a sale could reasonably impact the quoted price. The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, most mortgage products, state, and municipal obligations. Such instruments are generally classified within level 2 of the fair value hierarchy. Certain cash instruments are classified within level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency. Such instruments include private equity and subordinated obligations. The transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. This valuation is adjusted only when changes to inputs and assumptions are corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows. For positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate is used. 8 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. DERIVATIVES AND HEDGING ACTIVITIES Derivative contracts can be exchange-traded or over-the-counter ("OTC"). Exchange-traded derivatives typically fall within level 1 or level 2 of the fair value hierarchy depending on whether they are deemed to be actively traded or not. The Company generally values exchange-traded derivatives within portfolios using models which calibrate to market clearing levels and eliminate timing differences between the closing price of the exchange-traded derivatives and their underlying cash instruments. In such cases, exchange-traded derivatives are classified within level 2 of the fair value hierarchy. As of the Transaction, the Company entered into certain OTC derivatives, primarily equity put options and interest rate swaptions, to hedge certain equity market, credit and interest rate risk. None of these post-transaction instruments qualify for hedge accounting, and are carried at fair value or amounts that approximate fair value. OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection of a particular model to value an OTC derivative depends upon the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. The firm generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be verified and model selection does not involve significant management judgment. Such instruments are typically classified within level 2 of the fair value hierarchy. Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. Such instruments are classified within level 3 of the fair value hierarchy. Where the Company does not have corroborating market evidence to support significant model inputs and cannot verify the model to market transactions, transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. The valuations of these less liquid OTC derivatives are typically based on level 1 and/or level 2 inputs that can be observed in the market, as well as unobservable level 3 inputs. Subsequent to initial recognition, the Company updates the level 1 and level 2 inputs to reflect observable market changes, with resulting gains and losses reflected within level 3. Level 3 inputs are only changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations, or other empirical market data. In circumstances where the Company cannot verify the model value to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate is used. In November 2006, per an investment management agreement with Goldman Sachs Asset Management, L.P. ("GSAM"), the Company began to trade futures contracts. Exchange-traded futures and options are effected through a regulated exchange and positions are marked to market on a daily basis. The Company has little exposure to credit-related losses in the event of nonperformance by counterparties to such financial instruments. From time to time, futures contracts are terminated. The termination of such contracts would be recognized in income as they are marked to market on a daily basis. Terminations would not materially impact earnings as any payment due upon termination represents one day of market exposure. The clearinghouse guarantees the performance of both counterparties which mitigates credit risk. Prior to the Transaction, the Company formally documented all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process included linking all derivatives that were designated as fair value, cash flow or foreign currency hedges to specific assets and liabilities on the balance sheet or to specific forecasted transactions. The Company also formally assessed, both at the hedge's inception and on an ongoing basis, whether the derivatives that were used in hedging transactions were highly effective in offsetting changes in fair values or cash flows of hedged items. When it was determined that a derivative was not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinued hedge accounting prospectively, as discussed below. 9 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED) The Company discontinued hedge accounting prospectively when (1) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedge item, including forecasted transactions; (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is no longer designated as a hedge instrument, because it is unlikely that a forecasted transaction will occur; or (4) management determines that designation of the derivative as a hedge instrument is no longer appropriate. F. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, amounts due from banks and highly liquid debt instruments held in the ordinary course of business. None of this is restricted or segregated for specific business reasons. Approximately $37.2 million is held at one financial institution at December 31, 2007. G. DEFERRED POLICY ACQUISITION COSTS ("DAC") AND DEFERRED SALES INDUCEMENTS ("DSI") DAC consists of commissions, ceding commissions, and other costs, which vary with, and are primarily related to, the production of revenues. The Company defers sales inducements generated by variable annuities that offer enhanced crediting rates or bonus payments. As part of the recording of fair value purchase accounting due to the acquisition of the Company, DAC and DSI were written down to zero as of the Transaction date. Subsequent to the Transaction, DAC and DSI balances primarily were created via the deferral of ceding commissions and bonus interest credits paid in the reinsurance of in force contracts. DAC and DSI amortization is reviewed periodically and adjusted retrospectively when the Company revises its estimate of current or future gross profits to be recognized from these products. Acquisition costs and sales inducements related to variable annuity products are amortized in proportion to total estimated gross profits from investment yields, mortality, surrender charges and expense margins over the expected life of the contracts. (See Note 16 - Deferred Policy Acquisition Costs for further discussion). H. REINSURANCE Reinsurance accounting is followed for ceded and assumed transactions when the risk transfer provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," have been met. To meet risk transfer requirements, a long duration reinsurance contract must transfer mortality or morbidity risks, and subject the reinsurer to a reasonable possibility of a significant loss. With respect to ceded reinsurance, the valuation of claims recoverable depends on whether the underlying claim is a reported claim, or a future policy benefit. For reported claims, the Company values reinsurance recoverables at the time the underlying claim is recognized, in accordance with contract terms. For future policy benefits, the Company estimates the amount of reinsurance recoverables based on the terms of the reinsurance contracts and historical reinsurance recovery information and applies that information to the future policy benefit estimates. The reinsurance recoverables are based on what the Company believes are reasonable estimates and the balance is disclosed separately in the financial statements. However, the ultimate amount of the reinsurance recoverable is not known until all claims are settled. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. See Note 15 - Reinsurance for further discussion. 10 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) I. PROPERTY, EQUIPMENT AND CAPITALIZED SOFTWARE Property, equipment, leasehold improvements and capitalized software are stated at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. Certain costs of software developed or obtained for internal use are capitalized and amortized on a straight-line basis over the useful life of the software. Amortization of leasehold improvements is provided using the straight-line method over the lesser of the term of the leases or the estimated useful life of the improvements. The Company tests for the potential impairment of long-lived assets whenever events or changes in circumstances suggest that the carrying amounts may not be fully recoverable in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." The Company recognizes impairment losses only when the carrying amounts of long-lived assets exceed the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. In such cases, the Company reduces the carrying value of the asset to fair value. Fair values are estimated using discounted cash flow analysis. As part of the recording of purchase accounting due to the acquisition of the Company in 2005, $3.0 million of capitalized assets were written off. J. GOODWILL/VALUE OF BUSINESS ACQUIRED ("VOBA") Goodwill is the cost of an acquired company in excess of the fair value of its identifiable net assets at acquisition date. Relating to the Transaction and in accordance with the provisions of SFAS No. 142, an analysis was done to assign purchase price to the assets and liabilities of the business. The Company recorded a purchase price of $333.3 million as part of the Transaction, including the fair value allocation of other net assets and the establishment of VOBA (See Note 4 - Purchase Accounting). As part of the purchase accounting and the fair value analysis described above, no separate or additional value related to goodwill was recognized. K. SEPARATE ACCOUNTS Separate account assets and liabilities represent segregated funds administered and invested by the Company for the benefit of variable annuity and variable life insurance contractholders. Assets consist principally of mutual funds, bonds, common stocks, and short-term obligations at market value. The investment income and gains and losses of these accounts generally accrue to the contractholders and, therefore, are not included in the Company's net income. However, the Company's net income reflects fees assessed and earned on fund values of these contracts. See Note 7 - Adoption of Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts. Separate account assets representing contract holder funds are measured at fair value and reported as a summary total in the Balance Sheet, with an equivalent summary total reported for related liabilities. The open-ended mutual funds in the separate accounts produce a daily net asset value that is validated with a sufficient level of observable activity to support classification of the fair value measurement as level 1, under SFAS No. 157. L. POLICY LIABILITIES AND ACCRUALS Future policy benefits are liabilities for annuity, life, and health products. Such liabilities are established in amounts adequate to meet the estimated future obligations of policies in force. Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from 3 1/2 % to 9 1/2 % for annuities and 3% to 6% for life insurance. Mortality, morbidity and withdrawal assumptions for all policies are based on the Company's own experience and industry standards. Liabilities for universal life, variable universal life and variable annuities include deposits received from customers and investment earnings on their fund balances, less administrative charges. Universal life fund balances are also assessed mortality and surrender charges. Liabilities for variable annuities include a reserve for guaranteed minimum death benefits ("GMDB") in excess of contract values. The liabilities associated with traditional life insurance products are computed using the net level premium method for individual life and annuity policies, and are based upon estimates as to future investment yield, mortality and withdrawals that include provisions for adverse deviation. 11 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) L. POLICY LIABILITIES AND ACCRUALS (CONTINUED) Liabilities for outstanding claims and claims adjustment expenses are estimates of payments to be made on health insurance contracts for reported losses and claims adjustment expenses and estimates of losses and claims adjustment expenses incurred but not reported. These liabilities are determined using case basis evaluations and statistical analyses and represent estimates of the ultimate cost of all claims incurred but not paid. These estimates are continually reviewed and adjusted as necessary; such adjustments are reflected in current operations. Contractholder deposit funds and other policy liabilities include deposit administration funds and immediate participation guarantee funds and consist of deposits received from customers and investment earnings on their fund balances. Policy liabilities and accruals are based on the various estimates discussed above. Although the adequacy of these amounts cannot be assured, the Company believes that policy liability and accruals will be sufficient to meet future obligations of policies in force. The amount of liabilities and accruals, however, could be revised in the near-term if the estimates discussed above are revised. M. PREMIUM, FEE REVENUE AND RELATED EXPENSES Premiums for individual life insurance and individual and group annuity products, excluding universal life and investment-related products, are considered revenue when due. Benefits, losses and related expenses are matched with premiums, resulting in their recognition over the lives of the contracts. This matching is accomplished through the provision for future benefits, estimated and unpaid losses and amortization of deferred policy acquisition costs. Revenues for investment-related products consist of net investment income and contract charges assessed against the fund values. Related benefit expenses include annuity benefit claims for guaranteed minimum death benefits in excess of contract values, and net investment income credited to the fund values after deduction for investment and risk charges. Revenues for universal life products consist of net investment income, with mortality, administration and surrender charges assessed against the fund values. Related benefit expenses include universal life benefit claims in excess of fund values and net investment income credited to universal life fund values. Certain policy charges such as enhanced crediting rates or bonus payments that represent compensation for services to be provided in future periods are classified as deferred sales inducements and amortized over the period benefited using the same assumptions used to amortize deferred acquisition costs. See Note 16 - Deferred Policy Acquisition Costs, for further information regarding revaluation of DAC and deferred sales inducements. N. FEDERAL INCOME TAXES Deferred federal income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes, and for other temporary taxable and deductible differences as defined by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). These differences result primarily from insurance reserves, net operating loss carryforwards, policy acquisition expenses, tax credit carryforwards and deferred sales inducements. In June 2006, The Financial Accounting Standards Board issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN No. 48"), to create a single model to address accounting for uncertainty in tax positions (See Note 3O - New Accounting and Adopted Pronouncements). 12 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) O. NEW AND ADOPTED ACCOUNTING PRONOUNCEMENTS In September 2006, the FASB issued SFAS No. 157. SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be exchanged to sell an asset or transfer a liability in an orderly transaction between market participants. Under FAS No. 157, fair value measurements are not adjusted for transaction costs. SFAS No. 157 nullifies the consensus reached in EITF Issue No. 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities," ("EITF Issue No. 02-3") that prohibited the recognition of day one gain or loss on derivative contracts (and hybrid instruments measured at fair value under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as modified by SFAS No. 155) where the Company could not verify all of the significant model inputs to observable market data and verify the model to market transactions. However, SFAS No. 157 requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model. The Company adopted SFAS 157 as of January 1, 2007; adoption did not have a material effect on the Company's financial condition, results of operations or cash flows. In June 2006, the FASB issued FIN No. 48. FIN No. 48 requires that the Company determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets this recognition threshold, the position is measured to determine the amount of benefit to be recognized in the financial statements. The Company adopted the provisions of FIN No. 48 as of January 1, 2007; adoption did not have any impact on the Company's financial condition, results of operations or cash flows and did not result in any adjustments to retained earnings. In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140" ("SFAS No. 155"). SFAS No. 155 permits an entity to measure at fair value any financial instrument that contains an embedded derivative that otherwise would require bifurcation. As permitted, the Company early adopted SFAS No. 155 in the first quarter of 2006. Adoption did not have a material effect on the Company's financial condition, results of operations or cash flows. In September 2005, the AICPA issued Statement of Position 05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts" ("SOP 05-1"). SOP 05-1 provides guidance on accounting by insurance companies for deferred acquisition costs on internal replacements of insurance and investment contracts other than those described in SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," ("SFAS No. 97"). This statement is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The Company adopted SOP 05-1 as of January 1, 2007; adoption did not have a material effect on the Company's financial condition, results of operations or cash flows. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which gives entities the option to measure eligible financial assets, financial liabilities and firm commitments at fair value (i.e., the fair value option), on an instrument-by-instrument basis, that are otherwise not accounted for at fair value under other accounting standards. The election to use the fair value option is available at specified election dates, such as when an entity first recognizes a financial asset or financial liability or upon entering into a firm commitment. Subsequent changes in fair value must be recorded in earnings. Additionally, SFAS No. 159 allows for a one-time election for existing positions upon adoption, with the transition adjustment recorded to beginning retained earnings. The Company has not adopted SFAS No. 159 for any portion of its business. P. ACCOUNTING STANDARDS NOT YET ADOPTED In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires enhanced disclosures about an entity's derivative and hedging activities, effective for financial statements issued for fiscal years beginning after November 15, 2008, with early application encouraged. The Company will adopt SFAS No. 161 in the first quarter of 2009. Adoption of SFAS No. 161 will not affect the Company's financial condition, results of operations or cash flows. 13 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) P. ACCOUNTING STANDARDS NOT YET ADOPTED (CONTINUED) In June 2007, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 07-1, "Clarification of the Scope of the Audit and Accounting Guide `Audits of Investment Companies' and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies." SOP No. 07-1 clarifies when an entity may apply the provisions of the Audit and Accounting Guide for Investment Companies (the Guide). In February 2008, the FASB issued FSP SOP No. 07-1-a, "The Effective Date of AICPA Statement of Position 07-1," which indefinitely defers the effective date for SOP No. 07-01. Q. RECLASSIFICATIONS Certain reclassifications have been made to previously reported amounts to conform to the current presentation. 4. PURCHASE ACCOUNTING Goldman Sachs' acquisition of the Company is accounted for by applying SFAS No. 141 through "push down" accounting. Included in the following table is VOBA, which represents the present value of future profits embedded in the acquired contracts. See Note 14 - Value of Business Acquired, for further explanation of VOBA. The assessment of fair value in accordance with SFAS No. 141 included the establishment of intangible assets for VOBA and various state licenses. No specific goodwill was recognized as a result of this assessment. See Note 3 - Summary of Significant Accounting Policies, for further discussion of Goodwill. In accordance with SFAS No. 141 the purchase allocation period to identify and record fair value for all assets acquired and liabilities assumed should usually not exceed one year from the transaction date. At the conclusion of 2007 and 2006, additional balance sheet adjustments were identified. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of December 30, 2005 and purchase accounting adjustments made for the year ended December 31, 2007 and December 31, 2006.
EFFECT OF EFFECT OF PROFORMA DECEMBER 30, ADJUSTMENTS IN ADJUSTMENTS IN DECEMBER 31, FAIR VALUE 2005 2006(1) 2007(2) 2005 --------------------------------------------------------------------------------------------- (In millions) Assets: Total investments at market value $ 1,391.8 $ -- $ -- $ 1,391.8 Cash and cash equivalents 123.2 -- -- 123.2 VOBA 318.5 (12.4) (5.8) 300.3 Other assets at fair value 1,007.5 18.4 5.6 1,031.5 Separate account assets 8,578.3 -- -- 8,578.3 --------- ------ ----- --------- Total assets acquired 11,419.3 6.0 (0.2) 11,425.1 Liabilities: Policyholder account balances 2,436.3 5.3 -- 2,441.6 Other liabilities at fair value 72.3 -- (0.4) 71.9 Separate account liabilities 8,578.3 -- -- 8,578.3 --------- ------ ----- --------- Total liabilities assumed 11,086.9 5.3 (0.4) 11,091.8 Total purchase price $ 332.4 $ 0.7 $ 0.2 $ 333.3 ========= ====== ===== =========
(1) Adjustment to Other assets reflects the combined effect of adjustment to the deferred tax asset (see Note 11), receivables from reinsurers and other accounts receivable. (2) Adjustment to Other assets reflects the effect of adjustment to the deferred tax asset. 14 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 4. PURCHASE ACCOUNTING (CONTINUED) PURCHASE PRICE: --------------------------------------------- (In millions) Initial payment of purchase price $262.0 FAFLIC ceding commission 8.6 Direct transaction expenses 6.9 Additional deferred purchase price 54.9 Purchase accounting final adjustments 0.9 ------ Total purchase price $333.3 ======
5. PROFORMA On December 30, 2005 two material transactions occurred that are not reflected in the predecessor income statement presented for 2005. The divestiture of all subsidiaries of the Company will cause successor financial statements to be based upon unconsolidated activity. In addition, the establishment of a new fair value balance sheet in accordance with SFAS No. 141, as part of the purchase accounting, will generate certain differences in amortization of VOBA levels in subsequent years. The 2006 Consolidated Statement of Income reflects the two material transactions described above. The following unaudited pro forma condensed information presents the results of operations for the Company assuming the divestiture of all subsidiaries occurred at December 31, 2004 and that the implications of the push down accounting was reflected in the 2005 income statement. This unaudited proforma information does not necessarily represent what the results would be for future periods, but provides a comparison by which to understand the 2006 changes.
(UNAUDITED) FOR THE YEARS ENDED DECEMBER 31, 2005 2006 ----------------------------------------------------------------------------------------------------------------- (In millions) INCOME REINSURANCE STATEMENT PREDECESSOR DIVESTITURE OF FAFLIC'S EFFECT OF SUCCESSOR SUCCESSOR INCOME OF VARIABLE PURCHASE INCOME INCOME STATEMENT SUBSIDIARIES BUSINESS ACCOUNTING STATEMENT STATEMENT ----------------------------------------------------------------------------------------------------------------- Premiums $ 36.9 $ (36.9) $ -- $ -- $ -- $ -- Universal life and investment product policy fees 244.6 (16.9) 15.9 -- 243.6 233.0 Net investment income 192.6 (113.3) 1.6 (20.0) 60.9 110.5 Realized gains/(losses) 22.9 (16.0) (0.3) -- 6.6 (7.3) Other income 33.0 (22.7) 1.4 -- 11.7 20.7 ------ ------- ------ ------ ------ ------ Total revenues 530.0 (205.8) 18.6 (20.0) 322.8 356.9 Policy benefits, claims, losses and LAE 239.4 (106.2) 6.3 13.8 153.3 105.2 VOBA and DAC amortization 111.8 (6.7) -- (63.5) 41.6 39.0 Other expenses 170.5 (63.1) 1.8 (35.2) 74.0 121.6 ------ ------- ------ ------ ------ ------ Total benefits, losses and expenses 521.7 (176.0) 8.1 (84.9) 268.9 265.8 Total federal income tax benefit (expense) 33.0 (8.6) (3.7) (22.7) (2.0) (26.2) ------ ------- ------ ------ ------ ------ Net income (loss) $ 41.3 $ (38.4) $ 6.8 $ 42.2 $ 51.9 $ 64.9 ====== ======= ====== ====== ====== ======
15 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 6. SIGNIFICANT TRANSACTIONS On May 25, 2007 the Company signed an agreement, effective retroactive to January 1, 2007, with Pacific Life Insurance Company ("Pacific Life") to assume 8% of its variable annuity products sold in 2007. The base annuities were assumed on a modified coinsurance and the benefits provided via riders were assumed on a coinsurance basis. As separate account liabilities were assumed under modified coinsurance terms, ownership of the underlying separate account assets was not transferred and these assets are not reflected in the balance sheet. The Company assumed general account reserves of $58.2 million and, for the retroactive period prior to signing, recorded a payable to Pacific Life of $12.4 million for the period through May 2007. The assumed general account reserves as of December 31, 2007 were approximately $61.5 million (See Note 23 - Subsequent Events). On July, 1, 2006, the Company entered into a modified coinsurance agreement with Chase Insurance Life and Annuity Company ("CILAC") to assume 100% of its variable annuity business on a modified coinsurance basis. The Company assumed general account reserves of $1.3 billion and paid a ceding allowance of $85.0 million to CILAC. As separate account liabilities were assumed under modified coinsurance terms, ownership of the underlying separate account assets was not transferred and these assets are not reflected in the balance sheet. On April 1, 2007, CILAC was merged into Protective Life Insurance Company ("Protective"). Effective December 30, 2005 the Company entered into a coinsurance agreement with FAFLIC, a subsidiary of THG. The Company assumed 100% of the FAFLIC variable annuity and variable life book of business. The Company assumed $124.6 million of reserves and paid $8.6 million as a ceding allowance to FAFLIC. As part of this transaction, separate account liabilities were assumed under modified coinsurance terms, and, as such, ownership of the underlying separate accounts is not included in the Company's separate account assets and liabilities. 7. LIABILITIES FOR MINIMUM GUARANTEES UNDER STATEMENT OF POSITION 03-1, ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADTIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS GUARANTEED MINIMUM DEATH BENEFITS The Company has issued variable annuity contracts with a GMDB feature. The GMDB feature provides annuity contractholders with a guarantee that the benefit received at death will be no less than a prescribed minimum amount. This amount is based on either the net deposits paid into the contract, the net deposits accumulated at a specified rate, the highest historical account value on a contract anniversary, or more typically, the greatest of these values. If the GMDB is higher than the current account value at the time of death, the Company incurs a cost equal to the difference. 16 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 7. LIABILITIES FOR MINIMUM GUARANTEES UNDER STATEMENT OF POSITION 03-1, ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADTIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS (CONTINUED) The following summarizes the liability for GMDB contracts reflected in the general account. The GMDB exposure includes reinsurance assumed, however the modified coinsurance is excluded as it provides negligible GMDB reserves and significant account values:
FOR THE YEARS ENDED DECEMBER 31, 2007 2006 ------------------------------------------------ (In millions) Beginning balance $237.0 $281.3 Provision for GMDB: GMDB expense incurred 6.4 11.5 Volatility (1) 13.8 (6.6) -------------- 20.2 4.9 Claims, net of reinsurance: Claims from policyholders (44.6) (56.3) Claims ceded to reinsurers 41.1 55.2 ------ ------ (3.5) (1.1) GMDB reinsurance premium (41.3) (48.1) ------ ------ Ending balance $212.4 $237.0 ====== ======
(1) Volatility reflects the difference between actual and expected investment performance, persistency, age distribution, mortality and other factors that are assumptions within the GMDB reserving model. The reserve for the GMDB feature was computed using a risk neutral approach. The reserve represents estimates, over a range of stochastic scenarios, of the present value of future GMDB net benefits expected to be paid less the present value of future GMDB net fees charged to the policyholders. Starting in 2006, the GMDB reserves were calculated using best estimate, as opposed to risk neutral, scenarios for future projections and reflecting the December 31, 2005 reserve balance derived under purchase accounting. GMDB reserves were adjusted upwards by $229.2 million in 2005 as a result of the Transaction and revaluation based upon purchase accounting assumptions. The following information relates to the reserving methodology and assumptions for GMDB at December 31, 2007 and 2006. - The projection model used 500 stochastically generated return scenarios with mean performance ranging from 5% to 10% depending on the underlying fund type. - Implied volatilities by duration were based on a combination of over the counter quotes (when available) and historical volatilities. For 2007, volatility assumptions range from 20% to 34%, varying by equity fund type; 7% for bond funds; and 1% for money market funds. For 2006, volatility assumptions ranged from 13% to 32%, varying by equity fund type; 3% for bond funds; and 1% for money market funds. - The mortality assumption is 70% of the 1994 GMDB table. - The full surrender rate assumption varies from 1% to 50% depending on distribution channel, contract type, policy duration, and attained age. The aggregate projected full surrender rates for 2008 and 2009 are approximately 14% and 13%, respectively (full surrender rates include annuitizations, but they do not reflect partial withdrawals or deaths). 17 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 7. LIABILITIES FOR MINIMUM GUARANTEES UNDER STATEMENT OF POSITION 03-1, ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADTIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS (CONTINUED) - The partial withdrawal rate assumption varies by distribution channel, tax qualified status, and attained age. Total projected partial withdrawals are from 5% - 7% for all years. The following table presents the account value, net amount at risk and average attained age of underlying contractholders for guarantees in the event of death as of December 31, 2007 and 2006. The net amount at risk is the death benefit coverage in force or the amount that the Company would have to pay if all contractholders had died as of the specified date, and represents the excess of the guaranteed benefit over the account value.
DECEMBER 31, (IN MILLIONS, EXCEPT FOR CONTRACTHOLDER INFORMATION) 2007 2006 -------------------------------------------------------------------------- Net deposits paid Account value $ 4,239 $ 941 Net amount at risk $ 26 $ 17 Average attained age of contractholders 61 67 Ratchet (highest historical account value at specified anniversary dates) Account value $ 1,549 $ 1,415 Net amount at risk $ 60 $ 61 Average attained age of contractholders 66 65 Roll-up (net deposits accumulated at a specified rate) Account value $ 80 $ 93 Net amount at risk $ 17 $ 19 Average attained age of contractholders 78 77 Higher of ratchet or roll-up Account value $ 4,849 $ 5,560 Net amount at risk $ 958 $ 1,070 Average attained age of contractholders 73 73 -------- -------- Total of guaranteed benefits categorized above Account value $ 10,717 $ 8,009 Net amount at risk $ 1,061 $ 1,167 Average attained age of contractholders (weighted by account value) 67 71 Number of contractholders 213,958 135,057
The above table includes business coinsured from FAFLIC for all years. 2007 includes reinsurance assumed from Protective and Pacific Life at quota share. GUARANTEED MINIMUM INCOME BENEFIT Additionally, the Company previously issued variable annuity contracts with a guaranteed minimum income benefit ("GMIB") feature. The GMIB liability as of December 31, 2007 was $14.2 million with no benefits paid out. The GMIB liability at December 31, 2006 was $15.2 million with no benefits paid out. In conjunction with the Transaction and the application of SFAS No. 141, the GMIB liability was revalued to $16.5 million at December 31, 2005. Similarly to the approach employed to value the GMDB reserve, the fair value reserve for the GMIB feature was computed using a risk neutral approach. The reserve was determined by estimating the present value of future GMIB benefits expected to be paid less the present value of future GMIB fees charged to the policyholders, over a range of stochastic scenarios. 18 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 7. ADOPTION OF STATEMENT OF POSITION 03-1, ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADTIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS (CONTINUED) SALES INDUCEMENTS The Company's variable annuity product offerings included contracts that offered enhanced crediting rates or bonus payments. These enhanced rates are considered sales inducements under SOP 03-1. As such, the balance of sales inducement assets were required to be reclassified from DAC to other assets upon adoption of SOP 03-1, and amortization of these sales inducements over the life of the contract is required to be reflected as a policy benefit. Amortization of these contracts is required to be computed using the same methodology and assumptions used in amortizing DAC. Deferrred sales inducements at December 31, 2007 reflect bonus interest payments on assumed blocks and are included in other assets in the accompanying balance sheet. The Company did not have any deferred sales inducements at December 31, 2006, and amounts existing at prior to the Transaction were written off in purchase accounting. The following reflects the changes to the deferred sales inducement asset:
FOR THE YEARS ENDED DECEMBER 31, 2007 2006 ------------------------------------------------- (In millions) Balance at beginning of year $ -- $-- Block acquisition 3.9 -- Acquisition expenses deferred 5.3 -- Amortized to expense during the year (0.3) -- ----- --- Balance at end of year $ 8.9 $-- ===== ===
SEPARATE ACCOUNTS WITH CREDITED INTEREST GUARANTEES The Company issued variable annuity and life contracts through its separate accounts for which net investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholder. The Company also issued variable annuity and life contracts through separate accounts where the Company contractually guarantees to the contractholder the total deposits made to the contract less any partial withdrawals plus a minimum return. The market value adjusted ("MVA") product attributable to assumed variable annuity were assumed on a modified coinsurance basis. Therefore, the assets related to these liabilities are a recoverable from reinsurers and changes in fair value are not included in other comprehensive income. The Company had the following variable annuities with guaranteed minimum returns:
DECEMBER 31, 2007 2006 ----------------------------------------------------------------- (In millions) Account value $ 47.2 $ 59.8 Range of guaranteed minimum return rates 2.8 - 6.5% 2.8 - 6.5%
19 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 7. ADOPTION OF STATEMENT OF POSITION 03-1, ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADTIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS (CONTINUED) Account balances of these contracts with guaranteed minimum returns were invested in variable separate investment portfolio as follows:
DECEMBER 31, 2007 2006 ------------------------------------------ (In millions) Asset Type: Fixed maturities $40.8 $36.3 Cash and cash equivalents 11.5 26.5 ----- ----- Total $52.3 $62.8 ===== =====
8. INVESTMENTS A. FIXED MATURITIES AND EQUITY SECURITIES The Company accounts for its investments in fixed maturities and equity securities, all of which are classified as available-for-sale, in accordance with the provisions of SFAS No. 115. The amortized cost and fair value of available-for-sale fixed maturities and equity securities were as follows:
DECEMBER 31, 2007 --------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------------------------------------------------------------------------------------- (In millions) U.S. Treasury securities and U.S. government and agency securities $204.1 $ 5.2 $ -- $209.3 States and political subdivisions 16.1 0.2 -- 16.3 Corporate fixed maturities 428.2 2.0 (10.6) 419.6 Mortgage-backed securities 318.8 3.3 (1.6) 320.5 ------ ----- ------ ------ Total fixed maturities $967.2 $10.7 $(12.2) $965.7 ====== ===== ====== ====== Equity securities $108.1 $ -- $ (5.4) $102.7 ====== ===== ====== ======
DECEMBER 31, 2006 ----------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST (1) GAINS LOSSES VALUE ----------------------------------------------------------------------------------------- (In millions) U.S. Treasury securities and U.S. government and agency securities $ 335.1 $1.3 $(2.4) $ 334.0 States and political subdivisions 16.1 -- (0.2) 15.9 Corporate fixed maturities 372.1 0.5 (2.9) 369.7 Mortgage-backed securities 352.1 1.0 (1.6) 351.5 -------- ----- ------ -------- Total fixed maturities $1,075.4 $2.8 $(7.1) $1,071.1 ======== ===== ====== ======== Equity securities $ 64.4 $1.3 $ -- $ 65.7 ======== ===== ====== ========
(1) Amortized cost for fixed maturities securities after acquisition purchase accounting. 20 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 8. INVESTMENTS (CONTINUED) A. FIXED MATURITIES AND EQUITY SECURITIES (CONTINUED) In connection with AFLIAC's voluntary withdrawal of its license in New York, AFLIAC agreed with the New York Department of Insurance in 1994 to maintain, through a custodial account in New York, a security deposit, the market value of which will equal 102% of all outstanding liabilities of AFLIAC for New York policyholders, claimants and creditors. At December 31, 2007, the amortized cost and fair value of the assets on deposit were $42.4 million and $43.6 million, respectively. At December 31, 2006, the amortized cost and fair value of assets on deposit in New York were $43.0 million and $42.8 million, respectively. In addition, fixed maturities, excluding those securities on deposit in New York, with an amortized cost of $5.2 million and $5.8 million were on deposit with various state and governmental authorities at December 31, 2007 and 2006, respectively. Fair values related to these securities were $6.0 million and $5.7 million at December 31, 2007 and 2006, respectively. The Company entered into various derivative and other arrangements that required fixed maturities to be pledged as collateral. At December 31, 2007, the Company held $43.4 million compared to $31.5 million held as collateral at December 31, 2006. Corresponding liabilities for these items have also been recorded by the Company. There were no contractual investment commitments at December 31, 2007. The amortized cost and fair value by maturity periods for fixed maturities are shown below. Actual maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, or the Company may have the right to put or sell the obligations back to the issuers. Mortgage backed securities are included in the category representing their ultimate maturity. In accordance with SFAS No. 141, the amortized cost of the investments is shown below.
DECEMBER 31, DECEMBER 31, 2007 2007 AMORTIZED COST FAIR VALUE -------------------------------------------------------------------- (In millions) Due in one year or less $ 53.4 $ 53.1 Due after one year through five years 298.7 298.4 Due after five years through ten years 194.7 196.8 Due after ten years 420.4 417.4 ------ ------ Total $967.2 $965.7 ====== ======
B. DERIVATIVE INSTRUMENTS Simultaneous to the Transaction, the Company implemented a hedging strategy consisting of long duration equity and derivative put options. The hedge is primarily static consisting of quarterly put options. The purpose of the hedge is to protect against increases in GMDB liability in the event that the market grows at a rate below LIBOR. In addition, the Company invests in exchange traded futures and options as part of its overall diversification and total return objectives. On May 25, 2007, the Company entered into a reinsurance contract which is accounted for on a coinsurance/modified-coinsurance ("co-modco") basis with respect to the annuity riders and base contracts. Insurance contracts in their entirety do not meet the definition of a derivative instrument, but may contain embedded derivatives. This reinsurance agreement states that the Company will pay its proportionate share of the present value of the guaranteed future income stream in excess of account value. The riders are accounted for as an embedded derivative under Derivatives Implementation Group issue B25 ("DIG B25"). On July 1, 2006, the Company entered into a reinsurance contract which is accounted for on a modified coinsurance basis. Under a traditional modified coinsurance arrangement, the ceding company owns the assets backing the liabilities and transfers their book investment returns to the reinsurer, including credited related gains or losses. The reinsurance contract represents a hybrid instrument that should be bifurcated into its host contract and embedded derivative components. An embedded derivative exists because the Company is exposed to third-party credit risk. This is accounted for as an embedded derivative under Derivatives Implementation Group issue B36 ("DIG B36"). 21 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 8. INVESTMENTS (CONTINUED) B. DERIVATIVE INSTRUMENTS (CONTINUED) Under THG, an overall risk management strategy incorporating the use of derivative instruments to minimize significant unplanned fluctuations in earnings that were caused by foreign currency, equity market and interest rate volatility was employed. As a result of the Company's issuance of trust instruments supported by funding obligations denominated in foreign currencies, as well as its investment in securities denominated in foreign currencies, the Company's operating results were exposed to changes in exchange rates between the U.S. dollar, the Japanese Yen, and the British Pound. The Company used foreign currency exchange swaps and futures to mitigate the short-term effect of changes in currency exchange rates and to manage the risk of cash flow variability. Until August 22, 2005, the Company was also exposed to changes in the equity market due to increases in GMDB reserves that resulted from declines in the equity market. The Company used exchange-traded equity market futures contracts to reduce the volatility in statutory capital reserves from the effects of the equity market movements. Finally, for the period between August 22, 2005 and December 30, 2005, the closing date of the Transaction, the Company was exposed to changes in its surplus value, which was driven by a combination of equity market and interest rate movements. To economically hedge against fluctuations in the purchase price of the variable life insurance and annuity business, the Company used exchange-traded futures contracts and interest rate swap contracts. On December 12, 2007, the Company implemented an enhancement to its existing hedging strategy by selling short-duration S&P futures to reduce our long delta position. This strategy would help reduce expected volatility from changes in the market and protects the Company from adverse market movements. C. FAIR VALUE HEDGES During 2007 and 2006, no fair value hedges were established. In 2005, the Company entered into exchange-traded equity futures contracts to hedge the embedded gains on certain bonds identified to be liquidated to settle the maturity of a particular long-term funding agreement. The Company also entered into cross-currency swaps to convert its foreign denominated fixed rate trust instruments supported by funding obligations to U.S. dollar floating rate instruments. The Company recognized gains of $2.2 million for the year ended December 31, 2005, reported in net realized investment gains in the Consolidated Statements of Operations. These derivative instruments were determined to be effective hedges in accordance with FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). All components of each derivative's gain or loss are included in the assessment of hedge effectiveness, unless otherwise noted. D. CASH FLOW HEDGES During 2007 and 2006, no cash flow hedges were established. Prior to 2006, the Company entered into cross-currency swaps to hedge foreign currency and interest rate exposure on specific trust instruments supported by funding obligations. Under the swap contracts, the Company agreed to exchange interest and principal related to trust obligations payable in foreign currencies, at current exchange rates, for the equivalent payment in U.S. dollars translated at a specific currency exchange rate. Additionally, the Company used foreign exchange futures contracts to hedge foreign currency exposure on specific trust instruments supported by funding obligations. Finally, the Company also entered into foreign exchange forward contracts to hedge its foreign currency exposure on specific fixed maturity securities. Under the foreign exchange futures and forward contracts, the Company has the right to purchase the hedged currency at a fixed strike price in U.S. dollars. The Company recognized no gains or losses in 2005 on ineffective cash flow hedges. All components of each derivative's gain or loss are included in the assessment of hedge effectiveness, unless otherwise noted. 22 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 8. INVESTMENTS (CONTINUED) E. TRADING ACTIVITIES For 2007, the Company recognized a net loss of $6.8 million on its derivatives. For 2006, the Company recognized a net loss of $46.7 million on its derivatives. The derivatives in this program included exchange-traded futures contracts and interest rate swap contracts. The hedges did not qualify for hedge accounting under SFAS No. 133. The core risk the Company seeks to address with its hedging strategy is GMDB exposure. The objective is to protect against increases in GMDB liability in the event that the market grows at a rate below LIBOR, while maintaining some upside potential in rising markets. On May 25, 2007, the Company entered into a reinsurance contract which is accounted for on a co-modco basis with respect to the annuity riders and base contracts. Insurance contracts in their entirety do not meet the definition of a derivative instrument, and may contain embedded derivatives. This reinsurance agreement states that the Company will pay its proportionate share of the present value of the guaranteed future income stream in excess of account value. The riders are accounted for as an embedded derivative as defined by DIG B25. On August 23, 2005, the Company implemented a new derivative program designed to economically hedge against fluctuations in the purchase price of the variable life insurance and annuity businesses. The Transaction purchase price was determined on December 30, 2005 and was subject to changes in interest rate, equity market, implied equity market volatility and surrender activity. The derivatives were terminated concurrent with the sale closing on December 30, 2005. The derivatives in this program included exchange-traded futures contracts and interest rate swap contracts. The hedges did not qualify for hedge accounting under SFAS No. 133. The core risk the Company seeks to address with its hedging strategy is GMDB exposure. The objective is to protect against increases in GMDB liability in the event that the market grows at a rate below LIBOR, while maintaining some upside potential in rising markets. During 2005 the Company recognized net losses of $36.1 million on all trading derivatives. The net loss recognized in 2005 included $13.3 million in losses related to the derivatives used to economically hedge the purchase price and were reflected within other operating expenses in the Consolidated Statements of Operations. Additionally, the net loss in 2005 included $19.6 million of net losses representing the ineffectiveness on equity-linked swap contracts, which were recorded within other income in the Consolidated Statements of Operations. Further, the 2005 net loss also included a $2.3 million loss related to embedded derivatives on equity-linked trust instruments supported by funding obligations, which was reported in losses on derivative instruments in the Consolidated Statements of Operations. Finally, the 2005 net loss included $0.9 million in losses recorded within other operating expenses in the Consolidated Statements of Operations related to the GMDB hedges. 23 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 8. INVESTMENTS (CONTINUED) F. UNREALIZED GAINS AND LOSSES Unrealized gains and losses on available-for-sale, other securities, and derivative instruments are summarized as follows:
EQUITY FIXED SECURITIES AND DECEMBER 31, MATURITIES (1) OTHER (2) TOTAL -------------------------------------------------------------------------------------------------- (In millions) 2007 Net (depreciation) appreciation, beginning of year $ (2.0) $ 0.8 $ (1.2) ------ ----- ------ Net appreciation (depreciation) on available-for-sale securities and derivative instruments 2.8 (6.7) (3.9) Net appreciation from the effect on value of business acquired and on policy liabilities 0.9 -- 0.9 (Provision) benefit for deferred federal income taxes (1.3) 2.3 1.0 ------ ----- ------ 2.4 (4.4) (2.0) ------ ----- ------ Net appreciation (depreciation), end of year 0.4 (3.6) (3.2) ====== ===== ====== 2006 Net appreciation, beginning of year $ -- $ -- $ -- ------ ----- ------ Net (depreciation) appreciation on available-for-sale securities and derivative instruments (4.3) 1.3 (3.0) Net depreciation from the effect on value of business acquired and on policy liabilities 1.0 -- 1.0 Benefit (provision) for deferred federal income taxes 1.3 (0.5) 0.8 ------ ----- ------ (2.0) 0.8 (1.2) ------ ----- ------ Net (depreciation) appreciation, end of year $ (2.0) $ 0.8 $ (1.2) ====== ===== ====== 2005 Net appreciation, beginning of year $ 5.7 $ 4.4 $ 10.1 ------ ----- ------ Net depreciation on available-for-sale securities and derivative instruments (60.2) (6.8) (67.0) Net appreciation from the effect on deferred policy acquisition costs and on policy liabilities 60.8 -- 60.8 (Provision) benefit for deferred federal income taxes (0.2) 2.4 2.2 ------ ----- ------ 0.4 (4.4) (4.0) Purchase accounting adjustment (6.1) -- (6.1) ------ ----- ------ Net appreciation, end of year $ -- $ -- $ -- ====== ===== ======
(1) FIXED MATURITIES INCLUDE AFTER-TAX NET APPRECIATION (DEPRECIATION) ON DERIVATIVE INSTRUMENTS OF $0.0 MILLION, $0.0 MILLION AND $50.5 MILLION IN 2007, 2006 AND 2005, RESPECTIVELY. (2) THERE WAS NO AFTER TAX APPRECIATION (DEPRECIATION) ON EQUITY SECURITIES AND OTHER INVESTED ASSETS IN 2005. 24 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 8. INVESTMENTS (CONTINUED) G. SECURITIES IN A CONTINUOUS UNREALIZED LOSS POSITION The following table provides information about the Company's fixed maturities and equity securities that have been continuously in an unrealized loss position.
DECEMBER 31, 2007 ----------------------------------------------------------------------------------- (In millions) GROSS NUMBER OF UNREALIZED FAIR SECURITIES WITH GROSS LOSSES VALUE UNREALIZED LOSSES ----------------------------------------------------------------------------------- Investment grade fixed maturities (1): 0-6 months $ (1.7) $ 66.7 28 7-12 months (9.5) 190.9 43 Greater than 12 months (1.0) 19.7 7 ------ ------ --- Total investment grade fixed maturities $(12.2) $277.3 78 ------ ------ --- Below investment grade fixed maturities: $ -- $ -- -- ------ ------ --- Total fixed maturities $(12.2) $277.3 78 ------ ------ --- Equity securities: 0-6 months $ (5.4) $102.7 1 ------ ------ --- Total equity securities $ (5.4) $102.7 1 ------ ------ ---
(1) Includes gross unrealized losses for investment grade fixed maturity obligations of the U.S. Treasury, U.S. government and agency securities, states, and political subdivisions of $0.1 million at December 31, 2007.
