-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TTTtzdwS7vdGZzxNFXEMdLoX4/LvmhzJAG2BPIeRB7wX4kcYXb7RqgZ7T4XUXd1z 0KtIW66W4HrZ79BUokrowg== 0000950109-98-004681.txt : 19981002 0000950109-98-004681.hdr.sgml : 19981002 ACCESSION NUMBER: 0000950109-98-004681 CONFORMED SUBMISSION TYPE: N-4 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19981001 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST PROVIDIAN LIFE & HEALTH INSURANCE CO SEP ACCT B CENTRAL INDEX KEY: 0000874235 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 231743523 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-4 SEC ACT: SEC FILE NUMBER: 333-65151 FILM NUMBER: 98719076 FILING VALUES: FORM TYPE: N-4 SEC ACT: SEC FILE NUMBER: 811-06298 FILM NUMBER: 98719077 BUSINESS ADDRESS: STREET 1: 520 COLUMBIA DR CITY: JOHNSON CITY STATE: NY ZIP: 13790 BUSINESS PHONE: 8005237900 MAIL ADDRESS: STREET 1: 520 COLUMBIA DRIVE CITY: JOHNSON CITY STATE: NY ZIP: 13790 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL HOME LIFE ASSURANCE CO OF NY SEPARATE ACCOUNT B DATE OF NAME CHANGE: 19920929 N-4 1 N-4 AUSA LIFE INS. CO. SEPARATE ACCT. B - GROUP AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1998. REGISTRATION NO. 333-_____ & 811-6298 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PRE-EFFECTIVE AMENDMENT NO. [_] POST-EFFECTIVE AMENDMENT NO. [_] and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 AMENDMENT NO. 14 [X] AUSA LIFE INSURANCE COMPANY, INC. SEPARATE ACCOUNT B (Exact Name of Registrant) AUSA Life Insurance Company, Inc. (Name of Depositor) 666 Fifth Avenue New York, New York 10103 (Address of Depositor's Principal Executive Office) Depositor's Telephone Number: 212-246-5234 Gregory E. Miller-Breetz, Esquire AUSA Life Insurance Company, Inc. P.O. Box 32830 400 West Market Street Louisville, KY 40232 (Name and Address of Agent for Service) Copy to: Michael Berenson, Esquire James Bernstein, Esquire Jorden Burt Boros Cicchetti Berenson & Johnson LLP 1025 Thomas Jefferson St. N.W. Suite 400 E Washington, DC 20007-0805 Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement. It is proposed that this filing will become effective (check appropriate box): [_] Immediately upon filing pursuant to paragraph (b) of Rule 485. [_] On ___________ pursuant to paragraph (b)(1)(v) of Rule 485. [_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485. [_] On ______ pursuant to paragraph (a)(1) of Rule 485. [_] 75 days after filing pursuant to paragraph (a)(2) of Rule 485. [_] On ______ pursuant to paragraph (a)(2) of Rule 485. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) shall determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PURSUANT TO RULE 481 SHOWING LOCATION IN PART A (PROSPECTUS) AND PART B (STATEMENT OF ADDITIONAL INFORMATION) OF REGISTRATION STATEMENT OF INFORMATION REQUIRED BY FORM N-4 PART A
ITEM OF FORM N-4 PROSPECTUS CAPTION 1. Cover Page........................ Cover Page 2. Definitions....................... Glossary 3. Synopsis.......................... Highlights; Fee Table 4. Condensed Financial Information... Condensed Financial Information 5. General Description of Registrant, Depositor, and Portfolio Companies......................... AUSA Life Insurance Company, Inc.; AUSA Life Insurance Company, Inc. Separate Account B; Vanguard Variable Insurance Fund; Voting Rights 6. Deductions and Expenses........... Charges and Deductions; Taxes; Vanguard Variable Insurance Fund; Expenses 7. General Description of Variable Annuity Contracts................. Contract Features; Distribution at Death Rules; Voting Rights; Allocation of Purchase Payments; Exchanges Among the Portfolios; Additions, Deletions, or Substitutions of Investments 8. Annuity Period.................... Annuity Payment Options 9. Death Benefit..................... Death of Annuitant Prior to Annuity Date 10. Purchases and Contract Value...... Enrollment Form and Purchase Payments; Accumulated Value 11. Redemptions....................... Full and Partial Withdrawals; Annuity Payment Options; Free Look Period 12. Taxes............................. Federal Tax Considerations 13. Legal Proceedings................. Part B: Legal Proceedings 14. Table of Contents for the Statement of Additional Information....................... Table of Contents for the Vanguard Variable Annuity Plan Contract Statement of Additional Information PART B ITEM OF STATEMENT OF ADDITIONAL FORM N-4 INFORMATION CAPTION 15. Cover Page........................ Cover Page 16. Table of Contents................. Table of Contents 17. General Information and History... The Company 18. Services.......................... Part A: Auditors; Safekeeping of Account Assets; Distribution of the Contract 19. Purchase of Securities Being Offered........................... Distribution of the Contract 20. Underwriters...................... Distribution of the Contract 21. Calculation of Performance Data... Performance Information; Additional Performance Measures 22. Annuity Payments.................. Computations of Variable Annuity Income Payments 23. Financial Statements.............. Financial Statements
AUSA LIFE INSURANCE COMPANY, INC. SEPARATE ACCOUNT B PROSPECTUS FOR THE VANGUARD VARIABLE ANNUITY PLAN CONTRACT OFFERED BY AUSA LIFE INSURANCE COMPANY, INC. (A NEW YORK STOCK COMPANY) OCTOBER 1, 1998 The Vanguard Variable Annuity Plan Contract (the "Contract"), offered through AUSA Life Insurance Company, Inc. (the "Company"), provides a vehicle for in- vesting on a tax-deferred basis in nine Portfolios offered by The Vanguard Group, Inc. The Contract is a group variable annuity contract and is intended for retirement savings or other long-term investment purposes. The minimum Initial Purchase Payment for the Contract is $5,000; there are no sales loads. The Contract is a flexible-premium deferred variable annuity that provides a Free Look Period of 20 days during which you may cancel your in- vestment in the Contract. Your Purchase Payments for the Contract may be allocated among nine Subaccounts of AUSA Life Insurance Company, Inc. Separate Account B (the "Sep- arate Account"). Assets of each Subaccount are invested in corresponding Port- folios of Vanguard Variable Insurance Fund (the "Fund"), an open-end, diversi- fied investment company offered by The Vanguard Group, Inc. The Fund currently offers nine Portfolios: the Money Market Portfolio, the High-Grade Bond Port- folio, the High Yield Bond Portfolio, the Balanced Portfolio, the Equity In- come Portfolio, the Equity Index Portfolio, the Growth Portfolio, the Interna- tional Portfolio, and the Small Company Growth Portfolio. Net Purchase Payments are immediately allocated to the Portfolios in the whole-number per- centages you specify in the enrollment form. The Contract's Accumulated Value varies with the investment performance of the Portfolios you select. You bear all investment risk and investment results for the Portfolios are not guaranteed. The Contract offers a number of ways of withdrawing monies at a future date, including a lump-sum payment and several Annuity Payment Options. Full or par- tial withdrawals from the Contract may be made at any time before the Annuity Date, although in many instances withdrawals made prior to age 59 1/2 are sub- ject to a 10% penalty tax (and a portion may be subject to ordinary income taxes). If you elect an Annuity Payment Option, Annuity Payments may be re- ceived on a fixed or variable basis. You also have significant flexibility in choosing the Annuity Date on which Annuity Payments begin. This Prospectus sets forth the information you should know before investing in the Contract; it must be accompanied by the current Prospectus for the Van- guard Variable Insurance Fund. Please read both Prospectuses carefully and re- tain them for future reference. A Statement of Additional Information for the Contract Prospectus, which has the same date as this Prospectus, has also been filed with the Securities and Exchange Commission, is incorporated herein by reference and is available free by writing to Vanguard Variable Annuity Cen- ter, P.O. Box 1103, Valley Forge, PA 19482-1103. The Table of Contents of the Statement of Additional Information is included at the end of this Prospectus. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 1 - ------------------------------------------------------------------------------- TABLE OF CONTENTS Page HIGHLIGHTS............................................... 3 Fee Table................................................ 6 Glossary................................................. 9 Condensed Financial Information.......................... 12 Financial Statements..................................... 12 Yield and Total Return................................... 12 The Company and the Separate Account........................................ 13 Vanguard Variable Insurance Fund.......................................... 14 CONTRACT FEATURES........................................ 16 Free Look Period......................................... 16 Enrollment Form and Purchase Payments....................................... 17 Allocation of Purchase Payments.......................... 18 Charges and Deductions................................... 18 Accumulated Value........................................ 20 Dividends and Capital Gains Treatment......................................... 21 Annuity Express(TM)...................................... 21 Exchanges Among the Portfolios........................... 21 Full and Partial Withdrawals............................. 22 Minimum Balance Requirements............................................ 23 Designation of a Beneficiary............................................. 23 Death of Annuitant Prior to Annuity Date.................................................... 24 Annuity Date............................................. 25 Annuity Payment Options................................................. 25 FEDERAL TAX CONSIDERATIONS............................... 28 General Information...................................... 32 - ------------------------------------------------------------------------------- The Contract is only available in the State of New York. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. 2 HIGHLIGHTS REFER TO THE GLOSSARY (PAGE 9) FOR A DEFINITION OF ALL CAPITALIZED TERMS. VANGUARD VARIABLE The Contract provides a vehicle for investing on a tax- ANNUITY PLAN deferred basis in nine Portfolios offered by The Van- CONTRACT guard Group, Inc. Monies may be subsequently withdrawn from the Contract either as a lump sum or as an annuity income. Because Accumulated Values and, to the extent Variable Annuity Payments are selected, Annuity Payments depend on the investment performance of the selected Portfolios, you bear all investment risk for monies in- vested under the Contract. The investment performance of the Portfolios is not guaranteed. - ------------------------------------------------------------------------------- WHO SHOULD INVEST The Contract is designed for investors seeking long- term, tax-deferred accumulation of funds, generally for retirement but also for other long-term investment pur- poses. The tax-deferred feature of the Contract is most attractive to investors in high federal and state mar- ginal tax brackets who have exhausted other avenues of tax deferral, such as "pre-tax" contributions to employ- er-sponsored retirement or savings plans. The Contract is intended for long-term investors. - ------------------------------------------------------------------------------- INVESTMENT CHOICES Your investment in the Contract may be allocated among several Subaccounts of the Separate Account. The Subaccounts in turn invest exclusively in the nine Port- folios of Vanguard Variable Insurance Fund. The Fund, a member of The Vanguard Group of Investment Companies, offers nine Portfolios: the Money Market Portfolio, the High-Grade Bond Portfolio, the High Yield Bond Portfo- lio, the Balanced Portfolio, the Equity Income Portfo- lio, the Equity Index Portfolio, the Growth Portfolio, the International Portfolio, and the Small Company Growth Portfolio. The assets of each Portfolio are sepa- rate, and each Portfolio has distinct investment objec- tives and policies as described in the accompanying Fund Prospectus. PAGE 14 - ------------------------------------------------------------------------------- FREE LOOK PERIOD The Contract provides a Free Look Period of 20 days, during which you may cancel your investment in the Con- tract. To cancel your investment, please return your Contract to us. When we receive