DECEMBER 31, 2006 ----------------------------------------------------------------------------------- (In millions) GROSS NUMBER OF UNREALIZED FAIR SECURITIES WITH GROSS LOSSES VALUE UNREALIZED LOSSES ----------------------------------------------------------------------------------- Investment grade fixed maturities (1): 0-6 months $ (3.9) $489.3 70 7-12 months (3.2) 350.8 84 Greater than 12 months -- -- -- ------ ------ --- Total investment grade fixed maturities $ (7.1) $840.1 154 ------ ------ --- Below investment grade fixed maturities: 0-6 months $ -- $ 2.1 1 ------ ------ --- Total below investment grade fixed maturities -- 2.1 1 ------ ------ --- Total fixed maturities $ (7.1) $842.2 155 ====== ====== ===
(1) Includes gross unrealized losses for investment grade fixed maturity obligations of the U.S. Treasury, U.S. government and agency securities, states, and political subdivisions of $2.4 million at December 31, 2006. The Company employs a systematic methodology to evaluate declines in fair values below amortized cost for all investments. The methodology utilizes a quantitative and qualitative process ensuring that available evidence concerning the declines in fair value below amortized cost is evaluated in a disciplined manner. In determining whether a decline in fair value below amortized cost is other-than-temporary, the Company evaluates the ability and intent to hold the investment to maturity; the issuer's overall financial condition; the issuer's credit and financial strength ratings; the issuer's financial performance, including earnings trends, dividend payments, and asset quality; a weakening of the general market conditions in the industry or geographic region in which the issuer operates; the length of time in which the fair value of an issuer's securities remains below cost; and with respect to fixed maturity 25 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 8. INVESTMENTS (CONTINUED) G. SECURITIES IN A CONTINUOUS UNREALIZED LOSS POSITION (CONTINUED) investments, any factors that might raise doubt about the issuer's ability to pay all amounts due according to the contractual terms. The Company applies these factors to all securities as necessary. H. OTHER The Company had the following concentration of investments at fair value that exceeded 10% of shareholder's equity:
DECEMBER 31, 2007 2006 -------------------------------------------------- (In millions) Issuer Name: U.S. Treasury -- 65.8 GS High Yield Fund 102.7 64.4 Federal Home Loan Bank -- 60.7 Federal Home Loan Bank -- 56.0 Federal National Mortgage Association -- 49.4
9. INVESTMENT INCOME AND GAINS AND LOSSES A. NET INVESTMENT INCOME The components of net investment income were as follows:
FOR THE YEARS ENDED DECEMBER 31, 2007 2006 2005 ----------------------------------------------------------------------- (In millions) Fixed maturities $ 53.3 $ 59.9 $179.5 Equity securities 7.7 4.4 0.1 Mortgage loans -- -- 5.5 Policy loans 7.5 9.2 17.2 Derivatives -- -- (10.8) Other long-term investments -- -- 1.9 Short-term investments and miscellaneous income 71.9 43.9 5.0 ------ ------ ------ Gross investment income 140.4 117.4 198.4 Less investment expenses (2.9) (2.9) (5.8) ------ ------ ------ Net investment income $137.5 $114.5 $192.6 ====== ====== ======
The Company had no fixed maturities on non-accrual status at December 31, 2007, 2006 or 2005. The Company had no mortgage loans on non-accrual status at December 31, 2005. The Company does not have any mortgage loan investments at December 31, 2007 or December 31, 2006. There were no mortgage loans which were non-income producing at December 31, 2005. The Company had no fixed maturities which were non-income producing at December 31, 2007 or December 31, 2006. The payment terms of mortgage loans may from time to time be restructured or modified. There were no restructured mortgage loans at December 31, 2005. 26 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 9. INVESTMENT INCOME AND GAINS AND LOSSES (CONTINUED) B. NET REALIZED INVESTMENT GAINS AND LOSSES Realized (losses) and gains on investments were as follows:
FOR THE YEARS ENDED DECEMBER 31, 2007 2006 2005 ------------------------------------------------------------- (In millions) Fixed maturities $4.1 $(7.3) $20.8 Mortgage Loans -- -- 0.3 Derivatives -- -- 2.2 Other investments 1.8 -- (0.4) ---- ----- ----- Net realized investment gains/(losses) $5.9 $(7.3) $22.9 ==== ===== =====
The proceeds from voluntary sales of available-for-sale securities and the gross realized gains and gross realized losses on those sales were as follows:
PROCEEDS FROM VOLUNTARY GROSS GROSS FOR THE YEARS ENDED DECEMBER 31, SALES GAINS LOSSES ----------------------------------------------------------------- (In millions) 2007 Fixed maturities $ 773.9 $ 5.7 $ 1.6 2006 Fixed maturities $2,213.8 $ 3.3 $10.6 2005 Fixed maturities $ 933.7 $22.6 $ 9.0 Equity securities 1.7 -- --
The Company recognized no other-than-temporary impairments on fixed maturities in 2007 and 2006 respectively. There was $5.3 million in 2005 related to other-than-temporary impairments of fixed maturities. 27 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 9. INVESTMENT INCOME AND GAINS AND LOSSES (CONTINUED) C. OTHER COMPREHENSIVE INCOME RECONCILIATION The following table provides a reconciliation of gross unrealized gains (losses) to the net balance shown in the Consolidated Statements of Comprehensive Income:
FOR THE YEARS ENDED DECEMBER 31, 2007 2006 2005 -------------------------------------------------------------------------------------------------------- (In millions) Unrealized (depreciation) appreciation on available-for-sale securities: Unrealized holding losses arising during period, (net of income tax benefit of $0.7, $3.3 and $22.4 million in 2007, 2006 and 2005) $(1.4) $(5.9) $(41.7) Less: reclassification adjustment for gains (losses) included in net income (net of income tax expense (benefit) of $0.3, $(2.5) and $7.0 million in 2007, 2006 and 2005) 0.6 (4.7) 12.9 ----- ----- ------ Total available-for-sale securities (2.0) (1.2) (54.6) ----- ----- ------ Unrealized depreciation on derivative instruments: Unrealized holding (losses) gains arising during period, (net of income tax (benefit) expense of $0.0, $0.0 and $(20.9) million in 2007, 2006 and 2005) -- -- (38.8) Less: reclassification adjustment for (losses) gains included in net income (net of income tax (benefit) expense of $0.0, $0.0 and $(48.1) million in 2007, 2006 and 2005) -- -- (89.4) ----- ----- ------ Total derivative instruments -- -- 50.6 ----- ----- ------ Net unrealized (depreciation) appreciation on available-for-sale securities and derivative instruments $(2.0) $(1.2) $ (4.0) ===== ===== ======
28 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 10. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, as amended by SFAS No. 157, requires disclosure of fair value information about certain financial instruments (insurance contracts, real estate, goodwill and taxes are excluded) for which it is practicable to estimate such values, whether or not these instruments are included in the balance sheet. The fair values presented for certain financial instruments are estimates which, in many cases, may differ significantly from the amounts which could be realized in an orderly transaction. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: CASH AND CASH EQUIVALENTS For these short-term investments, the carrying amount approximates fair value. FIXED MATURITIES Fair values are based on quoted market prices, if available. If a quoted market price is not available, fair values are estimated using independent pricing sources or internally developed pricing models using discounted cash flow analyses which utilize current interest rates for similar financial instruments which have comparable terms and credit. EQUITY SECURITIES Fair values are based on quoted market prices, if available. If a quoted market price is not available, fair values are estimated using independent pricing sources or internally developed pricing models. POLICY LOANS The carrying amount reported in the Consolidated Balance Sheets approximates fair value since policy loans have no defined maturity dates and are inseparable from the insurance contracts. DERIVATIVE INSTRUMENTS Fair values of the Company's derivatives are generally determined using model inputs to observable market data. Derivative instruments include embedded derivatives related to insurance contracts. INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES) Liabilities under supplemental contracts without life contingencies are estimated based on current fund balances and other individual contract funds represent the present value of future policy benefits. SEPARATE ACCOUNT ASSETS The estimated fair value of assets held in separate accounts is based on quoted market prices. 29 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 10. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED) The estimated fair values of the financial instruments were as follows:
2007 2006 ----------------------------------------- CARRYING FAIR CARRYING FAIR DECEMBER 31, VALUE VALUE VALUE VALUE ------------------------------------------------------------------------------------------------ (In millions) Financial Assets Cash and cash equivalents $ 57.4 $ 57.4 $ 58.9 $ 58.9 Fixed maturities 965.7 965.7 1,071.1 1,071.1 Equity securities 102.7 102.7 65.7 65.7 Policy loans 106.1 106.1 117.0 117.0 Derivative instruments receivable 29.1 29.1 2.8 2.8 Separate account assets 6,906.7 6,906.7 7,894.5 7,894.5 -------- -------- -------- -------- $8,167.7 $8,167.7 $9,210.0 $9,210.0 ======== ======== ======== ======== Financial Liabilities Derivative instruments payable $ 33.7 $ 33.7 $ 28.5 $ 28.5 Supplemental contracts without life contingencies 27.4 27.4 32.5 32.5 Other individual contract deposit funds 20.7 20.7 23.7 23.7 -------- -------- -------- -------- $ 81.8 $ 81.8 $ 84.7 $ 84.7 ======== ======== ======== ========
The following tables set forth by level within the fair value hierarchy financial assets and liabilities accounted for at fair value under SFAS No. 157 as of December 2007. As required by SFAS No. 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
DECEMBER 31, LEVEL 1 LEVEL 2 LEVEL 3 TOTAL ------------------------------------------------------------------------------ (In millions) Financial Assets Fixed maturities $ 107.7 $854.3 $ 3.7 $ 965.7 Equity securities -- 102.7 -- 102.7 Derivative instruments receivable -- 18.0 11.1 29.1 Separate account assets 6,906.7 -- -- 6,906.7 -------- ------ ----- -------- Total assets at fair value $7,014.4 $975.0 $14.8 $8,004.2 ======== ====== ===== ======== Financial Liabilities Derivative instruments payable $ -- $ 2.6 $31.1 $ 33.7 -------- ------ ----- -------- Total liabilities at fair value $ -- $ 2.6 $31.1 $ 33.7 ======== ====== ===== ========
30 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 10. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED) LEVEL 3 GAINS AND LOSSES The table below sets forth a summary of changes in the fair value of the Company's level 3 financial assets and liabilities for the year ended December 2007. The table reflects gains and losses for the full year for all financial assets and liabilities categorized as level 3 as at December 31, 2007. As reflected in the table below, the net unrealized loss on level 3 financial assets and liabilities was $31.5 million for the year ended December 2007. CASH INSTRUMENTS The Company's cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Certain cash instruments are classified within level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency. Total financial assets at fair value classified within level 3 were $3.7 million as of December 31, 2007. This includes a tax credit investment and a surplus note. DERIVATIVE CONTRACTS - A derivative contract with level 1 and/or level 2 inputs is classified as a level 3 financial instrument in its entirety if it has at least one significant level 3 input. - If there is one significant level 3 input, the entire gain or loss from adjusting only observable inputs (i.e. level 1 and level 2) is still classified as level 3.
LEVEL 3 FINANCIAL ASSETS AND LIABILITIES ---------------------------------------- CASH INSTRUMENTS DERIVATIVE TOTAL DECEMBER 31, - ASSETS CONTRACTS LOSSES --------------------------------------------------------------------------------------------- (In millions) Balance, beginning of year $ 3.7 $ 0.5 N/A Realized (losses) (0.1) -- (0.1) Unrealized gains/(losses) relating to instruments still held at the reporting date 0.1 (31.6) (31.5) Purchases, issuances and settlements -- 11.1 N/A ----- ------ Balance, end of year $ 3.7 $(20.0) ===== ======
31 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 11. FEDERAL INCOME TAXES Provisions for federal income taxes have been calculated in accordance with the provisions of Statement No. 109. The federal income tax provision/(benefit) in the Consolidated Statements of Income is shown below:
FOR THE YEARS ENDED DECEMBER 31, 2007 2006 2005 ------------------------------------------------------------- (In millions) Federal income tax expense (benefit) Current $ -- $ -- $(34.1) Deferred 34.6 26.2 1.1 ----- ----- ------ Total $34.6 $26.2 $(33.0) ===== ===== ======
The federal income tax benefit attributable to the consolidated results of operations is different from the amount determined by multiplying income before federal income taxes by the statutory federal income tax rate at 35%. The sources of the difference and the tax effects of each were as follows:
FOR THE YEARS ENDED DECEMBER 31, 2007 2006 2005 ------------------------------------------------------------------------------------------- (In millions) Expected federal income tax expense $46.1 $31.9 $ 2.9 Prior years' federal income tax adjustment (1.1) -- (9.4) Change in estimates for prior years dividend received deduction -- -- (12.9) Dividend received deduction (8.2) (8.2) (10.0) Tax credits (0.5) (1.1) (6.2) Valuation allowance (1.7) 3.6 -- Changes in other tax estimates -- -- 5.6 Other, net -- -- (3.0) ----- ----- ------ Federal income tax expense (benefit) $34.6 $26.2 $(33.0) ===== ===== ======
32 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 11. FEDERAL INCOME TAXES (CONTINUED) Following are the components of the Company's deferred tax assets and liabilities.
DECEMBER 31, 2007 2006 -------------------------------------------------- (In millions) Deferred tax asset Insurance reserves $ 141.4 $ 171.1 Deferred acquisition costs 22.4 34.5 Tax credit carryforwards 7.8 7.8 Loss carryforwards 63.0 69.8 Investments, net 9.3 5.1 Ceding commission 23.8 27.6 Deferred compensation 0.8 0.5 Other, net 9.0 17.9 ------- ------- Subtotal deferred tax asset 277.5 334.3 Valuation allowance (17.6) (31.6) ------- ------- Total deferred tax asset, net $ 259.9 $ 302.7 ------- ------- Deferred tax liability VOBA $(130.2) $(144.8) ------- ------- Total deferred tax liability $(130.2) $(144.8) ------- ------- Total deferred tax asset, net $ 129.7 $ 157.9 ======= =======
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse. Gross deferred income tax assets totaled approximately $277.5 million and $334.3 million at December 31, 2007 and 2006, respectively. Gross deferred income tax liabilities totaled approximately $130.2 million and $144.8 million at December 31, 2007 and 2006, respectively. The Company has recorded a valuation allowance against tax benefits from capital losses and tax credit carryforwards. A portion of the valuation allowance against the December 31, 2007 deferred tax asset is due to limitations under Section 382 of the Internal Revenue Code against certain tax benefits. If the tax benefits established at the inception of the Transaction offset currently by the valuation allowance were to be subsequently realized, the entire benefit would reduce intangible assets. Any adjustment to the valuation allowance for events subsequent or unrelated to the Transaction would be realized through the income statement. During 2007, a reduction of $14.0 million was made to the valuation allowance. Of this amount, $1.7 million relates to foreign tax credits generated in 2006 and thus reduces income tax expense. In management's judgment, the gross deferred tax asset will more likely than not be realized through reductions of future taxes, except as otherwise noted. This conclusion is based primarily on a review of expected taxable income and considers all available evidence, both positive and negative. At December 31, 2007, there are available foreign tax credit carryforwards of $7.8 million which will expire beginning in 2013. At December 31, 2007, the Company has net operating loss carryforwards of $144.9 million and capital loss carryforwards of $35.2 million, which begin to expire in 2016 and 2010, respectively. All tax credits, net operating loss carryforwards, and capital loss carryforwards generated prior to 2006 are subject to annual limitations on utilization. This includes $6.1 million of foreign tax credits and $127.3 million of net operating and capital loss carryforwards. 33 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 11. FEDERAL INCOME TAXES (CONTINUED) The Company's federal income tax returns are routinely audited by the IRS, and when appropriate, provisions are made in the financial statements in anticipation of the results of these audits. THG has agreed to indemnify the Company and Goldman Sachs with respect to tax liabilities for periods before the acquisition as provided in the Stock Purchase Agreement. However, the tax attributes carried over from THG are not guaranteed under the Stock Purchase Agreement, and accordingly, such attributes may be adjusted in the future. At the end of 2007, THG disclosed an audit adjustment of approximately $7.5 million to the company's pre-acquisition net operating loss balance. As a result, the Company has reduced the gross net operating loss carryforward by $21.4 million. No post-acquisition periods are currently under audit. In June 2006, the FASB issued FIN No. 48 (See Note 3O - New Accounting and Adopted Pronouncements for further discussion around FIN No. 48). The Company adopted the provisions of FIN No. 48 as of January 1, 2007. The Company believes it does not have any tax positions that fail to meet the more likely than not standard and does not expect any material adverse effects from audit examination, including interest and penalties. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company's financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. The dividends received deduction claimed by the Company is generated by the separate accounts of variable annuity contracts. In Revenue Ruling 2007-61, the IRS issued notice that it intends to publish regulations dealing with the computation of separate account dividends received deductions. The impact and timing of such regulations is unknown at this time, but it is possible that the regulations could reduce the amount of dividends received deduction tax benefit that the Company claims. It is anticipated that any regulations would have a public comment period and would be effective prospectively. The Company will file a stand-alone tax return for the period January 1, 2007 through December 31, 2007. The Company's tax return is ineligible for consolidation in the Goldman Sachs Group until fiscal year end 2012. Any net operating loss carryforwards, capital loss carryforwards or foreign tax credits from prior to the acquisition date of December 30, 2005 can only be used against the income of the Company. 12. PENSION AND OTHER POST RETIREMENT BENEFITS DEFINED BENEFIT PLANS Goldman Sachs maintains a defined benefit pension plan for substantially all US employees hired prior to November 1, 2003. As of November 2004, this plan has been closed to new participants and no further benefits will be accrued to existing participants. The Company and its employees are not members of a Goldman Sachs sponsored pension program and the December 31, 2007 and 2006 balance sheets contain no pension liabilities and no postretirement benefit liabilities. Prior to the Transaction and prior to 2005, FAFLIC, a subsidiary of AFLIAC through December 30, 2005, provided retirement benefits to substantially all of its employees under defined benefit pension plans. These plans were based on a defined benefit cash balance formula, whereby the Company annually provided an allocation to each covered employee based on a percentage of that employee's eligible salary, similar to a defined contribution plan arrangement. In addition to the cash balance allocation, certain transition group employees who had met specified age and service requirements as of December 31, 1994, were eligible for a grandfathered benefit based primarily on the employees' years of service and compensation during their highest five consecutive plan years of employment. The Company's policy for the plans was to fund at least the minimum amount required by the Employee Retirement Income Security Act of 1974 ("ERISA"). As a result of the Transaction, the Company is no longer required to contribute any funds to the benefit plans, nor is it required to make any benefit payments. 34 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 12. PENSION AND OTHER POST RETIREMENT BENEFITS (CONTINUED) DEFINED CONTRIBUTION PLANS The Company participates in the Goldman Sachs employee-sponsored defined contribution plans for the employees of the Company. The Company matches a portion of employees' annual contributions. Matching contributions vest after three years of service. The Company incurred expenses relating to the defined contribution plan of $0.1 million for the years ended December 31, 2007 and 2006 respectively. FAFLIC, a subsidiary of the Company through December 30, 2005, also provided a defined contribution 401(k) plan for its employees, whereby the Company matched employee elective 401(k) contributions, up to a maximum percentage determined annually by the Board of Directors. Effective January 1, 2005, the Company enhanced its 401(k) plan to match 100% of employees' 401(k) plan contributions up to 5% of eligible compensation. During 2005, the expense for this matching provision was $11.5 million, of which $10.2 million was allocated to its affiliates. In addition to this matching provision, the Company made an annual contribution to employees' accounts equal to 3% of the employee's eligible compensation. This annual contribution was made regardless of whether the employee contributed to the plan, as long as the employee was employed on the last day of the year. The cost for this additional contribution was $8.3 million for 2005, of which $7.3 million was allocated to affiliated companies. COMPONENTS OF NET PERIODIC POSTRETIREMENT BENEFIT COSTS The components of net periodic postretirement benefit cost were as follows:
FOR THE YEARS ENDED DECEMBER 31, 2007 2006 2005 ---------------------------------------------------------------- (In millions) Service cost $-- $-- $ 0.4 Interest cost -- -- 3.2 Recognized net actuarial loss -- -- 0.4 Amortization of prior service cost -- -- (5.5) --- --- ----- Net periodic postretirement (benefit) cost $-- $-- $(1.5) === === =====
The Company allocated approximately $(0.7) million of the net periodic postretirement (benefit) cost to its affiliated companies in 2005. ASSUMPTIONS Assumed health care cost trend rates have a significant effect on the amounts reported. A one-percentage point change in assumed health care cost trend rates in each year would have the following effects:
1-PERCENTAGE POINT 1-PERCENTAGE POINT INCREASE DECREASE -------------------------------------------------------------------------------------------------- (In millions) Effect on total of service and interest cost during 2005 $0.1 $(0.1)
35 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 13. DIVIDEND RESTRICTIONS Massachusetts has enacted laws governing the payment of dividends to shareholders by insurers. Massachusetts laws affect the dividend paying ability of the Company. Massachusetts' statute limits the dividends a life insurer may pay in any twelve month period, without the prior permission of the Massachusetts Commissioner of Insurance (the "Commissioner"), to the greater of (i) 10% of its statutory policyholder surplus as of the preceding December 31 or (ii) the individual company's statutory net gain from operations for the preceding calendar year. In addition, under Massachusetts law, no domestic insurer may pay a dividend or make any distribution to its shareholders from other than unassigned funds unless the Commissioner has approved such dividend or distribution. The Company must meet minimum capital and surplus requirements under a risk-based capital ("RBC") formula. RBC is the standard measurement of an insurance company's required capital on a statutory basis. It is based on a formula calculated by applying factors to various assets, premium and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. Regulatory action is tied to the amount of a company's surplus deficit under the RBC formula. Goldman Sachs has agreed with the Commissioner to continue the previous THG commitment to maintain total adjusted capital levels at a minimum of 100% of the Company's Company Action Level ("CAL") as determined under the risk-based capital formula, which was $116.3 million at December 31, 2007. Total adjusted capital for life insurance companies is defined as statutory capital and surplus, plus asset valuation reserve, plus 50% of dividends apportioned for payment and was $466.8 million at December 31, 2007 for the Company. The Company's CAL RBC ratio of 401% is eight times greater than the level at which the Commissioner could be authorized to take an insurer into receivership. There were no dividends declared by the Company to Goldman Sachs in 2007 and 2006. In 2005, in connection with the Transaction and with permission from the Commissioner, the Company distributed FAFLIC and its other non-insurance subsidiaries to THG. 14. VALUE OF BUSINESS ACQUIRED VOBA represents the present value of future profits embedded in the acquired contracts related to the Transaction. VOBA is determined by estimating the net present value of future cash flows expected to result from contracts in force at the date of the Transaction. Future positive cash flows include fees and other charges assessed to the contracts for as long as they remain in force as well as fees collected upon surrender, while future negative cash flows include costs to administer the contracts, and benefit payments including payments under the GMDB provisions of the contracts. VOBA will be amortized over the expected life of the contracts in proportion to estimated gross profits arising principally from investment results, mortality and expense margins, and surrender charges based upon historical and estimated future experience, which is updated periodically. At December 31, 2007, the gross carrying amount and accumulated amortization of VOBA was $300.3 million and $81.6 million, respectively. VOBA is adjusted for amounts relating to unrealized investment gains and losses. This adjustment, net of tax, is included with unrealized investment gains and losses that are recorded in accumulated other comprehensive loss. VOBA was increased by $0.9 million at December 31, 2007 and $0.8 million at December 31, 2006 to account for unrealized investment losses. On November 1, 2006, VOBA of $1.9 million attributable to the future profits of the deferred fixed annuity business was written off following reinsurance of the block to Columbia (see Note 15 - Reinsurance). 36 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 14. VALUE OF BUSINESS ACQUIRED (CONTINUED) Estimated future amortization of VOBA as of December 31, 2007 is as follows: (In millions) 2008 $ 37.2 2009 30.1 2010 24.1 2011 19.1 2012 15.1 2013 and thereafter 94.8 ------ Total $220.4 ======
15. REINSURANCE The Company seeks to diversify risk and limit its overall financial exposure by reinsuring certain levels of risk in various areas of exposure through acquisition and cessions with other insurance companies or reinsurers. In addition, consistent with the overall business strategy, the Company assumes certain policy risks written by other insurance companies on a coinsurance and modified coinsurance basis. Under a coinsurance arrangement, depending upon the terms of the contract, the reinsurer may share in the risk of loss due to mortality or morbidity, lapses, and the investment risk, if any, inherent in the underlying policy. Modified coinsurance differs from coinsurance in that the assets supporting the reserves are retained by the ceding company while the risk is transferred to the reinsurer. On May 25, 2007 the Company entered into an agreement, retroactive to January 1, 2007, to assume 8% of the variable annuity products sold by Pacific Life in 2007. The base annuities were assumed on a modified coinsurance and the benefits provided via riders were assumed on a coinsurance basis. General account reserves of $58.2 million were assumed. The Company has evaluated the applicability of DIG B25 to products assumed from Pacific Life and an embedded derivative requiring bifurcation has been identified. A liability of $8.3 million as at December 31, 2007 is reflected on the balance sheet. The assumed general account reserves as of December 31, 2007 were approximately $61.5 million. As of November 1, 2006, the Company entered into a coinsurance agreement to cede 100% of its deferred fixed annuity insurance business to its affiliate, Columbia. The Company ceded reserves of $53.9 million. In consideration of Columbia's assumption of $53.9 million in reserves, the Company received a $1.9 million ceding commission. As at December 31, 2007 the Company ceded reserves of $46.7 million. On July, 1, 2006, the Company assumed on a modified coinsurance basis, 100% of the variable annuity business of CILAC. As of April 1, 2007 CILAC was merged into Protective. General account reserves of $1.3 billion were assumed. In consideration, the Company paid an $85.0 million ceding commission. The Company has evaluated the applicability of DIG B36 to its modified coinsurance agreement with Protective. An embedded derivative requiring bifurcation has been identified and a liability of $22.8 million and an asset of $0.5 million as of December, 31 2007 and December, 31 2006 respectively is reflected on the balance sheet. As at December 31, 2007, the Company assumed reserves of $1.2 billion. On December 30, 2005 subsequent to the Transaction, the Company assumed on a coinsurance basis 100% of the General Account liabilities related to FAFLIC's Variable Annuity and Variable Life policies. In consideration of the Company's assumption of these liabilities, FAFLIC transferred to the Company the statutory assets related to this block of business and received from the Company an $8.6 million ceding commission. The assumed reserves were approximately $83.7 million and $96.5 million as of December 31, 2007 and December 31, 2006 respectively. The Company also assumed on a modified coinsurance basis, essentially all of the Separate Account liabilities of FAFLIC. In addition, the MVA product was assumed on a modified coinsurance basis. In accordance with SOP 03-1, MVA liabilities are included as general account liabilities. Reserve liabilities of $2.2 million as of December 31, 2007 have been included in policy liabilities and a reinsurance recoverable of $2.2 million recognized. The December 30, 2005 value of the FAFLIC MVA was recognized in the 2006 adjustments to purchase accounting included within other assets and future policy benefits (See Note 4 - Purchase Accounting). The Company has evaluated the applicability of DIG 37 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 15. REINSURANCE (CONTINUED) B36 to its modified coinsurance arrangement to reinsure FAFLIC MVA and has determined that an embedded derivative requiring bifurcation does exist but is not considered to be material. Prior to the Transaction, the Company entered into other reinsurance treaties including non core traditional life and health business; the largest being a universal life insurance treaty representing reinsurance recoverables of $475.5 million and $506.0 million at December 31, 2007 and 2006, respectively. The Company determines the appropriate amount of reinsurance based on evaluation of the risks accepted and analyses prepared by consultants and reinsurers and on market conditions (including the availability and pricing of reinsurance). The Company also believes that the terms of its reinsurance contracts are consistent with industry practice in that they contain standard terms with respect to lines of business covered, limit and retention, arbitration and occurrence. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk. Based on its review of its reinsurers' financial statements and reputations in the reinsurance marketplace, the Company believes that its counterparties are financially sound. The effects of reinsurance were as follows:
FOR THE YEARS ENDED DECEMBER 31, 2007 2006 2005 --------------------------------------------------------------------------- (IN MILLIONS) Life and accident and health insurance premiums: Direct $ 18.3 $ 19.4 $ 72.8 Assumed -- -- 0.3 Ceded (18.3) (19.4) (36.2) ------ ------ ------ Net premiums $ -- $ -- $ 36.9 ====== ====== ====== Life and accident and health insurance and other individual policy benefits, claims, losses and loss adjustment expenses: Direct $100.8 $109.2 $289.1 Assumed 60.6 34.4 (1.7) Ceded (19.7) (38.4) (48.0) ------ ------ ------ Net policy benefits, claims, losses and loss adjustment expenses $141.7 $105.2 $239.4 ====== ====== ======
38 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 16. DEFERRED POLICY ACQUISITION COSTS The following reflects the changes to the deferred policy acquisition asset:
FOR THE YEARS ENDED DECEMBER 31, 2007 2006 2005 ------------------------------------------------------------- (In millions) Balance at beginning of year $103.6 $ -- $ 694.1 Block acquisition 24.2 106.7 -- Subsidiary adjustment -- -- (35.0) Acquisition expenses deferred 28.8 3.3 0.7 Amortized to expense during the year (3.3) (6.4) (112.4) Adjustment to equity during the year -- -- 9.3 Purchase accounting adjustment -- -- (556.7) ------ ------ ------- Balance at end of year $153.3 $103.6 $ -- ====== ====== =======
In 2007, the Company acquired 8% of the 2007 variable annuity business of Pacific Life through a modified coinsurance agreement and a block of variable life insurance from Protective through a modified coinsurance agreement, resulting in initial DAC balances of $18.2 million and $6.0 million respectively. In 2006, the Company acquired the variable annuity business of CILAC, whose booked of business was subsequently merged into Protective during 2007, through a modified coinsurance agreement, resulting in an initial DAC asset of $106.7 million upon contract date. Activity of $3.3 million related to deferral of acquisition expenses and amortization of $6.4 million, resulting in a $103.6 million DAC asset at December 31, 2006. In accordance with SFAS No. 141, the Company revalued its DAC asset to zero as of December 30, 2005 under purchase accounting. As such, any assets related to deferred policy acquisition costs relate to transactions occurring in 2007 and 2006. 17. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES The Company regularly updates its reserve estimates as new information becomes available and further events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in results of operations as adjustments to losses and LAE. Often these adjustments are recognized in periods subsequent to the period in which the underlying policy was written and loss event occurred. These types of subsequent adjustments are described as "prior year reserve development". Such development can be either favorable or unfavorable to the Company's financial results and may vary by line of business. The liability for future policy benefits and outstanding claims, and claims adjustment expenses, excluding the effect of reinsurance, related to the Company's accident and health business was $228.0 million and $233.5 million at December 31, 2007 and 2006, respectively. This business consists of the Company's exited individual health businesses. Reinsurance recoverables related to this business were $227.9 million and $233.6 million at December 31, 2007 and 2006 respectively. 39 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 18. COMPOSITION OF OTHER ASSETS, LIABILITIES, INCOME, AND EXPENSES Other assets consist of the following:
DECEMBER 31, 2007 2006 ----------------------------------------------- (In millions) State licenses (intangible asset) $ 2.6 $ 2.6 Accounts receivable 5.8 7.1 Deferred sales inducements 8.9 -- Miscellaneous assets 14.6 5.4 ----- ----- Total other assets $31.9 $15.1 ===== =====
Accrued expenses and other liabilities consist of the following:
DECEMBER 31, 2007 2006 ----------------------------------------------- (In millions) Payables in process $26.9 $39.4 Policyholder liabilities 11.9 5.5 Accrued expenses 8.9 10.1 Miscellaneous liabilities 8.7 6.2 ----- ----- Total accrued expenses and other liabilities $56.4 $61.2 ===== =====
Other income consists of the following:
DECEMBER 31, 2007 2006 2005 ------------------------------------------ (In millions) Asset management fees $17.4 $15.4 $29.4 Miscellaneous income 2.5 1.3 3.6 ----- ----- ----- Total other income $19.9 $16.7 $33.0 ===== ===== =====
Other operating expenses consist of the following:
DECEMBER 31, 2007 2006 2005 -------------------------------------------------------- (In millions) Taxes, licenses & fees $ 2.5 $ 3.2 $ 16.1 Commission expense 21.3 19.5 21.0 Management and administrative fees 29.9 23.8 -- Salaries & benefits 7.9 5.1 49.6 Processing & operational services 1.8 12.9 12.7 Legal & auditing 3.5 1.3 5.9 Loss on GMDB hedging -- -- 14.2 Miscellaneous operating expenses 3.2 9.1 29.1 ----- ----- ------ Total other operating expenses $70.1 $74.9 $148.6 ===== ===== ======
COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 19. COMMITMENTS The Company was allocated certain rental expenses, primarily for the building lease in Southborough, MA. Rental expenses for these operating leases amounted to $0.3 million and $0.1 million for 2007 and 2006, respectively. Prior to the Transaction, the Company was allocated rental expenses of $0.6 million in 2005. The Company does not have lease commitments for the Southborough, MA location. On April 19, 2007 the Company did enter into a lease agreement for the Elgin, IL premise. As of December 31, 2007, lease commitments relating to the Elgin, IL were $60.5 thousand for 2008 to 2010 inclusive. Concurrent to the closing of the Transaction, the Company entered into an operational servicing agreement with Security Benefit Life Insurance Company ("Se2"), whereby Se2, as third party administrator, will provide all contract/policy administration for a period of not less than ten years. 40 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 19. COMMITMENTS (CONTINUED) On October 31, 2007, the Company signed a third party administrator agreement with Transaction Applications Group, Inc ("TAG") and an application service provider agreement with Professional Data Management Again, Inc ("PDMA"). Commencing January 1, 2008 TAG will act as third party administrator for the Company's fixed block of business, utilizing a PDMA platform. As of December 31, 2007, the purchase commitments relating to agreements with Se2, TAG and PDMA were as follows: (in millions) 2008 $12.2 2009 11.3 2010 10.6 2011 9.7 2012 9.0 2013 and thereafter 24.3 ----- Total $77.1 =====
20. CONTINGENCIES REGULATORY AND INDUSTRY DEVELOPMENTS Unfavorable economic conditions may contribute to an increase in the number of insurance companies that are under regulatory supervision. This may result in an increase in mandatory assessments by state guaranty funds, or voluntary payments by solvent insurance companies to cover losses to policyholders of insolvent or rehabilitated companies. Mandatory assessments, which are subject to statutory limits, can be partially recovered through a reduction in future premium taxes in some states. The Company is not able to reasonably estimate the potential impact of any such future assessments or voluntary payments. LITIGATION The Company is involved from time to time in judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its business. THG has agreed to indemnify the Company and Goldman Sachs with respect to certain of these matters as provided in the Stock Purchase Agreement. Management believes, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on the Company's financial condition. Given the inherent difficulty of predicting the outcome of the Company's litigation and regulatory matters, particularly in cases or proceeding in which substantial or indeterminate damages or fines are sought, the Company cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred. However, the Company believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the its consolidated financial position. In 1997, a lawsuit on behalf of a putative class was instituted against the Company alleging fraud, unfair or deceptive acts, and breach of contract, misrepresentation, and related claims in the sale of life insurance policies. In November 1998, the Company and the plaintiffs entered into a settlement and in May 1999, the Federal District Court in Worcester, Massachusetts approved the settlement and certified the class for this purpose. In 2007, the Company released $0.4 million in liabilities related to this litigation representing the remaining expenses of its obligation under the settlement. On July 24, 2002, an action was commenced in the United States District Court for the Northern District of Illinois, Eastern Division. The Plaintiffs, who purchased two variable annuities, were subsequently identified as engaging in frequent transfers of significant sums between sub-accounts that in the Company's opinion constituted "market timing," and were subject to restrictions upon such trading that the Company imposed in December 2001. Plaintiffs allege that such restrictions constituted a breach of the terms of the annuity contracts. In December 2006, a jury returned a verdict of $1.3 million in favor of the plaintiffs, both parties have appealed. The outcome of this matter is not expected to be material to the Company's annual results of operations or financial position. In addition, THG has agreed to indemnify the Company and Goldman Sachs with respect to this litigation for amounts over $250,000. The Company released $0.2 million to THG for the year 2007 related to this litigation, leaving $0.1 million to cover 41 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 20. CONTINGENCIES (CONTINUED) current and estimated future contingent liabilities. THG, on behalf of the Company, continues to vigorously defend this matter, and regards plaintiffs' claims for lost trading profits as being speculative and, in any case, subject to an obligation to mitigate damages. In February 2008, the Court of Appeals vacated the $1.1 million verdict. Plaintiffs may appeal, but it is unlikely that the Court of Appeals will hear the case en banc or that the Supreme Court of the United States will take the case. In addition, the Company is involved, from time to time, in investigations and proceedings by governmental and self-regulatory agencies, which currently include investigations relating to "market timing" in sub-accounts of variable annuity and life products, "revenue sharing" and other matters, and regulatory inquiries into compensation arrangements with brokers and agents. A number of companies have announced settlements of enforcement actions related to such matters with various regulatory agencies, including the SEC, which have included a range of monetary penalties and restitution. In February 2006, THG reached a settlement agreement with the SEC regarding its investigation related to "market timing", "revenue sharing" and other matters, including the marketing support and administrative services arrangements entered into by VeraVest Investments, Inc. in connection with the distribution of life insurance and annuity products issued by unaffiliated insurance companies. The total amount of the settlement is $5.0 million. The Company's share of this settlement was $2.8 million, of which $2.1 million was paid during 2006 and $0.7 million was paid during 2007 representing all outstanding liabilities under this settlement. 21. RELATED PARTY TRANSACTIONS In 2007, the Company signed a distribution and service agreement with its affiliate, Epoch, to serve as principal underwriter and common remitter for certain variable annuity products issued by the Company and its separate accounts. This resulted in expense of $0.1 million for 2007 for these services. The Company performs certain administrative services on its behalf. No income was generated for the year ended December 31, 2007. The Company has a management services agreement with its affiliate, Goldman Sachs & Co ("GSCO"). Under this service agreement, GSCO provides support to the Company in administrative, legal, compliance, technology, operations, financial reporting, human resources, risk management and other areas, and the Company is allocated costs for services received. GSCO charged the Company approximately $3.0 million and $3.8 million in 2007 and 2006 respectively, for these services. These amounts are shown within other operating expenses. In 2005, the Company entered into several derivative transactions with its affiliate, Goldman Sachs International ("GSI"). These derivative positions resulted in income of $10.2 million and expense of $47.4 million, for 2007 and 2006 respectively, due to mark to market of the positions. During 2007, the Company entered into several derivative transactions with its affiliate, Goldman Sachs Financial Markets L.L.C ("GSFM"), which resulted in income of $9.5 million for 2007. The service agreement entered into with GSAM, an affiliate organization that provides investment management services, generated expense of $2.6 million and $2.1 million in 2007 and 2006, respectively. No expense was generated for the year ended December 31, 2005. As part of the variable products in the separate account, the Company offers underlying Goldman Sachs Variable Investment Trust funds. Management fees are paid directly to GSAM and certain of these distribution and administration fees are passed to the Company. This resulted in revenue of $6.9 million and $7.0 million for the years ended December 31, 2007 and December 31, 2006. As of November 1, 2006, the Company entered into a coinsurance agreement to cede 100% of its deferred fixed annuity insurance business to its South Carolina domiciled affiliate, Columbia. In consideration of Columbia's assumption of the liabilities, the Company received a $1.9 million ceding commission. As of December 31, 2007 the Company ceded reserves of $46.7 million. In 2006, the employees of the Company became participants in The Goldman Sachs Amended and Restated Stock Incentive Plan (the "SIP"). Pursuant to the SIP, Goldman Sachs issued restricted stock units (RSU's) to certain employees of the Company as part of their overall compensation for 2006. Unvested RSU's require future service as a condition of delivery of the underlying shares of Goldman Sachs' common stock generally over a three year period. Delivery of the underlying shares of common stock is also conditioned on the grantee's satisfying certain other requirements as outlined in the award agreement. The Company incurred expenses of $0.7 million and $1.5 million relating to RSU's for the years ended December 31, 2007 and December 31, 2006, respectively. 42 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 21. RELATED PARTY TRANSACTIONS (CONTINUED) Prior to the Transaction, the Company provided, through its wholly-owned subsidiary FAFLIC, management, space and other services, including accounting, electronic data processing, human resources, benefits, legal and other staff functions to affiliates. These entities ceased to be affiliates as of December 30, 2005 and effectively on that date the Company stopped providing these services. Amounts charged by the Company to its affiliates in periods prior to the Transaction for services were based on full cost including all direct and indirect overhead costs that amounted to $165.7 million in 2005. Net amounts due from predecessor affiliates for accrued expenses and various other liabilities and receivables was $0.4 million at December 31, 2006. There were no amounts due from affiliates at December 31, 2007. 22. STATUTORY FINANCIAL INFORMATION The Company is required to file annual statements with state regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis), as codified by the National Association of Insurance Commissioners. Statutory surplus differs from shareholders' equity reported in accordance with generally accepted accounting principles primarily because policy acquisition costs are expensed when incurred. Statutory accounting principles require asset valuation and interest maintenance reserves, postretirement benefit costs are based on different assumptions and reflect a different method of adoption, life insurance reserves are based on different assumptions and the recognition of deferred tax assets is based on different recoverability assumptions. Statutory net (loss) income and surplus are as follows:
(UNAUDITED) 2007 2006 2005 ---------------------------------------------------------------------- (In millions) Statutory Net (Loss) Income - Combined Life and Health Companies $ 58.2 $(35.5) $ (2.3) Statutory Shareholders' Surplus - Combined Life and Health Companies $461.4 $368.9 $374.1
23. SUBSEQUENT EVENTS Effective January 1, 2008, the Company assumption reinsured the book of business from Fidelity Mutual Life Insurance Company ("FML") comprising primarily whole, term and universal life insurance policies. FML is currently in rehabilitation under the governance of the State of Pennsylvania, and the Company will have no responsibility for the dissolution or future state of FML and any of its remaining legal entity obligations or liabilities. As part of this transaction, the Company paid a ceding commission of $4.3 million and assumed general account reserves of $0.7 billion. On October 31, 2007, the Company signed a third party administrator agreement with TAG and an application service provider agreement with PDMA. Commencing January 1, 2008 TAG began to provide administration for the Company's block of traditional insurance business reinsured from FML, utilizing a PDMA platform to administer the block. During the first quarter of 2008, the Company effectively ceded the entire FML block of business to Columbia. In consideration of Columbia's assumption of the business, the Company received a ceding commission of approximately $4.1 million. In the first quarter of 2008, Epoch replaced Security Distributors, Inc. ("SDI") as principal underwriter for several of the Company's previously issued variable products. However, SDI remains the principal underwriter of several previously issued variable annuity products. 43 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF THE GOLDMAN SACHS GROUP, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 23. SUBSEQUENT EVENTS (CONTINUED) In February, 2008 the Pacific Life block was recaptured retroactive to January 1, 2008. Concurrent with the recapture, certain derivative options hedging the rider benefits of this treaty will be disposed. The recapture of the Pacific Life block will result in a settlement receivable of $25.5 million with a subsequent reduction in policyholder liabilities and DAC. 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of Commonwealth Annuity and Life Insurance Company and the Contract Owners of Separate Account VA-K of Commonwealth Annuity and Life Insurance Company: In our opinion, the accompanying statements of assets and liabilities and the related statements of operations and of changes in net assets present fairly, in all material respects, the financial position of each of the sub-accounts constituting Separate Account VA-K of Commonwealth Annuity and Life Insurance Company at December 31, 2007, the results of each of their operations for the year then ended and the changes in each of their net assets for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Commonwealth Annuity and Life Insurance Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2007 by correspondence with the mutual funds, provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Hartford, Connecticut March 31, 2008 SEPARATE ACCOUNT VA-K STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2007
AIM AIM AIM V.I. V.I. AIM V.I. ALGER ALGER CAPITAL CORE V.I. INTERNATIONAL AMERICAN AMERICAN APPRECIATION EQUITY HIGH YIELD GROWTH LEVERAGED MIDCAP FUND FUND FUND FUND ALLCAP GROWTH SERIES I SERIES I SERIES I SERIES I PORTFOLIO PORTFOLIO SHARES SHARES SHARES SHARES CLASS O CLASS O ------------ ---------- ---------- ------------- ---------- ---------- ASSETS: Investments in shares of the Underlying Funds, at market value $2,624,992 $6,150,529 $1,282,269 $5,282,437 $4,915,495 $7,197,663 Investment income receivable -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total assets 2,624,992 6,150,529 1,282,269 5,282,437 4,915,495 7,197,663 LIABILITIES: -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Net assets $2,624,992 $6,150,529 $1,282,269 $5,282,437 $4,915,495 $7,197,663 ========== ========== ========== ========== ========== ========== Net asset distribution by category: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Accumulation reserves $2,624,992 $6,150,529 $1,282,269 $5,282,437 $4,915,495 $7,197,663 Annuity reserves -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- $2,624,992 $6,150,529 $1,282,269 $5,282,437 $4,915,495 $7,197,663 ========== ========== ========== ========== ========== ========== Investments in shares of the Underlying Funds, at cost $2,817,515 $5,987,169 $1,369,758 $3,466,693 $3,191,675 $6,183,471 Underlying Fund shares held 89,377 211,286 223,392 157,075 88,743 304,727 Units outstanding and net asset value per unit: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Units outstanding, December 31, 2007 4,730,039 7,993,107 1,175,440 4,105,376 4,914,723 4,772,426 Net asset value per unit, December 31, 2007 $ 0.554962 $ 0.769479 $ 1.090884 $ 1.286712 $ 1.000157 $ 1.508177
The accompanying notes are an integral part of these financial statements. SA-1 SEPARATE ACCOUNT VA-K STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) DECEMBER 31, 2007
ALGER ALLIANCE- ALLIANCE- ALLIANCE- AMERICAN BERNSTEIN BERNSTEIN ALLIANCE- BERNSTEIN SMALL VPS GLOBAL VPS GROWTH BERNSTEIN VPS LARGE DELAWARE CAPITALIZATION TECHNOLOGY AND INCOME VPS GROWTH CAP GROWTH VIP PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO BALANCED CLASS O CLASS B CLASS B CLASS B CLASS B SERIES -------------- ----------- ----------- ---------- ----------- ----------- ASSETS: Investments in shares of the Underlying Funds, at market value $2,020,969 $ 2,537,536 $17,513,848 $3,000,275 $ 6,463,298 $25,620,648 Investment income receivable -- -- -- -- -- -- ---------- ----------- ----------- ---------- ----------- ----------- Total assets 2,020,969 2,537,536 17,513,848 3,000,275 6,463,298 25,620,648 LIABILITIES: -- -- -- -- -- -- ---------- ----------- ----------- ---------- ----------- ----------- Net assets $2,020,969 $ 2,537,536 $17,513,848 $3,000,275 $ 6,463,298 $25,620,648 ========== =========== =========== ========== =========== =========== Net asset distribution by category: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Accumulation reserves $2,020,969 $ 2,537,536 $17,513,848 $3,000,275 $ 6,463,298 $23,436,977 Annuity reserves -- -- -- -- -- 2,183,671 ---------- ----------- ----------- ---------- ----------- ----------- $2,020,969 $ 2,537,536 $17,513,848 $3,000,275 $ 6,463,298 $25,620,648 ========== =========== =========== ========== =========== =========== Investments in shares of the Underlying Funds, at cost $1,409,192 $ 1,975,468 $14,855,965 $2,652,747 $ 6,380,398 $26,700,178 Underlying Fund shares held 60,653 124,940 659,655 133,821 215,731 1,728,789 Units outstanding and net asset value per unit: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Units outstanding, December 31, 2007 2,090,279 4,907,633 12,234,425 3,875,699 9,172,730 11,721,765 Net asset value per unit, December 31, 2007 $ 0.966842 $ 0.517059 $ 1.431522 $ 0.774125 $ 0.704621 $ 2.185733
The accompanying notes are an integral part of these financial statements. SA-2 SEPARATE ACCOUNT VA-K STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) DECEMBER 31, 2007
DELAWARE DELAWARE DELAWARE DELAWARE DELAWARE DELAWARE VIP VIP VIP VIP VIP VIP INTERNATIONAL CAPITAL CASH EMERGING GROWTH HIGH VALUE RESERVES RESERVE MARKETS OPPORTUNITIES YIELD EQUITY SERIES SERIES SERIES SERIES SERIES SERIES ----------- ----------- ----------- ------------- ----------- ------------- ASSETS: Investments in shares of the Underlying Funds, at market value $12,849,660 $19,204,656 $ 8,958,727 $27,309,164 $12,734,013 $23,967,213 Investment income receivable 17,090 32,468 -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Total assets 12,866,750 19,237,124 8,958,727 27,309,164 12,734,013 23,967,213 LIABILITIES: -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Net assets $12,866,750 $19,237,124 $ 8,958,727 $27,309,164 $12,734,013 $23,967,213 =========== =========== =========== =========== =========== =========== Net asset distribution by category: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Accumulation reserves $11,282,504 $19,237,124 $ 8,958,727 $27,309,164 $12,734,013 $23,967,213 Annuity reserves 1,584,246 -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- $12,866,750 $19,237,124 $ 8,958,727 $27,309,164 $12,734,013 $23,967,213 =========== =========== =========== =========== =========== =========== Investments in shares of the Underlying Funds, at cost $13,014,832 $19,204,656 $ 3,675,804 $22,661,194 $14,084,501 $24,074,686 Underlying Fund shares held 1,328,817 19,204,656 321,793 1,278,519 2,140,170 1,630,423 Units outstanding and net asset value per unit: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Units outstanding, December 31, 2007 6,926,477 13,563,566 2,701,817 7,223,689 6,445,281 6,626,100 Net asset value per unit, December 31, 2007 $ 1.857618 $ 1.418294 $ 3.315816 $ 3.780501 $ 1.975711 $ 3.617092
The accompanying notes are an integral part of these financial statements. SA-3 SEPARATE ACCOUNT VA-K STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) DECEMBER 31, 2007
DELAWARE DELAWARE DELAWARE VIP VIP DELAWARE DELAWARE DELAWARE VIP SELECT SMALL VIP VIP VIP REIT GROWTH CAP VALUE TREND U.S. GROWTH VALUE SERIES SERIES SERIES SERIES SERIES SERIES ---------- ----------- ----------- ----------- ---------- ----------- ASSETS: Investments in shares of the Underlying Funds, at market value $5,726,994 $11,953,235 $24,582,260 $26,440,235 $5,806,872 $65,979,749 Investment income receivable -- -- -- -- -- -- ---------- ----------- ----------- ----------- ---------- ----------- Total assets 5,726,994 11,953,235 24,582,260 26,440,235 5,806,872 65,979,749 LIABILITIES: -- -- -- -- -- -- ---------- ----------- ----------- ----------- ---------- ----------- Net assets $5,726,994 $11,953,235 $24,582,260 $26,440,235 $5,806,872 $65,979,749 ========== =========== =========== =========== ========== =========== Net asset distribution by category: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Accumulation reserves $5,726,994 $11,953,235 $24,582,260 $26,440,235 $5,806,872 $63,418,305 Annuity reserves -- -- -- -- -- 2,561,444 ---------- ----------- ----------- ----------- ---------- ----------- $5,726,994 $11,953,235 $24,582,260 $26,440,235 $5,806,872 $65,979,749 ========== =========== =========== =========== ========== =========== Investments in shares of the Underlying Funds, at cost $5,401,695 $12,389,454 $17,640,552 $20,240,860 $5,930,846 $50,267,644 Underlying Fund shares held 361,781 1,083,702 858,020 686,759 648,088 3,077,414 Units outstanding and net asset value per unit: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Units outstanding, December 31, 2007 2,304,005 12,035,170 6,358,883 7,141,842 7,112,804 17,596,261 Net asset value per unit, December 31, 2007 $ 2.485669 $ 0.993192 $ 3.865814 $ 3.702159 $ 0.816397 $ 3.749646
The accompanying notes are an integral part of these financial statements. SA-4 SEPARATE ACCOUNT VA-K STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) DECEMBER 31, 2007
FT VIP FRANKLIN FT VIP FT VIP FT VIP PIONEER PIONEER SMALL-MID CAP MUTUAL TEMPLETON TEMPLETON EMERGING MID CAP GROWTH SHARES FOREIGN GROWTH MARKETS VALUE SECURITIES SECURITIES SECURITIES SECURITIES VCT VCT FUND FUND FUND FUND PORTFOLIO PORTFOLIO CLASS 2 CLASS 2 CLASS 2 CLASS 2 CLASS II CLASS II ------------- ----------- ---------- ---------- ---------- ---------- ASSETS: Investments in shares of the Underlying Funds, at market value $2,724,366 $11,014,464 $4,874,715 $4,363,100 $4,197,516 $5,902,772 Investment income receivable -- -- -- -- -- -- ---------- ----------- ---------- ---------- ---------- ---------- Total assets 2,724,366 11,014,464 4,874,715 4,363,100 4,197,516 5,902,772 LIABILITIES: -- -- -- -- -- -- ---------- ----------- ---------- ---------- ---------- ---------- Net assets $2,724,366 $11,014,464 $4,874,715 $4,363,100 $4,197,516 $5,902,772 ========== =========== ========== ========== ========== ========== Net asset distribution by category: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Accumulation reserves $2,724,366 $11,014,464 $4,874,715 $4,363,100 $4,197,516 $5,902,772 Annuity reserves -- -- -- -- -- -- ---------- ----------- ---------- ---------- ---------- ---------- $2,724,366 $11,014,464 $4,874,715 $4,363,100 $4,197,516 $5,902,772 ========== =========== ========== ========== ========== ========== Investments in shares of the Underlying Funds, at cost $2,157,742 $ 8,617,238 $3,583,636 $3,491,532 $2,392,022 $5,914,620 Underlying Fund shares held 118,916 545,541 240,727 282,584 96,896 308,561 Units outstanding and net asset value per unit: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Units outstanding, December 31, 2007 3,084,782 6,153,776 3,182,899 2,751,642 1,505,794 2,900,241 Net asset value per unit, December 31, 2007 $ 0.883163 $ 1.789871 $ 1.531533 $ 1.585635 $ 2.787576 $ 2.035270
The accompanying notes are an integral part of these financial statements. SA-5 SEPARATE ACCOUNT VA-K STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007
AIM AIM AIM ALGER ALGER V.I. V.I. AIM V.I. AMERICAN AMERICAN CAPITAL CORE V.I. INTERNATIONAL LEVERAGED MIDCAP APPRECIATION EQUITY HIGH YIELD GROWTH ALLCAP GROWTH FUND FUND FUND FUND PORTFOLIO PORTFOLIO SERIES I SHARES SERIES I SHARES SERIES I SHARES SERIES I SHARES CLASS O CLASS O --------------- --------------- --------------- --------------- ---------- ---------- INVESTMENT INCOME: Dividends $ -- $ 72,057 $ 93,118 $ 21,461 $ -- $ -- EXPENSES: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Mortality and expense risk fees 36,755 85,538 19,125 68,145 61,219 89,731 Administrative expense fees 4,410 10,265 2,295 8,177 7,346 10,768 --------- -------- --------- -------- ---------- ---------- Total expenses 41,165 95,803 21,420 76,322 68,565 100,499 --------- -------- --------- -------- ---------- ---------- Total expenses 41,165 95,803 21,420 76,322 68,565 100,499 --------- -------- --------- -------- ---------- ---------- Net investment income (loss) (41,165) (23,746) 71,698 (54,861) (68,565) (100,499) --------- -------- --------- -------- ---------- ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Realized gain distributions from portfolio sponsor -- -- -- -- -- 955,924 Net realized gain (loss) from sales of investments (156,112) 22,124 8,848 535,449 519,782 170,960 --------- -------- --------- -------- ---------- ---------- Net realized gain (loss) (156,112) 22,124 8,848 535,449 519,782 1,126,884 Change in unrealized gain (loss) 501,911 449,786 (76,344) 175,610 885,420 829,314 --------- -------- --------- -------- ---------- ---------- Net realized and unrealized gain (loss) 345,799 471,910 (67,496) 711,059 1,405,202 1,956,198 --------- -------- --------- -------- ---------- ---------- Net increase (decrease) in net assets from operations $ 304,634 $448,164 $ 4,202 $656,198 $1,336,637 $1,855,699 ========= ======== ========= ======== ========== ==========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-6 SEPARATE ACCOUNT VA-K STATEMENTS OF OPERATIONS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 2007
ALGER ALLIANCE- ALLIANCE- ALLIANCE- AMERICAN BERNSTEIN BERNSTEIN ALLIANCE- BERNSTEIN SMALL VPS GLOBAL VPS GROWTH BERNSTEIN VPS LARGE DELAWARE CAPITALIZATION TECHNOLOGY AND INCOME VPS GROWTH CAP GROWTH VIP PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO BALANCED CLASS O CLASS B CLASS B CLASS B CLASS B SERIES -------------- ---------- ----------- ---------- ---------- ---------- INVESTMENT INCOME: Dividends $ -- $ -- $ 238,901 $ -- $ -- $1,033,394 EXPENSES: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Mortality and expense risk fees 23,196 31,653 249,258 40,704 83,164 375,267 Administrative expense fees 2,783 3,799 29,911 4,884 9,980 45,032 -------- -------- ----------- -------- -------- ---------- Total expenses 25,979 35,452 279,169 45,588 93,144 420,299 -------- -------- ----------- -------- -------- ---------- Total expenses 25,979 35,452 279,169 45,588 93,144 420,299 -------- -------- ----------- -------- -------- ---------- Net investment income (loss) (25,979) (35,452) (40,268) (45,588) (93,144) 613,095 -------- -------- ----------- -------- -------- ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Realized gain distributions from portfolio sponsor -- -- 982,704 -- -- -- Net realized gain (loss) from sales of investments 180,515 131,901 936,876 82,455 (73,474) (119,626) -------- -------- ----------- -------- -------- ---------- Net realized gain (loss) 180,515 131,901 1,919,580 82,455 (73,474) (119,626) Change in unrealized gain (loss) 99,567 326,240 (1,172,922) 296,447 912,256 (638,530) -------- -------- ----------- -------- -------- ---------- Net realized and unrealized gain (loss) 280,082 458,141 746,658 378,902 838,782 (758,156) -------- -------- ----------- -------- -------- ---------- Net increase (decrease) in net assets from operations $254,103 $422,689 $ 706,390 $333,314 $745,638 $ (145,061) ======== ======== =========== ======== ======== ==========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-7 SEPARATE ACCOUNT VA-K STATEMENTS OF OPERATIONS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 2007
DELAWARE DELAWARE DELAWARE DELAWARE DELAWARE DELAWARE VIP VIP VIP VIP VIP VIP CAPITAL CASH EMERGING GLOBAL GROWTH HIGH RESERVES RESERVE MARKETS BOND OPPORTUNITIES YIELD SERIES SERIES SERIES SERIES (a) SERIES SERIES -------- -------- ---------- ---------- ------------- ---------- INVESTMENT INCOME: Dividends $710,660 $940,643 $ 152,248 $ 366,565 $ -- $1,073,469 EXPENSES: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Mortality and expense risk fees 186,665 254,421 110,129 11,604 399,106 187,715 Administrative expense fees 22,400 30,530 13,215 1,392 47,893 22,526 -------- -------- ---------- --------- ---------- ---------- Total expenses 209,065 284,951 123,344 12,996 446,999 210,241 -------- -------- ---------- --------- ---------- ---------- Total expenses 209,065 284,951 123,344 12,996 446,999 210,241 -------- -------- ---------- --------- ---------- ---------- Net investment income (loss) 501,595 655,692 28,904 353,569 (446,999) 863,228 -------- -------- ---------- --------- ---------- ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Realized gain distributions from portfolio sponsor -- -- 658,407 -- -- -- Net realized gain (loss) from sales of investments (77,345) -- 1,586,468 (820,736) 1,756,952 (443,931) -------- -------- ---------- --------- ---------- ---------- Net realized gain (loss) (77,345) -- 2,244,875 (820,736) 1,756,952 (443,931) Change in unrealized gain (loss) 10,975 -- 439,716 485,944 2,422,324 (140,626) -------- -------- ---------- --------- ---------- ---------- Net realized and unrealized gain (loss) (66,370) -- 2,684,591 (334,792) 4,179,276 (584,557) -------- -------- ---------- --------- ---------- ---------- Net increase (decrease) in net assets from operations $435,225 $655,692 $2,713,495 $ 18,777 $3,732,277 $ 278,671 ======== ======== ========== ========= ========== ==========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-8 SEPARATE ACCOUNT VA-K STATEMENTS OF OPERATIONS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 2007
DELAWARE VIP DELAWARE DELAWARE INTERNATIONAL DELAWARE VIP VIP DELAWARE DELAWARE VALUE VIP SELECT SMALL VIP VIP EQUITY REIT GROWTH CAP VALUE TREND U.S. GROWTH SERIES SERIES SERIES SERIES SERIES SERIES ------------- ----------- ---------- ----------- ---------- ----------- INVESTMENT INCOME: Dividends $ 669,267 $ 109,007 $ -- $ 173,512 $ -- $ -- EXPENSES: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Mortality and expense risk fees 363,170 97,430 165,252 404,333 392,239 79,826 Administrative expense fees 43,581 11,691 19,830 48,520 47,069 9,579 ------------ ----------- ---------- ----------- ---------- --------- Total expenses 406,751 109,121 185,082 452,853 439,308 89,405 ------------ ----------- ---------- ----------- ---------- --------- Total expenses 406,751 109,121 185,082 452,853 439,308 89,405 ------------ ----------- ---------- ----------- ---------- --------- Net investment income (loss) 262,516 (114) (185,082) (279,341) (439,308) (89,405) ------------ ----------- ---------- ----------- ---------- --------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Realized gain distributions from portfolio sponsor 11,887,395 1,631,429 -- 2,756,568 223,436 -- Net realized gain (loss) from sales of investments 910,092 595,250 (332,469) 4,105,836 2,589,718 (184,586) ------------ ----------- ---------- ----------- ---------- --------- Net realized gain (loss) 12,797,487 2,226,679 (332,469) 6,862,404 2,813,154 (184,586) Change in unrealized gain (loss) (11,633,698) (3,345,116) 1,547,781 (8,588,552) 619,988 940,848 ------------ ----------- ---------- ----------- ---------- --------- Net realized and unrealized gain (loss) 1,163,789 (1,118,437) 1,215,312 (1,726,148) 3,433,142 756,262 ------------ ----------- ---------- ----------- ---------- --------- Net increase (decrease) in net assets from operations $ 1,426,305 $(1,118,551) $1,030,230 $(2,005,489) $2,993,834 $ 666,857 ============ =========== ========== =========== ========== =========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-9 SEPARATE ACCOUNT VA-K STATEMENTS OF OPERATIONS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 2007
FT VIP FRANKLIN FT VIP FT VIP FT VIP PIONEER PIONEER SMALL-MID CAP MUTUAL TEMPLETON TEMPLETON EMERGING MID CAP DELAWARE GROWTH SHARES FOREIGN GROWTH MARKETS VALUE VIP SECURITIES SECURITIES SECURITIES SECURITIES VCT VCT VALUE FUND FUND FUND FUND PORTFOLIO PORTFOLIO SERIES CLASS 2 CLASS 2 CLASS 2 CLASS 2 CLASS II CLASS II ------------ -------------- ---------- ---------- ---------- ---------- ---------- INVESTMENT INCOME: Dividends $ 1,412,038 $ -- $ 174,238 $102,783 $ 68,579 $ 12,153 $ 38,715 EXPENSES: Delaware Golden Medallion, Delaware Medallion I, Delaware Medallion II and Delaware Medallion III : Mortality and expense risk fees 1,033,190 37,361 152,038 65,383 64,405 46,030 83,624 Administrative expense fees 123,983 4,483 18,244 7,846 7,728 5,524 10,035 ------------ -------- ---------- -------- --------- ---------- --------- Total expenses 1,157,173 41,844 170,282 73,229 72,133 51,554 93,659 ------------ -------- ---------- -------- --------- ---------- --------- Total expenses 1,157,173 41,844 170,282 73,229 72,133 51,554 93,659 ------------ -------- ---------- -------- --------- ---------- --------- Net investment income (loss) 254,865 (41,844) 3,956 29,554 (3,554) (39,401) (54,944) ------------ -------- ---------- -------- --------- ---------- --------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Realized gain distributions from portfolio sponsor 2,228,730 213,785 426,590 234,436 218,813 361,931 691,792 Net realized gain (loss) from sales of investments 8,041,757 204,448 779,436 459,124 428,664 420,115 131,512 ------------ -------- ---------- -------- --------- ---------- --------- Net realized gain (loss) 10,270,487 418,233 1,206,026 693,560 647,477 782,046 823,304 Change in unrealized gain (loss) (12,808,472) (95,426) (921,582) (38,816) (572,407) 477,728 (475,026) ------------ -------- ---------- -------- --------- ---------- --------- Net realized and unrealized gain (loss) (2,537,985) 322,807 284,444 654,744 75,070 1,259,774 348,278 ------------ -------- ---------- -------- --------- ---------- --------- Net increase (decrease) in net assets from operations $ (2,283,120) $280,963 $ 288,400 $684,298 $ 71,516 $1,220,373 $ 293,334 ============ ======== ========== ======== ========= ========== =========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-10 SEPARATE ACCOUNT VA-K STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31,
AIM V.I. AIM V.I. AIM V.I. CAPITAL CORE HIGH APPRECIATION FUND EQUITY FUND YIELD FUND SERIES I SHARES SERIES I SHARES SERIES I SHARES ---------------------- ------------------------ ---------------------- 2007 2006 2007 2006 2007 2006 ---------- ---------- ----------- ----------- ---------- ---------- INCREASE (DECREASE) IN NET ASSETS: FROM OPERATIONS: Net investment income (loss) $ (41,165) $ (45,328) $ (23,746) $ 13,877 $ 71,698 $ 119,616 Net realized gain (loss) (156,112) (161,010) 22,124 (201,752) 8,848 7,208 Change in unrealized gain (loss) 501,911 380,839 449,786 1,156,910 (76,344) 22,443 ---------- ---------- ----------- ----------- ---------- ---------- Net increase (decrease) in net assets from operations 304,634 174,501 448,164 969,035 4,202 149,267 ---------- ---------- ----------- ----------- ---------- ---------- FROM CONTRACT TRANSACTIONS: Net purchase payments 6,045 8,772 6,106 19,097 194 4,571 Withdrawals (261,449) (401,774) (985,750) (1,041,282) (233,199) (256,568) Contract benefits (113,154) (76,119) (386,734) (205,980) (32,121) (30,448) Contract charges (3,026) (3,157) (11,388) (12,350) (1,092) (1,205) Transfers between sub-accounts (including Separate Account GPA), net (606,725) 95,859 (405,186) (254,063) (185,337) 168,704 Other transfers from (to) the General Account 4,447 50 (1,225) (3,471) (2) 8,462 ---------- ---------- ----------- ----------- ---------- ---------- Net increase (decrease) in net assets from contract transactions (973,862) (376,369) (1,784,177) (1,498,049) (451,557) (106,484) ---------- ---------- ----------- ----------- ---------- ---------- Net increase (decrease) in net assets (669,228) (201,868) (1,336,013) (529,014) (447,355) 42,783 NET ASSETS: Beginning of year 3,294,220 3,496,088 7,486,542 8,015,556 1,729,624 1,686,841 ---------- ---------- ----------- ----------- ---------- ---------- End of year $2,624,992 $3,294,220 $ 6,150,529 $ 7,486,542 $1,282,269 $1,729,624 ========== ========== =========== =========== ========== ==========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-11 SEPARATE ACCOUNT VA-K STATEMENTS OF CHANGES IN NET ASSETS (Continued) FOR THE YEARS ENDED DECEMBER 31,
ALGER AIM V.I. ALGER AMERICAN INTERNATIONAL AMERICAN MIDCAP GROWTH FUND LEVERAGED ALLCAP GROWTH SERIES I SHARES PORTFOLIO CLASS O PORTFOLIO CLASS O ---------------------- ------------------------ ------------------------ 2007 2006 2007 2006 2007 2006 ---------- ---------- ----------- ----------- ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: FROM OPERATIONS: Net investment income (loss) $ (54,861) $ (19,451) $ (68,565) $ (66,100) $ (100,499) $ (102,740) Net realized gain (loss) 535,449 295,562 519,782 114,639 1,126,884 1,083,990 Change in unrealized gain (loss) 175,610 829,679 885,420 726,728 829,314 (365,565) ---------- ---------- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets from operations 656,198 1,105,790 1,336,637 775,267 1,855,699 615,685 ---------- ---------- ----------- ----------- ----------- ----------- FROM CONTRACT TRANSACTIONS: Net purchase payments 21,063 4,347 2,417 2,239 34,797 14,387 Withdrawals (872,380) (821,162) (1,162,027) (779,388) (1,203,458) (1,266,861) Contract benefits (231,845) (112,627) (188,532) (373,916) (417,566) (212,999) Contract charges (4,848) (4,423) (7,382) (6,721) (10,175) (9,672) Transfers between sub-accounts (including Separate Account GPA), net 634,169 388,941 115,139 52,956 12,560 (59,028) Other transfers from (to) the General Account 5,365 113,748 2,641 5,269 5,885 11,373 ---------- ---------- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets from contract transactions (448,476) (431,176) (1,237,744) (1,099,561) (1,577,957) (1,522,800) ---------- ---------- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets 207,722 674,614 98,893 (324,294) 277,742 (907,115) NET ASSETS: Beginning of year 5,074,715 4,400,101 4,816,602 5,140,896 6,919,921 7,827,036 ---------- ---------- ----------- ----------- ----------- ----------- End of year $5,282,437 $5,074,715 $ 4,915,495 $ 4,816,602 $ 7,197,663 $ 6,919,921 ========== ========== =========== =========== =========== ===========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-12 SEPARATE ACCOUNT VA-K STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
ALGER AMERICAN ALLIANCE- ALLIANCE- SMALL BERNSTEIN VPS BERNSTEIN VPS CAPITALIZATION GLOBAL TECHNOLOGY GROWTH AND INCOME PORTFOLIO CLASS O PORTFOLIO CLASS B PORTFOLIO CLASS B ---------------------- ---------------------- ------------------------ 2007 2006 2007 2006 2007 2006 ---------- ---------- ---------- ---------- ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: FROM OPERATIONS: Net investment income (loss) $ (25,979) $ (21,230) $ (35,452) $ (38,827) $ (40,268) $ (54,772) Net realized gain (loss) 180,515 95,697 131,901 12,405 1,919,580 1,661,188 Change in unrealized gain (loss) 99,567 165,680 326,240 203,417 (1,172,922) 1,427,890 ---------- ---------- ---------- ---------- ----------- ----------- Net increase (decrease) in net assets from operations 254,103 240,147 422,689 176,995 706,390 3,034,306 ---------- ---------- ---------- ---------- ----------- ----------- FROM CONTRACT TRANSACTIONS: Net purchase payments 1,104 6,644 16,248 11,323 62,079 38,527 Withdrawals (198,555) (216,493) (253,533) (276,092) (2,933,921) (2,577,174) Contract benefits (9,162) (66,525) (182,794) (44,967) (1,118,447) (704,319) Contract charges (2,272) (1,744) (2,895) (2,950) (25,268) (25,571) Transfers between sub-accounts (including Separate Account GPA), net 362,662 289,784 (150,798) (97,371) (989,088) 118,069 Other transfers from (to) the General Account (180) 28,293 2,018 (1,410) 21,684 (42,738) ---------- ---------- ---------- ---------- ----------- ----------- Net increase (decrease) in net assets from contract transactions 153,597 39,959 (571,754) (411,467) (4,982,961) (3,193,206) ---------- ---------- ---------- ---------- ----------- ----------- Net increase (decrease) in net assets 407,700 280,106 (149,065) (234,472) (4,276,571) (158,900) NET ASSETS: Beginning of year 1,613,269 1,333,163 2,686,601 2,921,073 21,790,419 21,949,319 ---------- ---------- ---------- ---------- ----------- ----------- End of year $2,020,969 $1,613,269 $2,537,536 $2,686,601 $17,513,848 $21,790,419 ========== ========== ========== ========== =========== ===========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-13 SEPARATE ACCOUNT VA-K STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
ALLIANCE- ALLIANCE- DELAWARE BERNSTEIN VPS BERNSTEIN VPS VIP GROWTH LARGE CAP GROWTH BALANCED PORTFOLIO CLASS B PORTFOLIO CLASS B SERIES ----------------------- ------------------------ ------------------------ 2007 2006 2007 2006 2007 2006 ---------- ----------- ----------- ----------- ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: FROM OPERATIONS: Net investment income (loss) $ (45,588) $ (57,263) $ (93,144) $ (102,587) $ 613,095 $ 571,748 Net realized gain (loss) 82,455 171 (73,474) (257,797) (119,626) (915,720) Change in unrealized gain (loss) 296,447 (71,812) 912,256 165,643 (638,530) 4,913,742 ---------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets from operations 333,314 (128,904) 745,638 (194,741) (145,061) 4,569,770 ---------- ----------- ----------- ----------- ----------- ----------- FROM CONTRACT TRANSACTIONS: Net purchase payments 33,481 2,776 12,240 8,448 57,228 84,183 Withdrawals (585,186) (462,052) (767,790) (634,900) (6,224,588) (6,026,187) Contract benefits (203,352) (185,611) (298,191) (314,478) (2,290,938) (1,797,441) Contract charges (3,782) (5,520) (6,950) (7,486) (15,679) (14,383) Transfers between sub-accounts (including Separate Account GPA), net (97,062) (212,401) (39,195) (46,602) 581,568 907,915 Other transfers from (to) the General Account 4,571 (9,961) 9,603 45,564 182,079 (56,947) ---------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets from contract transactions (851,330) (872,769) (1,090,283) (949,454) (7,710,330) (6,902,860) ---------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets (518,016) (1,001,673) (344,645) (1,144,195) (7,855,391) (2,333,090) NET ASSETS: Beginning of year 3,518,291 4,519,964 6,807,943 7,952,138 33,476,039 35,809,129 ---------- ----------- ----------- ----------- ----------- ----------- End of year $3,000,275 $ 3,518,291 $ 6,463,298 $ 6,807,943 $25,620,648 $33,476,039 ========== =========== =========== =========== =========== ===========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-14 SEPARATE ACCOUNT VA-K STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
DELAWARE DELAWARE DELAWARE VIP VIP VIP CAPITAL RESERVES CASH RESERVE EMERGING MARKETS SERIES SERIES SERIES ------------------------ ------------------------- ------------------------ 2007 2006 2007 2006 2007 2006 ----------- ----------- ------------ ----------- ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: FROM OPERATIONS: Net investment income (loss) $ 501,595 $ 581,460 $ 655,692 $ 612,275 $ 28,904 $ (6,985) Net realized gain (loss) (77,345) (77,546) -- -- 2,244,875 1,833,623 Change in unrealized gain (loss) 10,975 69,213 -- -- 439,716 131,166 ----------- ----------- ------------ ----------- ----------- ----------- Net increase (decrease) in net assets from operations 435,225 573,127 655,692 612,275 2,713,495 1,957,804 ----------- ----------- ------------ ----------- ----------- ----------- FROM CONTRACT TRANSACTIONS: Net purchase payments 25,820 23,564 126,876 13,811 8,714 14,002 Withdrawals (2,622,567) (4,119,062) (13,927,811) (9,457,919) (1,667,363) (1,836,804) Contract benefits (1,673,474) (843,958) (1,816,463) (1,568,438) (447,196) (112,358) Contract charges (14,967) (18,937) (14,813) (13,462) (5,454) (5,929) Transfers between sub-accounts (including Separate Account GPA), net (152,935) (69,205) 13,580,274 6,816,668 (391,949) (530,430) Other transfers from (to) the General Account 30,639 91,831 1,003,194 1,226,151 77,983 (120,589) ----------- ----------- ------------ ----------- ----------- ----------- Net increase (decrease) in net assets from contract transactions (4,407,484) (4,935,767) (1,048,743) (2,983,189) (2,425,265) (2,592,108) ----------- ----------- ------------ ----------- ----------- ----------- Net increase (decrease) in net assets (3,972,259) (4,362,640) (393,051) (2,370,914) 288,230 (634,304) NET ASSETS: Beginning of year 16,839,009 21,201,649 19,630,175 22,001,089 8,670,497 9,304,801 ----------- ----------- ------------ ----------- ----------- ----------- End of year $12,866,750 $16,839,009 $ 19,237,124 $19,630,175 $ 8,958,727 $ 8,670,497 =========== =========== ============ =========== =========== ===========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-15 SEPARATE ACCOUNT VA-K STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
DELAWARE DELAWARE DELAWARE VIP VIP VIP GLOBAL BOND GROWTH OPPORTUNITIES HIGH YIELD SERIES (a) SERIES SERIES ------------------------- --------------------------- ------------------------- 2007 2006 2007 2006 2007 2006 ----------- ----------- ------------ ------------ ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: FROM OPERATIONS: Net investment income (loss) $ 353,569 $ 37,154 $ (446,999) $ (542,693) $ 863,228 $ 1,052,566 Net realized gain (loss) (820,736) (91,265) 1,756,952 434,770 (443,931) (814,919) Change in unrealized gain (loss) 485,944 147,027 2,422,324 2,025,946 (140,626) 1,643,334 ----------- ----------- ------------ ------------ ----------- ----------- Net increase (decrease) in net assets from operations 18,777 92,916 3,732,277 1,918,023 278,671 1,880,981 ----------- ----------- ------------ ------------ ----------- ----------- FROM CONTRACT TRANSACTIONS: Net purchase payments 63 1,944 73,760 80,193 23,503 34,200 Withdrawals (255,448) (1,179,321) (7,814,386) (6,822,791) (3,706,408) (4,015,000) Contract benefits (14,012) (227,003) (1,551,294) (1,291,288) (450,980) (584,123) Contract charges (824) (6,018) (17,685) (19,694) (8,277) (9,466) Transfers between sub-accounts (including Separate Account GPA), net (4,309,013) (611,987) (2,028,287) (1,960,082) (294,801) (286,857) Other transfers from (to) the General Account 460 (5,628) 138,759 (99,485) 62,638 (312,785) ----------- ----------- ------------ ------------ ----------- ----------- Net increase (decrease) in net assets from contract transactions (4,578,774) (2,028,013) (11,199,133) (10,113,147) (4,374,325) (5,174,031) ----------- ----------- ------------ ------------ ----------- ----------- Net increase (decrease) in net assets (4,559,997) (1,935,097) (7,466,856) (8,195,124) (4,095,654) (3,293,050) NET ASSETS: Beginning of year 4,559,997 6,495,094 34,776,020 42,971,144 16,829,667 20,122,717 ----------- ----------- ------------ ------------ ----------- ----------- End of year $ -- $ 4,559,997 $ 27,309,164 $ 34,776,020 $12,734,013 $16,829,667 =========== =========== ============ ============ =========== ===========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-16 SEPARATE ACCOUNT VA-K STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
DELAWARE VIP DELAWARE DELAWARE INTERNATIONAL VIP VIP VALUE EQUITY REIT SELECT GROWTH SERIES SERIES SERIES -------------------------- ------------------------- ------------------------- 2007 2006 2007 2006 2007 2006 ------------ ----------- ----------- ----------- ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: FROM OPERATIONS: Net investment income (loss) $ 262,516 $ 488,257 $ (114) $ 46,205 $ (185,082) $ (223,891) Net realized gain (loss) 12,797,487 4,643,344 2,226,679 1,567,848 (332,469) (691,782) Change in unrealized gain (loss) (11,633,698) 1,101,572 (3,345,116) 796,847 1,547,781 926,607 ------------ ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets from operations 1,426,305 6,233,173 (1,118,551) 2,410,900 1,030,230 10,934 ------------ ----------- ----------- ----------- ----------- ----------- FROM CONTRACT TRANSACTIONS: Net purchase payments 73,680 59,424 8,691 19,152 29,191 34,696 Withdrawals (7,713,073) (6,915,247) (1,284,185) (1,568,046) (1,682,197) (2,038,625) Contract benefits (892,572) (1,055,941) (197,081) (353,720) (876,473) (538,354) Contract charges (18,707) (16,162) (10,472) (11,776) (14,246) (16,108) Transfers between sub-accounts (including Separate Account GPA), net (911,425) 508,787 (579,582) (475,826) (1,027,057) (1,089,174) Other transfers from (to) the General Account 119,224 15,458 2,107 (9,863) 55,951 (6,181) ------------ ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets from contract transactions (9,342,873) (7,403,681) (2,060,522) (2,400,079) (3,514,831) (3,653,746) ------------ ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets (7,916,568) (1,170,508) (3,179,073) 10,821 (2,484,601) (3,642,812) NET ASSETS: Beginning of year 31,883,781 33,054,289 8,906,067 8,895,246 14,437,836 18,080,648 ------------ ----------- ----------- ----------- ----------- ----------- End of year $ 23,967,213 $31,883,781 $ 5,726,994 $ 8,906,067 $11,953,235 $14,437,836 ============ =========== =========== =========== =========== ===========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-17 SEPARATE ACCOUNT VA-K STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
DELAWARE DELAWARE DELAWARE VIP VIP VIP SMALL CAP VALUE TREND U.S. GROWTH SERIES SERIES SERIES --------------------------- -------------------------- ------------------------- 2007 2006 2007 2006 2007 2006 ------------ ------------ ------------ ----------- ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: FROM OPERATIONS: Net investment income (loss) $ (279,341) $ (471,039) $ (439,308) $ (538,086) $ (89,405) $ (102,619) Net realized gain (loss) 6,862,404 7,932,465 2,813,154 1,368,152 (184,586) (292,351) Change in unrealized gain (loss) (8,588,552) (1,798,409) 619,988 1,432,617 940,848 439,111 ------------ ------------ ------------ ----------- ----------- ----------- Net increase (decrease) in net assets from operations (2,005,489) 5,663,017 2,993,834 2,262,683 666,857 44,141 ------------ ------------ ------------ ----------- ----------- ----------- FROM CONTRACT TRANSACTIONS: Net purchase payments 83,662 56,856 96,341 99,002 11,717 19,406 Withdrawals (7,603,833) (8,671,073) (7,170,361) (5,937,169) (1,142,479) (668,520) Contract benefits (1,188,108) (1,065,598) (1,355,821) (1,307,629) (210,952) (306,103) Contract charges (21,433) (24,877) (23,788) (26,741) (7,510) (8,518) Transfers between sub-accounts (including Separate Account GPA), net (2,216,508) (2,080,731) (2,960,859) (2,586,053) (509,934) (104,591) Other transfers from (to) the General Account 197,398 (252,409) 152,787 (8,880) 9,247 23,664 ------------ ------------ ------------ ----------- ----------- ----------- Net increase (decrease) in net assets from contract transactions (10,748,822) (12,037,832) (11,261,701) (9,767,470) (1,849,911) (1,044,662) ------------ ------------ ------------ ----------- ----------- ----------- Net increase (decrease) in net assets (12,754,311) (6,374,815) (8,267,867) (7,504,787) (1,183,054) (1,000,521) NET ASSETS: Beginning of year 37,336,571 43,711,386 34,708,102 42,212,889 6,989,926 7,990,447 ------------ ------------ ------------ ----------- ----------- ----------- End of year $ 24,582,260 $ 37,336,571 $ 26,440,235 $34,708,102 $ 5,806,872 $ 6,989,926 ============ ============ ============ =========== =========== ===========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-18 SEPARATE ACCOUNT VA-K STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
FT VIP FRANKLIN FT VIP DELAWARE SMALL-MID CAP MUTUAL VIP GROWTH SHARES VALUE SECURITIES SECURITIES SERIES FUND CLASS 2 FUND CLASS 2 -------------------------- ---------------------- ------------------------ 2007 2006 2007 2006 2007 2006 ------------ ------------ ---------- ---------- ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: FROM OPERATIONS: Net investment income (loss) $ 254,865 $ 272,282 $ (41,844) $ (46,246) $ 3,956 $ (13,186) Net realized gain (loss) 10,270,487 8,155,238 418,233 169,297 1,206,026 888,598 Change in unrealized gain (loss) (12,808,472) 10,754,550 (95,426) 109,012 (921,582) 932,765 ------------ ------------ ---------- ---------- ----------- ----------- Net increase (decrease) in net assets from operations (2,283,120) 19,182,070 280,963 232,063 288,400 1,808,177 ------------ ------------ ---------- ---------- ----------- ----------- FROM CONTRACT TRANSACTIONS: Net purchase payments 211,742 169,943 4,060 30,469 57,653 84,892 Withdrawals (18,125,916) (20,398,138) (305,580) (537,625) (1,773,813) (1,438,151) Contract benefits (4,700,596) (4,293,002) (235,338) (124,491) (450,480) (241,783) Contract charges (41,843) (43,306) (3,465) (4,065) (13,677) (12,916) Transfers between sub-accounts (including Separate Account GPA), net (4,152,527) (1,430,696) (71,963) 55,810 699,027 929,932 Other transfers from (to) the General Account 466,737 (71,126) 35,424 (20,313) 51,441 4,746 Net increase (decrease) in net assets from ------------ ------------ ---------- ---------- ----------- ----------- contract transactions (26,342,403) (26,066,325) (576,862) (600,215) (1,429,849) (673,280) ------------ ------------ ---------- ---------- ----------- ----------- Net increase (decrease) in net assets (28,625,523) (6,884,255) (295,899) (368,152) (1,141,449) 1,134,897 NET ASSETS: Beginning of year 94,605,272 101,489,527 3,020,265 3,388,417 12,155,914 11,021,017 ------------ ------------ ---------- ---------- ----------- ----------- End of year $ 65,979,749 $ 94,605,272 $2,724,366 $3,020,265 $11,014,465 $12,155,914 ============ ============ ========== ========== =========== ===========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-19 SEPARATE ACCOUNT VA-K STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
PIONEER FT VIP FT VIP EMERGING TEMPLETON TEMPLETON MARKETS FOREIGN GROWTH VCT SECURITIES SECURITIES PORTFOLIO FUND CLASS 2 FUND CLASS 2 CLASS II ---------------------- ------------------------ ---------------------- 2007 2006 2007 2006 2007 2006 ---------- ---------- ----------- ----------- ---------- ---------- INCREASE (DECREASE) IN NET ASSETS: FROM OPERATIONS: Net investment income (loss) $ 29,554 $ (7,633) $ (3,554) $ (2,180) $ (39,401) $ (33,382) Net realized gain (loss) 693,560 249,924 647,477 646,236 782,046 634,893 Change in unrealized gain (loss) (38,816) 636,342 (572,407) 348,806 477,728 276,143 ---------- ---------- ----------- ----------- ---------- ---------- Net increase (decrease) in net assets from operations 684,298 878,633 71,516 992,862 1,220,373 877,654 ---------- ---------- ----------- ----------- ---------- ---------- FROM CONTRACT TRANSACTIONS: Net purchase payments 8,483 12,359 11,122 27,230 2,341 4,368 Withdrawals (828,031) (753,411) (1,027,095) (1,037,491) (423,882) (565,575) Contract benefits (466,301) (321,077) (114,838) (239,363) (145,723) (65,894) Contract charges (6,664) (6,505) (5,715) (5,910) (4,422) (3,915) Transfers between sub-accounts (including Separate Account GPA), net 290,152 568,410 100,997 8,738 313,247 357,852 Other transfers from (to) the General Account 42,160 (9,597) 38,884 49,434 261 1,634 ---------- ---------- ----------- ----------- ---------- ---------- Net increase (decrease) in net assets from contract transactions (960,201) (509,821) (996,645) (1,197,362) (258,178) (271,530) ---------- ---------- ----------- ----------- ---------- ---------- Net increase (decrease) in net assets (275,903) 368,812 (925,129) (204,500) 962,195 606,124 NET ASSETS: Beginning of year 5,150,618 4,781,806 5,288,229 5,492,729 3,235,321 2,629,197 ---------- ---------- ----------- ----------- ---------- ---------- End of year $4,874,715 $5,150,618 $ 4,363,100 $ 5,288,229 $4,197,516 $3,235,321 ========== ========== =========== =========== ========== ==========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-20 SEPARATE ACCOUNT VA-K STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
PIONEER MID CAP VALUE VCT PORTFOLIO CLASS II ------------------------ 2007 2006 ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: FROM OPERATIONS: Net investment income (loss) $ (54,944) $ (105,237) Net realized gain (loss) 823,304 2,264,026 Change in unrealized gain (loss) (475,026) (1,413,607) ----------- ----------- Net increase (decrease) in net assets from operations 293,334 745,182 ----------- ----------- FROM CONTRACT TRANSACTIONS: Net purchase payments 14,235 16,247 Withdrawals (940,246) (769,651) Contract benefits (230,172) (252,033) Contract charges (7,817) (9,160) Transfers between sub-accounts (including Separate Account GPA), net 17,980 (1,200,543) Other transfers from (to) the General Account 37,970 (77,133) ----------- ----------- Net increase (decrease) in net assets from contract transactions (1,108,050) (2,292,273) ----------- ----------- Net increase (decrease) in net assets (814,716) (1,547,091) NET ASSETS: Beginning of year 6,717,488 8,264,579 ----------- ----------- End of year $ 5,902,772 $ 6,717,488 =========== ===========
(a) Fund liquidation The accompanying notes are an integral part of these financial statements. SA-21 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION Separate Account VA-K (the "Separate Account"), which funds the Delaware Golden Medallion and Delaware Medallion I, Delaware Medallion II, and Delaware Medallion III variable annuity contracts (the "Delaware Contracts"), in addition to the Commonwealth Annuity Advantage, Directed Advisory Solutions, ExecAnnuity Plus, Commonwealth Annuity Immediate Advantage, Commonwealth Annuity Premier Choice, and Commonwealth Annuity Value Generation variable annuity contracts, is a separate investment account of Commonwealth Annuity and Life Insurance Company ("Commonwealth Annuity"), established on November 1, 1990 for the purpose of separating from the general assets of Commonwealth Annuity those assets used to fund the variable portion of certain variable annuity contracts (the "Contracts") issued by Commonwealth Annuity. Prior to September 1, 2006, Commonwealth Annuity was Allmerica Financial Life Insurance and Annuity Company. Prior to December 30, 2005 ("the Closing Date") Commonwealth Annuity was a wholly owned subsidiary of The Hanover Insurance Group, Inc. ("THG"). Prior to December 1, 2005 THG was named Allmerica Financial Corporation ("AFC"). On the Closing Date THG sold Commonwealth Annuity and its closed block of variable annuity and variable life business ("the Transaction") to The Goldman Sachs Group, Inc. ("Goldman Sachs"). Under applicable insurance law, the assets and liabilities of the Separate Account are clearly identified and distinguished from the other assets and liabilities of Commonwealth Annuity. The Separate Account cannot be charged with liabilities arising out of any other business of Commonwealth Annuity. Commonwealth Annuity's General Account is subject to the claims of creditors. The Separate Account is registered as a unit investment trust under the Investment Company Act of 1940, as amended (the "1940 Act"). Thirty Sub-Accounts are currently offered by the Separate Account under the Delaware contracts, all of which had activity during the year. One Sub-Account had activity during the year, but no balance as of December 31, 2007 due to a fund liquidation. Each Sub-Account invests exclusively in one of the Funds ("Underlying Funds") that are part of the following fund groups: AIM Variable Insurance Funds The Alger American Fund AllianceBernstein Variable Products Series Fund, Inc. Delaware VIP Trust Franklin Templeton Variable Insurance Products Trust Pioneer Variable Contracts Trust The fund groups listed above are open-end, diversified management investment companies registered under the 1940 Act. Pursuant to separate Agreements and Plans of Reorganization approved by each participating Portfolio's Board and by shareholders of the applicable Closed Funds, the following Underlying Funds were merged after the close of business on the dates shown. The mergers were structured as a transfer of all assets of the Closed Funds to the Surviving Funds in exchange for assumption of all liabilities of the Closed Funds by the Surviving Funds and for the issuance and delivery to the Closed Funds Merger Shares equal in aggregate value to the net value of the assets transferred to the Surviving Funds. The effects of the merger are reflected in the Transfers between Sub-Accounts line in the Statement of Changes in Net Assets.