the Contract, you will be reimbursed for all Purchase Payments and any fees or other charges and any corresponding appreciation cred- ited to your account. PAGE 16 - ------------------------------------------------------------------------------- HOW TO INVEST To invest in the Contract, please complete the accompa- nying enrollment form. The minimum Initial Purchase Pay- ment is $5,000; the minimum Portfolio balance is $1,000; and subsequent Purchase Payments must be at least $250. You may make subsequent Purchase Payments at any time before the Contract's Annuity Date, as long as the Annu- itant or Joint Annuitant specified in the Contract is living. Please note that when purchasing a Contract, the Annuitant you name, and the Joint Annuitant if applica- ble, must be 75 years of age or less. PAGE 17 - ------------------------------------------------------------------------------- 3 ALLOCATION OF Your Net Purchase Payments are immediately allocated to PURCHASE PAYMENTS the Portfolios in the whole-number percentages you se- lect in the enrollment form. Requests to change the al- location of subsequent Net Purchase Payments may be made in writing. PAGE 18 - ------------------------------------------------------------------------------- CHARGES AND The Contract imposes no sales charges. The costs of the DEDUCTIONS UNDER Contract include mortality and expense risk charges, THE CONTRACT maintenance and administrative charges which cover the cost of administering the Contract, and management, ad- visory and other fees, which reflect the costs of Van- guard Variable Insurance Fund. There are no charges un- der the Contract for withdrawals, although withdrawals made prior to age 59 1/2 may be subject to a 10% penalty tax. PAGE 18 - ------------------------------------------------------------------------------- EXCHANGES You may make exchanges among the Fund's Portfolios sub- ject to certain restrictions on excess exchange activi- ty. These restrictions do not apply, however, to non- substantive exchanges or to the Money Market Portfolio. No fee is imposed for exchanges. Exchanges must be for at least $250, or, if less, for the entire value of the Portfolio from which the exchange is made. PAGE 21 - ------------------------------------------------------------------------------- FULL AND PARTIAL You may withdraw all or part of the Accumulated Value of WITHDRAWALS the Contract before the earlier of the Annuity Date or the Annuitant's death (or the Joint Annuitant's death, if later). You may establish systematic withdrawals from your Contract, and receive distributions at regular in- tervals. Withdrawals made prior to age 59 1/2 may be subject to a 10% penalty tax. PAGE 22 - ------------------------------------------------------------------------------- DEATH BENEFIT If the Annuitant specified in your Contract dies prior to the Annuity Date, the Annuitant's named Beneficiary will receive the Death Benefit under the Contract. The Death Benefit is the greater of the then-current Accumu- lated Value of the Contract or the sum of all Purchase Payments (less any partial withdrawals). Your Benefi- ciary may elect to receive these proceeds as a lump sum or as Annuity Payments. PAGE 23 - ------------------------------------------------------------------------------- ANNUITY PAYMENT Beginning on the Annuity Date, you may withdraw monies OPTIONS from the Contract in the form of an annuity income. As the Contract Owner you may elect one of several Annuity Payment Options. The Options provide a wide range of flexibility in choosing an annuity payment schedule that meets your particular needs. Annuity Payments may be re- ceived for a designated period or for life (for either a single or joint life), with or without a guaranteed num- ber of payments. Annuity Payments can be fixed, or can vary with the investment performance of a Portfolio of the Fund. You may elect a lump-sum payment prior to the Annuity Date in lieu of Annuity Payments. PAGE 25 - ------------------------------------------------------------------------------- 4 CONTRACT AND If you have questions about your Contract, please tele- POLICYHOLDER phone the Vanguard Variable Annuity Center (1-800-258- INFORMATION 4271). Please have ready the Contract number and the Contract Owner's name when you call. As Contract Owner, you will receive periodic statements confirming any transactions that take place, as well as quarterly statements and an Annual Report. - ------------------------------------------------------------------------------- 5 FEE TABLE The following table illustrates all expenses that you would incur as a Contract Owner. The expenses and fees shown are for the Fund's 1997 fiscal year. The purpose of this table is to assist you in understanding the var- ious costs and expenses that you would bear directly or indirectly as a purchaser of the Contract. The fee table reflects all expenses for both the Separate Account and the Fund. For a complete discussion of contract costs and expenses, see "Charges and Deductions."
SEPARATE OWNER TRANSACTION EXPENSES ACCOUNT ---------------------------------------------------------- Sales Load Imposed on Purchases........................... None Redemption Fees........................................... None Exchange Fees............................................. None ---------------------------------------------------------- Annual Contract Maintenance Fee*.......................... $25
* Applies to Contracts valued at less than $25,000 at the time of initial purchase and on the last Business Day of each calendar year.
SEPARATE ANNUAL SEPARATE ACCOUNT EXPENSES ACCOUNT ------------------------------------------------------------ Mortality and Expense Risk Charge**......................... .28% Administrative Expense Charge............................... .10% --- Total Annual Separate Account Expenses.................... .38% ===
** This charge is currently reduced to 0.28% of all as- sets when net assets attributable to the Separate Ac- count (and Separate Account IV of Peoples Benefit Life Insurance Company) exceed $2.5 billion. This charge is further reduced to 0.27% of all assets when net assets attributable to the Separate Account (and Separate Account IV of Peoples Benefit Life Insurance Company) exceed $5 billion. See "Mortality and Ex- pense--Risk Charge."
HIGH SMALL MONEY HIGH-GRADE YIELD EQUITY EQUITY COMPANY ANNUAL FUND MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO - ------------------------------------------------------------------------------------------------------------------------ Management & Administrative Expenses............... .15% .21% .21% .19% .23% .20% .20% .22% .23% Investment Advisory Fees................... .02 .02 .06 .10 .10 .00 .15 .16 .12 12b-1 Distribution Fees. None None None None None None None None None Other Expenses Distribution Costs..... .03 .02 .02 .02 .02 .02 .02 .02 .01 Miscellaneous Expenses. .01 .04 .02 .01 .02 .01 .01 .06 .03 ---- ---- ---- ---- ---- ---- ---- ---- ---- Total Other Expenses.... .04 .06 .04 .03 .04 .03 .03 .08 .04 ---- ---- ---- ---- ---- ---- ---- ---- ---- TOTAL FUND OPERATING EXPENSES............. .21% .29% .31% .32% .37% .23% .38% .46% .39% ==== ==== ==== ==== ==== ==== ==== ==== ====
6
HIGH HIGH SMALL MONEY GRADE YIELD EQUITY EQUITY COMPANY MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH TOTAL EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO - ---------------------------------------------------------------------------------------------------------------------- Total Separate Account Expenses............... .38% .38% .38% .38% .38% .38% .38% .38% .38% Total Fund Operating Expenses............... .21 .29 .31 .32 .37 .23 .38 .46 .39 --- --- --- --- --- --- --- --- --- GRAND TOTAL, SEPARATE ACCOUNT AND FUND OPERATING EXPENSES............. .59% .67% .69% .70% .75% .61% .76% .84% .77% === === === === === === === === ===
The following example illustrates the expenses that you would incur on a $1,000 purchase payment over various periods, assuming (1) a 5% annual rate of return and (2) redemption at the end of each period. As noted in the table above, the Contract imposes no redemption fees of any kind. Your expenses are identical whether you con- tinue the Contract or withdraw the entire value of your Contract at the end of the applicable period as a lump sum or under one of the Contract's Annuity Payment Op- tions.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- Money Market Portfolio............. $ 6 $19 $33 $ 75 High-Grade Bond Portfolio.......... 7 22 38 85 High Yield Bond Portfolio.......... 7 22 38 86 Balanced Portfolio................. 7 23 40 89 Equity Income Portfolio............ 8 24 42 94 Equity Index Portfolio............. 6 20 35 78 Growth Portfolio................... 8 25 43 96 International Portfolio............ 9 27 47 105 Small Company Growth Portfolio..... 8 25 43 97
The Annual Contract Maintenance Fee is reflected in this example as a percentage equal to the total amount of fees collected during a year divided by the total aver- age net assets of the Portfolios during the same year. The fee is assumed to remain the same in each year of the above periods. The fee is prorated to reflect only the remaining portion of the calendar year of purchase. Thereafter, the fee is deducted on the last business day of the year for the following year, on a pro rata basis, from each of the Portfolios you have chosen. For a com- plete discussion of Contract costs and expenses, see "Charges and Deductions." THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EX- PENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN, SUBJECT TO THE GUARANTEES IN THE CONTRACT. --------------------------------------------------------- AUTOMATED QUOTES The Vanguard Tele-Account Service provides access to Ac- cumulation Unit Values (to two decimal places) and total returns for all Portfolios, and yield information for the Money Market, High-Grade Bond, and High Yield Bond Portfolios of the Plan. Contract Owners may utilize this service for 24-hour access to Plan Portfolio informa- tion. To access the service you may call 7 Tele-Account at 1-800-662-6273 (ON-BOARD) and follow the step-by-step instructions, or speak with a Vanguard as- sociate at 1-800-522-5555 to request a brochure that ex- plains how to use the service. Vanguard's website also has Accumulation Unit Values (to two decimal places) for all Portfolios. This service can be utilized from www.vanguard.com by double-clicking on fund prices. - ------------------------------------------------------------------------------- 8 GLOSSARY ACCUMULATION UNIT--A measure of your ownership interest in the Contract prior to the Annuity Date. Analogous, though not identical, to a share owned in a mutual fund account. ACCUMULATION UNIT VALUE--The value of each Accumulation Unit which is calculated each Valuation Period. Analo- gous, though not identical, to the share price (net as- set value) of a mutual fund. ACCUMULATED VALUE--The value of all amounts accumulated under the Contract prior to the Annuity Date, equivalent to the Accumulation Units multiplied by the Accumulation Unit Value. Analogous to the current market value of a mutual fund account. ANNUITANT--The person or persons whose life is used to determine the duration of any Annuity Payments and, sub- ject to the provision dealing with Joint Annuitants, upon whose death, prior to the Annuity Date, benefits under the Contract are paid. ANNUITY DATE--The date on which Annuity Payments begin. The Annuity Date is always the first day of the month you specify. ANNUITY PAYMENT--One of a series of payments made under an Annuity Payment Option. Annuity Payments are based on the lifetime or life expectancy of the Annuitant unless, after the Contract Date, an Annuity Income Option which pays for a certain period only is elected. ANNUITY PAYMENT OPTION--One of several ways in which a series of payments are made after the Annuity Date. Un- der a Fixed Annuity Option, the dollar amount of each Annuity Payment does not change over time. Annuity Pay- ments are based on the Contract's Accumulated Value as of the Annuity Date. Under a Variable Annuity Option, the dollar amount of each Annuity Payment may change over time, depending upon the investment experience of the Portfolio or Portfolios you choose. ANNUITY UNIT--Unit of measure used to calculate Variable Annuity Payments. BENEFICIARY--The person to whom any benefits are due upon the Annuitant's death. BUSINESS DAY--A day when the New York Stock Exchange is open for trading. COMPANY ("WE", "US", "OUR")--AUSA Life Insurance Compa- ny, Inc., a New York stock company. CONTRACT--The group flexible premium variable annuity contract described in this prospectus, participation in which will be evidenced by a certificate issued to the Contract Owner. When we use the word "Contract," we are referring to the certificate issued to a Contract Owner. CONTRACT ANNIVERSARY--Any anniversary of the Contract Date. CONTRACT DATE--The date of issue of the Contract Owner's certificate evidencing ownership in this Contract. 