DATE PRIOR FUND NEW FUND ------------- ------------------------------- ---------------------------------------------- March 21,2007 Delaware VIP Global Bond Series Delaware VIP Cash Reserve Series (Liquidation)
SA-22 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates at the date of the financial statements. Actual results could differ from those estimates. The following is a summary of significant accounting policies followed by the Separate Account in the preparation of its financial statements. INVESTMENTS - Security transactions are recorded as of the trade date. Investments held by the Sub-Accounts are stated at the net asset value per share of the Underlying Funds. Realized investment gains and losses are determined using the average cost method. Dividend income and capital gain distributions are recorded on the ex-distribution date and are reinvested in additional shares of the Underlying Funds at net asset value. Investment income receivable represents dividends receivable by, but not yet reinvested in, the Underlying Funds. FINANCIAL INSTRUMENTS - Commonwealth Annuity adopted Statement of Financial Accounting Standards No. 157, "Fair Value Measurements," ("SFAS No. 157") as of the beginning of 2007. SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Under SFAS No. 157, fair value measurements are not adjusted for transaction costs. SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The effect of adopting SFAS No. 157 was not material to Commonwealth Annuity's financial position or results of operations. The three levels of the fair value hierarchy under SFAS No. 157 are described below: Basis of Fair Value Measurement Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2 Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The open-ended mutual funds in the Separate Account produce a daily NAV that is validated with a sufficient level of observable activity to support classification of the fair value measurement as level 1. SA-23 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ANNUITIZED CONTRACTS - Net assets allocated to contracts in the payout phase ("Annuity Reserves") are computed according to either the 1983A or Annuity 2000 mortality tables. The assumed investment return is 3.5 percent. The mortality risk is fully borne by Commonwealth Annuity and may result in greater amounts being transferred into the Separate Account by Commonwealth Annuity to cover greater longevity of annuitants than expected. Conversely, if amounts allocated exceed amounts required, transfers may be made to Commonwealth Annuity. STATEMENTS OF CHANGES IN NET ASSETS - Contract Owners may allocate their Contract Values to variable investment options in the Separate Account, the Fixed Account and the Guaranteed Period Account. The Fixed Account is a part of Commonwealth Annuity's General Account that guarantees principal and a fixed minimum interest rate. The Guaranteed Period Account is included in Separate Account GPA, a non-registered separate account offered by Commonwealth Annuity, which offers fixed rates of interest for specified periods. Net Purchase Payments represent payments under the Contracts (excluding amounts allocated to the Fixed and Guaranteed Period Accounts) reduced by applicable deductions, charges, and state premium taxes. Contract Charges are deductions from Contract Values for optional rider benefits and annual contract fees. Contract benefits are payments made to Contract Owners and beneficiaries under the terms of the Contracts. Transfers between Sub-Accounts (including Separate Account GPA), net, are amounts that Contract Owners have directed to be moved among variable Sub-Accounts and the Guaranteed Period Account. Other transfers from (to) the General Account include certain transfers from and to contracts in the annuitization phase, reserve adjustments, and withdrawal charges. FINANCIAL HIGHLIGHTS - Statement of Position 03-5 "FINANCIAL HIGHLIGHTS OF SEPARATE ACCOUNTS: An Amendment to the Audit and Accounting Guide AUDITS OF INVESTMENT COMPANIES" was effective for fiscal years ending after December 15, 2003. This resulted in additional disclosures as detailed in Note 6, Financial Highlights. FEDERAL INCOME TAXES - The operations of the Separate Account are included in the federal income tax return of Commonwealth Annuity, which is taxed as a life insurance company under Subchapter L of the Internal Revenue Code ("IRC"). Under the current provisions of the IRC, Commonwealth Annuity does not expect to incur federal income taxes on the earnings or realized capital gains attributable to the Separate Account. Based on this, no Federal income tax provision is required. Commonwealth Annuity will review periodically the status of this policy during the year in the event of changes in the tax law. A charge may be made in future years for any federal income taxes that would be attributable to the Contracts. Under the provisions of Section 817(h) of the IRC, a variable annuity contract will not be treated as an annuity contract for federal income tax purposes for any period for which the investments of the segregated asset account on which the contract is based are not adequately diversified. The IRC provides that the "adequately diversified" requirement may be met if the underlying investments satisfy either a statutory safe harbor test or diversification requirements set forth in regulations issued by the Secretary of the Treasury. The Internal Revenue Service has issued regulations under Section 817(h) of the IRC. Commonwealth Annuity believes that the Separate Account satisfies the current requirements of the regulations, and it intends that it will continue to meet such requirements. NOTE 3 - EXPENSES AND RELATED PARTY TRANSACTIONS Commonwealth Annuity makes a daily charge against the net assets of each Sub-Account to compensate for certain mortality and expense risks it has assumed. If the charge for mortality and expense risks isn't sufficient to cover actual mortality experience and expenses, Commonwealth Annuity will absorb the losses. If costs are less than the amounts charged, the difference will be a profit to Commonwealth Annuity. Commonwealth Annuity also makes a daily administrative charge against the net assets of each Sub-Account. Both of these charges are imposed during the accumulation and annuity payout phase. A contract fee may be deducted from the contract value annually during the accumulation phase and upon full surrender of the Contract, if the accumulated value is below certain levels. This fee is currently waived for certain types of contracts, and, where permitted by law, for contracts whose owner or annuitant has certain affiliations with Commonwealth Annuity, or has certain family members with such an affiliation. When contract value has been allocated to more than one investment option, Contract Deductions are made from each on a pro-rata basis. Subject to state availability, Commonwealth Annuity offers a number of optional riders. A separate monthly charge is made for each rider. SA-24 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - EXPENSES AND RELATED PARTY TRANSACTIONS (CONTINUED) The annual rates of Mortality and Expense Risk Fees, Administrative Expense Fees, Optional Rider Fees, and the maximum dollar amount of the Contract Fee for the year ended are displayed in the table below. VA-K DELAWARE
DELAWARE GOLDEN MEDALLION DELAWARE MEDALLION I,II,III Variable Account Deductions: Mortality and Expense Risk (Annual Rate) 1.25% 1.25% Administrative Expense (Annual Rate) 0.15% 0.15% Contract Deductions: Rider Fees (Annual Rate): 0.15%-0.35% 0.15%-0.25% Annual Contract Fee (Maximum) $35 $30
A surrender charge may be deducted from the accumulated value of the Contract in the case of surrender or partial redemption of the Contract, or at the time annuity payments begin. The amount charged is determined by the product, the length of time the Contract has been in force, the category of accumulated value surrendered or redeemed, the time elapsed since the amount surrendered or redeemed was credited to the Contract, and whether the Contract Owner or annuitant are included in certain classes exempt from these charges. The maximum charge will not exceed 8.5% of the amount surrendered or redeemed. Some states and municipalities impose premium taxes, which currently range up to 3.5%, on variable annuity contracts. The disclosures above include charges currently assessed to the Contract Owner. There are certain other charges that may be assessed in future periods, at the discretion of Commonwealth Annuity, in accordance with Contract terms. Detailed descriptions of all fees and charges are available in the product prospectuses. SA-25 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - CONTRACT OWNER TRANSACTIONS Transactions from Contract Owners were as follows:
DELAWARE GOLDEN MEDALLION, DELAWARE MEDALLION I, DELAWARE MEDALLION II AND DELAWARE MEDALLION III YEAR ENDED DECEMBER 31, 2007 2006 ------------------------ ------------------------ UNITS AMOUNT UNITS AMOUNT ---------- ----------- ---------- ----------- AIM V.I. Capital Appreciation Fund Series I Shares Issuance of Units 403,123 $ 212,282 535,350 $ 227,193 Redemption of Units (2,229,084) (1,186,144) (1,315,857) (603,562) ---------- ----------- ---------- ----------- Net increase (decrease) (1,825,961) $ (973,862) (780,507) $ (376,369) ========== =========== ========== =========== AIM V.I. Core Equity Fund Series I Shares Issuance of Units 697,373 $ 533,540 304,733 $ 154,849 Redemption of Units (3,075,980) (2,317,717) (2,551,193) (1,652,898) ---------- ----------- ---------- ----------- Net increase (decrease) (2,378,607) $(1,784,177) (2,246,460) $(1,498,049) ========== =========== ========== =========== AIM V.I. High Yield Fund Series I Shares Issuance of Units 239,902 $ 266,517 316,945 $ 304,903 Redemption of Units (647,244) (718,074) (419,593) (411,387) ---------- ----------- ---------- ----------- Net increase (decrease) (407,342) $ (451,557) (102,648) $ (106,484) ========== =========== ========== =========== AIM V.I. International Growth Fund Series I Shares Issuance of Units 1,107,940 $ 1,359,922 870,104 $ 850,512 Redemption of Units (1,463,679) (1,808,398) (1,299,784) (1,281,688) ---------- ----------- ---------- ----------- Net increase (decrease) (355,739) $ (448,476) (429,680) $ (431,176) ========== =========== ========== =========== Alger American Leveraged AllCap Portfolio Class O Issuance of Units 1,031,749 $ 896,355 526,307 $ 360,140 Redemption of Units (2,457,839) (2,134,099) (2,143,994) (1,459,701) ---------- ----------- ---------- ----------- Net increase (decrease) (1,426,090) $(1,237,744) (1,617,687) $(1,099,561) ========== =========== ========== =========== Alger American MidCap Growth Portfolio Class O Issuance of Units 526,460 $ 697,529 437,464 $ 415,648 Redemption of Units (1,705,814) (2,275,486) (1,796,556) (1,938,448) ---------- ----------- ---------- ----------- Net increase (decrease) (1,179,354) $(1,577,957) (1,359,092) $(1,522,800) ========== =========== ========== =========== Alger American Small Capitalization Portfolio Class O Issuance of Units 830,505 $ 759,570 554,202 $ 419,208 Redemption of Units (669,118) (605,973) (511,564) (379,249) ---------- ----------- ---------- ----------- Net increase (decrease) 161,387 $ 153,597 42,638 $ 39,959 ========== =========== ========== =========== AllianceBernstein VPS Global Technology Portfolio Class B Issuance of Units 578,501 $ 284,398 310,781 $ 122,937 Redemption of Units (1,813,230) (856,152) (1,305,311) (534,404) ---------- ----------- ---------- ----------- Net increase (decrease) (1,234,729) $ (571,754) (994,530) $ (411,467) ========== =========== ========== =========== AllianceBernstein VPS Growth and Income Portfolio Class B Issuance of Units 659,505 $ 943,517 1,250,718 $ 1,488,849 Redemption of Units (4,163,337) (5,926,478) (3,798,212) (4,682,055) ---------- ----------- ---------- ----------- Net increase (decrease) (3,503,832) $(4,982,961) (2,547,494) $(3,193,206) ========== =========== ========== ===========
(a) Fund liquidation SA-26 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - CONTRACT OWNER TRANSACTIONS (CONTINUED)
DELAWARE GOLDEN MEDALLION, DELAWARE MEDALLION I, DELAWARE MEDALLION II AND DELAWARE MEDALLION III (CONTINUED) YEAR ENDED DECEMBER 31, 2007 2006 -------------------------- ------------------------- UNITS AMOUNT UNITS AMOUNT ----------- ------------ ---------- ------------ AllianceBernstein VPS Growth Portfolio Class B Issuance of Units 590,580 $ 442,750 861,916 $ 406,622 Redemption of Units (1,763,622) (1,294,080) (2,129,124) (1,279,391) ----------- ------------ ---------- ------------ Net increase (decrease) (1,173,042) $ (851,330) (1,267,207) $ (872,769) =========== ============ ========== ============ AllianceBernstein VPS Large Cap Growth Portfolio Class B Issuance of Units 836,299 $ 574,671 1,258,043 $ 769,719 Redemption of Units (2,487,093) (1,664,954) (2,820,158) (1,719,173) ----------- ------------ ---------- ------------ Net increase (decrease) (1,650,794) $ (1,090,283) (1,562,115) $ (949,454) =========== ============ ========== ============ Delaware VIP Balanced Series Issuance of Units 1,272,898 $ 2,875,208 1,032,746 $ 2,097,408 Redemption of Units (4,702,632) (10,585,538) (4,344,848) (9,000,268) ----------- ------------ ---------- ------------ Net increase (decrease) (3,429,734) $ (7,710,330) (3,312,102) $ (6,902,860) =========== ============ ========== ============ Delaware VIP Capital Reserves Series Issuance of Units 1,116,254 $ 2,044,398 766,671 $ 1,247,705 Redemption of Units (3,526,775) (6,451,882) (3,432,561) (6,183,472) ----------- ------------ ---------- ------------ Net increase (decrease) (2,410,521) $ (4,407,484) (2,665,889) $ (4,935,767) =========== ============ ========== ============ Delaware VIP Cash Reserves Series Issuance of Units 12,874,691 $ 17,923,913 7,277,329 $ 9,296,702 Redemption of Units (13,608,527) (18,972,656) (9,491,487) (12,279,891) ----------- ------------ ---------- ------------ Net increase (decrease) (733,836) $ (1,048,743) (2,214,158) $ (2,983,189) =========== ============ ========== ============ Delaware VIP Emerging Markets Series Issuance of Units 281,924 $ 798,381 369,031 $ 698,851 Redemption of Units (1,160,272) (3,223,646) (1,605,126) (3,290,959) ----------- ------------ ---------- ------------ Net increase (decrease) (878,348) $ (2,425,265) (1,236,094) $ (2,592,108) =========== ============ ========== ============ Delaware VIP Global Bond Series (a) Issuance of Units 35,644 $ 57,775 569,803 $ 469,279 Redemption of Units (2,844,612) (4,636,549) (1,829,986) (2,497,292) ----------- ------------ ---------- ------------ Net increase (decrease) (2,808,968) (4,578,774) (1,260,184) $ (2,028,013) =========== ============ ========== ============ Delaware VIP Growth Opportunities Series Issuance of Units 288,501 $ 1,082,298 240,242 $ 682,602 Redemption of Units (3,309,919) (12,281,431) (3,270,482) (10,795,749) ----------- ------------ ---------- ------------ Net increase (decrease) (3,021,418) $(11,199,133) (3,030,240) $(10,113,147) =========== ============ ========== ============ Delaware VIP High Yield Series Issuance of Units 705,896 $ 1,410,063 681,582 $ 1,184,412 Redemption of Units (2,894,379) (5,784,388) (3,493,425) (6,358,443) ----------- ------------ ---------- ------------ Net increase (decrease) (2,188,483) $ (4,374,325) (2,811,843) $ (5,174,031) =========== ============ ========== ============
(a) Fund liquidation SA-27 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - CONTRACT OWNER TRANSACTIONS (CONTINUED)
DELAWARE GOLDEN MEDALLION, DELAWARE MEDALLION I, DELAWARE MEDALLION II AND DELAWARE MEDALLION III (CONTINUED) YEAR ENDED DECEMBER 31, 2007 2006 -------------------------- ------------------------- UNITS AMOUNT UNITS AMOUNT ----------- ------------ ---------- ------------ Delaware VIP International Value Equity Series Issuance of Units 532,630 $ 1,951,604 771,230 $ 2,191,383 Redemption of Units (3,052,911) (11,294,477) (3,179,597) (9,595,064) ---------- ------------ ---------- ------------ Net increase (decrease) (2,520,281) $ (9,342,873) (2,408,367) $ (7,403,681) ========== ============ ========== ============ Delaware VIP REIT Series Issuance of Units 326,975 $ 939,335 229,283 $ 481,526 Redemption of Units (1,063,325) (2,999,857) (1,160,035) (2,881,605) ---------- ------------ ---------- ------------ Net increase (decrease) (736,350) $ (2,060,522) (930,751) $ (2,400,079) ========== ============ ========== ============ Delaware VIP Select Growth Series Issuance of Units 550,061 $ 539,094 661,843 $ 570,824 Redemption of Units (4,230,210) (4,053,925) (4,704,939) (4,224,570) ---------- ------------ ---------- ------------ Net increase (decrease) (3,680,149) $ (3,514,831) (4,043,096) $ (3,653,746) ========== ============ ========== ============ Delaware VIP Small Cap Value Series Issuance of Units 329,284 $ 1,397,074 266,751 $ 877,045 Redemption of Units (2,862,819) (12,145,896) (3,300,918) (12,914,877) ---------- ------------ ---------- ------------ Net increase (decrease) (2,533,535) $(10,748,822) (3,034,166) $(12,037,832) ========== ============ ========== ============ Delaware VIP Trend Series Issuance of Units 260,172 $ 949,584 299,535 $ 882,926 Redemption of Units (3,355,793) (12,211,285) (3,270,871) (10,650,396) ---------- ------------ ---------- ------------ Net increase (decrease) (3,095,621) $(11,261,701) (2,971,336) $ (9,767,470) ========== ============ ========== ============ Delaware VIP U.S. Growth Series Issuance of Units 419,231 $ 324,143 797,775 $ 570,678 Redemption of Units (2,808,980) (2,174,054) (2,253,679) (1,615,340) ---------- ------------ ---------- ------------ Net increase (decrease) (2,389,749) $ (1,849,911) (1,455,904) $ (1,044,662) ========== ============ ========== ============ Delaware VIP Value Series Issuance of Units 794,517 $ 3,198,692 796,543 $ 2,346,875 Redemption of Units (7,397,822) (29,541,095) (8,301,850) (28,413,200) ---------- ------------ ---------- ------------ Net increase (decrease) (6,603,305) $(26,342,403) (7,505,307) $(26,066,325) ========== ============ ========== ============ FT VIP Franklin Small-Mid Cap Growth Securities Fund Class 2 Issuance of Units 371,302 $ 325,324 372,856 $ 253,310 Redemption of Units (1,037,498) (902,186) (1,131,818) (853,525) ---------- ------------ ---------- ------------ Net increase (decrease) (666,196) $ (576,862) (758,962) $ (600,215) ========== ============ ========== ============ FT VIP Mutual Shares Securities Fund Class 2 Issuance of Units 1,165,836 $ 2,107,332 1,142,347 $ 1,713,673 Redemption of Units (1,941,452) (3,537,181) (1,546,050) (2,386,953) ---------- ------------ ---------- ------------ Net increase (decrease) (775,616) $ (1,429,849) (403,702) $ (673,280) ========== ============ ========== ============
(a) Fund liquidation SA-28 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - CONTRACT OWNER TRANSACTIONS (CONTINUED)
DELAWARE GOLDEN MEDALLION, DELAWARE MEDALLION I, DELAWARE MEDALLION II AND DELAWARE MEDALLION III (CONTINUED) YEAR ENDED DECEMBER 31, 2007 2006 ------------------------ ------------------------ UNITS AMOUNT UNITS AMOUNT ---------- ----------- ---------- ----------- FT VIP Templeton Foreign Securities Fund Class 2 Issuance of Units 650,263 $ 904,370 757,661 $ 868,465 Redemption of Units (1,295,880) (1,864,571) (1,185,359) (1,378,286) ---------- ----------- ---------- ----------- Net increase (decrease) (645,617) $ (960,201) (427,698) $ (509,821) ========== =========== ========== =========== FT VIP Templeton Growth Securities Fund Class 2 Issuance of Units 554,651 $ 890,473 642,702 $ 830,867 Redemption of Units (1,168,576) (1,887,118) (1,475,624) (2,028,229) ---------- ----------- ---------- ----------- Net increase (decrease) (613,925) $ (996,645) (832,922) $(1,197,362) ========== =========== ========== =========== Pioneer Emerging Markets VCT Portfolio Class II Issuance of Units 344,843 $ 812,942 475,304 $ 777,509 Redemption of Units (469,259) (1,071,120) (615,138) (1,049,039) ---------- ----------- ---------- ----------- Net increase (decrease) (124,416) $ (258,178) (139,834) $ (271,530) ========== =========== ========== =========== Pioneer Mid Cap Value VCT Portfolio Class II Issuance of Units 328,405 $ 696,373 261,770 $ 427,708 Redemption of Units (856,446) (1,804,423) (1,502,525) (2,719,981) ---------- ----------- ---------- ----------- Net increase (decrease) (528,041) $(1,108,050) (1,240,755) $(2,292,273) ========== =========== ========== ===========
(a) Fund liquidation SA-29 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 5 - PURCHASES AND SALES OF INVESTMENTS The cost of purchases and proceeds from sales of shares of the Underlying Funds of the Separate Account during the year ended December 31, 2007 were as follows:
INVESTMENT PORTFOLIO PURCHASES SALES ------------------------------------------------------------ ----------- ----------- AIM V.I. Capital Appreciation Fund Series I Shares $ 162,276 $ 1,177,302 AIM V.I. Core Equity Fund Series I Shares 437,947 2,245,871 AIM V.I. High Yield Fund Series I Shares 288,210 668,070 AIM V.I. International Growth Fund Series I Shares 1,042,135 1,545,473 Alger American Leveraged AllCap Portfolio Class O 608,646 1,914,956 Alger American MidCap Growth Portfolio Class O 1,428,295 2,150,827 Alger American Small Capitalization Portfolio Class O 700,922 573,303 AllianceBernstein VPS Global Technology Portfolio Class B 238,840 846,046 AllianceBernstein VPS Growth and Income Portfolio Class B 1,403,245 5,443,769 AllianceBernstein VPS Growth Portfolio Class B 297,642 1,194,560 AllianceBernstein VPS Large Cap Growth Portfolio Class B 372,414 1,555,840 Delaware VIP Balanced Series 2,332,296 9,429,531 Delaware VIP Capital Reserves Series 1,952,600 5,854,836 Delaware VIP Cash Reserves Series 12,985,065 13,384,651 Delaware VIP Emerging Markets Series 1,192,247 2,930,202 Delaware VIP Global Bond Series (a) 371,852 4,597,056 Delaware VIP Growth Opportunities Series 232,426 11,878,558 Delaware VIP High Yield Series 1,639,426 5,150,524 Delaware VIP International Value Equity Series 13,302,131 10,495,093 Delaware VIP REIT Series 2,347,775 2,776,981 Delaware VIP Select Growth Series 257,448 3,957,361 Delaware VIP Small Cap Value Series 3,032,762 11,304,356 Delaware VIP Trend Series 400,376 11,877,949 Delaware VIP U.S. Growth Series 164,823 2,104,139 Delaware VIP Value Series 3,915,760 27,774,570 FT VIP Franklin Small-Mid Cap Growth Securities Fund Class 2 460,924 865,847 FT VIP Mutual Shares Securities Fund Class 2 1,972,659 2,971,962 FT VIP Templeton Foreign Securities Fund Class 2 1,099,223 1,795,434 FT VIP Templeton Growth Securities Fund Class 2 971,149 1,752,535 Pioneer Emerging Markets VCT Portfolio Class II 1,084,946 1,020,593 Pioneer Mid Cap Value VCT Portfolio Class II 1,188,478 1,659,681
(a) Fund liquidation SA-30 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - FINANCIAL HIGHLIGHTS A summary of unit values, units outstanding, income and expense ratios and total return for each Sub-Account for the year ended December 31, 2007 is as follows:
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 -------------------------- ------------------------------ INVESTMENT NET INCOME EXPENSE TOTAL UNITS UNIT ASSETS RATIO RATIO RETURN (000s) VALUE ($) ($000s) (%) (1) (%) (2) (%) (3) ------ --------- ------- ---------- ------- ------- AIM V.I. CAPITAL APPRECIATION FUND SERIES I SHARES 2007 4,730 0.554962 2,625 N/A 1.40 10.45 2006 6,556 0.502474 3,294 0.06 1.40 5.44 2005 7,337 0.476533 3,496 N/A 1.40 5.97 2004 8,720 0.449669 3,921 N/A 1.40 6.71 2003 10,038 0.421389 4,230 N/A 1.40 29.41 AIM V.I. CORE EQUITY FUND SERIES I SHARES 2007 7,993 0.769479 6,151 1.06 1.40 6.60 2006 10,372 0.721823 7,487 1.59 1.40 13.63 2005 12,618 0.635239 8,016 0.80 1.40 4.17 2004 15,357 0.609786 9,364 0.42 1.40 4.29 2003 20,127 0.584683 11,768 0.30 1.40 23.33 AIM V.I. HIGH YIELD FUND SERIES I SHARES 2007 1,175 1.090884 1,282 6.14 1.40 -0.17 2006 1,583 1.092775 1,730 8.38 1.40 9.19 2005 1,685 1.000837 1,687 7.84 1.40 1.28 2004 1,914 0.988201 1,891 2.57 1.40 9.69 2003 2,574 0.900889 2,319 7.65 1.40 26.25 AIM V.I. INTERNATIONAL GROWTH FUND SERIES I SHARES 2007 4,105 1.286712 5,282 0.40 1.40 13.11 2006 4,461 1.137544 5,075 1.00 1.40 26.44 2005 4,891 0.899670 4,400 0.65 1.40 16.28 2004 5,594 0.773726 4,328 0.63 1.40 22.27 2003 6,026 0.632798 3,813 0.54 1.40 27.26 ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO CLASS O 2007 4,915 1.000157 4,915 N/A 1.40 31.67 2006 6,341 0.759619 4,817 N/A 1.40 17.59 2005 7,959 0.645963 5,141 N/A 1.40 12.84 2004 8,754 0.572444 5,011 N/A 1.40 6.67 2003 9,381 0.536634 5,034 N/A 1.40 32.84
(a) Fund liquidation SA-31 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 -------------------------- ------------------------------ INVESTMENT NET INCOME EXPENSE TOTAL UNITS UNIT ASSETS RATIO RATIO RETURN (000s) VALUE ($) ($000s) (%) (1) (%) (2) (%) (3) ------ --------- ------- ----------- ------- ------- ALGER AMERICAN MIDCAP GROWTH PORTFOLIO CLASS O 2007 4,772 1.508177 7,198 N/A 1.40 29.72 2006 5,952 1.162664 6,920 N/A 1.40 8.60 2005 7,311 1.070602 7,827 N/A 1.40 8.29 2004 8,839 0.988662 8,739 N/A 1.40 11.46 2003 9,783 0.886997 8,677 N/A 1.40 45.73 ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO CLASS O 2007 2,090 0.966842 2,021 N/A 1.40 15.60 2006 1,929 0.836371 1,613 N/A 1.40 18.34 2005 1,886 0.706778 1,333 N/A 1.40 15.25 2004 1,986 0.613283 1,218 N/A 1.40 14.94 2003 2,149 0.533574 1,146 N/A 1.40 40.35 ALLIANCEBERNSTEIN VPS GLOBAL TECHNOLOGY PORTFOLIO CLASS B 2007 4,908 0.517059 2,538 N/A 1.40 18.21 2006 6,142 0.437389 2,687 N/A 1.40 6.86 2005 7,137 0.409292 2,921 N/A 1.40 2.20 2004 9,738 0.400493 3,900 N/A 1.40 3.62 2003 11,310 0.386518 4,372 N/A 1.40 41.78 ALLIANCEBERNSTEIN VPS GROWTH AND INCOME PORTFOLIO CLASS B 2007 12,234 1.431522 17,514 1.21 1.40 3.39 2006 15,738 1.384551 21,790 1.15 1.40 15.35 2005 18,286 1.200351 21,949 1.27 1.40 3.13 2004 22,195 1.163889 25,832 0.74 1.40 9.67 2003 25,414 1.061313 26,972 0.85 1.40 30.34 ALLIANCEBERNSTEIN VPS GROWTH PORTFOLIO CLASS B 2007 3,876 0.774125 3,000 N/A 1.40 11.09 2006 5,049 0.696865 3,518 N/A 1.40 -2.62 2005 6,316 0.715643 4,520 N/A 1.40 10.07 2004 6,982 0.650152 4,539 N/A 1.40 12.93 2003 6,639 0.575722 3,822 N/A 1.40 32.82
(a) Fund liquidation SA-32 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 -------------------------- ------------------------------ INVESTMENT NET INCOME EXPENSE TOTAL UNITS UNIT ASSETS RATIO RATIO RETURN (000s) VALUE ($) ($000s) (%) (1) (%) (2) (%) (3) ------ --------- ------- ---------- ------- ------- ALLIANCEBERNSTEIN VPS LARGE CAP GROWTH PORTFOLIO CLASS B 2007 9,173 0.704621 6,463 N/A 1.40 12.02 2006 10,824 0.628995 6,808 N/A 1.40 -2.03 2005 12,386 0.642045 7,952 N/A 1.40 13.24 2004 15,025 0.566999 8,519 N/A 1.40 6.83 2003 19,247 0.530768 10,216 N/A 1.40 21.64 DELAWARE VIP BALANCED SERIES 2007 11,722 2.185733 25,621 3.47 1.40 -1.07 2006 15,151 2.209421 33,476 3.09 1.40 14.57 2005 18,570 1.928380 35,809 2.41 1.40 2.23 2004 22,624 1.886322 42,677 2.19 1.40 4.36 2003 27,725 1.807471 50,112 3.09 1.40 17.54 DELAWARE VIP CAPITAL RESERVES SERIES 2007 6,926 1.857618 12,867 4.80 1.40 3.00 2006 9,337 1.803471 16,839 4.47 1.40 3.12 2005 12,123 1.748918 21,202 4.12 1.40 0.37 2004 13,988 1.742485 24,373 4.41 1.40 2.21 2003 19,026 1.704789 32,436 4.02 1.40 3.17 DELAWARE VIP CASH RESERVES SERIES 2007 13,564 1.418294 19,237 4.66 1.40 3.30 2006 14,297 1.372989 19,630 4.40 1.40 3.04 2005 16,512 1.332466 22,001 2.62 1.40 1.26 2004 21,315 1.315933 28,049 0.82 1.40 -0.55 2003 30,325 1.323152 40,124 0.61 1.40 -0.80 DELAWARE VIP EMERGING MARKETS SERIES 2007 2,702 3.315816 8,959 1.74 1.40 36.91 2006 3,580 2.421815 8,670 1.33 1.40 25.36 2005 4,816 1.931956 9,305 0.34 1.40 25.70 2004 5,992 1.536921 9,209 3.01 1.40 31.61 2003 7,491 1.167828 8,749 2.62 1.40 68.16
(a) Fund liquidation SA-33 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 -------------------------- ------------------------------ INVESTMENT NET INCOME EXPENSE TOTAL UNITS UNIT ASSETS RATIO RATIO RETURN (000s) VALUE ($) ($000s) (%) (1) (%) (2) (%) (3) ------ --------- ------- ---------- ------- ------- DELAWARE VIP GLOBAL BOND SERIES (a) 2007 -- -- -- 8.85 1.40 N/A 2006 2,809 1.623371 4,560 2.08 1.40 1.70 2005 4,069 1.596179 6,495 15.47 1.40 -9.93 2004 4,430 1.772238 7,851 12.84 1.40 11.42 2003 5,711 1.590586 9,084 1.39 1.40 18.68 DELAWARE VIP GROWTH OPPORTUNITIES SERIES 2007 7,224 3.780501 27,309 N/A 1.40 11.37 2006 10,245 3.394403 34,776 N/A 1.40 4.87 2005 13,275 3.236913 42,971 N/A 1.40 9.84 2004 18,320 2.946820 53,987 N/A 1.40 10.90 2003 23,502 2.657214 62,450 N/A 1.40 39.08 DELAWARE VIP HIGH YIELD SERIES 2007 6,445 1.975711 12,734 7.21 1.40 1.36 2006 8,634 1.949285 16,830 7.20 1.40 10.87 2005 11,446 1.758117 20,123 7.04 1.40 2.14 2004 14,897 1.721361 25,643 6.36 1.40 12.65 2003 19,708 1.528122 30,116 7.24 1.40 26.94 DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES 2007 6,626 3.617092 23,967 2.32 1.40 3.76 2006 9,146 3.485945 31,884 2.95 1.40 21.86 2005 11,555 2.860669 33,054 1.62 1.40 11.30 2004 14,786 2.570323 38,005 2.77 1.40 20.08 2003 18,812 2.140449 40,266 2.52 1.40 41.43 DELAWARE VIP REIT SERIES 2007 2,304 2.485669 5,727 1.41 1.40 -15.14 2006 3,040 2.929285 8,906 1.93 1.40 30.77 2005 3,971 2.239992 8,895 1.98 1.40 5.67 2004 5,051 2.119810 10,708 2.11 1.40 29.54 2003 5,710 1.636411 9,344 2.57 1.40 32.15
(a) Fund liquidation SA-34 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 -------------------------- ------------------------------ INVESTMENT NET INCOME EXPENSE TOTAL UNITS UNIT ASSETS RATIO RATIO RETURN (000s) VALUE ($) ($000s) (%) (1) (%) (2) (%) (3) ------ --------- ------- ---------- ------- ------- DELAWARE VIP SELECT GROWTH SERIES 2007 12,035 0.993192 11,953 N/A 1.40 8.11 2006 15,715 0.918711 14,438 N/A 1.40 0.40 2005 19,758 0.915086 18,081 N/A 1.40 15.15 2004 25,157 0.794695 19,992 N/A 1.40 6.81 2003 30,396 0.744048 22,616 N/A 1.40 37.51 DELAWARE VIP SMALL CAP VALUE SERIES 2007 6,359 3.865814 24,582 0.54 1.40 -7.93 2006 8,892 4.198697 37,337 0.26 1.40 14.56 2005 11,927 3.665039 43,711 0.39 1.40 7.89 2004 15,826 3.397169 53,763 0.21 1.40 19.78 2003 20,733 2.836128 58,801 0.40 1.40 39.99 DELAWARE VIP TREND SERIES 2007 7,142 3.702159 26,440 N/A 1.40 9.20 2006 10,237 3.390303 34,708 N/A 1.40 6.09 2005 13,209 3.195817 42,213 N/A 1.40 4.38 2004 18,024 3.061835 55,187 N/A 1.40 11.03 2003 22,361 2.757695 61,665 N/A 1.40 33.21 DELAWARE VIP U.S. GROWTH SERIES 2007 7,113 0.816397 5,807 N/A 1.40 10.99 2006 9,503 0.735584 6,990 N/A 1.40 0.88 2005 10,958 0.729158 7,990 0.64 1.40 13.04 2004 14,803 0.645022 9,548 0.13 1.40 1.85 2003 17,918 0.633278 11,347 0.18 1.40 22.02 DELAWARE VIP VALUE SERIES 2007 17,596 3.749646 65,980 1.73 1.40 -4.09 2006 24,200 3.909379 94,605 1.70 1.40 22.36 2005 31,766 3.194885 101,490 1.83 1.40 4.54 2004 41,264 3.056026 126,103 1.67 1.40 13.32 2003 52,358 2.696757 141,197 1.83 1.40 26.50
(a) Fund liquidation SA-35 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 -------------------------- ------------------------------ INVESTMENT NET INCOME EXPENSE TOTAL UNITS UNIT ASSETS RATIO RATIO RETURN (000s) VALUE ($) ($000s) (%) (1) (%) (2) (%) (3) ------ --------- ------- ---------- ------- ------- FT VIP FRANKLIN SMALL-MID CAP GROWTH SECURITIES FUND CLASS 2 2007 3,085 0.883163 2,724 N/A 1.40 9.68 2006 3,751 0.805194 3,020 N/A 1.40 7.17 2005 4,510 0.751322 3,388 N/A 1.40 3.32 2004 5,656 0.727180 4,113 N/A 1.40 9.91 2003 6,276 0.661598 4,152 N/A 1.40 35.33 FT VIP MUTUAL SHARES SECURITIES FUND CLASS 2 2007 6,154 1.789871 11,014 1.44 1.40 2.03 2006 6,929 1.754254 12,156 1.30 1.40 16.72 2005 7,333 1.502915 11,021 0.91 1.40 9.01 2004 8,016 1.378735 11,052 0.78 1.40 11.06 2003 9,851 1.241486 12,230 1.04 1.40 23.40 FT VIP TEMPLETON FOREIGN SECURITIES FUND CLASS 2 2007 3,183 1.531533 4,875 1.98 1.40 13.84 2006 3,829 1.345330 5,151 1.25 1.40 19.75 2005 4,256 1.123488 4,782 1.19 1.40 8.63 2004 4,440 1.034272 4,592 1.10 1.40 16.87 2003 4,508 0.884977 3,989 1.74 1.40 30.36 FT VIP TEMPLETON GROWTH SECURITIES FUND CLASS 2 2007 2,752 1.585635 4,363 1.34 1.40 0.91 2006 3,366 1.571274 5,288 1.37 1.40 20.10 2005 4,198 1.308263 5,493 1.12 1.40 7.34 2004 4,386 1.218814 5,346 1.18 1.40 14.40 2003 4,155 1.065375 4,426 1.55 1.40 30.29 PIONEER EMERGING MARKETS VCT PORTFOLIO CLASS II 2007 1,506 2.787576 4,198 0.33 1.40 40.46 2006 1,630 1.984604 3,235 0.35 1.40 33.61 2005 1,770 1.485385 2,629 0.49 1.40 35.68 2004 1,799 1.094761 1,969 0.75 1.40 17.00 2003 1,633 0.935659 1,528 0.34 1.40 55.66
(a) Fund liquidation SA-36 SEPARATE ACCOUNT VA-K NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - FINANCIAL HIGHLIGHTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 -------------------------- ------------------------------ INVESTMENT NET INCOME EXPENSE TOTAL UNITS UNIT ASSETS RATIO RATIO RETURN (000s) VALUE ($) ($000s) (%) (1) (%) (2) (%) (3) ------ --------- ------- ---------- ------- ------- PIONEER MID CAP VALUE VCT PORTFOLIO CLASS II 2007 2,900 2.035270 5,903 0.58 1.40 3.87 2006 3,428 1.959433 6,717 N/A 1.40 10.70 2005 4,669 1.770082 8,265 0.21 1.40 6.14 2004 5,342 1.667756 8,908 0.28 1.40 20.07 2003 5,230 1.389026 7,264 0.24 1.40 35.17
(a) Fund liquidation (1) These amounts represent the dividends, excluding distributions of capital gains, received by the Sub-Account from the Underlying Fund, net of management fees assessed by the fund manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense charges, that result in direct reductions in the unit values. The recognition of investment income by the Sub-Account is affected by the timing of the declaration of dividends by the Underlying Fund in which the Sub-Accounts invest. (2) These ratios represent the annualized contract expenses of the Separate Account, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the Underlying Fund are excluded. (3) These amounts represent the total return for the periods indicated, including changes in the value of the Underlying Fund, and reflect deductions for all items included in the expense ratio. The total return does not include any expenses assessed through the redemption of units; inclusion of these expenses in the calculation would result in a reduction in the total return presented. Investment options with a date notation indicate the effective date of that investment option in the variable account. The total return is calculated for the period indicated or from the effective date through the end of the reporting period. SA-37 PART C. OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (a) FINANCIAL STATEMENTS Financial Statements Included in Part A None Financial Statements for Commonwealth Annuity and Life Insurance Company (the "Company" and "Depositor") and Financial Statements for Separate Account VA-K of Commonwealth Annuity and Life Insurance Company Financial Statements Included in Part C None (b) EXHIBITS EXHIBIT 1 Vote of Board of Directors Authorizing Establishment of Registrant dated November 1, 1990 was previously filed on April 24, 1998 in Post-Effective Amendment No. 14, and is incorporated by reference herein. EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance Company may hold the assets of the Registrant NOT pursuant to a trust indenture or other such instrument. EXHIBIT 3 (a) Effective January 1, 2007, VeraVest will no longer serve as Underwriter. Underwriting and Administrative Services Agreement (VeraVest Investment, Inc.) was previously filed on April 24, 1998 in Post-Effective Amendment No. 14, and is incorporated by reference herein. (b) Wholesaling Agreement was previously filed on April 24, 1998 in Post-Effective Amendment No. 14, and is incorporated by reference herein. (c) Sales Agreements with Commission Schedule were previously filed on April 24, 1998 in Post-Effective Amendment No. 14, and are incorporated by reference herein. (d) General Agent's Agreement was previously filed on April 24, 1998 in Post-Effective Amendment No. 14, and is incorporated by reference herein. (e) Career Agent Agreement was previously filed on April 24, 1998 in Post-Effective Amendment No. 14, and is incorporated by reference herein. (f) Registered Representative's Agreement was previously filed on April 24, 1998 in Post-Effective Amendment No. 14, and is incorporated by reference herein. (g) Effective January 22, 2008, SDI will no longer serve as Underwriter. Amendment No. 1 dated November 22, 2006 to the Distribution Agreement between the Company and Security Distributors, Inc. dated November 22, 2006 was previously filed in April of 2008 in Registrant's Post-Effective Amendment No. 29 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. Distribution Agreement between the Company and Security Distributors, Inc. was previously filed on February 28, 2007 in Post-Effective Amendment No. 32 (File Nos. 33-47216, 811-6632) and is incorporated by reference herein. (h) Effective January 22, 2008, SDI will no longer service as Underwriter. Form of Service Agreement with broker-dealers was previously filed on February 28, 2007 in Post-Effective Amendment No. 32 (File Nos. 33-47216, 811-6632) and is incorporated by reference herein. (i) Form of Service Agreement by and between the Epoch Securities, Inc., Commonwealth Annuity and Life Insurance Company, First Allmerica Financial Life Insurance Company and the "Broker-Dealer" was previously filed in April of 2008 in Registrant's Post-Effective Amendment No. 29 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. (j) Underwriting and Administrative Service Agreement dated January 22, 2008 between and among Commonwealth Annuity and Life Insurance Company and Epoch Securities, Inc. was previously filed in April of 2008 in Registrant's Post-Effective Amendment No. 29 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. (k) Shares Services Agreement date January 22, 2008 between Commonwealth Annuity and Life Insurance Company and Epoch Securities, Inc. was previously filed in April of 2008 in Registrant's Post-Effective Amendment No. 29 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. EXHIBIT 4 Guaranteed Minimum Annuity Payout Rider was previously filed on October 15, 1998 in Post-Effective Amendment No. 15, and is incorporated by reference herein. Specimen Generic Contract Form A was previously filed on April 24, 1998 in Post-Effective Amendment No. 14, and is incorporated by reference herein. Generic Contract Form B was previously filed on May 1, 1996 in Post-Effective Amendment No. 11, and is incorporated by reference herein. EXHIBIT 5 Specimen Generic Application Form was previously filed on April 24, 1998 in Post-Effective Amendment No. 14 and is incorporated by reference herein. Generic Policy Application Form B was previously filed on May 1, 1996 in Post-Effective Amendment No. 11, and is incorporated by reference herein. EXHIBIT 6 Articles of Organization and Bylaws, as amended of the Company, effective as of September 1, 2006 were previously filed on February 28, 2007 in Post-Effective Amendment No. 32 (File Nos. 33-47216, 811-6632) and are incorporated by reference herein. Bylaws, as amended of the Company, effective as of December 30, 2005 was previously filed on April 28, 2006 in Registrant's Post-Effective Amendment No. 27 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. The Depositor's Articles of Incorporation, as amended effective October 1, 1995 to reflect its new name, was previously filed on September 28, 1995 in Post-Effective Amendment No. 9, and is incorporated by reference herein. EXHIBIT 7 (a) Variable Annuity GMDB Reinsurance Agreement between Allmerica Financial Life Insurance and Annuity Company and Ace Tempest Life Reinsurance LTD dated December 1, 2002 was previously filed on February 12, 2003 in Post-Effective Amendment No. 10 (File Nos. 333-78245, 811-6632) and is incorporated by reference herein. (b) Variable Annuity GMDB Reinsurance Agreement between Allmerica Financial Life Insurance and Annuity Company and Ace Tempest Life Reinsurance LTD dated December 1, 2002 was previously filed on February 12, 2003 in Post-Effective Amendment No. 10 (File Nos. 333-78245, 811-6632) and is incorporated by reference herein. (c) Variable Annuity GMDB Reinsurance Agreement between Allmerica Financial Life Insurance and Annuity Company and RGA Reinsurance Company dated December 1, 2002 was previously filed on February 12, 2003 in Post-Effective Amendment No. 10 (File Nos. 333-78245, 811-6632) and is incorporated by reference herein. (d) Variable Annuity GMDB Reinsurance Agreement between Allmerica Financial Life Insurance and Annuity Company and RGA Reinsurance Company dated December 1, 2002 was previously filed on February 12, 2003 in Post-Effective Amendment No. 10 (File Nos. 333-78245, 811-6632) and is incorporated by reference herein. EXHIBIT 8 (a) Service Agreement dated March 1, 2001 between Boston Financial Data Services, Inc. and Allmerica Financial Life Insurance and Annuity Company for lockbox and mailroom services was previously filed on February 10, 2003 in Post-Effective Amendment No. 17 of Registration Statement No. 33-57792/811-7466, and is incorporated by reference herein. BFDS Agreements for lockbox and mailroom services were previously filed on April 24, 1998 in Post-Effective Amendment No. 14, and are incorporated by reference herein. (b) Directors' Powers of Attorney are filed herewith. (c) Third Party Agreement (TPA) between Security Benefit Life Insurance Co, Security Distributors, Inc and The Goldman Sachs Group, Inc. was previously filed on February 10, 2006 in Registrant's Post-Effective Amendment No. 27 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. (d) Administrative Services Agreement dated January 2, 2006 between the Company and Goldman Sachs Asset Management L.P. was previously filed on April 27, 2007 in Post-Effective Amendment No. 28 (File Nos. 33-39702, 811-6293) and is incorporated by reference herein. Form of Administrative Services Agreement dated January 2, 2006 between the Company and Goldman Sachs Variable Insurance Trust was previously filed on February 10, 2006 in Registrant's Post-Effective Amendment No. 27 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. (e) Work Assignment between Security Benefit Life Insurance Co, Security Distributors, Inc and the Company was previously filed on February 10, 2006 in Registrant's Post-Effective Amendment No. 27 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. (f) Transition Services Agreement dated December 30, 2005 between The Hanover Insurance Group, Inc., First Allmerica Financial Life Insurance Company, and Allmerica Financial Life Insurance and Annuity Company, and The Goldman Sachs Group, Inc. was previously filed on April 27, 2007 in Post-Effective Amendment No. 28 (File Nos. 33-39702, 811-6293) and is incorporated by reference herein. Form of Transition Services Agreement dated December 30, 2005 between The Hanover Insurance Group, Inc., First Allmerica Financial Life Insurance Company, and Allmerica Financial Life Insurance and Annuity Company, and The Goldman Sachs Group, Inc. was previously filed on February 10, 2006 in Registrant's Post-Effective Amendment No. 27 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. (g) Restructuring Agreement dated as of December 30, 2005 between The Hanover Insurance Group, Inc., Allmerica Financial Life Insurance and Annuity Company and First Allmerica Financial Life Insurance Company was previously filed on April 27, 2007 in Post-Effective Amendment No. 28 (File Nos. 33-39702, 811-6293) and is incorporated by reference herein. Form of Restructuring Agreement between First Allmerica Financial Life Insurance Company and Allmerica Financial Life Insurance and Annuity Company was previously filed on February 10, 2006 in Registrant's Post-Effective Amendment No. 27 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. EXHIBIT 9 Opinion of Counsel is filed herewith. EXHIBIT 10 Consent of Independent Registered Public Accounting Firm is filed herewith. EXHIBIT 11 None. EXHIBIT 12 None. EXHIBIT 13 Schedule for Computation of Performance Quotations was previously filed on February 26, 1993 in a post-effective amendment, and is incorporated by reference herein. EXHIBIT 14 Not Applicable. EXHIBIT 15 (a) Amendment dated May 1, 2001 to the Delaware Group Premium Fund Participation Agreement was previously filed on April 19, 2002 in Post-Effective Amendment No. 22 of Registration Statement No. 33-39702/811-6293, and is incorporated by reference herein. Form of Amendment dated May 1, 2001 to the Delaware Group Premium Fund Participation Agreement was previously filed on April 19, 2001 in Post-Effective Amendment No. 19 of Registration Statement No. 33-39702/811-6293, and is incorporated by reference herein. Form of Amendment to Delaware Participation Agreement was previously filed in December 2000 in Post-Effective Amendment No. 20 of Registration Statement No. 333-44830/811-6293, and is incorporated by reference herein. Participation Agreement with Delaware Group Premium Fund and Amendment were previously filed on April 24, 1998 in Post-Effective Amendment No. 14, and are incorporated by reference herein. (b) Amended and Restated Participation Agreement by and among AIM Variable Insurance Funds, Inc., A I M Distributors, Inc. and Commonwealth Annuity and Life Insurance Company dated July 31, 2007 was previously filed in April of 2008 in Registrant's Post-Effective Amendment No. 29 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. Amendment dated January 1, 2003 to the AIM Participation Agreement was previously filed on April 28, 2003 in Registrant's Post-Effective Amendment No. 23 (Registration Statement No. 33-39702/811-6293, and is incorporated by reference herein. Form of Amendment #7 dated May 1, 2002 to the AIM Participation Agreement was previously filed on April 19, 2002 in Registrant's Post-Effective Amendment No. 22 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. Form of Amendment #6 to the AIM Participation Agreement was previously filed on April 19, 2001 in Post-Effective Amendment No. 19 of Registration Statement No. 33-39702/811-6293, and is incorporated by reference herein. Form of Amendment to AIM Participation Agreement is filed herewith. Participation Agreement with AIM Variable Insurance Funds was previously filed on August 27, 1998 in Post-Effective Amendment No. 3 of Registration Statement No. 333-11377/811-7799, and is incorporated by reference herein. (c) Amendment dated June 1, 2002 with Alger was previously filed on April 28, 2003 in Registrant's Post-Effective Amendment No. 23 (Registration Statement No. 33-44830/811-6293), and is incorporated by reference herein. Amendment dated May 31, 2000 with Alger was previously filed in April 27, 2001 in Post-Effective Amendment No. 4 of Registration Statement No. 333-81281/811-6293, and is incorporated by reference herein. Amendment dated May 31, 2000 with Alger was previously filed in December 2000 in Post-Effective Amendment No. 4 of Registration Statement No. 333-81281/811-6293, and is incorporated by reference herein. Participation Agreement with Alger was previously filed in April 2000 in Post-Effective Amendment No. 7 of Registration Statement No. 333-09965/811-7767, and is incorporated by reference herein. (g) Amended And Restated Participation Agreement among Commonwealth Annuity and Life Insurance Company, AllianceBernstein L.P. and AllianceBernstein Investments, Inc. dated as of August 1, 2007 was previously filed in April of 2008 in Registrant's Post-Effective Amendment No. 29 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. Amendment dated May 1, 2002 to the Amended and Restated Participation Agreement with Alliance was previously filed on April 28, 2003 in Registrant's Post-Effective Amendment No. 23 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. Form of Amendment dated May 1, 2002 to the Amended and Restated Participation Agreement with Alliance was previously filed on April 19, 2002 in Post-Effective Amendment No. 22 of Registration Statement No. 33-39702/811-6293, and is incorporated by reference herein. Form of Amendment dated May 1, 2001 to the Amended and Restated Participation Agreement, Merger and Consolidated Agreement, and the Amended and Restated Participation Agreement with Alliance were previously filed on April 19, 2001 in Post-Effective Amendment No. 19 of Registration Statement No. 33-39702/811-6293, and is incorporated by reference herein. Form of Participation Agreement with Alliance was previously filed in December 2000 in Post-Effective Amendment No. 19 of Registration Statement No. 333-44830/811-6293, and is incorporated by reference herein. (h) Amendment No. 1 dated June 5, 2007 to Amended and Restated Participation Agreement between Franklin Templeton Variable Insurance Products Trust, Franklin/Templeton Distributors, Inc., and Commonwealth Annuity and Life Insurance Company was previously filed in April of 2008 in Registrant's Post-Effective Amendment No. 29 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. Form of Amended and Restated Participation Agreement dated September 25, 2006 with Franklin Templeton Variable Insurance Products Trust, Franklin/Templeton Distributors, Inc., and Commonwealth Annuity and Life Insurance Company was previously filed on April 27, 2007 in Post-Effective Amendment No. 28 (File Nos. 33-39702, 811-6293) and is incorporated by reference herein. Amendment dated May 1, 2002 to the Franklin Templeton Participation Agreement was previously filed on April 28, 2003 in Registrant's Post-Effective Amendment No. 23 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. Form of Amendment dated May 1, 2002 to the Franklin Templeton Participation Agreement was previously filed in April 19, 2002 in Post-Effective Amendment No. 22 of Registration Statement No. 33-39702/811-6293, and is incorporated by reference herein. Form of Amendment dated May 1, 2001 and the Franklin Templeton Participation Agreement dated March 1, 2000 was previously filed on April 19, 2001 in Post-Effective Amendment No. 19 of Registration Statement No. 33-39702/811-6293, and is incorporated by reference herein. Form of Participation Agreement with Franklin Templeton was previously filed in December 2000 in Post-Effective Amendment No. 19 of Registration Statement No. 333-44830/811-6293, and is incorporated by reference herein. (i) Amendment dated May 1, 2001 to the Pioneer Participation Agreement was previously filed in April 19, 2002 in Post-Effective Amendment No. 22 of Registration Statement No. 33-39702/811-6293, and is incorporated by reference herein. Amendment dated October 24, 2000 to the Pioneer Participation Agreement was previously filed on April 19, 2001 in Post-Effective Amendment No. 19 of Registration Statement No. 33-39702/811-6293, and is incorporated by reference herein. Form of Amendment to Pioneer Participation Agreement was previously filed in April 2000 in Post-Effective Amendment No. 14 of Registration Statement No. 33-85916/811-8848, and is incorporated by reference herein. Participation Agreement with Pioneer was previously filed on April 24, 1998 in Post-Effective Amendment No. 9 of Registration Statement No. 33-85916/811-8848, and is incorporated by reference herein. ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR The principal business address of most the following Directors and Officers* is: 85 Broad Street New York, NY 10004 The principal business address of the other following Directors and Officers is: 132 Turnpike Road, Suite 210 Southborough, MA 01772. DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY NAME POSITION WITH COMPANY ---------------------------- ------------------------------------------------ Allan S. Levine* Chairman of the Board Nicholas Helmuth von Moltke* Director and Senior Vice President J. William McMahon* Director Donald Mullen* Director Timothy J. O'Neill* Director Michael A. Reardon Director, President, and Chief Executive Officer Laura Bryant Vice President and Chief Operating Officer Manda J. D'Agata* Vice President and Treasurer Eleanor L. Kitzman Senior Vice President and Director of Regulatory Affairs Michael A. Pirrello Vice President and Chief Financial Officer Samuel Ramos* Vice President and Secretary Alan Akihiro Yamamura* Vice President and Chief Risk Officer Margot K. Wallin Vice President and Chief Compliance Officer ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT THE GOLDMAN SACHS GROUP, INC. ----------------------------- | THE GOLDMAN, SACHS GROUP, | | INC. | | (Delaware) | ----------------------------- | | ----------------------------------------------------------------------------------- --------------------- | | | | GOLDMAN, SACHS & |100%| |100% | 100% | CO. | (a)| --------------------- ----------------------- ---------------------------- | (New York) |----| | COLUMBIA CAPITAL | | COMMONWEALTH | | GS REHOLDINGS, INC. |----- --------------------- | | LIFE REINSURANCE | 100% | ANNUITY & LIFE | | (Delaware) | | | | COMPANY |------| |INSURANCE COMPANY(b) | ---------------------------- | | | (South Carolina) | | | (Massachusetts) | | | --------------------- | ----------------------- | | | 100% | ---------------------------- | | | | | LONGMORE CREDIT, LLC |100%| | ----------------------- | --------------------- | (Delaware) |----- | | CHARLESTON CAPITAL | |100%| ARROW REINSURANCE | ---------------------------- | --------------------- | | REINSURANCE, L.L.C. | |----| COMPANY LIMITED | | | GOLDMAN SACHS |100%| | (South Carolina) | | | (Bermuda) | | | ASSET MANAGEMENT, | (a)| ----------------------- | --------------------- ---------------------------- | | L.P. |----| | | LONGMORE CAPITAL, LLC |100%| | (Delaware) | | | --------------------- | (Delaware) |----- --------------------- | | | ARROW CAPITAL | ---------------------------- | | ----------------------- | |REINSURANCE COMPANY| | | | PEARL STREET |100%|100%| LIMITED | | ---------------------100%| | INSURANCE COMPANY |----|----| (Bermuda) | ---------------------------- | | GOLDMAN SACHS |(a) | | (Vermont) | | --------------------- | LONGMORE CREDIT |100%| | INTERNATIONAL |----| ----------------------- | | SERVICES, LLC |----- | (United Kingdom) | | ------------------------ | (Delaware) | --------------------- | | GOLDMAN SACHS | ---------------------------- ----------------------- |100%| RISK SERVICES L.L.C. | | GOLDMAN SACHS |100%|----| (Delaware) | | RISK BROKERS, INC. |----| ------------------------ | (Delaware) | | ----------------------- | ---------------------- ---------------------------- |100%| EASTPORT CAPITAL |100%| EPF FINANCIAL, LLC(c) | |----| CORP. |----| (Delaware) | ----------------------- | | (Delaware) | | | | GOLDMAN SACHS |100%| ---------------------- ---------------------------- | RISK ADVISORS, L.P. |----| | (Delaware) | | ---------------------- ----------------------- | | ARROW CORPORATE | | 25%| MEMBER HOLDINGS | |----| LLC LIMITED | | | (Delaware) | ---------------------- | ---------------------- | ARROW CORPORATE | | | 75% | MEMBER LIMITED | -------------------------------| (England) | ----------------------
(a) GS Group holds 100% of the equity interest in these subsidiaries through one or more intermediary holding companies (b) Allmerica Financial Life Insurance and Annuity Company was renamed Commonwealth Annuity and Life Insurance Company (c) Eastport Financial, L.L.C. was renamed EPF Financial, LLC
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- Arrow Syndicate 1910 Underwrites World property England 1 Arrow Corporate 100.00% catastrophe, Lyods mkt Member Limited NIHON HOTEL INVESTMENT TK To hold hotels in Japan. Japan 3 GOLDMAN SACHS GROUP, 39.47% INC. (THE GS STRATEGIC 50.13% INVESTMENTS JAPAN NIHON HOTEL 10.40% INVESTMENT CO.,LTD --------- 100.00% ELQ INVESTORS, LTD "Holding" company for distressed England 1 MTGLQ INVESTORS, L.P. 100.00% debt investments KANSAI REALTY CO., LTD. Astoria deal;Holding Real Estate. Japan 1 MG PARTNERS TK 100.00% PRIME EQUITY CO.,LTD. Astoria deal;Subsidiary of MG Japan 1 GOLDMAN SACHS REALTY 100.00% Partners;Real estate business JAPAN COR Ito Onsen Management Co. Flagged for New Onsen deal Japan 1 GOLDMAN SACHS REALTY 100.00% Ltd (Ebina);Management of Ryokan JAPAN COR (Japanese Hotel). GK Musashino Kaihatsu Flagged for Tohoku REO deal.Real Japan 1 MLQ INVESTORS, L.P. 100.00% Estate Kaike Onsen Hotel Mgmt Co Management of Ryokan.(Japannese Japan 1 GOLDMAN SACHS REALTY 100.00% Ltd Hotel);Flagged for Onsen deal. JAPAN COR GK Universal Hotel Purchasing loan;Flagged for Hotel Japan 1 AR Holdings GK 100.00% Management Universal Port Deal. GK Kitanomaru Purchasing Loans, Holding Real Japan 1 MLQ INVESTORS, L.P. 100.00% estates and Securities RIO NEGRO ASSESSORIA LTDA. (AMC Brazil) rendering of services BRAZIL 2 MTGLQ INVESTORS, L.P. 100.00% of collection, staff, restructuring and management of GS FINANCIAL SERVICES 0.00% assets L.P. --------- 100.00% ARCHON GEN-PAR, INC. 1% general partner of Archon Delaware 1 GOLDMAN SACHS GROUP, 100.00% Group, L.P. INC. (THE Goldman Sachs (France) 1% owner of Goldman Sachs Overseas Delaware 1 GOLDMAN SACHS GROUP, 100.00% Finance Finance, L.P.; formerly owned 2 INC. (THE Hong Kong companies which have since been liquidated. Non-regulated holding company. JADE DRAGON (MAURITIUS) 1) SPV for holding both India and Mauritius 1 TIGER STRATEGIC 100.00% LIMITE PRC investments. 2) Holding INVESTMENTS LT company for venture capital companies in India and PRC. Litton Cons & Corp LLC 100 % Subsidiary of GS Bank USA [-] 1 GOLDMAN SACHS BANK 100.00% (0247) and .01% owner of Litton (USA) INC Loan Servicing LP. Litton Mortgage Servicing 100 % Subsidiary of GS Bank USA Utah 1 GOLDMAN SACHS BANK 100.00% LLC (0247) and 99.99% owner of Litton (USA) INC Loan Servicing LP. ARES FINANCE S.R.L. A securitization vehicle Italy 1 GOLDMAN SACHS GROUP, 50.00% established under Italian law that INC. (THE holds sub-performing assets and has issued debt secured by these assets. KAKEGAWA HOLDINGS TK A trustor and Master Lessee of Japan 2 KAKEGAWA HOLDINGS 5.00% Kakegawa Grand Hotel. CO.,LTD GS FINANCIAL SERVICES 75.00% L.P. --------- 80.00% PNW, LLC A utilities supplier of energy and Delaware 1 SSIG SPF ONE LQ, LLC 100.00% energy-related products. GOLDMAN SACHS MITSUI AAA rated company established to Delaware 2 GSMMDPGP INC. 1.00% MARINE DR provide credit rating enhancement to derivative product trading. GOLDMAN SACHS 49.00% All trades to third parties are HOLDINGS (NETHE) back to back with affiliates. --------- 50.00% GS PRIME HOLDINGS LLC Acquired as part of the Linden Delaware 1 GOLDMAN SACHS GROUP, 100.00% Venture. INC. (THE LEAF GREEN TK Acquiring non performing loans and Japan 3 GOLDMAN SACHS GROUP, 5.11% realizing them. INC. (THE LEAF GREEN CO, LTD 5.00% GS Holdings Mauritius 45.51% Limited --------- 55.63% REAL ESTATE CREATION FUND Acquiring non performing loans and Japan 2 REC INVESTMENTS TK 85.00% TK realizing them.( Resona Deal ) REAL ESTATE CREATION 5.00% FUND CO., --------- 90.00% GS ASSET BACKED Acquisition and disposition of Delaware 1 GOLDMAN SACHS GROUP, 100.00% SECURITIES COR asset-backed securities INC. (THE THO B.V. Acquisition of an associate share Netherlands 1 ELQ INVESTORS, LTD 100.00% (45%) in Akfen, Turkish real estate entity. SSIG SPF ONE LQ, LLC Actively managed opportunity fund Delaware 1 MTGLQ INVESTORS, L.P. 100.00% which invests in distressed credit. GS COMM MORTGAGE CAPITAL, Acts as a general partner of Delaware 1 MLQ INVESTORS, L.P. 100.00% LLC. Archon Financial L.P. SLK INDEX SPECIALISTS LLC Acts as the AMEX specialist in New York 1 GS EXECUTION AND 100.00% index-based derivative products. CLEARING, L.P Broker Dealer; SEC File No. 8-44563 GS FUND MANAGEMENT S.A. Administration and management of Luxembourg 2 GOLDMAN SACHS 1.00% one or several mutual investment HOLDINGS (U.K.) funds or investment companies organised under the laws of GOLDMAN SACHS (UK) 99.00% Luxembourg. Management company L.L.C. for German Bond Fund. --------- 100.00% MORTGAGE ASSET MANAGEMENT Administrative services related to Delaware 1 GOLDMAN SACHS GROUP, 100.00% CORP issuance of collateralized INC. (THE mortgage obligations GS CALIC AFLIAC contains the variable Massachusetts 1 GOLDMAN SACHS GROUP, 100.00% annuity and variable universal INC. (THE life business acquired from Allmerica Financial Corp.AFLIAC contains the variable annuity and variable universal life business acquired from Allmerica Financial Corp.AFLIAC contains the variablea
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- MUNI TIC TOC SERIES TRUST Aggregation of multiple trusts United States 1 GOLDMAN, SACHS & CO. 100.00% CONS used in connection with the municipal tender option bond program (TIC TOC). GSTP LLC Aircraft ownership and leasing Delaware 1 GOLDMAN SACHS GROUP, 100.00% INC. (THE REMARK CAPITAL GROUP, LLC An AMSSG related entity that Delaware 1 MTGLQ INVESTORS, L.P. 75.00% manages and services portfolios of consumer auto loans. South Wind TK An ASSG related entity that holds Japan 4 GOLDMAN SACHS GROUP, 8.15% golf courses and related assets in INC. (THE Japan. GS STRATEGIC 10.00% INVESTMENTS JAPAN SOUTH WIND REALTY 5.00% FINANCE(CAYM SHIGA (DELAWARE) LLC 35.00% --------- 58.15% NIHON ENDEAVOR FUND TK An ASSG related entity that Japan 2 GOLDMAN SACHS GROUP, 55.04% invests in distressed loans INC. (THE NIHON ENDEAVOR FUND 5.10% CO., LTD --------- 60.14% LINDEN WOOD IIS TK An ASSG related entity that Cayman Islands 2 LINDEN WOOD IIS LTD 5.00% invests in distressed loans. GS FINANCIAL SERVICES 75.00% L.P. --------- 80.00% LINDEN WOOD TK An ASSG related entity that Japan 2 LINDEN WOOD, LTD 5.00% invests in distressed loans. GS FINANCIAL SERVICES 75.00% L.P. --------- 80.00% SOLAR WIND TK An ASSG related entity that Japan 2 SOLAR WIND, LTD 5.00% invests in distressed loans. KIRI (DELAWARE) LLC 75.00% --------- 80.00% REC INVESTMENTS TK An ASSG related entity that Japan 2 GS STRATEGIC 69.00% invests in loans. INVESTMENTS JAPAN REC INVESTMENTS CO., 5.00% LTD --------- 74.00% GAC PERSONAL TK An ASSG related entity that Japan 2 GAC PERSONAL CO. LTD 5.00% purchased residential loans from Chiyoda Life. GS FINANCIAL SERVICES 95.00% L.P. --------- 100.00% Slow Group Co.,Ltd. An insurance company for pets. Japan 1 JUPITER INVESTMENT 81.79% CO,. LTD. EPOCH SECURITIES INC An investment bank that uses Delaware 1 GOLDMAN SACHS GROUP, 100.00% sophisticated technology to INC. (THE connect to individual investors in the United States. Garden Capital Plaza SRL An investment hodling entity Barbados 2 GOLDMAN SACHS GROUP, 19.97% INC. (THE BAEKDU INVESTMENTS 30.00% LIMITED --------- 49.97% MINAMI AOYAMA KAIHATSU Aoyama-deal・Holding Real Japan 1 GOLDMAN SACHS REALTY 100.00% CO., LT Estate. JAPAN COR VANTAGE MARKET PLACE LLC As part of Goldman Sachs' Delaware 1 VANTAGE MARKETPLACE 100.00% independent research platform, HOLDINGS, Vantage Marketplace LLC's subject matter experts will consult with clients who have contracted the expert's services on specific questions/topics. GSEM (DEL) HOLDINGS, L.P. As part of the GSEM L.P. Delaware 2 GOLDMAN SACHS GLOBAL 25.00% restructuring, entity is being HOLDINGS formed as part of the holding company structure for GSEM L.P. GSEM DEL INC 75.00% --------- 100.00% GSEM BERMUDA HOLDINGS, As part of the GSEM L.P. Bermuda 2 GOLDMAN SACHS GLOBAL 1.00% L.P. restructuring, entity is being HOLDINGS formed as part of the holding company structure for GSEM L.P. GSEM (DEL) HOLDINGS, 99.00% L.P. --------- 100.00% GS INVESTMENT STRATEGIES, Asset Management Company Delaware 1 GOLDMAN SACHS GROUP, 100.00% LLC INC. (THE GS EURO INV GRP II LTD Asset owning subsidiary for GS England 1 GS EURO OPP FUND II LP 100.00% European Opportunities Fund II KANSAI REALTY TK ASSG entity engaged in real estate Japan 2 MG PARTNERS TK 99.00% activities in Japan. KANSAI REALTY CO., 1.00% LTD. --------- 100.00% NJLQ (IRELAND) LTD ASSG entity to hold the Jinro Ireland 1 GS FINANCIAL SERVICES 100.00% loan.Established to hold ASSG L.P. positions in Korean assets. JUPITER INVESTMENT CO,. ASSG Equity Position Japan 1 MLQ INVESTORS, L.P. 100.00% LTD. FJT (HK) LIMITED ASSG related entity holding a Hong Kong 2 GOLDMAN SACHS GROUP, 39.47% hotel property in China. INC. (THE GOLDMAN SACHS (ASIA) 60.53% FIN. HLDG --------- 100.00% Tamatsukuri Onsen Mgt Co. ASSG/REPIA Onsen deal.Managiment Japan 1 GOLDMAN SACHS REALTY 100.00% Ltd of Onsen ryokan( Japanese style JAPAN COR Hotel.) GK TAMATSUKURI ONSEN ASSG/REPIA Onsen deal.Managiment Japan 1 AR Holdings GK 100.00% KAIHATSU of Onsen ryokan( Japanese style Hotel.) MG PARTNERS CO LTD. Astoria dealReal estate business Japan 1 SOLAR WIND TK 100.00% BLUE DAISY TK Blue Daisy is a vehicle to invest Japan 1 BLUE DAISY CO.,LTD. 50.00% in recruit through its participation in the secondary shares acquired by Nochu. G.S. DO BRASIL BANCO Brazilian bank. BRAZIL 2 GOLDMAN SACHS GROUP, 99.90% MULTIPLO, INC. (THE GOLDMAN SACHS GLOBAL 0.10% HOLDINGS --------- 100.00% GS DO BRASIL CORRETORA Brazilian broker dealer entity [-] 2 G.S. DO BRASIL BANCO 99.99% that will enable GS to trade cash MULTIPLO, equities and listed options directly with the Brazilian GOLDMAN SACHS 0.01% exchange (BOVESPA). REPRESENTACOES L --------- 100.00% CIN MANAGEMENT LIMITED British Coal's pension fund England 1 GOLDMAN SACHS ASSET 100.00% manager (see Other Information) MGMT HOLDI GS EXECUTION AND Broker Dealer; SEC File No. New York 1 SPEAR, LEEDS & 100.00% CLEARING, L.P 8-00526; proprietary trading, KELLOGG LLC customer business clearing firm GOLDMAN, SACHS & CO. Broker/dealer engaging in New York 2 THE GOLDMAN, SACHS & 0.20% proprietary & agency transactions CO. L.L.C in fixed income, equity and currency markets; principal GOLDMAN SACHS GROUP, 99.80% provider of the Firm's investment INC. (THE banking services; primary dealer --------- effective 12/74; member NYSE since 100.00% 1/1/27.
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- GOLDMAN SACHS Broker/dealer which engages in England 2 GOLDMAN SACHS 99.00% INTERNATIONAL proprietary and agency HOLDINGS (U.K.) transactions in the fixed income, equity and currency market, GOLDMAN SACHS GROUP 1.00% provides investment banking HOLDINGS ( services in Europe; Rep. office in --------- Madrid; 4/3/98 Branches opened in 100.00% South Africa, Stockholm and Milan GOLDMAN SACHS (ASIA) Broker/dealer with dealing and Delaware 1 GS Holdings (Hong 100.00% L.L.C. underwriting business. Registered Kong) Ltd in HK with HK Coy Registry. Date of registration in HK 22nd July 1994.Licensed under the HK Securities and Futures Ordinance for the following regulated activities: Type 1 dealing in secur GS (INDIA) SECURITIES Broker/Dealer, merchant banking, India 1 GOLDMAN SACHS 100.00% PVT.LTD. provide financial services (MAURITIUS) L.L. MERCER ALLIED COMPANY L.P. Broker/Dealer. Part of Ayco Delaware 2 GS AYCO HOLDINGS LLC 1.00% acquisition. THE AYCO COMPANY L.P. 99.00% --------- 100.00% BRM Holdings LLC Business Records Management [-] 1 GSFS INVESTMENT I CORP 82.00% GOLDMAN SACHS Business tranferred to Goldman England 1 GOLDMAN SACHS 100.00% INTERNATIONAL FI Sachs International HOLDINGS (U.K.) J. ARON & COMPANY Business tranferred to J. Aron & England 2 GOLDMAN SACHS 50.00% (BULLION) Company (U.K.) HOLDINGS (U.K.) GOLDMAN SACHS GROUP 50.00% HOLDINGS ( --------- 100.00% GSTM LLC capital management Delaware 1 GOLDMAN SACHS GROUP, 100.00% INC. (THE AMC OF AMERICA LP Capital restructure. Delaware 2 MTGLQ INVESTORS, L.P. 99.00% AMC OF AMERICA LLC 1.00% --------- 100.00% Goldman, Sachs Gives gGmbH Charity Germany 1 GSCO BETEILIGUNGS GMBH 100.00% BEIJING GAO HUA Chinese entity engaged in People's 3 BEIJING GAO WANG 33.33% SECURITIES CL underwriting and proprietary Republic of VENTURE CCL trading of securities as well as China providing financial advisory BEIJING DE SHANG 33.33% services. VENTURE CCL BEIJING HOU FENG 33.33% VENTURE CCL --------- 100.00% GOLDMAN SACHS FUTURES PTE Clearing of futures and options Singapore 1 GOLDMAN SACHS FX 100.00% LTD contracts (SINGAPORE) P SunE Solar Fund I LLC Company founded to support the Delaware 1 GS SOLAR POWER I, LLC 100.00% installation of solar electric systems. GS CAP PARTNERS 2000 Consolidating employee fund. Delaware 1 GOLDMAN SACHS GROUP, 100.00% EMPLOY FU INC. (THE Kinbley Realty PTE Ltd. Consolidation of AEJ Entity. To Singapore 1 Dhoni Cayman Holding 100.00% acquire 48units which consists of Ltd apartments and townhouses in residential development in Singapore. FUKUOKA TOSHI KAIHATSU TK Consolidation of Japan Entity (REO Japan 3 GOLDMAN SACHS GROUP, 19.57% acquisition). To hold Real Estate. INC. (THE GS STRATEGIC 25.00% INVESTMENTS JAPAN FUKUOKA TOSHI 5.00% KAIHATSU CO.,LTD --------- 49.57% SHINING PARTNERS TK2 Consolidation of Japan Entity (to Japan 2 GS STRATEGIC 95.00% hold SPL portfolio) INVESTMENTS JAPAN SHINING PARTNERS 5.00% LTD(TKO) --------- 100.00% SHINING PARTNERS TK Consolidation of Japan Entity (to Japan 2 GS STRATEGIC 75.00% hold SPL portfolio) INVESTMENTS JAPAN SHINING PARTNERS 5.00% LTD(TKO) --------- 80.00% ARCHON GROUP DEUTSCHLAND, Consultancy on economic and Germany 1 ARCHON INTERNATIONAL, 100.00% GMBH technical aspects of investment in INC. real estate. Set up to support Archon's activities in Germany. YOSHINO HOSPITALITY Created for Ometosando deal Japan 1 GOLDMAN SACHS REALTY 100.00% CO.,LTD. JAPAN COR REAL ESTATE CREATION Created for Ometosando deal Japan 1 GOLDMAN SACHS REALTY 100.00% FUND2 CO. JAPAN COR NAGASAKA KAIHATSU CO.,LTD Created for Ometosando deal Japan 1 GOLDMAN SACHS REALTY 100.00% JAPAN COR YOSHINO KAIHATSU CO.,LTD. Created for Ometosando deal Japan 1 GOLDMAN SACHS REALTY 100.00% JAPAN COR STAR GATE REALTY CO.,LTD. Created for Ometosando deal Japan 1 GOLDMAN SACHS REALTY 100.00% JAPAN COR REC INVESTMENTS2 CO.,LTD. Created for Ometosando deal Japan 1 GOLDMAN SACHS REALTY 100.00% JAPAN COR PHOENIX OXNARD (DELAWARE) Created for transaction in Delaware 1 MLQ INVESTORS, L.P. 100.00% LLC JapanCreated for transaction in Japan DANDELION INVESTMENTS TK Dandelion has made investments in Japan 2 DANDELION INVESTMENTS 5.00% Green mountain to acquire CO.,LTD. non-performing loans from Linden Wood an existing SPC of the ASSG GS FINANCIAL SERVICES 73.00% business. L.P. --------- 78.00% J. ARON & COMPANY Dealer in petroleum, metals New York 2 THE J. ARON 0.20% (precious and base), grain and CORPORATION coffee/cocoa in the spot and forward markets and foreign J. ARON HOLDINGS, L.P. 99.80% currency options and maintains --------- seats on various exchanges; 100.00% Commodities dealer RTV VENTURES LLC Delaware entity established to Delaware 1 GOLDMAN SACHS CREDIT 66.70% service an existing loan portfolio. PARTNERS PRIME ASSET CO. LTD Dormant Japan 1 GOLDMAN SACHS REALTY 100.00% JAPAN COR P T GOLDMAN SACHS dormant company Indonesia 3 GOLDMAN SACHS (ASIA 90.00% INDONESIA PACIFIC) L GOLDMAN SACHS GLOBAL 0.10% HOLDINGS GOLDMAN SACHS 9.90% (CAYMAN) HOLDING --------- 100.00% HULL TRADING ASIA, LTD. Dormant. Proprietary trading Hong Kong 1 GS ASIAN VENTURE 100.00% firm.Holds a trading right in the (DELAWARE) LL Hong Kong Futures Exchange. GOLDMAN SACHS POWER L.L.C. DULLES HOLDING CORP. was former Delaware 2 J. ARON HOLDINGS, L.P. 99.00% name. Established to serve as the exclusive advisor to Constellation J. ARON & COMPANY 1.00% Power Source Inc. for power --------- trading and risk management. 100.00% THE EUROPEAN POWER SRC CO Dutch Holding Co for Pan-European Netherlands 1 GOLDMAN SACHS GROUP, 100.00% BV power trading business INC. (THE
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- ELQ Holdings (UK) Ltd ELQ Holdings (UK) Ltd holds ELQ II United Kingdom 1 ELQ Holdings (Del) LLC 100.00% and ELQ III. As part of the firmwide project to reduce the firms effective tax rate, US tax have been reviewing the ESSG structures and have determined that ELQ (func ccy USD) to be sub optimal from a tax perspective and therefore have had sign off from the desk, legal and controllers to incorproate ELQ2 which will be an exact replica of ELQ but will be set up in a more tax efficient way from day 1. The idea is for all ELQ to keep its existing investments, although the investments held in Russia and the Baltic states already owned by ELQ may be transfered to ELQ2, and ELQ2 will being to take on all new transactions either as direct balance sheet investments or through subsidiary ownership ELQ Investors II Ltd ELQ Holdings (UK) Ltd holds ELQ United Kingdom 1 ELQ Holdings (UK) Ltd 100.00% Investors II Ltd and ELQ Investors III Ltd. As part of the firmwide project to reduce the firms effective tax rate, US tax have been reviewing the ESSG structures and have determined that ELQ (func ccy USD) to be sub optimal from a tax perspective and therefore have had sign off from the desk, legal and controllers to incorproate ELQ2 & ELQ 3 which will be an exact replica of ELQ but will be set up in a more tax efficient way from day 1. The idea is for all ELQ to keep its existing investments, although the investments held in Russia already owned by ELQ may be transfered to ELQ 3, and ELQ3 will being to take on all new Russian transactions either as direct balance sheet investments or through subsidiary ownership ELQ Investors III Ltd ELQ Holdings (UK) Ltd holds ELQ United Kingdom 1 ELQ Holdings (UK) Ltd 100.00% Investors II Ltd and ELQ Investors III Ltd. As part of the firmwide project to reduce the firms effective tax rate, US tax have been reviewing the ESSG structures and have determined that ELQ (func ccy USD) to be sub optimal from a tax perspective and therefore have had sign off from the desk, legal and controllers to incorproate ELQ2 & ELQ 3 which will be an exact replica of ELQ but will be set up in a more tax efficient way from day 1. The idea is for all ELQ to keep its existing investments, although the investments held in Russia already owned by ELQ may be transfered to ELQ 3, and ELQ3 will being to take on all new Russian transactions either as direct balance sheet investments or through subsidiary ownership GOLDMAN SACHS SERVICES Employer of certain employees British Virgin 1 GOLDMAN SACHS GLOBAL 100.00% (B.V.I. whose services are lent to GSIL Islands SERVICES and GS(J)C GOLDMAN SACHS GLOBAL Employer of certain US Cayman Islands 1 GOLDMAN SACHS GROUP, 100.00% SERVICES citizens/green card holders INC. (THE outside US GOLDMAN SACHS GLOBAL Employer of certain US Cayman Islands 2 GOLDMAN SACHS GLOBAL 1.00% SERVICES citizens/green card holders HOLDINGS outside US GOLDMAN SACHS 99.00% (CAYMAN) HOLDING --------- 100.00% Rothesay Pensions Mgmt Employer Sponsor Company for [-] 1 GOLDMAN SACHS GROUP, 100.00% Limited Defined Benefit Pension Plan INC. (THE GOLDMAN SACHS EUROPE Employs consultants to Investment Isle of Jersey 1 GOLDMAN SACHS 100.00% LIMITED Banking Division; contracts with INTERNATIONAL International Advisers; EASTPORT CAPITAL Engage in life settlements business Delaware 1 GOLDMAN SACHS GROUP, 100.00% CORPORATION INC. (THE GS DIVERSIFIED HOLDINGS Engage in potential structured Delaware 2 GS FINANCIAL SERVICES 99.99% II LLC transaction with Azteca. L.P. GS DIVERSIFIED 0.01% FINANCE III LLC --------- 100.00% GSB1 - GS BANK (EUROPE) Entitiy for Irish Bank Ireland 1 GS Ireland Holdings 100.00% PLC Ltd CHESHIRE HOLDINGS EUROPE Entity established to facilitate Isle of Jersey 1 GOLDMAN SACHS GROUP, 100.00% LIMIT structured financing. INC. (THE LUGE LLC Entity established to facilitate Delaware 1 MEHETIA HOLDINGS INC 100.00% structured financing. GSGF MORTGAGE I, CO Entity established to facilitate Delaware 1 GS FINANCIAL SERVICES 100.00% structured financing. L.P. GSGF MORTGAGE II, CO Entity established to facilitate Delaware 1 GS FINANCIAL SERVICES 100.00% structured financing. L.P. GS MORTGAGE I, PARTNERS Entity established to facilitate Delaware 2 GOLDMAN SACHS 95.00% structured financing. MORTGAGE COMPANY GS MORTGAGE I 5.00% HOLDINGS, LLC --------- 100.00% MEHETIA INC Entity established to facilitate Delaware 1 MEHETIA HOLDINGS INC 100.00% structured financing. CARRERA2 LLC Entity established to facilitate Delaware 1 MEHETIA HOLDINGS INC 100.00% structured financing. COUNTY ASSETS LIMITED Entity established to facilitate Cayman Islands 1 COUNTY FUNDING LIMITED 100.00% structured financing.
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- COUNTY FUNDING LIMITED Entity established to facilitate England 1 COUNTY UK LIMITED 100.00% structured financing. COUNTY UK LIMITED Entity established to facilitate Cayman Islands 1 GS GLOBAL INVESTMENTS 100.00% structured financing. UK, INC. GS GLOBAL INVESTMENTS UK, Entity established to facilitate Delaware 1 GS GLOBAL INVESTMENTS 100.00% INC. structured financing. CO. GS GLOBAL PARTNERS LLC Entity established to facilitate Delaware 1 GS FINANCIAL SERVICES 100.00% structured financing. L.P. GS MORTGAGE I HOLDINGS, Entity established to facilitate Delaware 1 GOLDMAN SACHS 100.00% LLC structured financing. MORTGAGE COMPANY GS V-1 HOLDINGS, L.P. Entity established to facilitate Bermuda 2 GOLDMAN SACHS GROUP, 1.00% structured financing. INC. (THE GOLDMAN SACHS GLOBAL 99.00% HOLDINGS --------- 100.00% GS GLOBAL MARKETS INC Entity established to facilitate Delaware 1 GS FINANCIAL SERVICES 100.00% structured financing. L.P. GS Private Bank Ltd. Entity for Irish Bank Ireland 2 GOLDMAN SACHS GLOBAL 25.00% HOLDINGS GS Pvt Bank Holdings 75.00% LLC --------- 100.00% GS Ireland Holdings Ltd Entity for Irish Bank- GSB6 Ireland 1 GS Private Bank Ltd. 100.00% GOLDMAN SACHS CANADA Entity formed during 1996 to Nova Scotia 2 GOLDMAN SACHS GROUP, 1.00% CREDIT PA participate in the Canadian Senior INC. (THE bank debt business; holds inventory of and trades senior GOLDMAN SACHS CREDIT 99.00% bank debt. PARTNERS --------- 100.00% WILLIAM STREET EQUITY Entity invests in William Street Delaware 1 GOLDMAN SACHS CAPITAL 100.00% Funding Corporation in exchange MARKETS, for equity and mezzanine securities.Entity invests in William Street Funding Corporation in exchange for equity and mezzanine securities. SAVOY ASSOCIATES, LLC Entity is a condominium developer Delaware 1 REP SVY HOLDINGS 100.00% that is engaged in the business of REALTY, LLC selling its developed properties. GS LEASING LIMITED Entity is a partnerships set up to Cayman Islands 2 GS LEASING NO. 1 90.00% PARTNESHIP enter into a finance lease with LIMITED Tesco Plc. It will acquire assets from Tesco and then lease them GS Leasing No. 3 10.00% back in the form of the finance Limited lease. As such the fixed assets do --------- not go on the GS balance sheet. 100.00% Instead there is a lease receivable. GS Capital Funding UK I Entity is part of the European England 1 GS DIVERSIFIED 100.00% Ltd. Hedging Strategy deal. INVESTMENTS LTD GS LEASING NO. 2 LIMITED Entity is set up to purchase the Cayman Islands 1 GS DIVERSIFIED 100.00% limited partnership interest from FUNDING LLC GS Leasing Investments once the structure and subsequent sale of the lease rentals to a third party is complete. REP SVY HOLDINGS REALTY, Entity is the holding company that Delaware 1 GOLDMAN SACHS GROUP, 100.00% LLC owns Savoy (0113). INC. (THE GS Leasing KCSR II Entity maintains leveraged leases United States 1 GSFS INVESTMENT I CORP 100.00% for 60 locomotives on lease to Kansas City Southern Railways. Transactions closed in 2007. Arrow Corporate Member Entity owns participation in a England 1 ARROW CORP MEMBER 100.00% Limited syndicate at Lloyds that writes HOLDINGS LLC property catastrophe insurance. GS UNIT TRUST Entity purely acts as an Cayman Islands 1 GS LEASING NO. 1 100.00% ADMINISTRATION L administrator for GS Leasing LIMITED Investments. The entity will purely have a tiny amount of capital and cash. GS FINANCIAL SERVICES II Entity set up as part of an AMSSG Delaware 1 GOLDMAN SACHS GROUP, 100.00% structured transaction. To act as INC. (THE a parent company to AFCO 4 and the Amagansett chain of companies. GS LEASING HOLDINGS Entity set up to act as trustee Cayman Islands 1 GOLDMAN SACHS GROUP 100.00% LIMITED for GS Leasing Investments. The HOLDINGS ( entity will purely have a tiny amount of capital and cash. GS LEASING NO. 1 LIMITED Entity set up to be the general Cayman Islands 1 SCADBURY UK LIMITED 100.00% partner (controlling interest) in GS Leasing Limited Partnership. It will invest in the partnership in return for its share of the leasing income. WILLIAM STREET COMMITMENT Entity set up to extend unfunded Delaware 1 GOLDMAN SACHS GROUP, 100.00% loan commitments to INC. (THE investment-grade customers of GS Group Sana Acquisitions Ltd Entity set up to hold portfolio of England 1 GS EURO OPP FUND II LP 100.00% non-performing German loans Frangipani TK Entity set up to refinance the Japan 1 Blue Square TK 100.00% loan to Takara-Gumi. Blue Square TK Entity set up to refinance the Japan 2 GOLDMAN SACHS JAPAN 1.00% loan to Takara-Gumi. CO., LTD. NEPHRITE EQUITY 99.00% CO.,LTD. --------- 100.00% GS Site 25 Retail LLC Entity to house Embassy Suite Delaware 1 GS Site 25 Retail 100.00% Retail Acquisition Holding LLC GS Site 25 Retail Holding Entity to house holding company Delaware 1 GOLDMAN SACHS GROUP, 100.00% LLC for the Embassy Suite Retail INC. (THE Acquisition GS SITE 25 HOTEL, LLC Entity to house the entity for the Delaware 1 GS SITE 25 HOTEL 100.00% Embassy Suite Hotel Acquisition HOLDING, LLC GS SITE 25 HOTEL HOLDING, Entity to house the holding Delaware 1 GOLDMAN SACHS GROUP, 100.00% LLC company for Embassy Suite Hotel INC. (THE Acquisition GS LINDEN POWER HOLDINGS Entity was acquired as part of the Delaware 1 GOLDMAN SACHS GROUP, 100.00% LLC Linden venture. INC. (THE GS UNIT TRUST INVESTMENTS Entity will invest as a minority Cayman Islands 1 GS LEASING NO. 1 100.00% LIMI unit holder in GS Leasing LIMITED Investments. It will be capitalized by an existing GS entity. AKTEAS S.R.L ESSG Italian Real Estate trading Italy 1 ELQ INVESTORS, LTD 100.00% entity and controlled and managed by Archon Italy
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- POSEIDON ACQUISITIONS LTD ESSG Portfolio SPV for Kreta II England 1 GS EURO OPP FUND II LP 100.00% NPL portfolio in the Opportunities Fund II SOUTH WALES INVESTMENTS ESSG related entity established to United Kingdom 1 ELQ INVESTORS, LTD 100.00% TPL LT hold an investment in a power company. THE GS TRUST COMPANY OF Established as a limited purpose Delaware 1 THE GOLDMAN SACHS 100.00% DELAWA trust company. TRUST COMPAN GS A320 LLC Established as part of a Private Delaware 1 GSFS INVESTMENT I CORP 100.00% Finance Group Leasing Transaction. GS RJX LEASING LLC Established as part of a Private Delaware 1 GSFS INVESTMENT I CORP 100.00% Finance Group Leasing Transaction. SCADBURY UK LIMITED Established as part of an SSG England 1 GOLDMAN SACHS GROUP 100.00% Structured Investing Group HOLDINGS ( transaction. GS FUNDING EUROPE LIMITED Established as part of an SSG England 1 GS FINANCIAL SERVICES 100.00% Structured Investing Group II transaction. SCADBURY ASSETS Established as part of an SSG England 2 SCADBURY UK LIMITED 99.00% Structured Investing Group transaction. SCADBURY FUNDING 1.00% LIMITED --------- 100.00% AMAGANSETT II ASSETS Established as part of an SSG Cayman Islands 1 GS FUNDING EUROPE 100.00% Structured Investing Group LIMITED transaction. SCADBURY FUNDING LIMITED Established as part of an SSG Cayman Islands 1 SCADBURY UK LIMITED 100.00% Structured Investing Group transaction. AMAGANSETT FUNDING LIMITED Established as part of an SSG Cayman Islands 1 GS FUNDING EUROPE 100.00% Structured Investing Group LIMITED transaction. AMAGANSETT ASSETS Established as part of an SSG England 2 GS FUNDING EUROPE 99.00% Structured Investing Group LIMITED transaction. AMAGANSETT FUNDING 1.00% LIMITED --------- 100.00% SCADBURY II ASSETS Established as part of an SSG Cayman Islands 1 SCADBURY UK LIMITED 100.00% Structured Investing Group transaction. ELBE FUNDING LIMITED Established as part of an SSG Cayman Islands 1 GOLDMAN SACHS 100.00% Structured Investing Group (CAYMAN) HOLDING transaction. RHYS TRUST Established as part of an SSG United States 2 GS FINANCIAL SERVICES 95.00% Structured Investing Group L.P. transaction. GS GLOBAL MARKETS INC 5.00% --------- 100.00% SAPIEN LIMITED Established as part of an SSG United States 1 RHYS TRUST 100.00% Structured Investing Group transaction. SARGASSO LIMITED Established as part of an SSG United States 1 SAPIEN LIMITED 100.00% Structured Investing Group transaction. SHIRE II ASSETS Established as part of an SSG Cayman Islands 1 SHIRE UK LIMITED 100.00% Structured Investing Group transaction. SHIRE FUNDING LIMITED Established as part of an SSG Cayman Islands 1 SHIRE UK LIMITED 100.00% Structured Investing Group transaction. SHIRE ASSETS Established as part of an SSG England 2 SHIRE FUNDING LIMITED 1.00% Structured Investing Group transaction. SHIRE UK LIMITED 99.00% --------- 100.00% SHIRE UK LIMITED Established as part of an SSG England 1 GOLDMAN SACHS GROUP 100.00% Structured Investing Group HOLDINGS ( transaction. AMAGANSETT FINANCING Established as part of an SSG Cayman Islands 1 GOLDMAN SACHS GROUP 100.00% Structured Investing Group HOLDINGS ( transaction. LAFFITTE PARTICIPATION 10 Established as part of an SSG France 1 CHILTERN TRUST 100.00% Structured Investing Group transaction. LAFFITTE PARTICIPATION 12 Established as part of an SSG France 1 LAFFITTE 100.00% Structured Investing Group PARTICIPATION 10 transaction. GS CAPITAL OPPORTUNITIES Established as part of an SSG Delaware 1 GS FINANCIAL SERVICES 100.00% LLC Structured Investing Group L.P. transaction. GS FINANCING Established as part of an SSG Delaware 1 GS CAPITAL 100.00% OPPORTUNITIES LLC Structured Investing Group OPPORTUNITIES LLC transaction. GS 767 LEASING LLC Established as part of an SSG Delaware 1 GSFS INVESTMENT I CORP 100.00% Structured Investing Group transaction. KILLINGHOLME GENERATION Established as part of an SSG England 4 KILLINGHOLME HOLDINGS 0.00% LIMITE Structured Investing Group LIMITED transaction. Scadbury II Assets 50.32% SCADBURY UK LIMITED 13.37% Shire Funding Limited 36.31% --------- 100.00% KILLINGHOLME HOLDINGS Established as part of an SSG England 1 KILLINGHOLME POWER 100.00% LIMITED Structured Investing Group GROUP LTD transaction. GSGF INVESTMENTS INC. Established as part of an SSG Delaware 1 GS FINANCIAL SERVICES 100.00% Structured Investing Group L.P. transaction. FORRES LLC Established as part of an SSG Delaware 1 GOLDMAN SACHS 100.00% Structured Investing Group HOLDINGS (U.K.) transaction. LIQUIDITY ASSETS LIMITED Established as part of an SSG Cayman Islands 1 GS LEASING NO. 2 100.00% Structured Investing Group LIMITED transaction. GS GLOBAL INVESTMENTS III Established as part of an SSG Delaware 1 GS GLOBAL INVESTMENTS 100.00% Structured Investing Group CO. transaction. GS Raft River I Holdings, Established as part of an SSG Delaware 1 GSFS INVESTMENT I CORP 100.00% LLC Structured Investing Group transaction.