9 CONTRACT OWNER ("YOU", "YOUR")--The person or persons designated as the Contract Owner in the enrollment form to participate in this Contract. The term shall also in- clude any person named as Joint Owner. A Joint Owner shares ownership in all respects with the Owner. The Owner has the right to assign ownership to a person or party other than himself. CONTRACT YEAR--A period of 12 months starting with the Contract Date or any Contract Anniversary. DEATH BENEFIT--The greater of the then-current Accumu- lated Value or the sum of all Purchase Payments (less any partial withdrawals and premium taxes). DUE PROOF OF DEATH--(a) A certified death certificate; (b) a certified decree of a court of competent jurisdic- tion as to the finding of death; (c) a written statement by a medical doctor who attended the deceased; or (d) any other proof satisfactory to the Company. FREE LOOK PERIOD--The period during which the Contract can be cancelled and treated as void from the Contract Date. FUND--Vanguard Variable Insurance Fund, Inc., an open- end, diversified investment company, offered by The Van- guard Group, Inc., in which the Separate Account in- vests. JOINT ANNUITANT--The person other than the Annuitant who may be designated by the Contract Owner and on whose life Annuity Payments may also be based. NET PURCHASE PAYMENT--Any Purchase Payment less the ap- plicable Premium Tax, if any. NON-QUALIFIED CONTRACT--A Contract other than a Quali- fied Contract. Contributions to such a Contract are made with after-tax dollars. OWNER'S DESIGNATED BENEFICIARY--The person designated to receive the Contract Owner's interest in the Contract if the Contract Owner dies before the entire interest in the Contract is distributed, as explained in the "IRS- Required Distribution" section. PAYEE--The Contract Owner, Annuitant, Beneficiary, or any other person, estate, or legal entity to whom bene- fits are to be paid. PORTFOLIO--The separate investment Portfolios of the Fund. The Fund currently offers nine Portfolios: the Money Market Portfolio, the High-Grade Bond Portfolio, the High Yield Bond Portfolio, the Balanced Portfolio, the Equity Income Portfolio, the Equity Index Portfolio, the Growth Portfolio, the International Portfolio, and the Small Company Growth Portfolio. In this Prospectus, Portfolio will also be used to refer to the Subaccount that invests in the corresponding Portfolio. PREMIUM TAX--A regulatory tax that may be assessed by your state on the Purchase Payments made into your Con- tract. The amount which we must pay as Premium Tax will be deducted from each Purchase Payment or from your Ac- cumulated Value as it is incurred by us. 10 PURCHASE PAYMENT--Any premium payment--any amount you invest in the Contract. The minimum Initial Purchase Payment is $5,000; each Additional Purchase Payment must be at least $250. Purchase Payments may be made at any time prior to the Annuity Date as long as the Annuitant is living. QUALIFIED CONTRACT--A Contract that qualifies as an in- dividual retirement annuity under Section 408(b) of the Internal Revenue Code of 1986, as amended. SEPARATE ACCOUNT--AUSA Life Insurance Company, Inc. Sep- arate Account B. The Separate Account consists of assets that are segregated by AUSA Life Insurance Company, Inc. and invested in the Fund. The Separate Account is inde- pendent of the general assets of the Company. SUBACCOUNT--That portion of the Separate Account that invests in shares of the Fund's Portfolios. Each Subaccount will only invest in a single Portfolio. The investment performance of each Subaccount is linked di- rectly to the investment performance of one of the nine underlying Portfolios of the Fund. VALUATION PERIOD--A period between two successive Busi- ness Days commencing at the close of business of the first Business Day and ending at the close of business of the following Business Day. - ------------------------------------------------------------------------------- 11 CONDENSED The information presented below reflects the operations FINANCIAL of the Subaccounts in connection with the individual INFORMATION variable annuity contracts offered through the First Providian Life & Health Insurance Company Separate Ac- count B, which was acquired intact by AUSA Life Insur- ance Company, Inc. on October 1, 1998. As of October 1, 1998, a group variable annuity contract replaced the in- dividual variable annuity contract, and new individual variable annuity contracts no longer are offered for sale. The Accumulation Unit Values and the number of Ac- cumulation Units outstanding for each Subaccount in 1992 through 1997 are as follows:
FOR THE PERIOD DECEMBER 1, 1992 THROUGH DECEMBER 31, 1997* ---------------------------------------------------------------- HIGH- HIGH SMALL MONEY GRADE YIELD EQUITY EQUITY COMPANY MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH ------------------------------------------------------------------------------------- Accumulation unit value as of: Start Date*............ 1.061 11.489 10.000 11.098 10.000 11.596 10.000 10.000 10.000 12/31/92............... 1.064 11.656 * 11.514 * 12.039 * * * 12/31/93............... 1.091 12.514 * 12.961 10.488 13.144 10.569 * * 12/31/94............... 1.130 12.290 * 12.815 10.304 13.224 10.964 10.128 * 12/31/95............... 1.191 14.437 * 16.885 14.239 18.073 15.089 11.678 * 12/31/96............... 1.250 14.882 10.871 19.532 16.820 22.098 19.057 13.319 9.725 12/31/97............... 1.314 16.219 12.135 23.946 22.503 29.301 24.034 13.708 10.970 Number of units outstanding as of: 12/31/92............... 1,660 11 * 9 * 33 * * * 12/31/93............... 4,079 271 * 636 290 440 220 * * 12/31/94............... 5,365 526 * 745 306 534 457 322 * 12/31/95............... 9,080 622 * 766 380 784 620 433 * 12/31/96............... 13,590 689 253 852 525 1,035 906 698 246 12/31/97............... 15,573 912 645 1,035 819 1,392 1,187 833 743 (UNITS ARE SHOWN IN THOUSANDS)
* Date of commencement of operations for the Money Market Subaccount was De- cember 1, 1992, for the High-Grade Bond, Balanced, and Equity Index Subaccounts was December 16, 1992, for the Equity Income and Growth Subaccounts was June 7, 1993, for the International Subaccount was June 3, 1994, and for the High Yield Bond and Small Company Growth Subaccounts was June 3, 1996. - ------------------------------------------------------------------------------- FINANCIAL The audited supplemental statutory-basis financial STATEMENTS statements of the Company and the financial statements of the Separate Account (as well as the Independent Au- ditors' Reports thereon) are contained in the Statement of Additional Information. - ------------------------------------------------------------------------------- YIELD AND TOTAL From time to time a Portfolio of the Fund may advertise RETURN its yield and total return investment performance for various periods, including quarter-to-date, year-to- date, one year, three year, five year and since incep- tion. Advertised yields and total returns will be calcu- lated according to standardized methods prescribed by the Securities and Exchange Commission ("SEC"), so all charges and expenses attributable to the Contract will be included. Including these fees has the effect of de- creasing the advertised performance of a Portfolio, so that a Portfolio's investment performance will not be directly comparable to that of an ordinary mutual fund. 12 The Company may also advertise total return or other performance data in non-standard formats which do not reflect the Annual Contract Maintenance Fee. Please refer to the Statement of Additional Information for a description of the method used to calculate a Portfolio's yield and total return, and a list of the indexes and other benchmarks used in evaluating a Port- folio's performance. The performance measures discussed above are not in- tended to indicate or predict future performance. - ------------------------------------------------------------------------------- THE COMPANY AND The Company is a stock life insurance company incorpo- THE SEPARATE rated under the laws of the State of New York on October ACCOUNT 3, 1947, with offices at 666 Fifth Avenue, New York, New York 10103. The Company is principally engaged in offer- ing life insurance and annuity contracts, and is li- censed in the District of Columbia and all states except Hawaii. AUSA LIFE As of December 31, 1997, the Company had statutory as- INSURANCE COMPANY, sets of approximately $9.9 billion. The Company is a INC. wholly owned indirect subsidiary of AEGON USA, Inc., which conducts substantially all of its operations through subsidiary companies engaged in the insurance business or in providing non-insurance financial servic- es. All of the stock of AEGON USA, Inc. is indirectly owned by AEGON n.v. of the Netherlands. AEGON n.v., a holding company, conducts its business through subsidi- ary companies engaged primarily in the insurance busi- ness. On October 1, 1998, First Providian Life & Health Insur- ance Company ("First Providian") merged with and into the Company. First Providian was a stock life insurance company incorporated under the laws of the State of New York on March 23, 1970. Upon the merger, First Providian's existence ceased and the Company became the surviving company under the name AUSA Life Insurance Company, Inc. As a result of the merger, the Separate Account became a separate account of the Company. All of the Contracts issued by First Providian before the merger were, at the time of the merger, assumed by the Company. The merger did not affect any provisions of, or rights or obligations under, those Contracts. In approv- ing the merger on May 26, 1998, and May 29, 1998, re- spectively, the boards of directors of the Company and First Providian determined that the merger of two finan- cially strong stock life insurance companies would re- sult in an overall enhanced capital position and reduced expenses, which, together, would be in the long-term in- terests of the Contract Owners. On May 26, 1998, 100% of the stockholders of the Company voted to approve the merger, and on May 29, 1998, 100% of the stockholders of First Providian voted to approve the merger. In addi- tion, the New York Insurance Department has approved the merger. --------------------------------------------------------- AUSA LIFE The Separate Account was established by First Providian INSURANCE COMPANY, Life & Health Insurance Company, a former affiliate of INC. SEPARATE the Company, as a separate account under the laws of the State of New York on November 2, 1987. On 13 October 1, 1998, First Providian Life & Health Insurance Company, together with the Separate Account, was merged into the Company. The Separate Account survived the merger intact. The Separate Account is a unit investment trust regis- tered with the SEC under the Investment Company Act of 1940 (the "1940 Act"). Such registration does not sig- nify that the SEC supervises the management or the in- vestment practices or policies of the Separate Account. The assets of the Separate Account are owned by the Com- pany and the obligations under the Contract are obliga- tions of the Company. These assets are held separately from the other assets of the Company and are not charge- able with liabilities incurred in any other business op- eration of the Company (except to the extent that assets in the Separate Account exceed the reserves and other liabilities of the Separate Account). The Company will always keep assets in the Separate Account with a value at least equal to the total Accumulated Value under the Contracts. Income, gains and losses incurred on the as- sets in the Separate Account, whether or not realized, are credited to or charged against the Separate Account without regard to other income, gains or losses of the Company. Therefore, the investment performance of the Separate Account is entirely independent of the invest- ment performance of the Company's general account assets or any other separate account maintained by the Company. The Separate Account has nine Subaccounts, each of which invests solely in a corresponding Portfolio of the