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- Raft River Energy I, LLC Established as part of an SSG United States 1 GS Raft River I 100.00% Structured Investing Group Holdings, LLC transaction. GS CAPITAL INVESTMENTS Established as part of an SSG England 1 GS FINANCIAL SERVICES 100.00% LIMITED Structured Investing Group L.P. transaction. GS CAPITAL INVESTMENTS II Established as part of an SSG England 1 GS CAPITAL 100.00% LIMI Structured Investing Group INVESTMENTS LIMITED transaction. CAPITAL INVESTMENTS Established as part of an SSG Delaware 1 GS CAPITAL 100.00% (U.S.) III Structured Investing Group INVESTMENTS II LIMI transaction. GSFS INVESTMENT I CORP Established as part of an SSG Delaware 1 GS FINANCIAL SERVICES 100.00% Structured Investing Group L.P. transaction. ENERGY CENTER HOLDINGS LLC Established as part of an SSG Delaware 1 GSFS INVESTMENT I CORP 100.00% Structured Investing Group transaction. GS737 CLASSICS LEASING LLC Established as part of an SSG Delaware 1 GSFS INVESTMENT I CORP 100.00% Structured Investing Group transaction. FLURET LIMITED Established as part of an SSG Isle of Jersey 1 FLURET TRUST 100.00% Structured Investing Group transaction. ROTHMILL INVESTMENT Established as part of an SSG Cayman Islands 1 GS DIVERSIFIED 100.00% COMPANY Structured Investing Group INVESTMENTS LTD transaction. 501-2 INVESTMENT Established as part of an SSG Australia 1 ROTHMILL INVESTMENT 100.00% PARTNERSHIP Structured Investing Group COMPANY transaction. 201-2 INVESTMENT Established as part of an SSG Australia 1 ROTHMILL INVESTMENT 100.00% PARTNERSHIP Structured Investing Group COMPANY transaction. ACP PARTNERSHIP SERVICES Established as part of an SSG Cayman Islands 1 WYNDHAM INVESTMENTS 100.00% Structured Investing Group II LTD transaction. SHIRE UK LIMITED Established as part of an SSG United Kingdom 1 GOLDMAN SACHS GROUP 100.00% Structured Investing Group HOLDINGS ( transaction. PMF-2 LTD Established for the purpose of England 1 GS EURO OPP FUND BV 100.00% acquiring a 95% participation in a portfolio of non-performing Portuguese mortgages from PMF-1, Ltd. CHILTERN TRUST Established in connection with a Isle of Jersey 2 GS FINANCIAL SERVICES 95.00% third party funding transaction. L.P. GS GLOBAL MARKETS INC 5.00% --------- 100.00% CDV-1, LTD Established to acquire a portfolio England 1 CDV-1 HOLDING 91.62% of non-performing loans in the COMPANY, LP Czech Republic from Ceska konsolidacni agentura. GSCO BETEILIGUNGS GMBH Established to buy preferred Germany 1 GOLDMAN, SACHS & CO. 100.00% shares in NetJets, a Swiss based OHG company. FLURET TRUST Established to facilitate Delaware 2 GS FINANCIAL SERVICES 95.00% structured financing. L.P. GS FUNDING 5.00% OPPORTUNITIES II --------- 100.00% GSSM HOLDING CORP. Established to hold firm's Delaware 1 GOLDMAN SACHS GROUP, 100.00% investments in SMFG convertible INC. (THE preferreds - As of 11-25-05, the SMFG Pref's were held by GS Group, GS MULTI-CURR EURO Established to hold USD, GDP and Ireland 2 GOLDMAN SACHS GROUP, 100.00% PERFORMANCE Euro notes from the GS European INC. (THE Performance Fund Limited and issue single currency Euro notes to the GOLDMAN SACHS GROUP 0 Investor. HOLDINGS ( --------- 100.00% MLQ-MLL, LLC Established to originate and Delaware 1 MTGLQ INVESTORS, L.P. 100.00% purchase Mezzanine loans on real estate investments. FEDERAL BOULEVARD, LLC Established to purchase a data Delaware 1 GOLDMAN SACHS GROUP, 100.00% center. INC. (THE GS EUROPEAN INVESTMENT Established to purchase and Netherlands 1 ELQ INVESTORS, LTD 100.00% GROUP B originate publicly and privately issued fixed income securities. GS EURO MEZZANINE INVEST Established to purchase and Netherlands 1 ELQ INVESTORS, LTD 100.00% GROUP originate publicly and privately issued fixed income securities. COLUMBIA CAPITAL LIFE Established to pursue various South Carolina 1 GOLDMAN SACHS GROUP, 100.00% REINSURA opportunities in the reinsurance INC. (THE business. SIGNUM LIMITED Established to report all England 1 GOLDMAN SACHS GROUP 100.00% consolidated Signum variable HOLDINGS ( interest entities under FIN-46R. It is not a legal entity but set up for SPV consolidation process only. GS EQUITY MARKETS, L.P. Established to segregate trading Bermuda 2 GSEM DEL LLC 99.00% (BERMU of UK structured equity products; non-regulated Bermuda based GSEM BERMUDA 1.00% subsidiary which trades structured HOLDINGS, L.P. equity products;Holds hedges to --------- derivative transactions executed 100.00% by Goldman outside of the US. GSEM trades only with other G GS Logistics Holdings Firm direct investment hodling Mauritius 1 GS Direct, L.L.C. 100.00% Limited company 11 Broadway, LLP Firm direct investment holding [-] 1 GOLDMAN SACHS GROUP, 100.00% company. INC. (THE GS Treasure S.a.r.l Firm direct investment holding Luxembourg 1 GS Direct, L.L.C. 100.00% company. GS Phereclus Holdings Ltd Firm direct investment holding Mauritius 1 GS Direct, L.L.C. 100.00% company. GS Direct GD Limited Firm direct investment holding Mauritius 1 GS Direct, L.L.C. 100.00% company. GS MPIM I, L.L.C. Firm direct investment.GS MPIM I, Delaware 1 GOLDMAN SACHS GROUP, 100.00% L.L.C. INC. (THE GS MPIM II, L.L.C Firm direct investment.GS MPIM II, Delaware 1 GOLDMAN SACHS GROUP, 100.00% L.L.C. INC. (THE
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- GS REA Holdings, L.L.C. Firm direct investment.GS REA Delaware 1 GOLDMAN SACHS GROUP, 100.00% Holdings, L.L.C. INC. (THE GK Keisen Kaihatsu Flagged for Fujiya DealHolding Japan 1 MLQ INVESTORS, L.P. 100.00% real estate and trust beneficialy intrest. GK HAKATA HOTEL HOLDING Flagged for Hotel centraza.Holding Japan 1 GOLDMAN SACHS REALTY 100.00% Hotel. JAPAN COR GK Asuka Flagged for Hunet Deal. Japan 1 AR Holdings GK 100.00% MINATOMARU HOTEL HOLDINGS Flagged for JAL Hotel Japan 1 GOLDMAN SACHS REALTY 100.00% CO.L JAPAN COR GK Kazahana Flagged for Joy Park Deal Japan 1 GOLDMAN SACHS REALTY 100.00% JAPAN COR KINMIRAI CREATE CO., LTD. Flagged for Jusco deal. Japan 1 MLQ INVESTORS, L.P. 100.00% KAKEGAWA HOLDINGS CO.,LTD Flagged for Kagegawa deal. Japan 1 LINDEN WOOD, LTD 100.00% KAWASAKI HOLDINGS CO.LTD. Flagged for Kawasaki Hotel Japan 1 GOLDMAN SACHS REALTY 100.00% Deal/Owns hotel assets JAPAN COR GK Kashiwabara Toshi Flagged for Kobe developmemt Japan 1 GOLDMAN SACHS REALTY 100.00% Kaihatsu deal.Purchasing Loans. JAPAN COR MERCHANT SUPPORT CO., LTD. Flagged for Merchant JV Japan 1 GOLDMAN SACHS REALTY 100.00% (Factoring service) JAPAN COR MERCHANT CAPITAL CO. LTD. Flagged for Merchant JV (factoring Japan 1 GOLDMAN SACHS REALTY 100.00% service) JAPAN COR GK Shiohama Kaihatsu Flagged for Michinoku Sendai Deal Japan 1 MLQ INVESTORS, L.P. 100.00% (beneficiary rights) GREEN MOUNTAIN ONE Flagged for MIZUHO JV Deal. Japan 1 GOLDMAN SACHS REALTY 100.00% CO.,LTD. JAPAN COR NIHON HOTEL INVESTMENT Flagged for multiple hotel Japan 1 MLQ INVESTORS, L.P. 100.00% CO.,LTD acquisition deal GK Ito Onsen Kaihatsu Flagged for New Onsen Deal Japan 1 AR Holdings GK 100.00% (Ebina).Management of Ryokan (Japanese Hotel). GK Impact Holding Flagged for Nihon Birudo Deal. Japan 1 GOLDMAN SACHS REALTY 100.00% JAPAN COR RAICHO CO., LTD. Flagged for Omotesando deal. Japan 1 GOLDMAN SACHS REALTY 100.00% JAPAN COR HANAMIZUKI KAIHATSU CO. Flagged for Onsen Fund JVP Equity Japan 1 GOLDMAN SACHS REALTY 100.00% LTD. Investment /or Total Return JAPAN COR SwapHolding Kondo Sangyo Shares. WAKAKUSA KAIHATSU CO.,LTD. Flagged for Oomotesando Deal. Japan 1 GOLDMAN SACHS REALTY 100.00% JAPAN COR Senri Chuo GK Flagged for Osaka Senri Japan 1 GOLDMAN SACHS REALTY 100.00% deal.Flagged for Osaka Senri deal. JAPAN COR GK Kaihin Flagged for Paco Hakodate Japan 1 MLQ INVESTORS, L.P. 100.00% Deal/Real Estate GS PIA Holdings GK Flagged for PIA deals Japan 2 PIA Holdings Cayman 0.71% Tokyo Bran MLQ INVESTORS, L.P. 99.29% --------- 100.00% GK SAKURAZAKA CAPITAL Flagged for Principal Finance Deals Japan 2 AR Holdings GK 1.00% MLQ INVESTORS, L.P. 99.00% --------- 100.00% GK Frangipani Flagged for Project Manhattan. Japan 1 C.H. White Flower 100.00% GK Gekko Flagged for Project Taurus. Japan 1 JUPITER INVESTMENT 100.00% CO,. LTD. EXCELLENT EQUITY CO.,LTD. Flagged for REO Deal. Japan 1 GOLDMAN SACHS REALTY 100.00% JAPAN COR GK Luigi Flagged for Shibuya development Japan 1 MLQ INVESTORS, L.P. 100.00% deal GK TAIYO KAIHATSU Flagged for Shibuya Udagawa REO Japan 1 MLQ INVESTORS, L.P. 100.00% Deal GK Sayama Flagged for Shinjjuku retail REO Japan 1 MLQ INVESTORS, L.P. 100.00% deal. GK KANAGAWA HOLDING Flagged for Shinjuku Unika Deal. Japan 1 MLQ INVESTORS, L.P. 100.00% TG FUND CO.,LTD Flagged for SMAP2 (JV, Tokyu Japan 1 AMETHYST REALTY TK 100.00% Livable) NEPHRITE EQUITY CO.,LTD. Flagged for SMAP2 dealTK investor Japan 1 GOLDMAN SACHS REALTY 100.00% of Amethyst Realty Co., Ltd. JAPAN COR Taurus Investment LPS Flagged for Taurus deal. Japan 1 JUPITER INVESTMENT 100.00% CO,. LTD. TG Fund II Co.,Ltd Flagged for TG Fund Deal (SMAP 2) Japan 1 AMETHYST REALTY TK 100.00% GK Takahama Kaihatsu Flagged for Tiffany deal.Holding Japan 2 GOLDMAN SACHS REALTY 0.00% real estate trust beneficialy JAPAN COR intrest. MLQ INVESTORS, L.P. 1 --------- 100.00% CITRINE INVESTMENT Flagged for Universal Hotel Deal. Japan 1 MLQ INVESTORS, L.P. 100.00% CO.,LTD. MAIN STREET MORTGAGE Florida subsidiary acquired to Delaware 1 GOLDMAN SACHS GROUP, 99.00% COMPANY, service mortgage portfolios INC. (THE (primarily those held by Goldman Sachs Mortgage Company) GS LS LEASING LLC For PFG leasing business Delaware 1 GSFS INVESTMENT I CORP 100.00% AMC OF AMERICA LLC For the purpose of engaging Delaware 1 MTGLQ INVESTORS, L.P. 100.00% (directly or through subsidiary or affiliated companies or both) in any business or activities that may lawfully be angaged in by a limited liability company formed under the Delaware Act. GS MACRO INVESTMENTS 2006 Formed to facilitate a SALG US 1 GOLDMAN SACHS GROUP, 100.00% LLC trading program INC. (THE GOLDMAN SACHS (INDIA) Formed to hold Representative Delaware 2 GOLDMAN SACHS GROUP, 99.00% L.L.C. Office in India INC. (THE GOLDMAN SACHS GLOBAL 1.00% HOLDINGS --------- 100.00% GOLDMAN SACHS (CHINA) Formed to set up Representative Delaware 2 GOLDMAN SACHS GROUP, 99.00% L.L.C. Offices in Beijing and Shanghai, INC. (THE engaging in liaison activities. GOLDMAN SACHS GLOBAL 1.00% HOLDINGS --------- 100.00% GOLDMAN SACHS (ASIA) FIN. Former holding company for Goldman Delaware 2 GOLDMAN, SACHS & CO. 99.00% HLDG Sachs (Asia) Finance. GOLDMAN SACHS GLOBAL 1.00% HOLDINGS --------- 100.00% KILLINGHOLME POWER LIMITED Former operating entity for the England 1 KILLINGHOLME 100.00% Killingholme Power station. GENERATION LIMITE GOLDMAN SACHS CANADA Formerly a 1% general partner of Alberta 1 GOLDMAN SACHS GROUP, 100.00% FINANCE I Goldman Sachs Canada Finance, INC. (THE L.P. Now a 1% shareholder of Goldman Sachs Canada Finance Co. entity will be dissolved in the near future. REP PRS II WTE, L.L.C. Fountains at Delray Beach [-] 1 GOLDMAN SACHS GROUP, 100.00% INC. (THE
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- GOLDMAN, SACHS & CO. OHG Frankfurt based subsidiary which Germany 2 GOLDMAN, SACHS & CO. 1.00% provides investment banking FINANZ GM services; German bank; documents must be signed by authorized GOLDMAN SACHS 99.00% persons in Frankfurt; CONSULT WITH (CAYMAN) HOLDING ANDREAS KOERNLEIN FOR PROPER --------- SIGNING AUTHORITY. Approved 100.00% Person. ROTHESAY LIFE LIMITED FSA-regulated Insurance Company England 1 Rothesay Life 100.00% (Cayman) Limited GS Admin Services Fund Administration Nova Scotia 1 GS Admin 100.00% (Canada)Co Serv(Canada)Hold LP Cornwall Investments Futures & options trading in Cayman Islands 1 GOLDMAN SACHS (ASIA) 100.00% Limited Korea. Holds a Foreign Investor FIN. HLDG status in Korea (FINI).Maples & Calder is the agent in Cayman Islands. PATTERSON CAPITAL Futures introducing broker. Illinois 1 GOLDMAN SACHS GROUP, 100.00% MARKETS, LTD INC. (THE CDV-1 HOLDING COMPANY General partner for CDV-1 Holding Delaware 1 MTGLQ INVESTORS, L.P. 100.00% GEN-PAR, Company, L.P. GS Admin Serv(Canada)Hold general partner for Goldman Sachs Delaware 1 GS FINANCIAL SERVICES 100.00% LLC Administration Services (Canada) L.P. Holdings LP GSEM DEL INC General partner for GS Equity Delaware 1 GOLDMAN SACHS GROUP, 100.00% Market, L.P. (Bermuda). INC. (THE GOLDMAN SACHS REAL ESTATE General Partner in Goldman Sachs New York 1 GOLDMAN SACHS GROUP, 100.00% FUND Mortgage Company INC. (THE GOLDMAN SACHS CAPITAL General Partner of Goldman Sachs Delaware 1 GS FINANCIAL SERVICES 100.00% MARKETS, Capital Markets, L.P. L.P. GSMMDPGP INC. General partner of Goldman Sachs Delaware 1 GOLDMAN SACHS GROUP, 100.00% Mitsui Marine Derivative Products, INC. (THE L.P. GOLDMAN, SACHS MGT GP GMBH General Partner of GS Capital Germany 1 GOLDMAN, SACHS & CO. 100.00% Partners 2000 GmbH & Co. OHG Beteiligungs KG GS Risk Advisors, Inc. General Partner of GS Risk Delaware 1 GOLDMAN SACHS GROUP, 100.00% Advisors, L.P. INC. (THE THE J. ARON CORPORATION General partner of J. Aron & Delaware 1 GOLDMAN SACHS GROUP, 100.00% Company and J. Aron Holdings L.P. INC. (THE J. ARON HOLDINGS, L.P. General partner of J. Aron & Delaware 2 THE J. ARON 0.20% Company. CORPORATION GOLDMAN SACHS GROUP, 99.80% INC. (THE --------- 100.00% Liberty Harbor I GP,LLC General Partner of Liberty Harbor Delaware 1 GSCS Holdings II, LLC 100.00% Master Fund MLQ L.L.C General partner of MLQ Investors, Delaware 2 GOLDMAN SACHS GROUP, 99.00% L.P. INC. (THE GOLDMAN SACHS GLOBAL 1.00% HOLDINGS --------- 100.00% STRATEGIC MORTGAGE General Partner of Strategic Delaware 1 GOLDMAN SACHS GROUP, 100.00% HOLDINGS, I Mortgage Holdings, L. P. INC. (THE CER Holdings GP general partner to CER Holdings LP Cayman Islands 1 GOLDMAN SACHS GLOBAL 100.00% HOLDINGS GS Investment Partners GP General Partner to make nominal [-] 1 GS INVESTMENT 100.00% investment in GSIP entities STRATEGIES, LLC REP SAN REAL ESTATE, L.P. General partners for REP SAN Real Delaware 2 GOLDMAN SACHS GROUP, 99.80% Estate, LP. INC. (THE REP SAN GEN PAR, LLC 0.20% --------- 100.00% SARATOGA SPRINGS LLC General partners for the Ayco Delaware 1 GS AYCO HOLDINGS LLC 100.00% Company LP. DELMORA BANK GMBH German Bank holding a portfolio of Germany 1 ARCHON INTERNATIONAL, 100.00% german non-performing loans and a INC. restricted banking licence GS STRATEGIC HOLDINGS Global Business Licence CATEGORY Mauritius 1 PANDA INVESTMENTS LTD. 100.00% LIMITED 1. Holding Company for certain PRC investments for ASSG. GOLDMAN SACHS H&HC GNMA issuer/servicer and a New York 2 GOLDMAN SACHS GROUP, 99.00% FUNDING COM non-supervised mortgagee under FHA INC. (THE regulationss to originate, process and service FHA insured mortgages GOLDMAN SACHS H&HC 1.00% CAPITAL COR --------- 100.00% GSBR Fundo Inv em GOLDMAN SACHS DO BRASIL BANCO [-] 1 G.S. DO BRASIL BANCO 100.00% Direitos Cr MULTIPLO S/A will own 100% of BRFD MULTIPLO, GS HEDGE FUND STRATEGIES Goldman Sachs Hedge Fund Delaware 2 GOLDMAN SACHS GROUP, 99.00% LLC Strategies LLC (formerly Goldman INC. (THE Sachs Princeton LLC) is registered as a Commodity Pool Operator GOLDMAN SACHS ASSET 1.00% (???CPO???) and a Commodity MANAGEMENT Trading Advisor (???CTA???) with --------- the Commodity Futures Trading 100.00% Commission (???CFTC???) and is a member of GSI Fundo Investimento GOLDMAN SACHS INTERNATIONAL will [-] 1 GOLDMAN SACHS 100.00% own 100% of IFIF INTERNATIONAL GSCO Fundo Inv em GOLDMAN, SACHS & CO. will own 100% [-] 1 GOLDMAN, SACHS & CO. 100.00% Direitos Cr of (COFD) BLOSSOM HOLDING III BV GS European Opportunities Fund BV Netherlands 1 GS EURO OPP FUND BV 100.00% subsidary for Ihr Platz Investment GS PENSION MANAGEMENT GSAM-related vehicle formed to Cayman Islands 2 GOLDMAN SACHS GROUP, 99.00% COMPANY serve as the general partner of INC. (THE Progressive Pension Management LP; also general partner of GOLDMAN SACHS 1.00% Progressive Pension Management II, (CAYMAN) HOLDING LP; Nenpuku is the indirect --------- limited partner of both entities 100.00%
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- GS Killingholme Cayman GSKC III is a new entity that will Cayman Islands 2 GS KILLINGHOLME 0.01% Inv III be party to cross currency basis CAYMAN INVESME swaps as part of a larger structured deal by the Structured GS Killinghme Caymn 99.99% Investing desk in ESSG. As per Inv II Ltd the derivative booking policy, any --------- entity that enters into derivates 100.00% must be set up in books and records. This entity will be formed on the 5th of February. GSPS INVESTMENTS GSPS London investment company England 1 GSPS STRATEGIES CORP 100.00% GSPS Lotus Limited GSPS Lotus is set up to hold India Mauritius 1 GSPS Asia Limited 100.00% principal finance investments. It is 100% owned by GSPS Asia Limited (0385) HYOGO WIDE SERVICE CO. Gurantee loan purchased from RCC Japan 1 GAC PERSONAL TK 100.00% LTD. MIDORI DATA CO. LTD. Gurantee loan purchased from RCC Japan 1 GAC PERSONAL TK 100.00% WAKABA HOKEN DAIKO CO. Gurantee loan purchased from RCC Japan 1 GAC PERSONAL TK 100.00% LTD. SLK-HULL DERIVATIVES History: 1985 Hull Trading Delaware 1 THE HULL GROUP LLC 100.00% L.L.C. Company, an ILL general partnership is formed; 1995 Hull Trading Company is converted to an ILL LLC; 1998 A decision is made to create a holding company structure; Broker/Dealer;SEC File No. 8-51552. The SHD BDW was filed on3 MLQ INVESTORS, L.P. Hold certain mortgage properties Delaware 2 GOLDMAN SACHS GROUP, 99.00% for liquidation. INC. (THE MLQ L.L.C 1.00% --------- 100.00% STRATEGIC MORTGAGE Hold debt and equity interests in Delaware 2 GOLDMAN SACHS GROUP, 99.00% HOLDINGS, L a Canadian mortgage broker business INC. (THE STRATEGIC MORTGAGE 1.00% HOLDINGS, I --------- 100.00% CMLQ INVESTORS COMPANY Hold mortgages. To invest in and Nova Scotia 2 MLQ L.L.C 1.00% hold performing Canadian loans. MTGLQ INVESTORS, L.P. 99.00% --------- 100.00% REP PEB REALTY, LLC Hold real estate investment Delaware 1 SSIG SPF ONE LQ, LLC 100.00% GOLDMAN SACHS (SINGAPORE) Holder of a Capital Markets Singapore 1 GOLDMAN SACHS FX 100.00% PTE. Services Licence to advise on (SINGAPORE) P corporate finance, deal in securities, leveraged foreign exchange trading and fund management. REP DER GEN-PAR, LLC Holder or REP DER real estate Delaware 1 MTGLQ INVESTORS, L.P. 100.00% Limited Partnership. NASU URBANE PROPERTIES Holding a Japanese Inn Japan 1 JLQ LLC 100.00% CO., LT (Ouan)・Holding Real Estate. SINGEL COOL TWO Holding and Finance. Maison Netherlands 1 GS FINANCIAL SERVICES 100.00% (Management structure GAH). To L.P. act as general partner of Gestion d'Actifs Haussmann SCA. Elevatech Limited Holding ASSG investments Hong Kong 1 MLT INVESTMENTS LTD. 100.00% GS CHINA VENTURE Holding Co of Jade Dragon Venture Mauritius 1 JADE DRAGON 100.00% I(MAURITIUS) Investment Limited (MAURITIUS) LIMITE GS CHINA VENTURE II Holding Co of Jade Dragon Venture Mauritius 1 JADE DRAGON 100.00% (MAURITIUS Investment Limited (MAURITIUS) LIMITE WEALTH EARNERS LIMITED Holding company British Virgin 1 GS STRATEGIC 100.00% Islands INVESTMENTS (ASIA GSIP Holdco A LLC holding company Delaware 1 GOLDMAN SACHS GROUP, 100.00% INC. (THE GSIP Holdco B LLC holding company Delaware 1 GSIP Holdco A LLC 100.00% GS Holdings Mauritius holding company Mauritius 2 GOLDMAN SACHS (ASIA) 99.00% Limited FIN. HLDG GOLDMAN SACHS GLOBAL 1.00% HOLDINGS --------- 100.00% GS MIDDLE EAST (CAYMAN) Holding Company Cayman Islands 1 GSEM (DEL) HOLDINGS, 100.00% LTD L.P. GS BANK USA HOLDINGS LLC Holding Company (Single Member LL) Delaware 1 GOLDMAN SACHS GROUP, 100.00% to hold GS Group Investment in GS INC. (THE Bank USA DAC HOLDING I, L.L.C Holding company for 6 other Delaware 1 SSIG SPF ONE LQ, LLC 100.00% special purpose partnerships involved inleveraged lease transactions GS RBD HOLDINGS I CORP Holding company for a US Delaware 1 GOLDMAN SACHS GROUP, 100.00% partnership, which in turn will INC. (THE hold an interest in a new Russian broker/dealer entity. GS RBD HOLDINGS II CORP Holding company for a US Delaware 1 GOLDMAN SACHS GROUP, 100.00% partnership, which in turn will INC. (THE hold an interest in a new Russian broker/dealer entity. GS Holdings (Hong Kong) Holding company for AEJ entities Hong Kong 1 GS Asia Corporate 100.00% Ltd Holdings LP GSAM India Holdings Holding company for an asset Mauritius 1 GOLDMAN SACHS ASSET 100.00% Limited management company in India MANAGEMENT ARCHON INTERNATIONAL, INC. Holding company for Archon Italy Delaware 1 GS FINANCIAL SERVICES 100.00% and Archon Germany L.P. GS ASIAN VENTURE Holding company for ASSG entities Delaware 2 GOLDMAN SACHS GLOBAL 25.00% (DELAWARE) LL HOLDINGS GS FINANCIAL SERVICES 75.00% L.P. --------- 100.00% TIGER STRATEGIC Holding company for ASSG entities Mauritius 1 GS ASIAN VENTURE 100.00% INVESTMENTS LT (DELAWARE) LL PANDA INVESTMENTS LTD. Holding company for ASSG entities Mauritius 1 TIGER STRATEGIC 100.00% INVESTMENTS LT MLT INVESTMENTS LTD. Holding company for ASSG entities Mauritius 1 TIGER STRATEGIC 100.00% INVESTMENTS LT GOLDMAN SACHS (UK) L.L.C. Holding company for CIN Managemenet Delaware 2 GOLDMAN SACHS (UK) 99.00% III L.L.C. GOLDMAN SACHS GROUP 1.00% HOLDINGS ( --------- 100.00% GOLDMAN SACHS ASSET MGMT Holding company for CIN Management England 1 GOLDMAN SACHS (UK) 100.00% HOLDI which is now inactive L.L.C. III
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- W2005/W2007 Amelia Asset Holding company for equity Netherlands 1 ELQ INVESTORS, LTD 50.00% 4 BV investment in Goldreef, a South African casino operator. BEST INVESTMENT Holding company for Express Delaware 1 GS FINANCIAL SERVICES 100.00% (DELAWARE) LLC Securitization Specialty L.L.C. L.P. and Express II Securitization Specialty L.L.C.Holding company for Express Securitization Specialty L.L.C. and Express II Securitization Specialty L.L.C. GS Admin Serv(Canada)Hold holding company for Goldman Sachs Delaware 3 GS Admin 1.00% LP Administration Services (Canada) Serv(Canada)Hold LLC Co. GOLDMAN SACHS GLOBAL 25.00% HOLDINGS GS FINANCIAL SERVICES 74.00% L.P. --------- 100.00% GSEM DEL LLC Holding company for GS Equity Delaware 1 GSEM BERMUDA 100.00% Market, L.P. (Bermuda). HOLDINGS, L.P. GS GLOBAL FUNDING II CO. Holding company for GS Global Delaware 2 GOLDMAN SACHS CANADA 23.08% Funding III, Co.Holding company INC. for GS Global Funding III, Co. GS FINANCIAL SERVICES 76.92% L.P. --------- 100.00% GS GLOBAL FUNDING III, CO. Holding company for GS Global Delaware 1 GS GLOBAL FUNDING II 100.00% Funding IV, LLC CO. GSIP Holdco Cayman LTD Holding Company for GSIP Offshore [-] 1 GSEM (DEL) HOLDINGS, 100.00% Fund L.P. GS GLOBAL FUNDING Holding company for Hechshire Cayman Islands 1 GS FINANCIAL SERVICES 100.00% (CAYMAN) LLC Limited. L.P. GS HULL HOLDING, INC. Holding company for Hull Delaware 1 GOLDMAN SACHS GROUP, 100.00% INC. (THE GS INDIA HOLDINGS Holding company for investments Delaware 1 GOLDMAN SACHS GROUP, 100.00% (DELAWARE) L into India. INC. (THE GS INDIA HOLDINGS L.P. Holding company for investments Delaware 3 GOLDMAN SACHS GROUP, 74.99% into India. INC. (THE GOLDMAN SACHS GLOBAL 25.00% HOLDINGS GS INDIA HOLDINGS 0.01% (DELAWARE) L --------- 100.00% GS Pvt Bank Holdings LLC holding company for Irish bank Delaware 1 GOLDMAN SACHS GROUP, 100.00% structure INC. (THE ELQ Holdings (Del) LLC Holding company for new ESSG Delaware 2 GOLDMAN SACHS GROUP, 75.00% investing entitiesHolding company INC. (THE for new ESSG investing entities MLQ L.L.C 25.00% --------- 100.00% GS POWER HOLDINGS LLC Holding company for power Delaware 1 GOLDMAN SACHS GROUP, 100.00% generation assets obtained in the INC. (THE firm's acquisition of Cogentrix Energy, Inc. and National Energy & Gas Transmission, Inc. GOLDMAN SACHS (ASIA Holding company for PT Goldman Delaware 2 GOLDMAN SACHS GLOBAL 1.00% PACIFIC) L Sachs Indonesia. Entity in joint HOLDINGS operating agreement with Indonesian firm. Generates GOLDMAN SACHS 99.00% investment banking fee income. (CAYMAN) HOLDING --------- 100.00% SYNFUEL SOLUTIONS Holding company for Synfuel Delaware 2 GOLDMAN SACHS GROUP, 99.99% HOLDINGS LLC Holdings LLC. INC. (THE GS FINANCIAL SERVICES 0.01% L.P. --------- 100.00% WESTERN POWER INVESTMENTS Holding company for Teesside Power England 1 ELQ INVESTORS, LTD 100.00% LTD Limited J.ARON (CHINA) HOLDINGS Holding company for the WFOE set Delaware 1 GOLDMAN SACHS GLOBAL 100.00% L.L.C up for the commodities business. HOLDINGS MERCAY CORPORATION Holding Company for two entitis Delaware 1 AYCO SERVICES AGENCY, 100.00% that was established to provide L.P. insurance services in particular states. GS FINANCIAL SERVICES L.P. Holding company for various Delaware 1 GOLDMAN SACHS GROUP, 100.00% entites owned wholly or partially INC. (THE by GS that may incur material amounts of foreign income tax; most entities previously owned by GS Capital Markets, L.P.; GSCS Holdings II, LLC Holding Company of GS Capital Delaware 1 GSCS Holdings I, LLC 100.00% Strategies LLC GOLDMAN SACHS (JAPAN) LTD. Holding company of Goldman Sachs British Virgin 1 GOLDMAN SACHS GROUP, 100.00% Japan Co., Ltd. Islands INC. (THE GS Asia Corporate Holding company of GS (HK) Delaware 7 GOLDMAN, SACHS & CO. 1.83% Holdings LP Holdings Ltd which holds major AEJ entities. GOLDMAN SACHS GROUP, 14.26% INC. (THE GOLDMAN SACHS (ASIA) 13.78% FIN. HLDG GOLDMAN SACHS GLOBAL 0.93% HOLDINGS --------- 100.00% GSCS Holdings I, LLC Holding Company of GSCS Holdings Delaware 1 GOLDMAN SACHS GROUP, 100.00% II, LLC which in turn holds GS INC. (THE Capital Strategies LLC GS COMM ASSET HOL holding company of non-us Cayman Islands 1 GS ASIAN VENTURE 100.00% (CAYMAN)LTD. investments (DELAWARE) LL KILLINGHOLME POWER GROUP Holding company of the England 1 GOLDMAN SACHS GROUP 100.00% LTD Killingholme group of companies HOLDINGS ( purchased by ESSG. The group formerly held the Killingholme Power Station before its restructure. GOLDMAN SACHS GROUP Holding company. England 1 GOLDMAN SACHS (UK) 100.00% HOLDINGS ( L.L.C. SINGEL COOL ONE Holding Company. Maison Netherlands 1 GS FINANCIAL SERVICES 100.00% (Management structure GAH). L.P. Limited partner of Gestion d'Actifs Haussmann, SCA. MEP GS Investor (CayCo) Holding Entity Cayman Islands 1 MLQ L.L.C 100.00% Ltd CER HOLDINGS LP holding entity for CER Investments Cayman Islands 2 GSEM (DEL) HOLDINGS, 99.00% 1 and all further special purpose L.P. vehicles which are incorporated for the business purpose of CER Holdings GP 1.00% holding CERs --------- 100.00% GSPS (DEL) LP holding entity for GSPS Bermuda Delaware 2 GSPS STRATEGIES CORP 75.00% Corporation GOLDMAN SACHS GLOBAL 25.00% HOLDINGS --------- 100.00% MARS EQUITY CO., LTD. Holding equity in SEC. Japan 1 GOLDMAN SACHS REALTY 100.00% JAPAN COR AR Holdings GK Holding equity interst. Japan 1 MLQ INVESTORS, L.P. 100.00% C.H. White Flower Holding GK Frangipani Japan 1 AR Holdings GK 100.00% TORIIZAKA KAIHATSU TK Holding Hotel assets in Japan. Japan 3 GOLDMAN SACHS GROUP, 18.59% INC. (THE GS STRATEGIC 23.50% INVESTMENTS JAPAN GK TORIIZAKA KAIHATSU 5.00% --------- 47.09% GK TORIIZAKA KAIHATSU Holding Hotel Assets in Japan. Japan 2 GOLDMAN SACHS REALTY 0.83% JAPAN COR MLQ INVESTORS, L.P. 99.17% --------- 100.00% ASHITABA CREATION CO. LTD. Holding laon securely Shinjuku Japan 1 GOLDMAN SACHS REALTY 100.00% building morgage. JAPAN COR PALMWOOD CO., LTD Holding loans transferred from Japan 1 GOLDMAN SACHS REALTY 100.00% PIAJ, and assets purchased from JAPAN COR Hyogin Factor. GS EURO OPP FUND II LP Holding Partnership for the England 1 ELQ INVESTORS, LTD 75.00% European Opportunities Fund II
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- ENDEAVOR PRIVATE FUND Holding RE Trust beneficicary Japan 1 MLQ INVESTORS, L.P. 100.00% CO.LTD Interest. UMEDA KAIHATSU TMK Holding real estate. Japan 1 MLQ INVESTORS, L.P. 100.00% GK Blue Square Holding shares in Fakedelic Japan 1 JUPITER INVESTMENT 100.00% Holdings Co., LTd. CO,. LTD. PIA Holdings Cayman Tokyo Holding Shares. Cayman Islands 1 MLQ INVESTORS, L.P. 100.00% Bran GK CRYSTAL INVESTMENT Holding SPL. Japan 2 GOLDMAN SACHS REALTY 1.00% JAPAN COR MLQ INVESTORS, L.P. 99.00% --------- 100.00% GS GLOBAL FUNDING UK LTD Holds a Far East structured England 1 GOLDMAN SACHS 100.00% finance deal. INTERNATIONAL CITRINE INVESTMENT TK Holds a hotel in Osaka, Japan. Japan 3 GOLDMAN SACHS GROUP, 18.98% INC. (THE GS STRATEGIC 24.10% INVESTMENTS JAPAN CITRINE INVESTMENT 5.00% CO.,LTD. --------- 48.08% Rainbow Capital SRL Holds a residential building in People's 2 GOLDMAN SACHS GROUP, 39.47% Shanghai, China. Republic of INC. (THE China BAEKDU INVESTMENTS 60.53% LIMITED --------- 100.00% RUBY REALTY TK Holds commercial buildings in Japan 3 GOLDMAN SACHS GROUP, 19.57% Tokyo, Japan. INC. (THE GS STRATEGIC 25.00% INVESTMENTS JAPAN RUBY REALTY CO.,LTD. 5.00% --------- 49.57% MINATOMARU HOTEL HOLDINGS Holds hotels in Narita, Naha and Japan 3 GOLDMAN SACHS GROUP, 18.98% TK Chitose, Japan. INC. (THE GS STRATEGIC 24.10% INVESTMENTS JAPAN MINATOMARU HOTEL 5.00% HOLDINGS CO.L --------- 48.08% GOLDMAN SACHS GLOBAL Holds minority interests in Delaware 2 THE GOLDMAN, SACHS & 1.00% HOLDINGS various subsidiaries CO. L.L.C GOLDMAN SACHS GROUP, 99.00% INC. (THE --------- 100.00% GS MUNICIPAL PRODUCTS Holds sponsor certificates issued Delaware 2 GOLDMAN, SACHS & CO. 1.00% L.L.C. in tender option programs. GOLDMAN SACHS GROUP, 99.00% INC. (THE --------- 100.00% JAPAN HOTEL `&` RESORT K K Hotel REIT AM company (Regulated) Japan 1 MLQ INVESTORS, L.P. 100.00% GOLDMAN In accordance with law no. 1.194 Monaco 1 GOLDMAN SACHS GROUP 100.00% SACHS(MONACO)S.A.M. of 9 July 1997 and Sovereign HOLDINGS ( Ordinance no. 13.184 of 16 September 1997, as modified, the Minister of State has authorised the company to carry out the following activities: transfer of orders on the financial markets of s GS DIVERSIFIED FINANCE In connection with Televisa Delaware 1 GS FINANCIAL SERVICES 100.00% III LLC transaction. L.P. GS DIVERSIFIED FINANCE V In connection with Televisa Delaware 1 GS FINANCIAL SERVICES 100.00% LLC transaction. L.P. GS MACRO INVESTMENTS I LLC In connection with the MEIV Delaware 1 GS MACRO INVESTMENTS 100.00% transaction. LLC GS MACRO INVESTMENTS III In connection with the MEIV Delaware 1 GS MACRO INVESTMENTS 100.00% LLC transaction. LLC GS MACRO INVESTMENTS IV In connection with the MEIV Delaware 1 GS MACRO INVESTMENTS 100.00% LLC transaction. LLC GS Macro Investments V LLC In connection with the MEIV Delaware 1 GS MACRO INVESTMENTS 100.00% transaction. LLC GS MACRO INVESTMENTS II In connection with the MEIV Delaware 1 GS MACRO INVESTMENTS 100.00% LLC transaction.In connection with the LLC MEIV transaction. DEMAC FINANCIAL SERVICES Incorporated to provide debt The Czech 1 MTGLQ INVESTORS, L.P. 91.62% S.R.O servicing and administrative Republic services for CDV-1, Ltd.'s loan assets. AYCO SERVICES AGENCY, L.P. Insurance Agency Delaware 2 GS AYCO HOLDINGS LLC 1.00% THE AYCO COMPANY L.P. 99.00% --------- 100.00% Rothesay Life (Cayman) Insurance holding company for UK Cayman Islands 1 Rothesay Life, L.P. 100.00% Limited insurance business PEARL STREET INSURANCE Insures specific hazards and Vermont 1 GOLDMAN SACHS GROUP, 100.00% COMPANY operational risks of the firm. INC. (THE GOLDMAN SACHS CAPITAL Interest-rate swaps dealer; Delaware 2 GS FINANCIAL SERVICES 99.00% MARKETS, non-regulated entity which trades L.P. various fixed income derivative products with customers and GOLDMAN SACHS CAPITAL 1.00% affiliates; MARKETS, --------- 100.00% BAEKDU INVESTMENTS LIMITED Intermediate holding company of Cayman Islands 1 GS FINANCIAL SERVICES 100.00% ASSG for investments with REPIA. L.P. GOLDMAN SACHS CANADA INC. International investment bank and Ontario 1 GOLDMAN SACHS GROUP, 100.00% Canadian broker/dealer INC. (THE specializing in fixed income products; regulated Broker/Dealer; all officers of the company must be registered as such with the regulator. SLK GLOBAL MARKETS LTD. Introduces foreign customer trades England 1 GS EXECUTION AND 100.00% to Spear, Leeds & Kellogg, LP on a CLEARING, L.P fully-disclosed basis. EXPRESS SECURITIZATN Invest in Cho Hung bank deal. Korea 1 BEST INVESTMENT 100.00% SPECIALTY (DELAWARE) LLC EXPRESS II SECURITIZATION Invest in Cho Hung bank deal. Korea 1 BEST INVESTMENT 100.00% SPEC (DELAWARE) LLC GS STRATEGIC INVESTMENTS Invest in TK arrangements in Japan Delaware 1 GS FINANCIAL SERVICES 100.00% JAPAN L.P. GS Capital Partners Aurum Investement in white electronic Mauritius 1 GOLDMAN SACHS GROUP, 100.00% Hold goods company in China, economics INC. (THE will be swapped to GS Capital partners VI Funds ENDEAVOR PRIVATE FUND TK Investing in real estate. Change Japan 3 GOLDMAN SACHS GROUP, 12.14% from EQPU to Consolidated due to INC. (THE purchase TK interest from 3rd party GS STRATEGIC 25.00% INVESTMENTS JAPAN ENDEAVOR PRIVATE FUND 5.00% CO.LTD --------- 42.14% GS Inv Strategies Canada Investment Advisory for Liberty Canada 1 GOLDMAN SACHS GROUP, 100.00% Inc Harbour funds INC. (THE GOLDMAN SACHS JAPAN CO., Investment bank and securities Japan 1 GOLDMAN SACHS (JAPAN) 100.00% LTD. business. LTD. GOLDMAN SACHS Investment banking activities; Netherlands 1 GOLDMAN SACHS GROUP, 100.00% (NETHERLANDS) B. fixed income trader. Executes, INC. (THE clears and carries all types of futures transactions on the MATIF for affiliated entities. GS PARIS Investment banking activities; France 2 GOLDMAN, SACHS & CO. 99.00% fixed income trader. Executes, clears and carries all types of GOLDMAN SACHS GLOBAL 1.00% futures transactions on the MATIF HOLDINGS for affiliated entities. --------- 100.00% DUNVEGAN INVESTMENTS, LTD Investment company (dormant). Cayman Islands 1 GOLDMAN SACHS 100.00% HOLDINGS (U.K.) PERCIER FINANCE SAS Investment company. France 1 ELQ INVESTORS, LTD 90.00% GS DIRECT MEZZANINE 2006, Investment fund Delaware 1 GOLDMAN SACHS GROUP, 90.40% L.P. INC. (THE GS MEZZANINE PARTNERS 2006 Investment Fund Delaware 1 GOLDMAN SACHS GROUP, 100.00% INC. (THE GLOBAL TECHNOLOGIES Investment Holding British Virgin 1 MLT INVESTMENTS LTD. 100.00% INTERNATIO Islands Goldman Sachs (HK) Co. Investment holding Hong Kong 1 GS Holdings (Hong 100.00% Ltd. Kong) Ltd
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- Goldman Sachs (HK) Funding Investment holding - subscribing Hong Kong 2 Goldman Sachs (HK) 5.00% for a bond to invest in US Co. Ltd. treasuries GS Killingholme 95.00% Cayman Inv III --------- 100.00% EXCHANGE REALTY SRL Investment holding company formed Barbados 2 GOLDMAN SACHS GROUP, 39.47% for the purpose of investing in INC. (THE real estate in China BAEKDU INVESTMENTS 60.53% LIMITED --------- 100.00% Oxley Investments B.V. Investment holding for ASSG [-] 1 GS ASIAN VENTURE 100.00% Indonesian investments. It is (DELAWARE) LL 100% owned by GS Asian Venture (Delaware) L.L.C. (0191). GS RE Investments Investment holding for real estate Cayman Islands 1 GS ASIAN VENTURE 100.00% Holdings Ltd investments. (DELAWARE) LL GS Direct Pharma Limited investment in pharmaceutical Mauritius 1 GS Direct, L.L.C. 100.00% company in China WWD Topaz Investment Investment in Vatika Group, a Mauritius 1 WWD Investment 100.00% Limited Gurgaon (India) based real estate Holdings Ltd developer LFG Holdings L.L.C. Investment is a market data base Delaware 1 GSUIG, LLC 100.00% and marketing consulting firm based in Miami GS ASSET MANAGEMENT CO., Investment management of Japan 2 GOLDMAN SACHS GROUP, 1.00% LTD securities investment trusts; INC. (THE discretionary and non-discretionary investment GOLDMAN SACHS ASSET 99.00% advisory business since 4/1/02. MANAGEMENT Established in connection with --------- obtaining a mutual fund license in 100.00% Japan.Limited license to engage in offering of offshor GS Capital Partners Auto Investment vehicle for Fuyao Auto Mauritius 1 GOLDMAN SACHS GROUP, 100.00% Glass Glass. INC. (THE GSCP VI Employee Fund LP Investment vehicle for gS Delaware 1 GOLDMAN SACHS GROUP, 100.00% employees investing in GS Cap INC. (THE Partners VI GS HONY HOLDINGS I LTD Investment vehicle for Hony Cayman Islands 1 GS ASIAN VENTURE 100.00% Capital III Investment vehicle for (DELAWARE) LL Hony Capital III GS HONY HOLDINGS II LTD Investment vehicle for the firm's Cayman Islands 1 GS ASIAN VENTURE 100.00% interest in Hony Capital fund III (DELAWARE) LL LP GSUIG, LLC investment vehicle for UIG Delaware 1 GOLDMAN SACHS GROUP, 100.00% INC. (THE BEIJING DE SHANG VENTURE Investor in Beijing Gao Hua People's 1 GOLDMAN SACHS (ASIA) 100.00% CCL Securities Company Limited. Republic of FIN. HLDG China GS GLOBAL FUNDING IV, LLC Investor in preferred securities. Delaware 1 GS GLOBAL FUNDING 100.00% III, CO. GS GLOBAL INVESTMENTS CO. Investor in preferred securities. Delaware 1 GS FINANCIAL SERVICES 100.00% L.P. MTGLQ INVESTORS, L.P. Investor in various real estate Delaware 2 GOLDMAN SACHS GROUP, 99.00% transactions INC. (THE MLQ L.L.C 1.00% --------- 100.00% BEIJING GAO WANG VENTURE Invests in Beijing Gao Hua People's 1 GOLDMAN SACHS (ASIA) 100.00% CCL Securities Company Limited. Republic of FIN. HLDG China BEIJING HOU FENG VENTURE Invests in Beijing Gao Hua People's 1 GOLDMAN SACHS (ASIA) 100.00% CCL Securities Company Limited. Republic of FIN. HLDG China RIO TOCURUI CLA S.DE Invests in non-performing loan Brazil 1 MTGLQ INVESTORS, L.P. 100.00% CREDITOS portfolios in Brazil. R&G CO., LTD Invests in non-performing loans. Japan 2 GOLDMAN SACHS REALTY 98.33% JAPAN COR JLQ LLC 1.67% --------- 100.00% MG PARTNERS TK Invests in real estate. Japan 2 MG PARTNERS CO LTD. 5.00% KIRI (DELAWARE) LLC 75.00% --------- 80.00% GS KILLINGHOLME CAYMAN Is a part of the structured Cayman Islands 1 KILLINGHOLME POWER 100.00% INVESME investing trade and will enter LIMITED into Swaps. GOLDMAN SACHS CANADA Issues commercial paper in Canada Nova Scotia 2 GOLDMAN SACHS GROUP, 99.00% FINANCE C and lends the proceeds to INC. (THE regulated and unregulated GS affiliates in Canada. GOLDMAN SACHS CANADA 1.00% FINANCE I --------- 100.00% GS FUNDING OPPORTUNITIES Issuing shares and effecting Delaware 1 GS FINANCIAL SERVICES 100.00% II transfers, making distributions, L.P. entering into and performing its obligations, and exercising and enforcing its rights under each GS Funding II transaction document. GS FUNDING OPPORTUNITY Issuing shares and effecting Delaware 1 GS FUNDING 100.00% transfers, making distributions, OPPORTUNITIES II entering into and performing its obligations, and exercising and enforcing its rights under each GS Funding transaction document. GREEN MOUNTAIN ONE TK It has been set up jointly with Japan 2 GREEN MOUNTAIN ONE 5.00% Dandelion Investmenst YK CO.,LTD. ("Dandelion") and Mizuho Security, a third party, to acquire DANDELION INVESTMENTS 55.00% nonperforming loans from TK LindenWood, an existing SPC of the --------- ASSG business. 60.00% PMF-1 (BES III) It is not a true legal entity. PMF United Kingdom 1 ELQ INVESTORS, LTD 100.00% 1 (2403) has a non performing porfolio for which the desk needs separate reporting and entity 2398 has been set up to facilitate this. PMF-2 (BES III), LTD It is not a true legal entity. PMF United Kingdom 1 GS EURO OPP FUND BV 100.00% 2 (2404) has a non performing porfolio for which the desk needs separate reporting and entity 2399 has been set up to facilitate this. GS Direct, L.L.C. It is wholly owned by GS Group, Delaware 1 GOLDMAN SACHS GROUP, 100.00% Inc. and this entity will be used INC. (THE to make investments. BRENTA REAL ESTATE SRL Italian Co., to purchase , sell Italy 1 ELQ INVESTORS, LTD 100.00% exchange , build and manage properties J-Aron Fundo Investimento J. ARON & COMPANY will own 100% of [-] 1 J. ARON & COMPANY 100.00% JFIF GSJC MASTER LESSEE LLC Jersey City Property Delaware 1 GOLDMAN SACHS GROUP, 100.00% INC. (THE
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- M B ACQUISITIONS BV Joint venture company for the Mont Netherlands 1 ELQ INVESTORS, LTD 50.00% Blanc non-performing loan portfolio MADISON/SPEC SITUATIONS Joint venture partner to purchase Delaware 1 SSIG 100.00% VALUE small bankrupcy trade clients. Just Options LLC Just Options is a joint venture Delaware 1 GS EXECUTION AND 100.00% between Peak 6 and GSEC where we CLEARING, L.P are currently taking a majority share in the company's net losses. Accounting Policy is mandating that we treat this as a consolidating VIE until the situation changes. EXCELLENT EQUITY TK Kamata kosan ( Residential); Japan 3 GOLDMAN SACHS GROUP, 19.57% Excellent to purchase 2 retail INC. (THE store buildings , 1 hotel plus parking area ( land), 1 residential GS STRATEGIC 25.00% and 5 lands INVESTMENTS JAPAN EXCELLENT EQUITY 5.00% CO.,LTD. --------- 49.57% GSAM KOREA LIMITED Korea asset management business Korea 1 GOLDMAN SACHS ASSET 100.00% MANAGEMENT Beeston Investments Korea futures & options trading. Cayman Islands 1 GOLDMAN SACHS (ASIA 100.00% Limited Holds a Foreign Investor status in PACIFIC) L Korea (FINI).Maples & Calder is the Cayman Islands agent. Blue Lotus Limited Korea Principal Finance business Ireland 1 GS ASIAN VENTURE 100.00% for the Asia GSPS desk (DELAWARE) LL GSJC LAND LLC Land owner for construction Delaware 1 GOLDMAN SACHS GROUP, 100.00% project in Jersey City. INC. (THE GSJC 50 HUDSON URBAN Lessee and construction agent for New Jersey 1 GOLDMAN SACHS GROUP, 100.00% RENEWAL L construction project in Jersey INC. (THE City. GSJC 30 HUDSON URBAN Lessee and construction agent for New Jersey 1 GOLDMAN SACHS GROUP, 100.00% RENEWAL L construction project in Jersey INC. (THE City. MLK DRIVE URBAN RENEWAL Lessee and construction agent for New Jersey 1 GOLDMAN SACHS GROUP, 100.00% LLC construction project in Jersey INC. (THE City. GOLDMAN SACHS Licensed bank in the U.K. performs England 1 GOLDMAN SACHS GROUP 100.00% INTERNATIONAL BA foreign currency option and swap HOLDINGS ( trading and is a deposit-taking institution Goldman Sachs Licensed bank in the U.K. performs United Kingdom 1 GOLDMAN SACHS 100.00% International Ba foreign currency option and swap INTERNATIONAL BA trading and is a deposit-taking institution ARROW REINSURANCE Licensed insurance company to act Bermuda 1 GOLDMAN SACHS GROUP, 100.00% as a "transformer" between INC. (THE traditional insurance and reinsurance markets and the capital markets. Holds casualty bond positions. ARROW CORP MEMBER Licensed insurance entity that Delaware 2 GOLDMAN SACHS GROUP, 75.00% HOLDINGS LLC facilitates the life settlements INC. (THE agency business,including the premium finance business. GOLDMAN SACHS GLOBAL 25.00% HOLDINGS --------- 100.00% GOLDMAN SACHS RISK Licensed re-Insurance intermediary Delaware 2 GOLDMAN SACHS GROUP, 99.00% ADVISORS, L in NY that can act as re-insurance INC. (THE broker; licensed re-insurance broker in CT. GS Risk Advisors, Inc. 1.00% --------- 100.00% LONGMORE CAPITAL, LLC life settlement companylife Delaware 1 GS RE Holdings Inc. 100.00% settlement company MEP GS INVESTOR L.P. Limited Partner in an Investment United Kingdom 2 GOLDMAN SACHS GLOBAL 1.00% Fund HOLDINGS MTGLQ INVESTORS, L.P. 99.00% --------- 100.00% Litton Loan Servicing LP Litton Loan Servicing LP, a [-] 2 Litton Mortgage 99.99% Delaware limited partnership, is Servicing LLC approved to service mortgage loans. The entity is licensed to Litton Cons & Corp LLC 0.01% conduct business in variuous --------- states and subject to regulation 100.00% and examination by various agencies and certain states. GS CREDIT PARTNERS Loan trading; Money lender Japan 1 GOLDMAN SACHS REALTY 100.00% (JAPAN), LT license; License No: Tokyo JAPAN COR (3)No.22615 GS SPEC. LENDING CLO-I LTD loans to middle market companies Cayman Islands 1 GS SPECIALTY LENDING 100.00% HOLDING I J. ARON & COMPANY (U.K.) London based dealer in base metal, England 2 GOLDMAN SACHS 99.00% petroleum, oil and coffee/cocoa in HOLDINGS (U.K.) the spot and forward markets; commodities dealer in London GOLDMAN SACHS GROUP 1.00% HOLDINGS ( --------- 100.00% GOLDMAN SACHS ASSET MGMT London-based provider of asset England 2 GOLDMAN SACHS 99.00% INT'L management and investment advisory HOLDINGS (U.K.) services, covering European and other international asset classes. GOLDMAN SACHS GROUP 1.00% HOLDINGS ( --------- 100.00% Arrow Capital Risk Maintains Insurance Broker's Bermuda 1 GOLDMAN SACHS RISK 100.00% Services Li license in Bermuda, effective ADVISORS, L 3/27/98; reinsurance intermediary that can act as reinsurance broker. TEIBOW HOLDINGS, CO., LTD. Making and selling Stationery Japan 1 JUPITER INVESTMENT 100.00% CO,. LTD. TK Universal Hotel Management company related to Japan 3 GOLDMAN SACHS GROUP, 18.98% Management Citrine deal INC. (THE GS STRATEGIC 24.10% INVESTMENTS JAPAN GK Universal Hotel 5.00% Management --------- 48.08% ARCHON HOSPITALITY CO, LTD Management of Hotels Japan 1 GOLDMAN SACHS REALTY 100.00% JAPAN COR OMACHI ONSEN KAIHATSU CO, Management of Ryokan.(Japannese Japan 1 GOLDMAN SACHS REALTY 100.00% LTD. Hotel).Management of JAPAN COR Ryokan.(Japannese Hotel). THE GOLDMAN, SACHS & CO. Managing General partner of Delaware 1 GOLDMAN SACHS GROUP, 100.00% L.L.C Goldman, Sachs & Co. INC. (THE GOLDMAN, SACHS & CO. Managing general partner of Germany 1 GOLDMAN SACHS GROUP, 100.00% FINANZ GM Goldman, Sachs & Co. oHG, a German INC. (THE general partnership; non regulated Taurus Leasing Co. Ltd Master lessee of KK Taurus Realty Japan 1 GOLDMAN SACHS REALTY 100.00% JAPAN COR
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- GS ACA,LLC Member in Agricultural Company of Delaware 1 GOLDMAN SACHS GROUP, 100.00% America Holdings LLC, a joint INC. (THE venture with Duquesne Partners to invest in agricultural (farm) real estate RIO PARANA CLA SECUR DE Merged survivor of Rio Potiguar BRAZIL 2 MTGLQ INVESTORS, L.P. 99.99% CREDIT Companhia Securitizadora de Creditos Financeiros and this GS FINANCIAL SERVICES 0.01% entity. L.P. --------- 100.00% GOLDMAN SACHS MEXICO Mexican Broker-Dealer; Group Inc. Mexico 2 GOLDMAN SACHS GROUP, 99.99% CASA DE B owns 43,995,599 shares; Global INC. (THE Holdings owns 4,400 shares; as of 10/30/01 no longer Approved GOLDMAN SACHS GLOBAL 0.01% Person and will not actively HOLDINGS engage in the securities or --------- advisory business 100.00% DANDELION INVESTMENTS Mizuho JV (TK contributor to Japan 1 GOLDMAN SACHS REALTY 100.00% CO.,LTD. Green Mountain One) JAPAN COR GOLDMAN SACHS CREDIT nation and syndication of Bermuda 2 GSCP (DEL) INC. 99.90% PARTNERS commercial loans as well the secondary trading of such GSCP (DEL) LLC. 0.10% loans.Inventory and trade lesser --------- developed country debt and senior 100.00% bank debt; to invest in assignments and participations in certain bank debt, debt of other lenders and anyo Bridgewater ODC, LLC New entity to house a new US data Delaware 1 GOLDMAN SACHS GROUP, 100.00% center property INC. (THE GOLDMAN, SACHS & CO. Nominee Company for Rhein-Donau Germany 1 GOLDMAN, SACHS & CO. 100.00% VERWALTUNGS G Capital Partners Fund and GS OHG Capital Partners II and III (Germany) C.L.P. CL INVESTMENTS LIMITED Non-regulated Cayman Island based Cayman 1 GOLDMAN SACHS GROUP, 100.00% entity established to invest in Islands INC. (THE an unaffiliated entity which holds a consumer loan portfolio; contribute equity to a trust which will hold ITT receivables EURO-SPLITTER B.V. Non-regulated Dutch entity Netherlands 1 J. ARON & COMPANY 100.00% established to invest in a Antilles condensate splitter. GOLDMAN SACHS FX Non-regulated entity which is a Singapore 1 GS Holdings (Hong Kong) 100.00% (SINGAPORE) P holding company and deals in Ltd foreign exchange and derivative contracts J. ARON & COMPANY Non-regulated entity which trades Singapore 1 GOLDMAN SACHS FX 100.00% (SINGAPORE) in physical oil and oil-related (SINGAPORE) P derivative contracts GOLDMAN SACHS SERVICES Non-regulated entity; employer of British 1 GOLDMAN, SACHS & CO. 100.00% LIMITED certain London office personnel Virgin Islands GOLDMAN, SACHS & CO. Non-regulated Frankfurt based Germany 1 GOLDMAN SACHS GROUP, 100.00% WERTPAPIE entity which issues warrants and INC. (THE purchases offsetting OTC options in the fixed income, eqity, commodity and currency markets. GOLDMAN SACHS (CAYMAN) Non-regulated holding company and Cayman 2 GOLDMAN SACHS GROUP, 97.00% HOLDING General Partner of Goldman Sachs Islands INC. (THE & Co. OHG; parent of The Goldman Sachs (Cayman) Trust Limited GOLDMAN SACHS GLOBAL 3.00% HOLDINGS --------- 100.00% GOLDMAN SACHS (UK) L.L.C. Non-regulated holding company for Delaware 1 GOLDMAN SACHS GROUP, 100.00% Goldman Sachs Overseas Limited; INC. (THE established to achieve tax efficiencies within UK group; GOLDMAN SACHS OVERSEAS Non-regulated Paris based entity Delaware 2 GOLDMAN SACHS GROUP, 99.00% FINANCE formed to issue a $1.5 billion INC. (THE French France Note; finance Company; Goldman Sachs (France) 1.00% Finance --------- 100.00% FLEET TRADE & TRANSPORT Non-regulated petroleum shipping Delaware 1 GOLDMAN SACHS GROUP, 100.00% (USA) entity; INC. (THE GOLDMAN SACHS HOLDINGS Non-regulated tax efficient England 1 GOLDMAN SACHS GROUP 100.00% (U.K.) holding company for U.K. HOLDINGS ( pass-through entities GOLDMAN SACHS PROPERTY Non-regulated UK based entity England 1 GOLDMAN SACHS GROUP, 100.00% MGMT LI which holds the leasehold INC. (THE improvements for Peterborough Court and incurs all expenses for operating the building; branch in Paris; GS GLOBAL COMMODITIES Oil and Gas commodity operating Nova Scotia 1 GS GLOB 100.00% (CANADA)C entity COMMODITIES(CAN)HOLDIN FLEET TRADE & TRANSPORT Oil shipping and transporting; England 1 GOLDMAN SACHS GROUP 100.00% LIMITE non-regulated London based HOLDINGS ( petroleum shipping entity; GS HEADQUARTERS LLC Operating entity for Site 26 Delaware 2 GOLDMAN SACHS GROUP, 99.80% INC. (THE SITE 26 HOLDINGS INC 0.20% --------- 100.00% YELLOW ACQUISITION LTD Opportunities Fund SPV to hold England 1 GS EURO OPP FUND BV 100.00% Yellow NPL Portfolio LONGMORE CREDIT originate and service Life Delaware 1 GS RE Holdings Inc. 100.00% SERVICES, LLC Finance business GS SPECIALTY LENDING Originates (or purchases) loans Delaware 1 GOLDMAN SACHS GROUP, 100.00% HOLDINGS made to middle market borrowers INC. (THE that cannot sufficiently access the market through traditional senior bank debt lenders. GOLDMAN SACHS H&HC Originates and services FHA New York 1 GOLDMAN SACHS GROUP, 100.00% CAPITAL COR insured mortgages; General INC. (THE Partner in Goldman Sachs Housing and Health Care Funding Company G.S. FINANCIAL MARKETS, OTC derivatives dealer (also Delaware 1 GOLDMAN SACHS GROUP, 100.00% L.L.C. commonly known as BD Lite). It INC. (THE currently engages in OTC options on the S&P 500 Index. BROKER DEALER LITE 1 OTC Derivatives Dealer; Delaware 2 GOLDMAN SACHS GROUP, 99.00% broker/dealer; SEC File No. INC. (THE 8-51753 G.S. FINANCIAL MARKETS, 1.00% L.L.C. --------- 100.00%
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- ARROW CAPITAL REINSURANCE ow Capital Risk Services Bermuda 1 GOLDMAN SACHS GROUP, 100.00% CO., Limited).will be the risk taking INC. (THE entity for our property catastrophe reinsurance business. Arrow Capital Re will not have any employees. All reinsurance professionals supporting the business will be employees of GS Risk Advisors FUNABIKI CO., LTD. Owner of Hotel. Japan 1 AR Holdings GK 100.00% REP LKS Realty, LLC Ownership and investment in Delaware 1 GOLDMAN SACHS GROUP, 100.00% office property known as INC. (THE Lakeside Atrium, located in Santa Clara, CA GS GLOB COMMODITIES(CAN) Ownership of a newly formed Delaware 3 GS GLOB 1.00% HOLDIN Canadian entity which will COMMODITIES(CAN)HOLDIN conduct the firms Canadian commodities business. GOLDMAN SACHS GLOBAL 25.00% HOLDINGS GS FINANCIAL SERVICES 74.00% L.P. --------- 100.00% GS GLOB COMMODITIES(CAN) Ownership of a newly formed Delaware 1 GS FINANCIAL SERVICES 100.00% HOLDIN Canadian entity which will L.P. conduct the firms Canadian commodities business. REP PRS II FTB, L.L.C. Ownership of Fountains at Delray Delaware 1 GOLDMAN SACHS GROUP, 100.00% Beach Apartment Homes INC. (THE HAMBRE INC Owns and leases its employees to New York 1 GS AYCO HOLDINGS LLC 100.00% the Ayco Company LP and to The Ayco Services Agency LP (monthly mgmt charge between the entities for compensation and benefits related to its employees). ASTORIA INVESTMENT Owns approximately 18.6% of the None 1 GS Holdings Mauritius 100.00% VENTURES, I ERP shares issued by a Limited Philippine metro operating company. KAWASAKI HOLDINGS TK Owns hotel assets in Japan. Japan 3 GOLDMAN SACHS GROUP, 11.53% INC. (THE GS STRATEGIC 23.50% INVESTMENTS JAPAN KAWASAKI HOLDINGS 5.00% CO.LTD. --------- 40.03% ASAMA ONSEN KAIHATSU CO., Owns two hot-spring hotels in Japan 1 GOLDMAN SACHS REALTY 100.00% LTD Japan. JAPAN COR GS MEHETIA PARTNERSHIP LP Parent company of GS Mehetia Delaware 2 GS MEHETIA CORP 1.00% Holdings Inc. GS MEHETIA LLC 99.00% --------- 100.00% MEHETIA HOLDINGS INC Parent company of Luge LLC, Delaware 3 GS MEHETIA CORP 20.00% Mehetia Inc and Carrera2 LLC GS MEHETIA LLC 50.00% GS MEHETIA PARTNERSHIP 30.00% LP --------- 100.00% GS MEHETIA LLC Parent company of Mehetia Delaware 1 GOLDMAN SACHS GROUP, 100.00% Holdings Inc. INC. (THE GS MEHETIA CORP Parent company of Mehetia Delaware 1 GOLDMAN SACHS GROUP, 100.00% Holdings, Inc. and GS Mehetia INC. (THE Partnership LP. GS AYCO HOLDINGS LLC Parent company to The Ayco Delaware 1 GOLDMAN SACHS GROUP, 100.00% Company, LP, Saratoga Springs, INC. (THE LLC, also is a General Partner for the Ayco Services Agency LP. GS WIND POWER II LLC Part of a wind energy project. Delaware 1 GSFS INVESTMENT I CORP 100.00% GS WIND LLC Part of a wind energy project. Delaware 1 GS FINANCIAL SERVICES 100.00% L.P. Amagansett FX Part of structured investing United 1 GS FINANCIAL SERVICES 100.00% trade which will enter into Kingdom L.P. contracts and options GS LONGPORT INVESTMENT Part of structured transaction Delaware 1 LAFFITTE PARTICIPATION 100.00% CORPORA with BNP Paribas. 12 GS OCEANSIDE INVESTMENTS Part of structured transaction Delaware 1 GS LONGPORT INVESTMENT 100.00% LLC with BNP Paribas. CORPORA GSFS PRINCIPAL STRATEGIES part of the Killingholme Cayman 1 GS FINANCIAL SERVICES 100.00% restructure in the AmSSG business Islands L.P. AMERICAN GAS ROYALTY Part of the VPP Dominion Delaware 1 GOLDMAN, SACHS & CO. 100.00% TRUST Transaction. SITE 26 HOLDINGS INC Partial Owner of GS Headquarter Delaware 1 GOLDMAN SACHS GROUP, 100.00% LLC INC. (THE GS DIVERSIFIED INVESTMENTS Participate in PBL structured Delaware 1 GS DIVERSIFIED FUNDING 100.00% LTD financing transaction. LLC GS DIVERSIFIED HOLDINGS Participate in PBL structured Cayman 1 GS DIVERSIFIED FUNDING 100.00% LTD financing transaction. Islands LLC GS DIVERSIFIED FUNDING Participate in PBL structured Delaware 1 GOLDMAN SACHS GROUP, 100.00% LLC financing transaction. INC. (THE WYNDHAM INVESTMENTS I Participate in PBL structured Cayman 2 GS FINANCIAL SERVICES 86.67% LTD financing transaction. Islands L.P. GS DIVERSIFIED FUNDING 13.33% LLC --------- 100.00% WYNDHAM INVESTMENTS II Participate in PBL structured Cayman 1 WYNDHAM INVESTMENTS I 100.00% LTD financing transaction. Islands LTD FAIRWAY RESOURCES L.P. Partnership focused on oil and United 1 MTGLQ INVESTORS, L.P. 100.00% gas production and ownership of States lease acreage. GS RBD HOLDINGS,L.P. Partnership will hold an equity Delaware 2 GS RBD HOLDINGS I CORP 99.00% interest in a new Russian broker/dealer entity. GS RBD HOLDINGS II CORP 1.00% --------- 100.00% KIRI (DELAWARE) LLC Pass-through entity used in Delaware 1 GOLDMAN SACHS (ASIA) 100.00% connection with TK investing FIN. HLDG structures. GK Arisugawa Finance PFS Deal Japan 1 AR Holdings GK 100.00% GOLDMAN SACHS S.G.R. Portfolio management company Italy 2 GOLDMAN SACHS HOLDINGS 1.00% S.P.A (U.K.) GOLDMAN SACHS (UK) 99.00% L.L.C. --------- 100.00% GS STRATEGIC INVESTMENTS Potentially holding ASSG Delaware 2 EUSTON ENTERPRISES LTD 50.00% (DELA positions FAIRWAY ENTERPRISES LTD 50.00% --------- 100.00% Fantasia (Cayman) Ltd Pre-IPO investment in China. The Cayman 2 GOLDMAN SACHS GROUP, 13.49% deal entails investment in Islands INC. (THE Equity and debt of real estate developer with most projects in GS RE Investments 53.33% Shenzhen and Chengdu. Holdings Ltd --------- 66.83% Longmore Credit LLC premium finance company Delaware 1 GS RE Holdings Inc. 100.00% TRIUMPH INVESTMENTS Primarily established to hold Ireland 1 BEST II 100.00% (IRELAND) ASSG positions in Korean assets. INVESTMENTS(DELAWARE)L TRIUMPH II INVESTMENT Primarily established to hold Ireland 1 GS ASIAN VENTURE 100.00% (IRELAND ASSG positions in Korean assets. (DELAWARE) LL BEST II INVESTMENTS Primarily established to hold Delaware 1 GS FINANCIAL SERVICES 100.00% (DELAWARE)L investments in Triumph L.P. Investments (Ireland) Limited and Triumph III Investments (Ireland) Limited.
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- GS STRATEGIC INVESTMENTS Primarily established to hold Delaware 1 MLT INVESTMENTS LTD. 100.00% (ASIA private equity positions of ASSG RESTAMOVE IRELAND LIMITED Primarily established to hold Ireland 1 GS FINANCIAL SERVICES 100.00% proprietary positions in Korean L.P. and AustraliaN assets. Trading activity will be limited to affiliates and Korean broker/dealers. MADISON/SPEC SITUATIONS Primarily in the business of Delaware 1 SSIG 100.00% VALUE buying bankruptcy trade claims GS EURO STRATEGIC INV GRP Primarily invests in non Netherlands 1 GS EURO OPP FUND BV 100.00% BV investment grade or distressed securities and loans of European companies. GS EUROPEAN PERFORMANCE Primarily invests in senior bank Ireland 2 GOLDMAN SACHS GROUP, 100.00% FUND loans of European companies and INC. (THE related activities. GOLDMAN SACHS GROUP 0 HOLDINGS ( --------- 100.00% GS EUROPEAN OPPORTUNITY Primary activity is to provide Cayman Islands 1 MTGLQ INVESTORS, L.P. 75.00% FUND, subordinated debt to the various Opportunities Fund entities. Note that this Cayman L.P. was formed to replace the existing Delaware L.P. of the same name which was disolved on 28/12/04. Money Partners Financial Principal business of NEWCO is to [-] 1 GOLDMAN SACHS GROUP 100.00% CoLtd act as subparticipant for loans HOLDINGS ( originated by GSIB Milan Branch and the secondary trading of such loans. Dhoni Cayman Ltd Private equity vehicle for GS to Cayman Islands 2 Dhoni Cayman Holding 99.00% Partnership invest in Urban Infrastructure Ltd Real Estate Investment Fund managed by Urban Infrastructure Dhoni Cayman GP Ltd 1.00% Capital Advisors.Private equity --------- vehicle for GS to invest in Urban 100.00% Infrastructure Real Estate Investment Fund managed by Urban Inf FLEET PROPERTIES Property company incorporated in Portugal 2 ELQ INVESTORS, LTD 99.00% Portugual for the purpose of participating in the public MTGLQ INVESTORS, L.P. 1.00% auctions of properties held as --------- collateral for the NPL portfolios 100.00% held by PMF-2, Ltd Savu Properties PTE. Ltd. Property management. Singapore 2 GOLDMAN SACHS GROUP, 20.23% INC. (THE BAEKDU INVESTMENTS 30.00% LIMITED --------- 50.23% GS MAURITIUS I Proprietary trading and inter Mauritius 1 GS FINANCIAL SERVICES 100.00% company otc derivatives - special L.P. purpose vehicle formed to deal proprietarily in Indian shares - no client relationships - unregulated. Established to engage in trading in financial products including equity securities in I GOLDMAN SACHS GROUP Y Provide assets and services to Mexico 2 GOLDMAN SACHS GROUP, 99.00% COMPANIA Goldman Sachs Mexico Casa de INC. (THE Bolsa, S.A. de C.V. in Mexico City, or others as deemed GOLDMAN SACHS GLOBAL 1.00% appropriate. HOLDINGS --------- 100.00% ARCHON GROUP ITALIA S.R.L Provides consulting services Italy 1 ARCHON INTERNATIONAL, 100.00% relating to assignment, INC. acquisition, evaluation and management of immovable assets and/or assignment & management of credits. THE AYCO COMPANY L.P. Provides financial counseling to Delaware 2 GS AYCO HOLDINGS LLC 99.00% individuals employed by corporations. SARATOGA SPRINGS LLC 1.00% --------- 100.00% GOLDMAN SACHS REALTY Provides liaison services and Japan 1 MLQ INVESTORS, L.P. 100.00% JAPAN COR other activities with respect to real estate loans, transactions in or outside of Japan, holds leases for Japan based entities, and Japanese real estate agent services. ARCHON GROUP FRANCE S.A.S Provides real estate loan and France 2 SINGEL COOL ONE 99.98% property asset management as well as underwriting services. SINGEL COOL TWO 0.02% --------- 100.00% WILLIAM STREET FUNDING Provides sources of liquidity for Delaware 1 WILLIAM STREET EQUITY 100.00% potential funding of commitments initiated in William Street Commitment Corporation. NATIONAL HEALTHCARE Provides temporary nurse staffing Florida 1 GOLDMAN SACHS GROUP, 100.00% STAFFING, to medical institutions. INC. (THE GS Admin Provision of administration Hong Kong 1 GOLDMAN SACHS 100.00% Services(Asia)Limited services (CAYMAN) TRUST, Savu Investments Ltd Purchase of 100% shares of asset Cayman Islands 2 GOLDMAN SACHS GROUP, 20.22% holding company Savu Investments INC. (THE Ltd which is holding Hitachi Towers in Singapore. GS RE Investments 30.00% Holdings Ltd --------- 50.22% RESIMARNE SAS Purchase of Euro Disney resort France 1 ELQ INVESTORS, LTD 100.00% buildings. CASE RM, LLC Purchase retail installment Delaware 1 MTGLQ INVESTORS, L.P. 100.00% contracts (RICs) and Auto Loans from Banks, Thrifts, Credit Unions, Independent Finance Companies and other Specialty Finance Dealer Related Company. Purchase loans and get leverage or securitize after a couple of years (couldP
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- REMARK FUNDING CO, LLC. Purchase retail installment Delaware 1 MTGLQ INVESTORS, L.P. 100.00% contracts (RICs) and Auto Loans from Banks, Thrifts, Credit Unions, Independent Finance Companies and other Specialty Finance Dealer Related Company. Purchase loans and get leverage or securitize after a couple of years (couldP GS EURO OPP FUND BV Purchase through its subsidiaries Netherlands 1 ELQ INVESTORS, LTD 75.00% fixed income securities and portfolio of investments. EPF FINANCIAL, LLC. Purchaser of life settled policies. Delaware 1 EASTPORT CAPITAL 100.00% CORPORATION Fast Capital, LLC Purchaser of Receivables [-] 1 GS SPECIALTY LENDING 100.00% HOLDINGS SARC SRL Purchases non-performing Italian Italy 2 ARCHON GROUP ITALIA 2.00% mortgage and consumer loan S.R.L portfolios and then securitizes them. MTGLQ INVESTORS, L.P. 98.00% --------- 100.00% NIHON ENDEAVOR FUND CO., Purchasing Loan (SMBC Rivival Fund) Japan 1 GOLDMAN SACHS REALTY 66.67% LTD JAPAN COR GK Kogane Purchasing loan.Flagged for Restir Japan 2 AR Holdings GK 1.00% Deal. MLQ INVESTORS, L.P. 99.00% --------- 100.00% GOLDMAN SACHS JAPAN Purchasing Loans Japan 1 GS FINANCIAL SERVICES 100.00% FINANCE K. L.P. LEAF GREEN CO, LTD Purchasing loans (RCC-MTB) Japan 2 GOLDMAN SACHS (ASIA) 0.00% FINANCE GOLDMAN SACHS REALTY 1 JAPAN COR --------- 100.00% LIME GREEN CO., LTD Purchasing loans (Sanyo Electric Japan 1 MLQ INVESTORS, L.P. 100.00% Credit)・Dissolved as of 11/06/2007, liquidation completed as of Nov 7,2007. GAC PERSONAL CO. LTD Purchasing loans from RCC (Hyogin Japan 1 GOLDMAN SACHS REALTY 100.00% loan) JAPAN COR WHITE OCEAN CO, LTD. Purchasing loans from Resona Japan 1 GOLDMAN SACHS REALTY 100.00% (RCC/Resona Securitization Deal) JAPAN COR SOLAR WIND, LTD Purchasing loans from SMBC Cayman Islands 1 MLQ INVESTORS, L.P. 100.00% BAY WIND REALTY FINANCE Purchasing loans jointly with Cayman Islands 1 MLQ INVESTORS, L.P. 100.00% (CAYMA NochuPurchasing loans jointly with Nochu SOUTH WIND REALTY Purchasing loans secured by Nitto Cayman Islands 1 MLQ INVESTORS, L.P. 100.00% FINANCE(CAYM Kogyo 30 golf courses (JV w/Nochu) CFGI CO., LTD Purchasing loans to Fukunan Japan 1 GOLDMAN SACHS REALTY 100.00% Kaihatsu from DBJ, to succeed the JAPAN COR business of Fukunan KaihatsuDissolved as of 25/072007, liquidation completed as of 15/11/2007. GK Spica Purchasing Loans. Flagged for SMBC Japan 1 JLQ LLC 100.00% SPL portfolio acquisition deal (ASSG) KEYAKIZAKA FINANCE CO., Purchasing loans.Equity deals of Japan 1 GS FINANCIAL SERVICES 100.00% LTD. PFS team. L.P. LINDEN WOOD, LTD Purchasing unsecured loans jointly Cayman Islands 1 MLQ INVESTORS, L.P. 100.00% with Nochu BAY WIND II LTD. Purchasing unsecured loans jointly Cayman Islands 1 MLQ INVESTORS, L.P. 100.00% with Nochu LINDEN WOOD IIS LTD Purchasing unsecured loans jointly Cayman Islands 1 MLQ INVESTORS, L.P. 100.00% with Nochu LINDEN WOOD II, LTD. Purchasing unsecured loans jointly Cayman Islands 1 MLQ INVESTORS, L.P. 100.00% with Nochu PH PIER MANAGEMENT LLC Purchasing, investing in, Delaware 1 GSJC LAND LLC 100.00% financing, selling, leasing and otherwise dealing with direct and indirect interests in real estate assets (including mortgage loans) and in companies or entities owning, leasing and otherwise operating and maintaining such asset Restir Investment Co.,Ltd Real Estate Japan 1 JUPITER INVESTMENT 50.00% CO,. LTD. Bay Wind TK Real Estate business Japan 3 GOLDMAN SACHS GROUP, 6.52% INC. (THE BAY WIND REALTY 5.00% FINANCE (CAYMA SHIGA (DELAWARE) LLC 35.00% --------- 46.52% FUKUOKA TOSHI KAIHATSU Real Estate Development Deal. Japan 1 GOLDMAN SACHS REALTY 100.00% CO.,LTD JAPAN COR REP KBY REALTY, LLC Real Estate investment Delaware 1 GOLDMAN SACHS GROUP, 100.00% INC. (THE ARCHON GROUP, L.P. Real estate property/asset manager Delaware 2 GOLDMAN SACHS GROUP, 99.00% INC. (THE ARCHON GEN-PAR, INC. 1.00% --------- 100.00% AYCO SERVICES INSURANCE Record insurance revenues UNITED STATES 1 MERCAY CORPORATION 100.00% AGENCY generated in the state of Mass. GOLDMAN SACHS ASSET Registered investment adviser. Delaware 2 GOLDMAN SACHS GROUP, 99.00% MANAGEMENT holding company for Goldman Sachs INC. (THE Asset amanagement Japan Limited. GOLDMAN SACHS GLOBAL 1.00% HOLDINGS --------- 100.00% GOLDMAN SACHS FUTURES Registered under Hong Kong laws as Hong Kong 1 GS Holdings (Hong 100.00% (ASIA) L a commodities dealer; trades in Kong) Ltd Hong Kong listed futures.Licensed under the HK Securities and Futures Ordinance for the following regulated activities: dealing in futures, advising on futures and asset management. SFC GOLDMAN SACHS (ASIA) Registered under Hong Kong laws as Hong Kong 1 GS Holdings (Hong 100.00% SECURITIE a securities dealer and investment Kong) Ltd advisor. Conducts the Hong Kong Stock Exchange listed securities business; Shanghai B shares license broker.Licensed under the HK Securities and Futures Ordinance for the following reg GSJBWERE FINANCIAL Regulated by the Australian Australia 2 GOLDMAN SACHS GROUP, 100.00% MARKETS PTY Securities and Investments INC. (THE Commission and transacts FICC business in Australia and New J. ARON & COMPANY 0 Zealand. Essentially, GAUS --------- transacts with ANZ clients and 100.00% enters into back to back trades with J Aron NY or another GS entity.
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- GOLDMAN SACHS RISK Reinsurance broker. Delaware 1 GOLDMAN SACHS GROUP, 100.00% SERVICS LLC INC. (THE GOLDMAN SACHS (AO) L.L.C. Rep office in Moscow and has in Delaware 2 GOLDMAN SACHS GROUP, 99.00% past entered into M&A advisory INC. (THE engagements in Russia; does not engage in securities trading or GOLDMAN SACHS GLOBAL 1.00% brokerage; As of 1/1/02 once again HOLDINGS operating a branch in Russia, --------- taxable by Russian authorities, 100.00% supplying consultancy servicest REP FSB Real Estate, L.L.C REPIA entity. Delaware 1 GOLDMAN SACHS GROUP, 100.00% INC. (THE GS LPII Phase I Realty LLC REPIA entity. Delaware 1 GOLDMAN SACHS GROUP, 100.00% INC. (THE REP PRK REALTY, LLC REPIA entity. Delaware 1 GOLDMAN SACHS GROUP, 100.00% INC. (THE REP ALX REALTY, LLC REPIA entity. Delaware 1 GOLDMAN SACHS GROUP, 100.00% INC. (THE GOLDMAN SACHS Representative office in Sao BRAZIL 2 GOLDMAN, SACHS & CO. 1.00% REPRESENTACOES L Paulo, Brazil GOLDMAN SACHS GROUP, 99.00% INC. (THE --------- 100.00% GOLDMAN SACHS ARGENTINA Representitive Office in Buenos Delaware 2 GOLDMAN SACHS GROUP, 99.00% L.L.C. Aires INC. (THE GOLDMAN SACHS GLOBAL 1.00% HOLDINGS --------- 100.00% REC INVESTMENTS CO., LTD Resona deal Japan 1 GOLDMAN SACHS REALTY 100.00% JAPAN COR REAL ESTATE CREATION FUND Resona deal.Purchasing Loan Japan 1 GOLDMAN SACHS REALTY 100.00% CO., JAPAN COR GS TRADING & CLEARING Sales agent for affiliated Netherlands 2 J. ARON HOLDINGS, L.P. 0.25% SERVICES companies. Non-regulated entity established to employ traders in J. ARON & COMPANY 99.75% Rotterdam. --------- 100.00% SPF ONE IL, L.L.C. Serve as intermediate Delaware 1 MTGLQ INVESTORS, L.P. 100.00% (intercompany) lender to GS&Co as part of non-recourse financing transaction. Strategic capital planning entity. MINATO DEBT COLLECTION KK Servicer; Japanese Stock Japan 1 MLQ INVESTORS, L.P. 100.00% Corporation CDV-1 HOLDING COMPANY, LP Set up as a partnership to own Delaware 2 MTGLQ INVESTORS, L.P. 89.80% CDV-1, Ltd. CDV-1 HOLDING COMPANY 0.20% GEN-PAR, --------- 90.00% GSFS (CAYMAN) 2002-A Set up as part of a Structured Cayman Islands 1 GS FINANCIAL SERVICES 100.00% LIMITED Investing Group transaction. The L.P. entity will be capitalised by GS Financial Services LP. It's purpose will purely be to sell a third party a put option over the third parties' minority interest in a GS controlled Unit Trust. It is effectively a guarantee. GS FUNDING MANAGEMENT Set up as part of a structured Cayman Islands 1 SHIRE UK LIMITED 100.00% LIMITED transaction containing Interest rate Swaps,Asset swaps and treasuries. Forres Investments Ltd Set up as part of rthe structured Cayman Islands 1 FORRES LLC 100.00% investing trade that will enter into swaps and purchase treasuries. GSFS INVESTMENTS II CORP Set up as part of the SBD Delaware 1 GSFS INVESTMENT I CORP 100.00% Principal Investing Portfolio-to hold airplane leases. PMF - 1, LTD Set up for the purpose of England 1 ELQ INVESTORS, LTD 100.00% acquiring a portfolio of non-performing Portuguese mortgages GS (Mauritius) NBFC L.L.C Set up in Mauritius as a Private Mauritius 1 GS INDIA HOLDINGS L.P. 100.00% Company Limited by shares to hold stake in an Indian Company which will conduct Fixed Income busniess. GS Management (Ireland) Set up to oversee a number of GSAM Ireland 2 GOLDMAN SACHS GROUP, 99.00% Limited managed Trusts INC. (THE GOLDMAN SACHS GLOBAL 1.00% HOLDINGS --------- 100.00% KINMIRAI CREATE TK Set up to purchase Mizuho REO JV Japan 3 GOLDMAN SACHS GROUP, 19.57% deal. INC. (THE GS STRATEGIC 25.00% INVESTMENTS JAPAN KINMIRAI CREATE CO., 5.00% LTD. --------- 49.57% GS CAPITAL FUNDING UK II Set-up as part of a Structured England 1 GS CAPITAL FUNDING, 100.00% Investing Group Transaction. INC. GSPS STRATEGIES CORP Setup to trade private equity Delaware 1 GS FINANCIAL SERVICES 100.00% investments. L.P. GK Dotonbori Kaihatsu Shelf. Purchasing Loans, Holding Japan 1 MLQ INVESTORS, L.P. 100.00% Real estates and Securities. GK Miyuki Shelf. Purchasing Loans, Holding Japan 1 GOLDMAN SACHS REALTY 100.00% Real estates and JAPAN COR Securities.・Flagged for Greens deal. GOLDMAN SACHS (ISRAEL) LLC Single Member Office in Israel. Delaware 1 GOLDMAN SACHS GROUP, 100.00% For Regulatory matters contact INC. (THE Robert Charnley or Matthias Bock in London. Israeli investment research entity. GS GAO HUA SECURITIES CO. Sino-foreign Joint Venture Company People's 2 GOLDMAN SACHS (ASIA) 33.00% LTD with Beijing Gao Hua Securities Republic of L.L.C. Company Limited.Business Scope: China Underwriting of shares (incluidng Renminbi donominated ordinary BEIJING GAO HUA SEC 67.00% shares and foreign investment CL, BJHQ shares) and bonds (including --------- government bonds and corporatebon 100.00% GS RE Holdings Inc. SPE set up as a Holding entity for Delaware 1 GOLDMAN SACHS GROUP, 100.00% Life Settlement Solutions , Inc. INC. (THE JLQ LLC Special purpose company for Cayman Islands 1 GS FINANCIAL SERVICES 100.00% purchase of loans. L.P. VEICOLO ACQUISIZIONE Special purpose vehicle for Italy 2 MLQ L.L.C 50.00% PORTAFOGL securitization deal. MTGLQ INVESTORS, L.P. 50.00% --------- 100.00% CER Investment 1 special purpose vehicle to hold Cayman Islands 1 CER HOLDINGS LP 100.00% carbon emission reduction units (CERs) HECHSHIRE LIMITED Special purpose vehicle. Entity England 1 SHIRE UK LIMITED 100.00% established to facilitate structured financing, specifically a loan note issuance by Goldman Sachs International.
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- MERCER INVESTMENTS V SPV for ASSG. Equity investments Malaysia 1 GS Holdings Mauritius 100.00% PRIVATE L in Beijing Goldman Sachs Consulting Limited Co., Ltd (formerly Shang Er Kang) (PRC On-shore Consulting/Servicing Company). EXPRESS INVESTMENTS III SPV for ASSG. Direct investement in Malaysia 1 GS Holdings Mauritius 100.00% PRIVAT Philipppine based assets Limited (Non-interest accuring). GSPS Dai Viet Ltd SPV for GSPS business Mauritius 1 GSPS Asia Limited 100.00% GSPS Asia Limited SPV for GSPS business in Asia Mauritius 1 GS ASIAN VENTURE 100.00% (DELAWARE) LL MERCER INVESTMENTS IV SPV for REPIA and ASSG. Equity Malaysia 2 GOLDMAN SACHS GROUP, 14.78% PRIVATE Investment in PRC Investment SPC. INC. (THE GS Holdings Mauritius 85.22% Limited --------- 100.00% MATTERHORN ACQUISITIONS SPV incorporated for the England 1 GS EURO OPP FUND BV 100.00% LTD. acquisition of a portfolio of NPLs from Delmora Bank in Germany Kypris Acquisitions Ltd. SPV purchaser for portfolio of NPLs England 1 GS EURO OPP FUND II LP 100.00% from HVB named Project Aphrodite KRETA ACQUISTIONS LTD. SPV to purchase Project Kreta NPL England 1 GS EURO OPP FUND II LP 100.00% Portfolio CONRAD P4 LTD. SPV to purchase the CP4 Porfolio of England 1 ELQ INVESTORS, LTD 100.00% NPLs from HVB (via HANSEN & SCHUCHT DEBITORENMANAGEMENT GMBH) GS Killinghme Caymn Inv Structured investing entity Cayman Islands 1 GS KILLINGHOLME 100.00% II Ltd CAYMAN INVESME GS INVSTMT Sub-advisor to Liberty Harbor Singapore 1 GOLDMAN SACHS FX 100.00% STRATEGIES(SINGAPOR (SINGAPORE) P GS European Inv Group III Subdiairy of GS European England 1 GS European Opp Fund 100.00% Ltd Opportunities Fund III LP to trade III Ltd in loan and bond positions GS European Opp Fund III Subsidiary of ELQ and Holdco for United Kingdom 1 ELQ INVESTORS, LTD 100.00% Ltd Opp Fund 3 HWE Holdings LLC Subsidiary of GS Wind Holdings LLC Delaware 1 GS WIND HOLDINGS, LLC 100.00% GS Guernsey Investments Subsidiary of MTGLQ to hold 75% of [-] 1 MTGLQ INVESTORS, L.P. 100.00% Ltd Shilling/Caledonian group via Preference shares GS SERVICES PRIVATE LTD Technology and data process entity. India 2 GOLDMAN SACHS (ASIA) 1.05% FINANCE GOLDMAN SACHS 98.95% (MAURITIUS) L.L. --------- 100.00% RIVER NORTH TECHNOLOGIES, Technology hostingTechnology hosting Illinois 1 GOLDMAN SACHS GROUP, 100.00% INC. INC. (THE GS ADMINISTRATION SERVC The Company to act as manager of Ireland 1 GS Ireland Holdings 100.00% CO LTD Goldman Sachs Global Currency Fund Ltd - Dollar Plus, Goldman Sachs Global Currency Fund - Euro Plus, Goldman Sachs Money Market Funds, Goldman Sachs Global Funds, Goldman Sachs Global Multi Manager Funds, Goldman Sachs Select GS Asset Management The company's purpose is to render BRAZIL 2 GOLDMAN SACHS GLOBAL 0.01% Brasil Ltd asset management services, acting HOLDINGS as a manager of investment funds and securities portfolios. GOLDMAN SACHS ASSET 99.99% MANAGEMENT --------- 100.00% ALKAS REALTY PRIVATE The entity is a SPC which will Singapore 2 GOLDMAN SACHS GROUP, 19.57% LIMITED purchase DBS tower as a rental INC. (THE property in Singapore. BAEKDU INVESTMENTS 30.00% LIMITED --------- 49.57% GS LEASING (KCSR 2005-1) The entity is an equity holder in a United States 1 GSFS INVESTMENT I CORP 100.00% LLC leverage lease transaction where the assets are locomotives. GS China Inv (Mauritius) The entity is principally holding a Mauritius 1 GS ASIAN VENTURE 100.00% Ltd China private equity fund (DELAWARE) LL incorporated in Cayman Island. GS CAPITAL FUNDING The entity is setup as part of an Cayman Islands 1 GS CAPITAL FUNDING UK 100.00% (CAYMAN) upcoming Structured Investment II Group (SSG) transaction. GS CAPITAL FUNDING, INC. The entity is setup as part of an Delaware 1 GS FINANCIAL SERVICES 100.00% upcoming Structured Investment L.P. Group (SSG) transaction. GS CAPITAL FUNDING UK The entity is setup as part of an Cayman Islands 1 GOLDMAN SACHS GROUP 100.00% upcoming Structured Investment HOLDINGS ( Group (SSG) transaction. GCN CE HOLDINGS The entity will own several Delaware 1 GS FINANCIAL SERVICES 100.00% CORPORTATION micro-ticket machine leases L.P. throughout the US and Canada. GS Money Market Fund The entity will reflect GS [-] 1 LIQUIDITY ASSETS 100.00% investment in a consolidated money LIMITED market fund (part of the Futures Services Group Investment of Customer funds trade) AmSSG. Agalia Capital Ltd. The entity, incorporated in BVI, is British 1 GS STRATEGIC 75.00% newly acquired by GSSIA (6153) in Virgin Islands INVESTMENTS (ASIA Dec 07. The entity is 75% owned by GSSIA (6153) upon completion of acquisition. The entity's principal business is investment holding. GS China Strategic Inv Ltd The entity, incorporated in Mauritius 1 JADE DRAGON 100.00% Mauritius. The entity is 100% owned (MAURITIUS) LIMITE by Jade Dragon (Mauritius) Limited (0164). The entity is setup for the purpose of acquiring ASSG investments.