Fund. Additional Subaccounts may be established at the discre- tion of the Company. The Separate Account meets the def- inition of a "separate account" under Rule O-1(e)(1) of the 1940 Act. - ------------------------------------------------------------------------------- VANGUARD VARIABLE Vanguard Variable Insurance Fund is an open-end diversi- INSURANCE FUND fied investment company intended exclusively as an in- vestment vehicle for variable annuity or variable life insurance contracts offered by insurance companies. The Fund is a member of The Vanguard Group of Investment Companies, a family of more than 30 investment companies with more than 94 distinct portfolios and assets in ex- cess of $360 billion. Through their jointly owned sub- sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and the other Funds in the Group obtain at cost virtu- ally all of their corporate management, administrative, shareholder accounting and distribution services. The Fund offers nine Portfolios--a money market portfo- lio, a high-grade bond portfolio, a high yield bond portfolio, a balanced portfolio, an equity income port- folio, an equity index portfolio, a growth portfolio, an international portfolio, and a small company growth portfolio--each with distinct investment objectives and policies. THE MONEY MARKET PORTFOLIO seeks to provide current in- come consistent with the preservation of capital and li- quidity. The Portfolio also seeks to maintain a stable net asset value of $1.00 per share. The Portfolio in- vests primarily in high-quality money market instruments issued by financial in- 14 stitutions, non-financial corporations, the U.S. Govern- ment, state and municipal governments and their agencies or instrumentalities as well as repurchase agreements collateralized by such securities. The Portfolio also invests in Eurodollar obligations (dollar-denominated obligations issued outside the U.S. by foreign banks or foreign branches of domestic banks) and Yankee obliga- tions (dollar-denominated obligations issued in the U.S. by foreign banks). Vanguard's Fixed Income Group serves as this Portfolio's investment adviser. THE HIGH-GRADE BOND PORTFOLIO seeks to parallel the in- vestment results of the Lehman Brothers Aggregate Bond Index. The Portfolio invests primarily in a diversified portfolio of U.S. Government and corporate bonds, and mortgage-backed securities. Vanguard's Fixed Income Group serves as this Portfolio's investment adviser. THE HIGH YIELD BOND PORTFOLIO seeks to provide a high level of current income by investing in lower-rated debt securities, which may be regarded as having speculative characteristics and are commonly referred to as "junk bonds." Under normal circumstances, at least 80% of the Portfolio's assets will be invested in high-yield corpo- rate debt obligations rated at least B by Moody's In- vestors Service, Inc. or Standard & Poor's Corporation or, if unrated, of comparable quality as determined by the Portfolio's adviser, Wellington Management Company. THE BALANCED PORTFOLIO seeks the conservation of princi- pal, a reasonable income return and profits without un- due risk. The Portfolio invests in a diversified portfo- lio of common stocks and bonds, with common stocks expected to represent 60% to 70% of the Portfolio's to- tal assets and bonds to represent 30% to 40%. Wellington Management Company serves as this Portfolio's investment adviser. THE EQUITY INCOME PORTFOLIO seeks to provide a high level of current income by investing principally in div- idend-paying equity securities. Newell Associates serves as this Portfolio's investment adviser. THE EQUITY INDEX PORTFOLIO seeks to parallel the invest- ment results of the Standard & Poor's 500 Composite Stock Price Index (S&P 500). The Portfolio invests in common stocks included in the S&P 500. Vanguard's Core Management Group serves as this Portfolio's investment adviser. THE GROWTH PORTFOLIO seeks to provide long-term capital appreciation. The Portfolio invests primarily in equity securities of seasoned U.S. companies with above average prospects for growth. Lincoln Capital Management Company serves as this Portfolio's investment adviser. THE INTERNATIONAL PORTFOLIO seeks to provide long-term capital appreciation. The Portfolio invests primarily in equity securities of companies based outside the United States. Schroder Capital Management International, Inc. serves as this Portfolio's investment adviser. THE SMALL COMPANY GROWTH PORTFOLIO seeks to provide long term growth in capital by investing primarily in equity securities of small companies deemed to have favorable prospects for growth. These securities are primar- 15 ily common stocks but may also include securities con- vertible into common stock. Granahan Investment Manage- ment serves as this Portfolio's investment adviser. There is no assurance that a Portfolio will achieve its stated objective. ADDITIONAL INFORMATION CONCERNING THE INVESTMENT OBJEC- TIVES AND POLICIES OF THE PORTFOLIOS AND THE INVESTMENT ADVISORY SERVICES, TOTAL EXPENSES AND CHARGES CAN BE FOUND IN THE CURRENT PROSPECTUS FOR THE FUND, WHICH AC- COMPANIES THIS PROSPECTUS. THE FUND PROSPECTUS SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE CONCERNING ALLOCATION OF PURCHASE PAYMENTS TO A PORTFOLIO. The Portfolios may be made available to registered sepa- rate accounts offering variable annuity and variable life products of the Company as well as other insurance companies. Although we believe it is unlikely, a mate- rial conflict could arise between the interests of the Separate Account and one or more of the other partici- pating separate accounts. In the event of a material conflict, the affected insurance companies agree to take any necessary steps, including removing their separate account from the Fund if required by law, to resolve the matter. See the Fund's Prospectus for more information. Administrative services are provided by The Vanguard Group, Inc., The Vanguard Variable Annuity Center, 100 Vanguard Boulevard, Malvern, PA 19355. In addition, The Continuum Company, Inc., 301 West 11th Street, Kansas City, MO 64105, provides some subadministrative servic- es. - ------------------------------------------------------------------------------- CONTRACT FEATURES The rights and benefits under the Contract are described below and in the Contract. The Company reserves the right to make any modification to conform the Contract to, or give the Contract Owner the benefit of, any fed- eral or state statute or any rule or regulation of the United States Treasury Department. --------------------------------------------------------- FREE LOOK PERIOD A Free Look Period exists for 20 days after the Contract Owner receives the Contract plus 5 days for mailing. The Contract permits the Contract Owner to cancel the Con- tract during the Free Look Period by returning the Con- tract to the agent, person or entity from whom it was purchased. The contract should be returned to Vanguard Variable Annuity Center, P.O. Box 1103, Valley Forge, PA 19482-1103. Withdrawals are not permitted during the Free Look Period. Upon cancellation, the Contract is treated as void from the Contract Date and the Contract Owner will receive the greater of the Purchase Payments made under the Contract and any fees or other charges or the Accumulated Value of the Contract as of the day the Contract is received by the Company. - ------------------------------------------------------------------------------- 16 ENROLLMENT FORM AND PURCHASE Individuals wishing to purchase a Non-Qualified Contract PAYMENTS should send a completed enrollment form and your Initial Purchase Payment to the Variable Annuity Center. Your Initial Purchase Payment must be equal to or greater than the $5,000 minimum investment requirement. Further- more, the named Annuitant and Joint Annuitant must be 75 years of age or less. The Contract will be issued and the Initial Net Purchase Payment will be credited within two Business Days after acceptance of the enrollment form and the Initial Pur- chase Payment. Acceptance is subject to the enrollment form being received in good order, and the Company re- serves the right to reject any enrollment form or Ini- tial Purchase Payment. If the Initial Purchase Payment cannot be credited be- cause the enrollment form is incomplete, the Company will contact the applicant in writing, explain the rea- son for the delay and will refund the Initial Purchase Payment within five Business Days. As soon as the neces- sary requirements are fulfilled the Purchase Payment will be credited. Additional Purchase Payments may be made at any time prior to the Annuity Date, as long as the Annuitant or Joint Annuitant, if applicable, is living. Additional Purchase Payments must be for at least $250. Additional Purchase Payments received prior to the close of the New York Stock Exchange (generally 4:00 p.m. Eastern time) are credited to the Accumulated Value of the Contract as of the close of business that same day. In order to prevent lengthy processing delays caused by the clearing of foreign checks, we will only accept a foreign check which has been drawn in U.S. dollars and has been issued by a foreign bank with a U.S. correspon- dent bank. The Contracts are available on a non-qualified basis and as individual retirement annuities (IRAs) that qualify for special federal income tax treatment. Generally, Qualified Contracts may be purchased only in connection with a "rollover" of funds from another qual- ified plan or IRA and contain certain other restrictive provisions limiting the timing and amount of payments to and distributions from the Qualified Contract. Total Purchase Payments may not exceed $1,000,000 with- out prior approval of the Company. PURCHASING BY WIRE MONEY SHOULD BE CORESTATES BANK N.A., WIRED TO: ABA 031000011 PLEASE CALL: 1- DEPOSIT ACCOUNT NUMBER 1412652296 800-258-4271 AUSA LIFE INSURANCE COMPANY, INC. BEFORE WIRING CONTRACT NUMBER CONTRACT REGISTRATION To assure proper receipt, please be sure your bank in- cludes the contract number Vanguard has assigned you. For an Initial Purchase Payment, please complete the Vanguard Variable Annuity Plan enrollment form and mail it to the Vanguard Variable Annuity Center, P.O. Box 1103, Valley 17 Forge, PA 19482-1103, prior to completing wire arrange- ments. Note: Federal funds wire purchase orders will be accepted only when the New York Stock Exchange and Cus- todian Bank are open for business. --------------------------------------------------------- SECTION 1035 You may exchange your Accumulated Value under an exist- EXCHANGES ing annuity contract to the Vanguard Variable Annuity Plan. Section 1035 of the Internal Revenue Code of 1986, as amended (the "Code"), provides, in general, that no gain or loss shall be recognized on the exchange of one annuity contract for another. To complete a "1035 Ex- change" simply provide all the requested information on the 1035 Exchange Form and mail it, along with your en- rollment form and current contract, to the Vanguard Variable Annuity Center. As an accommodation to owners of Vanguard Variable Annuity Plan contracts, and in ac- cordance with the Code, we will accept, under certain conditions, the consolidation of two or more Vanguard Variable Annuity Plan contracts into one. Such exchanges will be accepted on a case by case basis in order to provide contract owners with consolidated account re- porting. In addition, if applicable, contract owners will be responsible for only one Annual Contract Mainte- nance Fee. Under no circumstances will an exchange of an existing Vanguard Variable Annuity Plan contract for an identical new Vanguard Variable Annuity Plan contract be allowed. Special rules and procedures apply to Code Sec- tion 1035 transactions, particularly if the Contract be- ing exchanged was issued prior to August 14, 1982. Pro- spective Contract Owners wishing to take advantage of Code Section 1035 should consult their tax advisers. Please note, that an outstanding loan on the contract that you wish to transfer may create a tax consequence. Therefore, you are encouraged to settle any outstanding loans with your current insurance company prior to ini- tiating a 1035 exchange into the Plan. - ------------------------------------------------------------------------------- ALLOCATION OF The Contract Owner specifies on the enrollment form how PURCHASE PAYMENTS Purchase Payments will be allocated. The Contract Owner may allocate each Purchase Payment to one or more of the Portfolios as long as such portions are whole number percentages and any allocation made is at