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- Agelia Energy Inv Pte Ltd The entity, incorporated in Singapore 1 Agalia Capital Ltd. 100.00% Singapore, is newly acquired indirectly by GSSIA (6153) in Dec 07. The entity is 100% owned by Agalia Capital Ltd, which is owned 75% by GSSIA (6153) upon completion of acquisition. As a result, GSSIA is effectively holding 75% of Agalia Energy via Agalia Capital. The entity's principal business is investment holding. SSIG The primary purpose of the entity Delaware 1 GOLDMAN SACHS GROUP, 100.00% is the buying and selling of bank INC. (THE debt. Additionally, there will be some securities trading. NORTHERN ELECTRIC The principal activity of the United Kingdom 1 ELQ INVESTORS, LTD 100.00% (PEAKING) LT Company is to hold an investment in Teesside Power Limited, a company established to build and operate a power station on Teesside. SPEAR, LEEDS & KELLOGG LLC The surviving entity of the New York 1 GSTM LLC 100.00% 10/30/2000 merger between SLK Acquisition LLC (Goldman merger vehicle) and SLK LLC. The Goldman Sachs Group, Inc. is the Managing Member. SLK Acquisition Holdings, Inc. is the other member. The surviving entity of the 10/30 RUBY REALTY CO.,LTD. The TK Operator for entity 0462. Japan 1 MLQ INVESTORS, L.P. 100.00% GS REALTY ASIA PACIFIC This entity is a corporate entity Singapore 1 GOLDMAN SACHS FX 100.00% PTE LTD for Archon, and will perform Real (SINGAPORE) P estate asset management in Singapore and non Japan Asia. BAY WIND II TK This entity is a SPC which Japan 3 GOLDMAN SACHS GROUP, 11.18% purchases golf course operators as INC. (THE a facility similar to Southwind structure. BAY WIND II LTD. 5.00% SHIGA (DELAWARE) LLC 35.00% --------- 51.18% GS European Funding II Ltd This entity is to be involved in a Cayman Islands 2 GS FUNDING EUROPE 10.00% trade undertaken by the structured LIMITED investment group. It will receive funds from GS European Funding I GS European Funding I 90.00% Limited. Ltd --------- 100.00% GS European Funding I Ltd This entity is to be involved in a Cayman Islands 1 GS FUNDING EUROPE 100.00% trade undertaken by the structured LIMITED investment group. It will receive funds from GS European Funding Limited. Shire Assets This entity was set up as part of United Kingdom 2 Shire Funding Limited 1.00% a Structured Investing Group transaction SHIRE UK LIMITED 99.00% --------- 100.00% Shire Funding Limited This entity was set up as part of United Kingdom 1 SHIRE UK LIMITED 100.00% a Structured Investing Group transaction Shire II Assets This entity was set up as part of United Kingdom 1 SHIRE UK LIMITED 100.00% a Structured Investing Group transaction OOO GOLDMAN SACHS This entity was set up as part of Russia 1 GS RBD HOLDINGS,L.P. 100.00% an AMSSG Structured Investing Group transaction Amagansett Assets This entity was set up as part of United Kingdom 1 GS FINANCIAL SERVICES 100.00% an AMSSG Structured Investing II Group transaction Amagansett Funding Limited This entity was set up as part of United Kingdom 1 GS FUNDING EUROPE 100.00% an AMSSG Structured Investing LIMITED Group transaction Amagansett II Assets This entity was set up as part of United Kingdom 2 Amagansett Funding 99.00% an AMSSG Structured Investing Limited Group transaction GS FUNDING EUROPE 1.00% LIMITED --------- 100.00% GS FUNDING EUROPE LIMITED This entity was set up as part of England 1 GS FINANCIAL SERVICES 100.00% an AMSSG Structured Investing II Group transaction Scadbury Assets This entity was set up as part of United Kingdom 2 Scadbury Funding 1.00% an AMSSG Structured Investing Limited Group transaction SCADBURY UK LIMITED 99.00% --------- 100.00% Scadbury Funding Limited This entity was set up as part of United Kingdom 1 SCADBURY UK LIMITED 100.00% an AMSSG Structured Investing Group transaction Scadbury II Assets This entity was set up as part of United Kingdom 1 Scadbury Funding 100.00% an AMSSG Structured Investing Limited Group transaction SCADBURY UK LIMITED This entity was set up as part of United Kingdom 1 GOLDMAN SACHS GROUP 100.00% an AMSSG Structured Investing HOLDINGS ( Group transaction CPV GERMANY This entity was set up to invest United States 2 GOLDMAN SACHS GROUP, 0.00% in principal investments. INC. (THE GOLDMAN, SACHS MGT GP 0 GMBH --------- 0.00% SHIGA (DELAWARE) LLC This entity, a TK investor, was Delaware 1 GOLDMAN SACHS (ASIA) 100.00% set up to provide equity financing FIN. HLDG to SPCs which invests in non-performing loans and real estates. GS Finance Corp. This finance subsidiary will issue Delaware 1 GOLDMAN SACHS GROUP, 100.00% cash settled structured notes. INC. (THE WWDI Investments Ltd This involves purchase of 6.5 Mauritius 1 WWD Investment 91.50% Acres of land to develop Holdings Ltd residential property, luxury hotel and service apartments. Development to commence in Jul 08. Seller is ETA- a Dubai based development company.
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- WWD Investment Holdings This involves purchase of 6.5 Mauritius 3 GOLDMAN SACHS GROUP, 18.30% Ltd Acres of land to develop INC. (THE residential property, luxury hotel and service apartments. GOLDMAN SACHS 7.00% Development to commence in Jul 08. INVESTMENTS LTD. Seller is ETA- a Dubai based development company. GS RE Investments 30.00% Holdings Ltd --------- 55.30% Calais LNG Project This is a consolidated entity Delaware 1 GS POWER HOLDINGS LLC 100.00% under 0534 to hold GS Power Holdings' investment in Project Lobster. GS Strategic Investments This is a UK incorporated entity England 1 GSEM (DEL) HOLDINGS, 100.00% UK set up to hold private equity L.P. investments. COMM. ANN. AND LIFE INS. This is an insurance company MA 1 GOLDMAN SACHS GROUP, 100.00% CO organized under the laws of INC. (THE Massachusetts. The Company manages blocks of variable annuity, variable universal life and minor blocks of group retirement products. AMETHYST REALTY CO.,LTD. TK Operator of Amethsyt Realty TK Japan 1 MLQ INVESTORS, L.P. 100.00% KK Yonago Kaike Onsen To acquire "Toko yen" traditional Japan 1 AR Holdings GK 100.00% Kaihatsu Japan hotel in kaike spa resort Shiohama Kaihatsu TK To acquire 3 retail neighborhood Japan 4 GOLDMAN, SACHS & CO. 1.00% shopping centres in Fukushima Pref. GOLDMAN SACHS GROUP, 20.18% INC. (THE GS STRATEGIC 24.00% INVESTMENTS JAPAN GK Shiohama Kaihatsu 5.00% --------- 50.18% IMPACT HOLDING TK To acquire a piece of land with a Japan 3 GOLDMAN SACHS GROUP, 19.57% building in Chiba and rebuild a INC. (THE new shopping center GS STRATEGIC 25.00% INVESTMENTS JAPAN GK Impact Holding 5.00% --------- 49.57% REP MCR REALTY, LLC To acquire and hold 2 Delaware 1 MTGLQ INVESTORS, L.P. 100.00% non-performing real estate secured loans (McCook and Randolph Assets). REP DER REAL ESTATE LP To acquire and hold a Delaware 2 MTGLQ INVESTORS, L.P. 99.90% non-performing real estate secured loan (Deerfield asset). REP DER GEN-PAR, LLC 0.10% --------- 100.00% CDV-2 LTD To acquire Czech debt England 1 ELQ INVESTORS, LTD 90.00% Kashiwabara Toshi To acquire Real Estate in Kobe, Japan 2 NEPHRITE EQUITY 85.00% Kaihatsu TK Japan CO.,LTD. GK Kashiwabara Toshi 5.00% Kaihatsu --------- 90.00% GS WIND HOLDINGS, LLC To acquire the wind business of Delaware 1 GSFS INVESTMENT I CORP 100.00% Zilkha Renewable Energy LLC Musashino Kaihatsu TK To acquire three suburban Japan 3 GOLDMAN SACHS GROUP, 19.57% neighborhood shopping centers INC. (THE located in northern part of Japan, such as Koriyama, Sendai and GS STRATEGIC 25.00% Aomori Pref. INVESTMENTS JAPAN GK Musashino Kaihatsu 5.00% --------- 49.57% OPAL RESOURCES LLC To acquire, own, hold, maintain, Delaware 1 MTGLQ INVESTORS, L.P. 100.00% renew, drill, develop and operate Oil and Gas Interests and related assets and other properties in the continental United States, and the state and federal waters offshore. GOLDMAN SACHS JAPAN To acquire, own, lease, maintain, Japan 1 GOLDMAN SACHS (JAPAN) 100.00% HOLDINGS, guard and administer real LTD. properties and facilities for offices, etc. at delegation by Goldman Sachs Japan, Ltd. and its affiliated companies; GSCP (DEL) INC. To act as a general partner and Delaware 1 GOLDMAN SACHS GROUP, 100.00% regular partner in GSCPTo act as a INC. (THE general partner and regular partner in GSCP GSSM HOLDING II LLC To act as a holding company for Delaware 1 GOLDMAN SACHS GROUP, 100.00% GSSM Holding II Corp INC. (THE SPEAR,LEEDS&KELLOGG To act as a specialist on the New New York 1 GS EXECUTION AND 100.00% SPECIALIST York Stock Exchange; Broker CLEARING, L.P Dealer; SEC File No. 8-49673 GOLDMAN SACHS INVESTMENT To act as an investment advisor in Germany 1 GOLDMAN, SACHS & CO. 100.00% MGMT Germany OHG GS MORTGAGE SECURITIES To act as depositor for commercial Delaware 1 GOLDMAN SACHS GROUP, 100.00% CORP. I mortgage backed securities deals INC. (THE GSCP (DEL) LLC. To act as limited partner for GSCP Delaware 1 GSCP (DEL) INC. 100.00% REP SAN GEN PAR, LLC To act as sole general partner of Delaware 1 GOLDMAN SACHS GROUP, 100.00% REP San Real Estate Limited INC. (THE Partnership GOLDMAN SACHS MORTGAGE To buy and sell whole loans and New York 2 GOLDMAN SACHS GROUP, 99.00% COMPANY mortgage servicing for its own INC. (THE account GOLDMAN SACHS REAL 1.00% ESTATE FUND --------- 100.00% NORMANDY FUNDING To capitalize an entity used to Delaware 1 GS FINANCIAL SERVICES 100.00% CORPORATION raise 750 million of financing. L.P. HULL TRADING UK LIMITED To carry on business as a general England 1 THE HULL GROUP LLC 100.00% commercial company. Proprietary trading firm. Re-registered as unlimited on 16 August 2004 THE GOLDMAN SACHS TRUST To carry on the business of Federal 1 GOLDMAN SACHS GROUP, 100.00% COMPAN banking limited to the exercise of INC. (THE full fiduciary powers and the support of activities incidental to the exercise of these powers. A creature of banking law --it's a national association GS(LABUAN) INVESTMENT To conduct offshore investment Malaysia 1 GS Holdings (Hong 100.00% BANK LTD banking business. Products and Kong) Ltd services to be offered include: 1) offering of and dealing in a variety of investment products (whether in the form of notes, certificateso or otherwise); 2) offering of and dealing in Islamica Pinnacle Partners To consolidate GS Pinnacle Delaware 1 GOLDMAN SACHS 100.00% Group, LP Partners, LP INVESTMENTS LTD.
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- THE HULL GROUP LLC To engage directly or indirectly Illinois 2 GOLDMAN SACHS GROUP, 12.33% through trading partnerships or INC. (THE other trading arrangements with others in trading & investment GS HULL HOLDING, INC. 87.67% activities. Managing member for --------- Hullm Trading Company, L.L.C.To 100.00% tranfer any and all lawful businesses for which limited liabil GOLDMAN SACHS BANK (USA) To engage in the business of Utah 1 GS BANK USA HOLDINGS 100.00% INC credit and other financial related LLC services, organized under the law of the state of Utah. VANTAGE MARKETPLACE to establish a holding company for Delaware 1 GOLDMAN SACHS GROUP, 100.00% HOLDINGS, Vantage Marketplace LLCto INC. (THE establish a holding company for Vantage Marketplace LLC WILLIAM STREET CREDIT To extend commitments to borrowers Delaware 1 GOLDMAN SACHS GROUP, 100.00% CORPORAT during transition over to William INC. (THE Street Corp. IMD Non Employee To facilitate the consolidation of Delaware 1 GOLDMAN SACHS GROUP, 100.00% Funds,L.L.C teh GSAM fund Seed Investments INC. (THE IMD Employee Funds,L.P To facilitate the consolidation of Delaware 1 GOLDMAN SACHS GROUP, 100.00% the GSAM employee funds. INC. (THE GS LEASING ENGINES II, LLC To hold 6 operating leases to United States 1 GSFS INVESTMENT I CORP 100.00% Mesaba Aviations guaranteed by 6 engines. GS Leasing No. 3 Limited To hold a 10% stake in GS Leasing Cayman Islands 1 SCADBURY UK LIMITED 100.00% ( 1344) HAKATA HOTEL HOLDING TK To hold a 197-romm city hotel , Japan 3 GOLDMAN SACHS GROUP, 18.96% Hotel Centraza, in Japan. INC. (THE GS STRATEGIC 29.08% INVESTMENTS JAPAN GK HAKATA HOTEL 1.00% HOLDING --------- 49.04% GS LEASING (N506MC), LLC To hold an aircraft. Delaware 1 GSFS INVESTMENT I CORP 100.00% TRIUMPH III INVSTMNTS To hold an array of Dong Ah Ireland 1 BEST II INVESTMENTS 100.00% (IRELAND Construction Ltd claims with a (DELAWARE) L portion guaranteed by Korea Express Co. and certain direct claim of Korea Express Co. DISTRESSED OPPORTUNITIES To hold and invest in securities Delaware 1 GOLDMAN SACHS GROUP, 90.00% INTER and engage in general commercial INC. (THE activities SOPAC, LLC To hold assets purchased from Delaware 1 GOLDMAN SACHS GROUP, 100.00% Southern Pacific Funding INC. (THE Corporation EUSTON ENTERPRISES LTD To hold ASSG investments in Tung Hong Kong 1 MLT INVESTMENTS LTD. 100.00% Fung Development Co. FAIRWAY ENTERPRISES LTD To hold ASSG investments in Tung Hong Kong 1 MLT INVESTMENTS LTD. 100.00% Fung Development Co. GS Strategic Investments To hold ASSG positions in Indian Mauritius 1 PANDA INVESTMENTS LTD. 100.00% Ltd. private equities. SOUTHERN PACIFIC FUNDING To hold certain mortgage loans and California 1 GOLDMAN SACHS GROUP, 100.00% CORP securities purchased out of INC. (THE bankruptcy. Purchase of S. Pacific Funding Corp. and residuals. GS SOLAR POWER I, LLC To hold equity interest in solar Delaware 1 GSFS INVESTMENT I CORP 100.00% power investment. GSPS Bermuda Corporation to hold equity investments for Bermuda 1 GSPS (DEL) LP 100.00% GSPSto hold equity investments for GSPSto hold equity investments for GSPSto hold equity investments for GSPS JANY Fundo Creditorios To hold FIDC (credit receivable) [-] 1 J. ARON & COMPANY 100.00% instruments. GSSM HOLDING UK To hold firms investments in SMFG England 1 GOLDMAN SACHS GROUP, 100.00% convertible preferreds. INC. (THE GSFS Investments III, LLC to hold five opearting leases for Delaware 1 GSFS INVESTMENT I CORP 100.00% the SBD Principal Investing desk GSSLQ, L.L.C. To hold GS ownership interest in Delaware 1 MTGLQ INVESTORS, L.P. 100.00% SLQ S de R.L. de C.V., a Mexican limited liability company established to purchase rights in distressed assets. GRAND STEEL STRATEGIC To hold investments in Jianlong, a Cayman Islands 1 GS STRATEGIC 100.00% INVESTMT steel Manufacturer in China INVESTMENTS (ASIA GOLDMAN SACHS INVESTMENTS To hold investments on behalf of Bermuda 1 GOLDMAN SACHS GROUP, 100.00% LTD. yet-to-be formed funds. INC. (THE GS SPECIALTY LENDING To hold loans to be financed by Delaware 1 GOLDMAN SACHS GROUP, 100.00% HOLDING I Norinchukin Bank INC. (THE Goldman Sachs LLC To hold our investment in ICBC . Mauritius 1 HULL TRADING ASIA, 100.00% LTD. ARES (REAL ESTATE) B.V. to hold real estate assets from Netherlands 1 GS FINANCIAL SERVICES 50.00% the loan workouts in Ares Finance L.P. s.r.l. AMETHYST REALTY TK To hold real estate in Japan Japan 2 NEPHRITE EQUITY 85.00% CO.,LTD. AMETHYST REALTY 5.00% CO.,LTD. --------- 90.00% TG FUND TK To hold real estate in Japan. Japan 2 AMETHYST REALTY TK 99.00% TG FUND CO.,LTD 1.00% --------- 100.00% AMC REO LLC To hold real estate obligations. Delaware 1 MTGLQ INVESTORS, L.P. 100.00% Rothesay Life, L.P. to hold stock in cayman company Delaware 2 GOLDMAN SACHS GROUP, 75.00% INC. (THE GOLDMAN SACHS GLOBAL 25.00% HOLDINGS --------- 100.00% GSSM HOLDING II CORP To hold the Sumitomo preferred Delaware 1 GSSM HOLDING II LLC 100.00% shares GSFS Investments IV, LLC To hold two operating leases on Delaware 1 GSFS INVESTMENT I CORP 100.00% mining equipment. GS Loan Partners Holdings To invest / lend GS Loan Partners Delaware 1 GOLDMAN SACHS CREDIT 100.00% LLC LLC and pledge equity to funding PARTNERS counterpart MIL PHASE I DALLAS To invest 0.2% interest in an Delaware 1 MTGLQ INVESTORS, L.P. 100.00% GEN-PAR, LL serve as general partner of MIL Phase I Dallas, L.P. GS COMM MORTGAGE CAPITAL, To invest in commercial mortgages Delaware 2 GS COMM MORTGAGE 1.00% L.P CAPITAL, LLC. MLQ INVESTORS, L.P. 99.00% --------- 100.00%
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- SENNA INVESTMENTS To invest in KAMCO I loans Ireland 1 GS FINANCIAL SERVICES 100.00% (IRELAND) LT purchased from Restamove Ireland L.P. Limited. (Loans classified as non accrual but is continuing to pay interest.); to ring-fence litigious ASSG KAMCO loan positions from other firm assets within a tax-efficient legal entity REP ELD REAL ESTATE, L.P. To invest in land and land Delaware 2 GOLDMAN SACHS GROUP, 99.80% development INC. (THE REP ELD GEN-PAR, 0.20% L.L.C. --------- 100.00% REP CHW REALTY, L.L.C To invest in land and land Delaware 1 GOLDMAN SACHS GROUP, 100.00% development. INC. (THE Arisugawa Finance TK To Invest in Loan and Preferred Japan 1 GK Arisugawa Finance 54.55% Shares of AP8, a SPC created by Advantage Partners, a well known MBO fund in Japan SAKURAZAKA KAIHATSU TK To invest in the Recruit deal - Japan 1 SAKURAZAKA KAIHATSU 50.00% Total return Swap. CO., LTD. Dhoni Cayman Holding Ltd To invest in Urban Infrastructure Cayman Islands 1 GS ASIAN VENTURE 100.00% Real Estate Fund managed by (DELAWARE) LL Reliance Industrieis in India. GS MORTGAGE SECURITIES To issue bonds and/or form trusts Delaware 1 GOLDMAN SACHS GROUP, 100.00% CORP. to issue bonds collateralized by INC. (THE pools of mortgage related securities. GOLDMAN SACHS (JERSEY) LTD To issue warrants Isle of Jersey 1 GOLDMAN SACHS 100.00% INTERNATIONAL GOLDMAN SACHS GESTION To manage Spanish SICAVs, Spain 1 GOLDMAN SACHS 100.00% S.G.I.I. discretionary portfolios, provide (NETHERLANDS) B. advisory services and distribute funds. QxX Index Co. to own and operate the QxX Delaware 1 GS RE Holdings Inc. 100.00% Longevity/Mortality Index BIRCHFIELD ESTATES LTD. To own data site in London England 1 GOLDMAN SACHS GROUP, 100.00% INC. (THE GS LONDON PROPERTY LIMITED To own property. To hold property England 1 GOLDMAN SACHS GROUP, 100.00% owned by Goldman Sachs Property INC. (THE Management. GOLDMAN SACHS HOLDINGS To own the GS limited partnership Netherlands 1 GOLDMAN SACHS GROUP, 100.00% (NETHE) interest in GSMMDP INC. (THE PRNP, LLC To provide the SSG business Delaware 1 MTGLQ INVESTORS, L.P. 100.00% opportunity to invest on the island of Puerto RicoTo provide the SSG business opportunity to invest on the island of Puerto Rico TG Fund II TK To purchase 28 assets such as an Japan 2 AMETHYST REALTY TK 99.00% office, retail and multifamily residential properties located all over Japan from Yusei Fukushi a pension fund manager for Japan Post. TG Fund II Co.,Ltd 1.00% --------- 100.00% SENRI CHUO TK To purchase a building named Senri Japan 3 GOLDMAN SACHS GROUP, 19.57% Life Science Center in Japan . INC. (THE GS STRATEGIC 25.00% INVESTMENTS JAPAN Senri Chuo GK 5.00% --------- 49.57% PRALQ LLC To purchase a portfolio of Delaware 1 SSIG SPF ONE LQ, LLC 100.00% consumer receivables, primarily auto loans. GS Loan Partners LLC to purchase and finance bank loan Delaware 1 GS Loan Partners 100.00% inventory Holdings LLC ARLO LLC To purchase and hold Delaware 1 SSIG SPF ONE LQ, LLC 100.00% non-performing loans. PORTFOLIO ACQUISITIONS 1 To purchase and originate real England 1 ELQ INVESTORS, LTD 100.00% LTD. estate debt KEISEN KAIHATSU TK To purchase buildings in Tokyo Japan 3 GOLDMAN SACHS GROUP, 19.57% from Fujiya, a confectionary Co. INC. (THE in Japan. GS STRATEGIC 25.00% INVESTMENTS JAPAN GK Keisen Kaihatsu 5.00% --------- 49.57% SCLQ, S.DE R.L. DE C.V. To purchase distressed assets in Mexico 1 MTGLQ INVESTORS, L.P. 100.00% Mexico CMA CO., LTD To purchase equity of CMA Japan 1 LINDEN WOOD IIS TK 100.00% Luigi TK To purchase land and develop Japan 3 GOLDMAN SACHS GROUP, 14.19% office building in Shibuya, Tokyo INC. (THE GS STRATEGIC 16.75% INVESTMENTS JAPAN GK Luigi 5.00% --------- 35.94% EMBARGO LLC To purchase portfolios of credit Delaware 1 MTGLQ INVESTORS, L.P. 80.00% cards receivables. Zaheer Holdings To purchase preferred equity for Mauritius 1 JADE DRAGON 98.00% (Mauritius) office development carried out by (MAURITIUS) LIMITE Vatika group in Gurgaon, India PRIME ASSET TK To purchase real estate and the Japan 3 GOLDMAN SACHS GROUP, 19.57% Juraku 8 building in a commercial INC. (THE area in Japan from KK Juraku. GS STRATEGIC 25.00% INVESTMENTS JAPAN PRIME ASSET CO. LTD 5.00% --------- 49.57% Takahama Kaihatsu TK To purchase the building which Japan 3 GOLDMAN SACHS GROUP, 20.18% occupied by Tiffany's in Ginza INC. (THE where commercial area in Japan. GS STRATEGIC 25.00% INVESTMENTS JAPAN GK Takahama Kaihatsu 5.00% --------- 50.18% Dotonbori Kaihatsu TK To purchase Toei Dotonbori (Land Japan 3 GOLDMAN SACHS JAPAN 1.00% and movie theatre buidling) in CO., LTD. Osaka, Japan NEPHRITE EQUITY 89.00% CO.,LTD. GK Dotonbori Kaihatsu 5.00% --------- 95.00% CHARLESTON REINSURANCE LLC To pursue various opportunities in South Carolina 1 COLUMBIA CAPITAL LIFE 100.00% the reinsurance business. REINSURA GOLDMAN SACHS INSURANCE To sell life insurance products New York 1 GOLDMAN SACHS GROUP, 100.00% AGENCY and receive commissions; broker in INC. (THE the life insurance business GS GLOBAL FUNDING LLC To serve as a funding vehicle for Delaware 1 GS FINANCIAL SERVICES 100.00% Project Sonar. Holding Company L.P. for GS Global Funding (Cayman) Limited. REP ELD GEN-PAR, L.L.C. To serve as General Partner of REP Delaware 1 GOLDMAN SACHS GROUP, 100.00% ELD Real Estate, L.P. INC. (THE Archon Japan Branch To set up Archon Japan ( division None 1 GOLDMAN SACHS REALTY 100.00% of GSRJL) with ots own enity code. JAPAN COR Initially set up as Shell Entity 8. LORRAINE FUNDING LIMITED To settle a trust used to raise Cayman Islands 1 GOLDMAN SACHS 100.00% [pound] 750 million of financing. (CAYMAN) HOLDING William Street LLC To support growth in the William Delaware 1 GOLDMAN SACHS BANK 100.00% Street business (USA) INC
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- GS STRUCTURED CREDIT To take advantage of mis-pricing in Delaware 1 GOLDMAN, SACHS & CO. 100.00% OPPS, LLC the structured product market. MIL PHASE I DALLAS, L.P. to take interests in the place of Delaware 3 ARCHON GROUP, L.P. 2.00% MSMC as Mezzanine Lender with respect to asset: Millennium Phase MTGLQ INVESTORS, L.P. 97.80% I in Dallas MIL PHASE I DALLAS 0.20% GEN-PAR, LL --------- 100.00% HULL GMBH FRANKFURT To trade in, to broker and to sell Germany 1 THE HULL GROUP LLC 100.00% listed and non-listed investments, securities, options on the capital and money market and financial futures contracts that are executed directly GSFS IV, LLC to warehouse aircrafts Delaware 1 GOLDMAN SACHS CREDIT 100.00% PARTNERS SHINING PARTNERS LTD(TKO) Tokyo Brach / Nishi-Azabu Annex, Cayman Islands 1 MLQ INVESTORS, L.P. 100.00% 20-16, Nishi-Azabu 3-chome, Minato-ku, Tokyo. MONT BLANC ACQUISITIONS Total Return Swap counterparty for England 1 ELQ INVESTORS, LTD 100.00% LTD. the Mont Blanc NPL Portfolio BLUE DAISY CO.,LTD. Total return SWAP w/Nochu Japan 1 GOLDMAN SACHS REALTY 100.00% re.Recruit shares. JAPAN COR SAKURAZAKA KAIHATSU CO., Total return swap with Aozora re. Japan 1 GOLDMAN SACHS REALTY 100.00% LTD. Recruit Shares JAPAN COR GOLDMAN SACHS (ASIA) Trades currency , metals, Mauritius 1 GS Holdings (Hong 100.00% FINANCE proprietary, unregulated trading Kong) Ltd and fixed income products in the Hong Kong market; exempted under Leveraged Foreign Exchange Trading; declared exempt dealer under Hong Kong laws; ceased to be an exempt dealer from October 2002. Hilltop Investments Trading Company for Korean Futures Cayman Islands 1 GOLDMAN SACHS 100.00% Limited (CAYMAN) HOLDING J.ARON (CHINA)COMM TRAD Trading of base metals People's 1 J.ARON (CHINA) 100.00% CO LTD Republic of HOLDINGS L.L.C China THE EUROPEAN POWER SRC CO Trading power in the UK/NETA England 1 THE EUROPEAN POWER 100.00% (UK) Environment. SRC CO BV GOLDMAN SACHS TRUST Trust company, principally for New York 1 GOLDMAN SACHS GROUP, 100.00% COMPANY (T holding customer securities; INC. (THE limited purpose trust company providing global custody and clearing services;provides securities lending services on an agency basis through its Boston Global Advisors division GOLDMAN SACHS (CAYMAN) Trust company; acts as offshore Cayman Islands 2 GOLDMAN SACHS GLOBAL 1.00% TRUST, trust administrator HOLDINGS GOLDMAN SACHS 99.00% (CAYMAN) HOLDING --------- 100.00% GS NEW MARKETS FUND, LLC UIG Delaware 2 GOLDMAN SACHS GROUP, 98.00% INC. (THE GS NEW MARKETS FUND 2.00% PRN, INC. --------- 100.00% GS NEW MARKETS FUND PRN, UIG Delaware 1 GOLDMAN SACHS GROUP, 100.00% INC. INC. (THE GOLDMAN SACHS EUROPE - BGA UK covered warrants and agency England 2 GOLDMAN SACHS 99.00% lending HOLDINGS (U.K.) GOLDMAN SACHS GROUP 1.00% HOLDINGS ( --------- 100.00% GS Chestnut Ltd UK Mortgage Business United Kingdom 1 GOLDMAN SACHS GROUP 100.00% HOLDINGS ( GS LEASING INVESTMENTS Unauthorized unit trust that will Cayman Islands 3 GOLDMAN SACHS 94.18% act as a limited partner in GS INTERNATIONAL Leasing Limited Partnership. It will invest in the partnership in GSFS (CAYMAN) 2002-A 4.82% return for its share of the leasing LIMITED the leasing income. GS UNIT TRUST 1.00% INVESTMENTS LIMI --------- 100.00% GOLDMAN SACHS (MAURITIUS) Vehicle for investing in India; Mauritius 1 GS INDIA HOLDINGS L.P. 100.00% L.L. holding company for Goldman Schs (India) Securities Private Limited and Goldman Sachs Services Private Limited. The Company was also the holding company for GS joint venture in Kotak Mahindra Capital Company and Kotak Secur GS MACRO INVESTMENTS LLC Vehicle for structured trades. Delaware 2 GOLDMAN SACHS GROUP, 11.11% INC. (THE MTGLQ INVESTORS, L.P. 88.89% --------- 100.00% JADE DRAGON VENTURE INV Venture capital company for ASSG in People's 2 GS CHINA VENTURE 60.00% LIMITE the PRC Republic of I(MAURITIUS) China GS CHINA VENTURE II 40.00% (MAURITIUS --------- 100.00% GS STRUCTURED PRODUCTS Warrant business Cayman Islands 1 GOLDMAN SACHS (ASIA) 100.00% (ASIA) LI FINANCE FRANKFURTER MOBILIEN, L.C. was constituted to acquire and own Isle of Jersey 1 GS FINANCIAL SERVICES 100.00% German share purchases, leases and L.P. loans. GS Funding Investments Wholly owned direct subsidiary of Cayman Islands 1 SHIRE UK LIMITED 100.00% Limited The Goldman Sachs Group, Inc. May enter into certain financing agreements with GS Group and/or its affiliates from time to time and/or may invest in certain Euro government securities in connection with the issuance of ce GS INDIA VENTURE CAPITAL Will hold ASSG assets. Mauritius 1 JADE DRAGON 100.00% LIMIT (MAURITIUS) LIMITE WALL STREET ON DEMAND, WSOD Acquisition Corp. merged into Delaware 1 GOLDMAN SACHS GROUP, 95.41% INC. Wall Street On Demand, Inc. on INC. (THE 4/17/06. GS BANK ZURICH Zurich based bank providing Switzerland 1 GOLDMAN SACHS GROUP, 100.00% financial services to wealthy INC. (THE individual clients, lead-manager of Swiss Franc denominated warrants and providing clearance for Swiss equity securities;Zurich based bank providing financial services to wealthy individual client GS&CO ZURICH REPR. OFFICE Provides sales & mkting for the [-] 1 GOLDMAN, SACHS & CO. 100.00% equity mkt GS KOREAN BRANCH investment bank Asia 1 GOLDMAN SACHS (ASIA) 100.00% L.L.C. GOLDMAN SACHS Provides IBD,Asset, & PWM services [-] 1 GOLDMAN SACHS 100.00% INTERNATIONAL, DI out of Dubai INTERNATIONAL GOLDMAN SACHS INTL SWEDEN Stockholm branch is an IBD office [-] 1 GOLDMAN SACHS 100.00% BRAN INTERNATIONAL
NUMBER OF PARENT ENTITY DESCRIPTION PURPOSE DOMICILE OWNERS PARENT NAME OWNERSHIP -------------------------- ----------------------------------- ---------------- ---------- ----------------------- --------- GSI, SUCURSAL EN ESPANA branch of London, does IBD business United Kingdom 1 GOLDMAN SACHS 100.00% in Spain INTERNATIONAL GOLDMAN SACHS INTL IBD office locacted in Johannesburg [-] 1 GOLDMAN SACHS 100.00% JOHANNESBUR INTERNATIONAL GS ARGENTINA LLC-BUENOS rep office that handles investment Argentina 1 GOLDMAN SACHS 100.00% AIRES banking activities ARGENTINA L.L.C. GSISPL- Bangalore Branch Foreign Merchant Banking [-] 1 GS (INDIA) SECURITIES 100.00% PVT.LTD. GSI Qatar FC branch IBD services out of Quatar [-] 1 GOLDMAN SACHS 100.00% financial centre INTERNATIONAL GOLDMAN SACHS INTL ZURICH provides sales and mkting services [-] 1 GOLDMAN SACHS 100.00% BRAN for equity mkt INTERNATIONAL GSI, ZWEIGNIEDERLASSUNG branch of GSI, only FICC & equity [-] 1 GOLDMAN SACHS 100.00% FRANKF sales INTERNATIONAL GSI BRANCH ITALY branch of GS London, investment [-] 1 GOLDMAN SACHS 100.00% banking,asset mgmt INTERNATIONAL GS Israel LLC-Tel Aviv Foreign Merchant Banking Israel 1 GOLDMAN SACHS 100.00% Branch (ISRAEL) LLC Dhoni Cayman GP Ltd hold an investment structure in Cayman Islands 1 GS ASIAN VENTURE 100.00% emerging Asian mkts (DELAWARE) LL BEIJING GAO HUA SEC CL, trading plus exchange seat leasing China 1 BEIJING GAO HUA SEC 100.00% BJTO to mutual funds CL, BJHQ BEIJING GAO HUA SEC CL, trading plus exchange seat leasing China 1 BEIJING GAO HUA SEC 100.00% SHTO to mutual funds CL, BJHQ BEIJING GAO HUA SEC CL, Beijing headquarters, proprietary China 3 BEIJING GAO WANG 33.33% BJHQ trading w/ china exch VENTURE CCL BEIJING DE SHANG 33.33% VENTURE CCL BEIJING HOU FENG 33.33% VENTURE CCL --------- 100.00% GS (CHINA) SHANGHAI REP. liaison offices for GS affiliates China 1 GOLDMAN SACHS (CHINA) 100.00% OFFIC L.L.C. GS (CHINA) BEIJING REP. liaison offices for GS affiliates China 1 GOLDMAN SACHS (CHINA) 100.00% OFFICE L.L.C. GS (ASIA) LLC THAILAND develops banking invest activity & [-] 1 GOLDMAN SACHS (ASIA) 100.00% REP. OF relationships in Thai L.L.C. GOLDMAN SACHS (ASIA) LLC Taiwan brokerage, agency trading Delaware 1 GOLDMAN SACHS (ASIA) 100.00% TAIWA GSI L.L.C. GS INVESTMENTS (CAYMAN) equity investments Cayman Islands 1 GSEM (DEL) HOLDINGS, 100.00% LTD. L.P. Tung Fung Development Co. HK partnership, transferred to Hong Kong 2 EUSTON ENTERPRISES LTD 50.00% another ASSG entity FAIRWAY ENTERPRISES 50.00% LTD --------- 100.00%
These entities are directly or indirectly controlled by or under common control with the Company. ITEM 27. NUMBER OF CONTRACT OWNERS As of February 29, 2008, there were 1,736 Contract holders of qualified Contracts and 3,449 Contract holders of non-qualified Contracts. ITEM 28. INDEMNIFICATION Article VI of the Company's Bylaws states: The Corporation shall indemnify to the full extent permitted by applicable law any person made or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person's testator or intestate is or was a director, officer or employee of the Corporation or serves or served at the request of the Corporation any other enterprise as a director, officer or employee. Expenses, including attorneys' fees, incurred by any such person in defending any such action, suit or proceeding shall be paid or reimbursed by the Corporation promptly upon receipt by it of an undertaking of such person to repay such expenses if such person if finally adjudicated not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the Corporation or other enterprise. The Corporation shall accept such undertaking without reference to the financial ability of such person to make repayment. Notwithstanding the foregoing, no indemnification shall be provided for any person with respect to any matter as to which such person shall have been finally adjudicated not to have acted in good faith in the reasonable belief that the action was in best interests of the Corporation or other enterprise. No matter disposed of by settlement, compromise, the entry of a consent decree or the entry of any plea in a criminal proceeding, shall of itself be deemed an adjudication of not having acted in good faith in the reasonable belief that the action was in the best interest of the Corporation. The rights provided to any person by this by-law shall be enforceable against the Corporation by such person who shall be presumed to have relied upon it in serving or continuing to serve as director, officer or employee as provided above. No amendment of this by-law shall impair the rights of any person arising at any time with respect to events occurring prior to such amendment. ITEM 29. PRINCIPAL UNDERWRITERS (a) Epoch Securities, Inc. also acts as a principal underwriter for the following: - VEL Account, VEL II Account, VEL Account III, Separate Account SPL-D, Separate Account IMO, Select Account III, Inheiritage Account, Separate Accounts VA-A, VA-B, VA-C, VA-G, VA-H, VA-K, VA-P, Commonwealth Annuity Select Separate Account II, Group VEL Account, Separate Account KG, Separate Account KGC, Fulcrum Separate Account, Fulcrum Variable Life Separate Account, Separate Account FUVUL, Separate Account IMO, Commonwealth Annuity Select Separate Account, and Commonwealth Annuity Separate Account A of Commonwealth Annuity and Life Insurance Company - Inheiritage Account, VEL II Account, Separate Account I, Separate Account VA-K, Separate Account VA-P, Allmerica Select Separate Account II, Group VEL Account, Separate Account KG, Separate Account KGC, Fulcrum Separate Account, and Allmerica Select Separate Account of First Allmerica Financial Life Insurance Company. (b) The principal business address of most the following Directors and Officers is: 85 Broad Street New York, NY 10004 The principal business address of the other following Directors and Officers* is: 132 Turnpike Road, Suite 210 Southborough, MA 01772.
NAME POSITION OR OFFICE WITH UNDERWRITER ---- ----------------------------------- Julie Abraham Assistant Secretary Elizabeth E. Beshel Treasurer Steven M. Bunson Assistant Secretary Richard Cohn Assistant General Counsel and Secretary Kathleen Jack Chief Compliance Officer, Securities Underwriting Activities Kenneth L. Josselyn Assistant Secretary Robert A. Mass Compliance Officer Albert P. Meo Finance and Operations Prinicipal Beverly O'Toole Assistant Secretary Stephen R. Pierce Vice President Benjamin J. Rader Assistant Secretary Michael A. Reardon* President, Chief Executive Officer and Chief Operating Officer Margot Kibbe Wallin* Chief Compliance Officer, Variable Products Distribution
(c) As indicated in Part B (Statement of Additional Information) in response to Item 20(c), there were no commissions or other compensation retained by Security Distributors, Inc., the former principal underwriter of the Contracts, directly or indirectly, for sales of variable contracts funded by the Registrant in 2007. No commissions or other compensation was received by Epoch Securities, Inc., the current principal underwriter, directly or indirectly, from the Registrant during the Registrant's last fiscal year. ITEM 30. LOCATION OF ACCOUNTS AND RECORDS Each account, book or other document required to be maintained by Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1 to 31a-3 thereunder are maintained for the Company by Security Benefit Life Insurance Company at One Security Benefit Place, Topeka, Kansas. ITEM 31. MANAGEMENT SERVICES Effective March 31, 1995, the Company provides daily unit value calculations and related services for the Company's separate accounts. ITEM 32. UNDERTAKINGS (a) The Registrant hereby undertakes to file a post-effective amendment to this registration statement as frequently as is necessary to ensure that the audited financial statements in the registration statement are never more than 16 months old for so long as payments under the variable annuity contracts may be accepted. (b) The Registrant hereby undertakes to include in the prospectus a toll-free telephone number that the Contract Owner can use to request a Statement of Additional Information. (c) The Registrant hereby undertakes to deliver a Statement of Additional Information and any financial statements promptly upon written or oral request, according to the requirements of Form N-4. (d) Insofar as indemnification for liability arising under the 1933 Act may be permitted to Directors, Officers and Controlling Persons of Registrant under any registration statement, underwriting agreement or otherwise, Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a Director, Officer or Controlling Person of 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, 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 1933 Act and will be governed by the final adjudication of such issue. (e) The Company hereby represents that the aggregate fees and charges under the Policies are reasonable in relation to the services rendered, expenses expected to be incurred, and risks assumed by the Company. ITEM 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(B) PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM Registrant, a separate account of Commonwealth Annuity and Life Insurance Company ("Company"), states that it is (a) relying on Rule 6c-7 under the 1940 Act with respect to withdrawal restrictions under the Texas Optional Retirement Program ("Program") and (b) relying on the "no-action" letter (Ref. No. IP-6-88) issued on November 28, 1988 to the American Council of Life Insurance, in applying the withdrawal restrictions of Internal Revenue Code Section 403(b)(11). Registrant has taken the following steps in reliance on the letter: 1. Appropriate disclosures regarding the redemption restrictions imposed by the Program and by Section 403(b)(11) have been included in the prospectus of each registration statement used in connection with the offer of the Company's variable contracts. 2. Appropriate disclosures regarding the redemption restrictions imposed by the Program and by Section 403(b)(11) have been included in sales literature used in connection with the offer of the Company's variable contracts. 3. Sales Representatives who solicit participants to purchase the variable contracts have been instructed to specifically bring the redemption restrictions imposed by the Program and by Section 403(b)(11) to the attention of potential participants. 4. A signed statement acknowledging the participant's understanding of (I) the restrictions on redemption imposed by the Program and by Section 403(b)(11) and (ii) the investment alternatives available under the employer's arrangement will be obtained from each participant who purchases a variable annuity contract prior to or at the time of purchase. Registrant hereby represents that it will not act to deny or limit a transfer request except to the extent that a Service-Ruling or written opinion of counsel, specifically addressing the fact pattern involved and taking into account the terms of the applicable employer plan, determines that denial or limitation is necessary for the variable annuity contracts to meet the requirements of the Program or of Section 403(b). Any transfer request not so denied or limited will be effected as expeditiously as possible. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940 the Registrant certifies that it meets all of the requirements for effectiveness of this Post-Effective Amendment to the Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Southborough, and Commonwealth of Massachusetts, on the 7th day of April, 2008. SEPARATE ACCOUNT VA-K OF COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY By: /s/ Samuel Ramos ------------------------------------------- Samuel Ramos, Vice President and Secretary Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, this Post-Effective Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURES TITLE DATE ----------------------------- ---------------------------------- ------------- /s/ Michael A. Pirrello Vice President and April 7, 2008 ----------------------------- Chief Financial Officer Michael A. Pirrello Allan S. Levine* Chairman of the Board ----------------------------- Nicholas Helmuth von Moltke* Director and Senior Vice President ----------------------------- J. William McMahon* Director ----------------------------- Timothy J. O'Neill* Director ----------------------------- Donald R. Mullen* Director ---------------------------- Michael A. Reardon* Director, President, and ----------------------------- Chief Executive Officer /s/ Samuel Ramos Vice President and Secretary ----------------------------- Samuel Ramos Manda J. D'Agata* Vice President and Treasurer ----------------------------- Alan Akihiro Yamamura* Vice President and ----------------------------- Chief Risk Officer Laura Bryant* Vice President and ----------------------------- Chief Operating Officer * Jon-Luc Dupuy, by signing his name hereto, does hereby sign this document on behalf of each of the above-named Directors and Officers of the Registrant pursuant to the Powers of Attorney dated April 2, 2008 duly executed by such persons. /s/ Jon-Luc Dupuy ------------------------------- Jon-Luc Dupuy, Attorney-in-Fact EXHIBIT TABLE Exhibit 8(e) Directors' Powers of Attorney Exhibit 9 Opinion of Counsel Exhibit 10 Consent of Independent Registered Public Accounting Firm