least 10% and at least $1,000. The Net Initial Purchase Payment will be immediately allocated to the Portfolios as the Con- tract Owner specifies in the enrollment form. Allocation instructions for future Purchase Payments may be changed by the Contract Owner by sending a written notice to the Vanguard Variable Annuity Center. You may change your investment by eliminating a Contract Portfo- lio from your allocations or by adding a new Contract Portfolio to your list. Please note that you must main- tain a minimum of $1,000 in each Portfolio to which you have allocated assets. - ------------------------------------------------------------------------------- CHARGES AND DEDUCTIONS The projected expenses for the Contract are substan- tially below the costs of other variable annuity con- tracts. For example, based on a $25,000 contract the av- erage expense ratio of other variable annuity contracts was 2.09% as of December 31, 1997, compared to .71% for the Vanguard Variable 18 Annuity Contract (source for competitors' data: Morning- star Performance Report January 1998). No sales load is deducted from the Initial Purchase Pay- ment or any Additional Purchase Payments. In addition, there are no sales charges imposed upon withdrawals. --------------------------------------------------------- MORTALITY AND The Company imposes a charge as compensation for bearing EXPENSE RISK certain mortality and expense risks under the Contracts. CHARGE The annual charge is assessed daily based on the com- bined net assets of the Separate Account and Separate Account IV of Peoples Benefit Life Insurance Company in the Fund according to the following schedule: RATE FOR NET ASSETS ALL ASSETS -------------------------------------- ---------- Up to $2.5 Billion 0.30% Over $2.5 Billion and Up To $5 Billion 0.28% Over $5 Billion 0.27% The Company guarantees that these mortality and expense risk breakpoints will never increase. If this charge is insufficient to cover actual costs and assumed risks, the loss will fall on the Company. Conversely, if the charge proves more than sufficient, any excess will be added to the Company surplus. The mortality risk borne by the Company under the Con- tracts, where one of the life Annuity Payment Options was selected, is to make monthly annuity payments (de- termined in accordance with the annuity tables and other provisions contained in the Contract) regardless of how long all Annuitants may live. We also assume mortality risk as a result of our guarantee of a minimum Death Benefit in the event the Annuitant dies prior to the An- nuity Date. The expense risk borne by the Company under the Con- tracts is that the charges for administrative expenses which are guaranteed for the life of the Contract may be insufficient to cover the actual costs of issuing and administering the Contract. --------------------------------------------------------- ADMINISTRATIVE An annual administrative charge of .10% of the net asset CHARGE & value of the Separate Account is assessed daily along MAINTENANCE FEE with an annual maintenance fee of $25 for Contracts val- ued at less than $25,000 at the time of initial purchase and on the last Business Day of each calendar year. It is important to note that fluctuation in Accumulation Unit Values due to changes in the market values of secu- rities may cause an investor's Contract's value to fall below $25,000. The annual maintenance fee is deducted proportionately from each Contract's Accumulated Value; therefore, the $25 fee is assessed per Contract, not per Portfolio chosen. Your Initial Purchase Payment of less than $25,000 is reduced by an initial maintenance fee which is pro rated to reflect only the remaining portion of the calendar year of purchase. Thereafter, the fee is deducted on the last Business Day of the year for the 19 following year, on a pro rata basis from each of the Portfolios you have chosen. These deductions represent reimbursement to the Company for the costs expected to be incurred over the life of the Contract for issuing and maintaining each Contract and the Separate Account. Please note that Contracts valued at $25,000 or more as of the last Business Day of the year will not be as- sessed the $25 maintenance fee for the following year. --------------------------------------------------------- TAXES Under present laws, the Company will not incur New York state or local taxes. If there is a change in state or local tax laws, charges for such taxes may be made. The Company does not expect to incur any federal income tax liability attributable to investment income or capital gains retained as part of the reserves under the Con- tracts. (See "Federal Tax Considerations," page 28.) Based upon these expectations, no charge is currently being made to the Separate Account for corporate federal income taxes that may be attributable to the Separate Account. The Company will periodically review the question of a charge to the Separate Account for corporate federal in- come taxes related to the Separate Account. Such a charge may be made in future years for any federal in- come taxes incurred by the Company. This might become necessary if the tax treatment of the Company is ulti- mately determined to be other than what the Company cur- rently believes it to be, if there are changes made in the federal income tax treatment of annuities at the corporate level, or if there is a change in the Company's tax status. In the event that the Company should incur federal income taxes attributable to in- vestment income or capital gains retained as part of the reserves under the Contracts, the Accumulated Value of the Contract would be correspondingly adjusted by any provision or charge for such taxes. --------------------------------------------------------- VANGUARD VARIABLE The value of the assets in the Separate Account will re- INSURANCE FUND flect the fees and expenses paid by the Fund. A complete EXPENSES description of these expenses is found in the "Fee Ta- ble" section of this Prospectus and in the "Management of the Fund" section of the Fund's Statement of Addi- tional Information. - ------------------------------------------------------------------------------- ACCUMULATED VALUE At the commencement of the Contract, the Accumulated Value equals the Initial Net Purchase Payment. Thereaf- ter, on any Business Day the Accumulated Value equals the Accumulated Value from the previous Business Day in- creased by: i) any Additional Net Purchase Payments re- ceived by the Company and ii) any increase in the Accu- mulated Value due to investment results of the selected Portfolio(s) that occur during the Valuation Period; and reduced by: i) any decrease in the Accumulated Value due to investment results of the selected Portfolio(s), ii) a daily charge to cover the mortality and expense risks assumed by the Company, iii) any charge to cover the cost of administering the Contract, iv) any partial withdrawals, and v) Premium Taxes, if any, that occur during the Valuation Period. 20 The Accumulated Value is expected to change from Valua- tion Period to Valuation Period, reflecting the invest- ment experience of the selected Portfolios of the Fund as well as the daily deduction of charges. When your Net Purchase Payments are allocated to a selected Portfolio, they result in a particular number of Accumulation Units being credited to your Contract. The number of Accumula- tion Units credited is determined by dividing the dollar amount allocated to each Portfolio by the Accumulation Unit Value for that Portfolio as of the end of the Valu- ation Period in which the payment is received. The Accu- mulation Unit Value varies each Valuation Period (i.e., each day that there is trading on the New York Stock Ex- change) with the net rate of return of the Portfolio. The net rate of return reflects the investment perfor- mance of the Portfolio for the Valuation Period and is net of asset charges to the Portfolio. - ------------------------------------------------------------------------------- DIVIDENDS AND All dividends and capital gains earned will be rein- CAPITAL GAINS vested and reflected in the Accumulation Unit Value. TREATMENT Only in this way can these earnings remain tax deferred. - ------------------------------------------------------------------------------- ANNUITY The Annuity Express service allows you to transfer funds EXPRESS(TM) automatically from your checking or statement savings account to one or more Portfolios in your Contract. You may purchase into existing Portfolios (if the $1,000 minimum balance requirement has been met) monthly, quar- terly, semiannually, or annually. The minimum automatic purchase is $50 and the maximum is $100,000. - ------------------------------------------------------------------------------- EXCHANGES AMONG Should your investment goals change, you may exchange THE PORTFOLIOS the Accumulated Value among the Portfolios of the Fund. Requests for exchanges may be made in writing and, if received prior to the close of the New York Stock Ex- change (generally 4:00 p.m. Eastern time) are processed at the close of business that same day. Requests re- ceived after the close of the Exchange are processed the next Business Day. The Contract's exchange privilege is not intended to af- ford Contract Owners a way to speculate on short-term movements in the market. Accordingly, in order to pre- vent excessive use of the exchange privilege that may potentially disrupt the management of the Fund and in- crease transaction costs, the Separate Account has es- tablished a policy of limiting excessive exchange activ- ity. Because excessive exchanges can potentially disrupt the management of the Portfolios and increase transaction costs, exchange activity is limited to two substantive exchanges (at least 30 days apart) from each Portfolio (except the Money Market Portfolio) during any 12 month period. "Substantive" means either a dollar amount large enough to have a negative impact on a Portfolio or a se- ries of movements between Portfolios. This restriction does not limit non-substantive exchanges and does not apply to exchanges from the Money Market Portfolio. All exchanges must be for at least $250 or, if less, the Ac- cumulated Value in the Portfolio. However, the Company and 21 the Fund reserve the right to revise or terminate the exchange privilege, limit the amount of or reject any exchange, as deemed necessary, at any time. --------------------------------------------------------- AUTOMATIC The Automatic Exchange Service allows you to move money EXCHANGES automatically among the Portfolios of the Fund. You may exchange fixed amounts or percentages of your Portfolio balance either monthly, quarterly, semiannually or annu- ally into existing (the $1,000 minimum balance require- ment has been met) Portfolios. Exchanges at regular in- tervals or "dollar-cost averaging" can be used, for example, to move money from a money market portfolio into a stock or bond portfolio. The minimum exchange amount is $250. The Automatic Exchange Service may be established by completing a Vanguard Variable Annuity Plan Automatic Exchange Service Application Form or writing a letter of instruction. You may change the transfer amount or cancel this service in writing. Please note that the Automatic Exchange Service cannot be used to establish a new Portfolio, and will not be activated until the Free Look Period has expired. - ------------------------------------------------------------------------------- FULL AND PARTIAL At any time before the Annuity Date and while the Annui- WITHDRAWALS tant or Joint Annuitant is living, the Contract Owner may make a partial or full withdrawal of the Contract to receive all or part of the Accumulated Value by sending a written request to the Variable Annuity Center. Full or partial withdrawals may only be made before the Annu- ity Date and all partial withdrawal requests must be for at least $250. (See "Federal Tax Considerations," page 28.) You can make a withdrawal by writing to the Variable An- nuity Center. Your written request should include your Contract number, social security number, withdrawal amount, the signature of all owners, and federal tax withholding election (IF NO WITHHOLDING ELECTION IS CHO- SEN, WE WILL BE REQUIRED TO WITHHOLD 10%). Your proceeds will normally be distributed within two Business Days after the receipt of the request but in no event will it be later than seven calendar days, subject to postpone- ment in certain circumstances (see "Deferment of Pay- ment" page 27). --------------------------------------------------------- SYSTEMATIC You may establish an automatic withdrawal of a specific WITHDRAWALS amount, a percentage of the balance, or accumulated earnings from your Contract, and receive distributions on a monthly, quarterly, semiannual, or annual schedule. Once established, a check will be sent to your Contract address, bank account or as you direct. Please note that each systematic withdrawal, like any other partial with- drawal, is subject to federal income taxes on the earn- ings, and may be subject to a 10% tax imposed by the IRS on withdrawals made prior to age 59 1/2. A minimum Contract balance of $10,000, and Portfolio balance of $1,000 are required to establish a systematic withdrawal program for your Contract. The minimum auto- matic withdrawal amount is $250. Changes to the with- drawal amount, percentage, or the frequency of distribu- tions may be made by telephone. Any other changes, including a change in the destina- 22 tion of the check, must be requested in writing, and should include signatures of all Contract owners. To cancel the systematic withdrawal program, the Contract owner(s) needs to submit a letter of instruction with the appropriate signatures. To establish a systematic withdrawal program for your Contract, simply complete the Vanguard Variable Annuity Plan Systematic Withdrawal Program Application Form. Please note that the completed form must be signed by all Contract owners, and must be signature guaranteed if you are directing the withdrawal checks to an address other than the Contract address. Payments under the Contract of any amounts derived from premiums paid by check may be delayed until such time as the check has cleared your bank. If, at the time the Contract Owner requests a full or partial withdrawal, he or she has not provided the Company with a written elec- tion not to have federal income taxes withheld, the Com- pany must by law withhold such taxes from the taxable portion of any full or partial withdrawal and remit that amount to the federal government. Moreover, the Internal Revenue Code provides that a 10% penalty tax will be im- posed on certain early withdrawals. (See "Federal Tax Considerations," page 28.) Since the Contract Owner assumes the investment risk with respect to amounts allocated to the Separate Ac- count, the total amount paid upon withdrawal of the Con- tract (taking into account any prior withdrawals) may be more or less than the total Purchase Payments made. - ------------------------------------------------------------------------------- MINIMUM BALANCE Due to the relatively high cost of maintaining smaller REQUIREMENTS accounts, the Company reserves the right to transfer the balance in any Portfolio account that falls below $1,000, due to a partial withdrawal or exchange, to the remaining Portfolios held under that Contract, on a pro rata basis. In the event that the entire value of the Contract falls below $1,000, you may be notified that the Accumulated Value of your account is below the Con- tract's minimum requirement. You would then be allowed 60 days to make an additional investment before the ac- count is liquidated. Proceeds would be promptly paid to the Contract Owner. The full proceeds would be taxable as a withdrawal. A full withdrawal will result in an au- tomatic termination of the Contract. - ------------------------------------------------------------------------------- DESIGNATION OF The Contract Owner may select one or more Beneficiaries, A BENEFICIARY who would receive benefits upon the death of the Annui- tant, and name them in the enrollment form. The beneficiary(ies), as named on the enrollment form, will serve as the beneficiary designation. Thereafter, while the Annuitant or Joint Annuitant is living, the Contract Owner may change the Beneficiary by written notice. Such change will take effect on the date the notice is signed by the Contract Owner but will not affect any payment made or other action taken before the Company acknowl- edges the notice. The Contract Owner may also make the designation of Beneficiary irrevocable by sending writ- ten notice to, and obtaining approval from, the Company. Changes in the 23 Beneficiary may then be made only with the consent of the designated irrevocable Beneficiary. If the Annuitant dies prior to the Annuity Date, the following will apply unless the Contract Owner has made other provisions: (a) If there is more than one Beneficiary, each will share in the Death Benefits equally; (b) If one or two or more Beneficiaries has already died, that share of the Death Benefit will be paid equally to the survivor(s); (c) If no Beneficiary is living, the proceeds will be paid to the Contract Owner; (d) If a Beneficiary dies at the same time as the Annui- tant, the proceeds will be paid as though the Bene- ficiary had died first. If a Beneficiary dies within 15 days after the Annuitant's death and before the Company receives due proof of the Annuitant's death, proceeds will be paid as though the Beneficiary had died first. If a Beneficiary who is receiving Annuity Payments dies, any remaining Payments Certain will be paid to that Beneficiary's named Beneficiary(ies) when due. If no Beneficiary survives the Annuitant, the right to any amount payable will pass to the Contract Owner. If the Contract Owner is the Annuitant, this right will pass to his or her estate. If a Life Annuity with Period Certain Option was elect- ed, and if the Annuitant dies on or after the Annuity Date, any unpaid Payments Certain will be paid to the Beneficiary. - ------------------------------------------------------------------------------- DEATH OF ANNUITANT Subject to the provisions dealing with Joint Annuitants, PRIOR TO ANNUITY if the Annuitant dies prior to the Annuity Date, an DATE amount will be paid as proceeds to the Beneficiary. If the Annuitant or Joint Annuitant dies prior to the Annu- ity Date, the survivor shall become the sole Annuitant. The Death Benefit is calculated and is payable upon re- ceipt of Due Proof of Death of the Annuitant as well as proof that the Annuitant died prior to the Annuity Date. Upon receipt of this proof, the Death Benefit will be paid within seven days, or as soon thereafter as the Company has sufficient information about the Beneficiary to make the payment. The Beneficiary may receive the amount payable in a lump sum cash benefit or under one of the Annuity Payment Options. A lump sum cash benefit will equal the greater of: (a) the Accumulated Value as of the date of Due Proof of Death and proof that the Annuitant died prior to the An- nuity Date or (b) the sum of Purchase Payments less the sum of all partial withdrawals and premium taxes, if any. An Annuity Payment will be based on the greater of: (a) the Accumulated Value on the Annuity Date elected by the Beneficiary and approved by the Company or (b) the sum of Purchase Payments less the sum of all partial withdrawals and premium taxes, if any. The Contract Owner may elect an Annuity Payment Option for the Bene- ficiary or, if no such election was made by the 24 Contract Owner and a cash benefit has not been paid, the Beneficiary may make this election after the Annuitant's death. For a discussion of the consequences of the death of the Contract Owner, if different from the Annuitant, see "Distribution-at-Death Rules," page 30. - ------------------------------------------------------------------------------- ANNUITY DATE The Contract Owner may specify an Annuity Date in the enrollment form, which can be no later than the first day of the month after the Annuitant's 90th birthday, without the Company's prior approval. If no Annuity Date is specified in the enrollment form, the Annuity will begin receiving Annuity Payments on the first day of the month after ten full years from the date of this Con- tract, or the first day of the month which follows the Annuitant's 65th birthday, whichever is later. The Annu- ity Date is the date that Annuity Payments are scheduled to commence under the Contract, unless the Contract has been surrendered or an amount has been paid as proceeds to the designated Beneficiary prior to that date. The Contract Owner may advance or defer the Annuity Date. However, the Annuity Date may not be advanced to a date prior to 30 days after the date of receipt of a written request or, without the Company's prior approv- al, deferred to a date beyond the Annuitant's 90th birthday. An Annuity Date may only be changed by written request during the Annuitant's or Joint Annuitant's lifetime and must be made at least 30 days before the then-scheduled Annuity Date. The Annuity Date and Annu- ity Payment Options available for Qualified Contracts may also be controlled by endorsements, the plan or ap- plicable law. - ------------------------------------------------------------------------------- ANNUITY PAYMENT All Annuity Payment Options (except the Designated Pe- OPTIONS riod Annuity Option) are offered as "Variable Annuity Options." This means that Annuity Payments, after the initial payment, will reflect the investment experience of the Portfolio or Portfolios chosen by the Contract Owner. All Annuity Payment Options are offered as "Fixed Annuity Options." This means that the amount of each payment will be set on the Annuity Date and will not change. If you choose a Fixed Option, your investment will be moved out of the underlying Vanguard Portfolios and into the general account of AUSA Life Insurance Com- pany, Inc. If you do not wish to receive your payments on an annuity basis, you may take a lump sum payment at anytime before the annuity date. The lump sum value is equal to the Accumulation Value. The following Annuity Payment Options are available under the Contract: LIFE ANNUITY--Available as either a Fixed or Variable Option. Monthly Annuity Payments are paid for the life of an Annuitant, ceasing with the last Annuity Payment due prior to the Annuitant's death. JOINT AND LAST SURVIVOR ANNUITY--Available as either a Fixed or Variable Option. Monthly Annuity Payments are paid for the life of two Annuitants and thereafter for the life of the survivor, ceasing with the last Annuity Payment due prior to the survivor's death. 25 LIFE ANNUITY WITH PERIOD CERTAIN--Available as either a Fixed or Variable Option. Monthly Annuity Payments are paid for the life of an Annuitant, with a Period Certain of not less than 120, 180, or 240 months, as elected. INSTALLMENT OR UNIT REFUND LIFE ANNUITY--Available as either a Fixed (Installment Refund) or Variable (Unit Refund) Option. Monthly Annuity Payments are paid for the life of an Annuitant, with a Period Certain deter- mined by dividing the Accumulated Value by the First An- nuity Payment. DESIGNATED PERIOD ANNUITY--Only available as a Fixed Op- tion. Monthly Annuity Payments are paid for a Period Certain as elected, which may be from 10 to 30 years. In the event that an Annuity Payment Option is not se- lected, the Company will make monthly Annuity Payments that will go on for as long as the Annuitant lives (120 payments guaranteed) in accordance with the Life Annuity with Period Certain Option and the annuity benefit sec- tions of the Contract. That portion of the Accumulated Value that has been held in a Portfolio prior to the An- nuity Date will be applied under a Variable Annuity Op- tion based on the performance of that Portfolio. Subject to approval by the Company, the Contract Owner may se- lect any other Annuity Payment Option then being offered by the Company. Annuity Payments are guaranteed to be not less than as provided by the Annuity Tables for the first payment under a Variable Option and each payment under a Fixed Option, and the Annuity Payment Option elected by the Contract Owner. The minimum payment, how- ever, is $100. If the Accumulated Value is less than $2,000, the Company has the right to pay that amount in a lump sum. From time to time, the Company may require proof that the Annuitant, Joint Annuitant, or Contract Owner is living. Annuity Payment Options are not avail- able to: (1) an assignee; or (2) any other than a natu- ral person, except with the consent of the Company. The Company may, at the time of election of an Annuity Payment Option, offer more favorable rates in lieu of the guaranteed rates specified in the Annuity Tables found in the Contract. The value of Variable Annuity Payments will reflect the investment experience of the chosen Portfolio. On or af- ter the Annuity Date, the Annuity Payment Option is ir- revocable. Only one Variable Annuity Option may be cho- sen from among those made available by the Company per each Portfolio. The annuity tables, which are contained in the Contract and are used to calculate the value of Variable Annuity Payments, are based on an assumed in- terest rate of 4%. If the actual net investment experi- ence exactly equals the assumed interest rate, then the Variable Annuity Payments will remain the same (equal to the first Annuity Payment). However, if actual invest- ment experience exceeds the assumed interest rate, the Variable Annuity Payments will increase; conversely, they will decrease if the actual experience is lower. If an Annuity Payment Option is chosen that depends on the continuation of the life of the Annuitant or of a Joint Annuitant, proof of birth date may be required be- fore Annuity Payments begin. For Annuity Payment Options 26 involving life income, the actual age of the Annuitant or of a Joint Annuitant will affect the amount of each payment. Since payments to older Annuitants are expected to be fewer in number, the amount of each Annuity Pay- ment shall be greater. If at the time of any Annuity Payment the Contract Owner has not provided the Company with a written election not to have federal income taxes withheld, the Company must by law withhold such taxes from the taxable portion of such Annuity Payment and remit that amount to the fed- eral government. The value of all payments, both fixed and variable, will be greater for shorter guaranteed periods than for longer guaranteed periods, and greater for life annui- ties than for joint and survivor annuities, because they are expected to be made for a shorter period. After the Annuity Date, the Contract Owner may change the Portfolio funding the Variable Annuity Payments by written request. Because excessive exchanges can poten- tially disrupt the management of the Portfolios and in- crease transaction costs, exchange activity is limited to two substantive exchanges (at least 30 days apart) from the Portfolios (except the Money Market Portfolio) during any 12-month period. "Substantive" means either a dollar amount large enough to have a negative impact on a Portfolio or a series of movements between Portfolios. The method of computation of Variable Annuity Payments is described in more detail in the Statement of Addi- tional Information. If you choose an Annuity Payment Option and the postal or other delivery service is unable to deliver checks to the Payee's address of record, no interest will accrue on amounts represented by uncashed Annuity Payment checks. It is the Payee's responsibility to keep the Company informed of the Payee's current address of rec- ord. --------------------------------------------------------- DEFERMENT OF Payment of any cash withdrawal or lump-sum death benefit PAYMENT due from the Separate Account will occur within seven days from the date the election becomes effective, ex- cept that the Company may be permitted to defer such payment if: (1) the New York Stock Exchange is closed for other than usual weekends or holidays, or trading on the Exchange is otherwise restricted; or (2) an emer- gency exists as defined by the SEC, or the SEC requires that trading be restricted; or (3) the SEC permits a de- lay for the protection of Contract Owners. - ------------------------------------------------------------------------------- 27 FEDERAL TAX CONSIDERATIONS INTRODUCTION The ultimate effect of federal income taxes on the amounts paid for the Contract, on the investment returns on assets held under a Contract, on Annuity Payments, and on the economic benefits to the Contract Owner, An- nuitant or Beneficiary, depends on the terms of the Con- tract, the Company's tax status and upon the tax status of the individuals concerned. The following discussion is general in nature and is not intended as tax advice. You should consult a tax adviser regarding the tax con- sequences of purchasing a Contract. No attempt is made to consider any applicable state or other tax laws. Moreover, the discussion is based upon the Company's un- derstanding of the federal income tax laws as they are currently interpreted. No representation is made regard- ing the likelihood of continuation of the federal income tax laws, the Treasury Regulations, or the current in- terpretations by the Internal Revenue Service. We re- serve the right to make uniform changes on the Contract to the extent necessary to continue to qualify the Con- tract as an annuity. For a discussion of federal income taxes as they relate to the Fund, please see the accom- panying Prospectus for the Fund. --------------------------------------------------------- TAXATION OF Section 72 of the Code governs taxation of annuities. In ANNUITIES IN general, a Contract Owner is not taxed on increases in GENERAL value under a Contract until some form of withdrawal or distribution is made under it. However, under certain circumstances, the increase in value may be subject to current federal income tax. (See "Contracts Owned by Non-Natural Persons", and "Diversification Standards", page 31.) Section 72 provides that the proceeds of a full or par- tial withdrawal from a Contract prior to the Annuity Date will be treated as taxable income to the extent the amounts held under the Contract exceed the "investment in the Contract", as that term is defined in the Code. The "investment in the Contract" can generally be de- scribed as the cost of the Contract, and generally con- stitutes all purchase payments paid for the Contract less any amounts received under the Contract that are excluded from the individual's gross income. The taxable portion is taxed at ordinary income tax rates. For pur- poses of this rule, a pledge or assignment of a Contract is treated as a payment received on account of a partial withdrawal of a Contract. Upon receipt of a full or partial withdrawal or an Annu- ity Payment under the Contract, you will be taxed if the value of the Contract exceeds the investment in the Con- tract. Ordinarily, the taxable portion of such payments will be taxed at ordinary income tax rates. Partial withdrawals are generally taken out of earnings first and then your purchase payments in the Contract. For Fixed Annuity Payments, in general, the taxable por- tion of each payment is determined by using a formula known as the "exclusion ratio", which establishes the ratio that the investment in the Contract bears to the total expected amount of Annuity Payments for the term of the Contract. That ratio is then applied to each pay- ment to determine the non-taxable portion of the pay- ment. The remaining portion of each payment is taxed at 28 ordinary income tax rates. For Variable Annuity Pay- ments, in general, the taxable portion is determined by a formula that establishes a specific dollar amount of each payment that is not taxed. The dollar amount is de- termined by dividing the investment in the Contract by the total number of expected periodic payments. The re- maining portion of each payment is taxed at ordinary in- come tax rates. Once the excludible portion of Annuity Payments to date equals the investment in the Contracts, the balance of the Annuity Payments will be fully tax- able. Generally, the entire amount distributed from a Quali- fied Contract is taxable to the Owner. In the case of Qualified Contracts with after tax contributions, the Owner is entitled to exclude the portion of each with- drawal or annuity payment constituting a return of after tax contributions. Once all of your after tax contribu- tions have been returned to you on a non-taxable basis, subsequent withdrawals or annuity payments are fully taxable as ordinary income. Since the Company has no knowledge of the amount of after tax contributions you have made, you will need to make this computation in the preparation of your federal income tax return. Withholding of federal income taxes on all distributions is required unless the recipient elects not to have any amounts withheld and properly notifies the Company of that election. In certain situations, taxes will be withheld on distributions to non-resident aliens at a 30% flat rate unless an exemption from withholding ap- plies under the applicable tax treaty. With respect to amounts withdrawn or distributed before the taxpayer reaches age 59 1/2, a penalty tax is im- posed equal to 10% of the taxable portion of amounts withdrawn or distributed. However, the penalty tax will not apply to withdrawals: (i) made on or after the death of the Contract Owner (or where the Contract Owner is not an individual, the death of the primary Annuitant, who is defined as the individual the events in whose life are of primary importance in affecting the timing and payment under the Contract); (ii) attributable to the taxpayer's becoming disabled within the meaning of Code Section 72(m)(7); (iii) that are part of a series of substantially equal periodic payments made at least annually for the life (or life expectancy) of the tax- payer, or joint lives (or joint life expectancies) of the taxpayer and his Beneficiary; (iv) from a qualified plan; (v) allocable to investment in the Contract before August 14, 1982; (vi) under a qualified funding asset (as defined in Code Section 130(d)); (vii) under an im- mediate annuity contract as defined in Section 72(u)(4); or (viii) that are purchased by an employer on termina- tion of certain types of qualified plans and that are held by the employer until the employee separates from service. Other tax penalties may apply to certain dis- tributions as well as to certain contributions and other transactions under a qualified contract. If the penalty tax does not apply to a withdrawal as a result of the application of item (iii) above, and the series of payments are subsequently modified (other than by reason of death or disability), the tax for the year in which the modification occurs will be increased by an amount (as determined under Treasury Regulations) equal to the penalty tax that would have been imposed but for item (iii) above, plus interest for the deferral 29 period. The foregoing rule applies if the modification takes place (a) before the close of the period that is five years from the date of the first payment and after the taxpayer attains age 59 1/2, or (b) before the tax- payer reaches age 59 1/2. The tax penalty may also not apply to distributions from Qualified Contracts issued under Section 408(b) of the Code used to pay qualified higher education expenses or the acquisition costs (up to $10,000) involved in the purchase of a principal res- idence by a first-time homebuyer. --------------------------------------------------------- THE COMPANY'S The Company is taxed as a life insurance company under TAX STATUS Part I of Subchapter L of the Code. Since the Separate Account is not a separate entity from the Company and its operations form a part of the Company, it will not be taxed separately as a "regulated investment company" under Subchapter M of the Code. Investment income and realized capital gains on the assets of the Separate Ac- count are reinvested and taken into account in determin- ing the Accumulation Value. Under existing federal in- come tax law, the Separate Account's investment income, including realized net capital gains, is not taxed to the Company. The Company reserves the right to make a deduction for taxes should they be imposed with respect to such items in the future. --------------------------------------------------------- DISTRIBUTION-AT- In order to be treated as an annuity contract, a con- DEATH RULES tract must, generally, provide the following two distri- bution rules: (a) if any Contract Owner dies on or after the Annuity Date and before the entire interest in the Contract has been distributed, the remaining portion of such interest must be distributed at least as rapidly as the method in effect on the Contract Owner's death; and (b) if any Contract Owner dies before the Annuity Date, the entire interest in the Contract must generally be distributed within five years after the date of death. To the extent such interest is payable to a Designated Beneficiary, however, such interest may be annuitized over the life of that Designated Beneficiary or over a period not extending beyond the life expectancy of that Beneficiary, so long as distributions commence within one year after the Contract Owner's death. If the Desig- nated Beneficiary is the spouse of the Contract Owner, the Contract (together with the deferred tax on the ac- crued and future income thereunder) may be continued un- changed in the name of the spouse as Contract Owner. The term Designated Beneficiary means the natural person named by the Contract Owner as a beneficiary and to whom ownership of the Contract passes by reason of the Con- tract Owner's death. If the Contract Owner is not an individual, death of the "primary Annuitant" (as defined under the Code) is treated as the death of the Contract Owner. The primary Annuitant is the individual who is of primary importance in affecting the timing or the amount of payout under a Contract. In addition, when the Contract Owner is not an individual, a change in the primary Annuitant is treated as the death of the Contract Owner. Finally, in the case of Joint Contract Owners, the distribution will be re- quired at the death of the first of the Contract Owners. --------------------------------------------------------- 30 TRANSFERS OF Any transfer of a Non-Qualified Contract prior to the ANNUITY CONTRACTS Annuity Date for less than full and adequate considera- tion will generally trigger tax on the gain in the Con- tract to the Contract Owner at the time of such trans- fer. The investment in the Contract of the transferee will be increased by any amount included in the Contract Owner's income. This provision, however, does not apply to those transfers between spouses or incident to a di- vorce which are governed by Code Section 1041(a). --------------------------------------------------------- CONTRACTS OWNED BY Where the Contract is held by a non-natural person (for NON-NATURAL example, a corporation), the Contract is generally not PERSONS treated as an annuity contract for federal income tax purposes, and the income on that Contract (generally the increase in the net Accumulated Value less the payments) is includible in taxable income each year. The rule does not apply where the non-natural person is only a nominal owner such as a trust or other entity acting as an agent for a natural person. The rule also does not apply where the Contract is acquired by the estate of a decedent, where the Contract is a qualified funding asset for structured settlements, where the Contract is purchased by an employer on behalf of an employee upon termination of a qualified plan, and in the case of an immediate an- nuity as defined under the Code. --------------------------------------------------------- ASSIGNMENTS A transfer of ownership of a Contract or the designation of an Annuitant or other Beneficiary who is not also the Contract Owner may result in tax consequences to the Contract Owner, Annuitant or Beneficiary that are not discussed herein. A Contract Owner contemplating such a transfer or assignment of a Contract should contact a tax adviser with respect to the potential tax effects of such a transaction. --------------------------------------------------------- MULTIPLE CONTRACTS All non-qualified annuity contracts issued by the same RULE company (or affiliate) to the same Contract Owner during any calendar year are to be aggregated and treated as one contract for purposes of determining the amount in- cludible in the taxpayer's gross income. Thus, any amount received under any Contract prior to the Con- tract's Annuity Date, such as a partial withdrawal, will be taxable (and possibly subject to the 10% penalty tax) to the extent of the combined income in all such con- tracts. The Treasury Department has specific authority to issue regulations that prevent the avoidance of Code Section 72(e) through the serial purchase of annuity Contracts or otherwise. In addition, there may be other situations in which the Treasury may conclude that it would be appropriate to aggregate two or more Contracts purchased by the same Contract Owner. The aggregation rules do not apply to immediate annuities as defined un- der Section 72(u)(4) of the Code. Accordingly, a Con- tract Owner should consult a tax adviser before purchas- ing more than one Contract or other annuity contracts. --------------------------------------------------------- DIVERSIFICATION To comply with certain diversification regulations (the STANDARDS "Regulations"), which were issued in final form on March 2, 1989, under Code Section 817(h), after a start up pe- riod, each Subaccount of the Separate Account will be required to diversify its investments. The Regulations generally re- 31 quire that on the last day of each quarter of a calendar year, no more than 55% of the value of each Subaccount of the Separate Account is represented by any one in- vestment, no more than 70% is represented by any two in- vestments, no more than 80% is represented by any three investments, and no more than 90% is represented by any four investments. A "look-through" rule applies that suggests that each Subaccount of the Separate Account will be tested for compliance with the percentage limi- tations by looking through to the assets of the Portfo- lio of the Fund in which each such division invests. All securities of the same issuer are treated as a single investment. As a result of the 1988 Act, each government agency or instrumentality will be treated as a separate issuer for purposes of those limitations. In connection with the issuance of temporary diversifi- cation regulations in 1986, the Treasury announced that such regulations did not provide guidance concerning the extent to which Contract Owners may direct their invest- ments to particular divisions of a separate account. It is possible that regulations or revenue rulings may be issued in this area at some time in the future. It is not clear, at this time, what these regulations or rul- ings would provide. It is possible that when the regula- tions or rulings are issued, the Contracts may need to be modified in order to remain in compliance. For these reasons, the Company reserves the right to modify the Contracts, as necessary, to prevent the Contract Owner from being considered the owner of assets of the Sepa- rate Account. We intend to comply with the Regulations to assure that the Contracts continue to be treated as annuity con- tracts for federal income tax purposes. --------------------------------------------------------- QUALIFIED Qualified Contracts to provide for retirement may gener- INDIVIDUAL ally be purchased only in connection with a "rollover" RETIREMENT of funds from another individual retirement annuity ANNUITIES (IRA) or qualified plan. IRA Contracts must contain spe- cial provisions and are subject to limitations on con- tributions and the timing of when distributions can be made. Tax penalties may apply to contributions in excess of specified limits, loans or reassignments, distribu- tions that do not meet specified requirements, or in other circumstances. Anyone desiring to purchase a Qual- ified Contract should consult a personal tax adviser. - ------------------------------------------------------------------------------- GENERAL The Company retains the right, subject to any applicable INFORMATION law, to make certain changes. The Company reserves the right to eliminate the shares of any of the Portfolios ADDITIONS, and to substitute shares of another Portfolio of the DELETIONS, OR Fund, or of another registered open-end management in- SUBSTITUTIONS OF vestment company, if the shares of the Portfolios are no INVESTMENTS longer available for investment, or, if in the Company's judgment, investment in any Portfolio would be inappro- priate in view of the purposes of the Separate Account. To the extent required by the 1940 Act, substitutions of shares attributable to a Contract Owner's interest in a Portfolio will not be made until SEC approval has been obtained and the Contract Owner has been notified of the change. 32 New Portfolios may be established when marketing, tax, investment, or other conditions so warrant. Any new Portfolios will be made available to existing Contract Owners on a basis to be determined by the Company. The Company may also eliminate one or more Portfolios if marketing, tax, investment or other conditions so war- rant. In the event of any such substitution or change, the Company may, by appropriate endorsement, make such changes in the Contracts as may be necessary or appro- priate to reflect such substitution or change. Further- more, if deemed to be in the best interests of persons having voting rights under the Contracts, the Separate Account may be operated as a management company under the 1940 Act or any other form permitted by law, may be deregistered under such Act in the event such registra- tion is no longer required, or may be combined with one or more other separate accounts. --------------------------------------------------------- DISTRIBUTOR OF THE The Vanguard Group, Inc., through its wholly-owned sub- CONTRACTS sidiary, Vanguard Marketing Corp., is the principal dis- tributor of the Contract. For these services, the Fund paid a fee of less than .02% of the Fund's average net assets for the 1997 fiscal year. This fee is guaranteed not to exceed .20% of the Fund's average month-end net assets. A complete description of these services is found in the "Management of the Fund" section of the Fund's Prospectus and in the Fund's Statement of Addi- tional Information. The principal business address for The Vanguard Group, Inc. is The Vanguard Variable Annu- ity Center, 100 Vanguard Boulevard, Malvern, PA 19355. --------------------------------------------------------- VOTING RIGHTS The Fund does not hold regular meetings of shareholders. The Directors of the Fund may call special meetings of shareholders as may be required by the 1940 Act or other applicable law. To the extent required by law, the Port- folio shares held in the Separate Account will be voted by the Company at shareholder meetings of the Fund in accordance with instructions received from persons hav- ing voting interests in the corresponding Portfolio. Fund shares as to which no timely instructions are re- ceived or shares held by the Company as to which Con- tract Owners have no beneficial interest will be voted in proportion to the voting instructions that are re- ceived with respect to all Contracts participating in that Portfolio. Voting instructions to abstain on any item to be voted upon will be applied on a pro rata ba- sis to reduce the votes eligible to be cast. Prior to the Annuity Date, the Contract Owner holds a voting interest in each Portfolio to which the Accumu- lated Value is allocated. The number of votes which are available to a Contract Owner will be determined by di- viding the Accumulated Value attributable to a Portfolio by the net asset value per share of the applicable Port- folio. After the Annuity Date, the person receiving An- nuity Payments under any variable annuity option has the voting interest. The number of votes after the Annuity Date will be determined by dividing the reserve for such Contract allocated to the Portfolio by the net asset value per share of the corresponding Portfolio. After the Annuity Date, the votes attributable to a Contract decrease as the reserves allocated 33 to the Portfolio decrease. In determining the number of votes, fractional shares will be recognized. The number of votes of the Portfolio that are available will be determined as of the date coincident with the date established by that Portfolio for determining shareholders eligible to vote at the meeting of the Fund. Voting instructions will be solicited by written communication prior to such meeting in accordance with procedures established by the Fund. --------------------------------------------------------- YEAR 2000 MATTERS In October, 1996, the Company adopted and currently has in place a Year 2000 Assessment and Planning Project (the "Plan") to review and analyze existing hardware and software systems, as well as voice and data communica- tions systems, to determine if they are Year 2000 com- patible. The Plan provides for a management process that ensures that when a particular system, or software ap- plication, is determined to be "non-compliant" the proper steps are in place to either remedy the "non-com- pliance" or cease using the particular system or soft- ware. The Plan also provides that the Chief Information Officer report to the Board of Directors as to the sta- tus of the efforts under the Plan on a regular and rou- tine basis. The Company has engaged the services of a third-party provider that is specialized in Year 2000 issues to work on the project. The Plan has four specific objectives: (1) to develop an inventory of all applications; (2) to evaluate all ap- plications in the inventory to determine the most pru- dent manner to move them to Year 2000 compliance, if re- quired; (3) to estimate budgets, resources and schedules for the migration of the "affected" applications to Year 2000 compliance; and (4) to define testing and deploy- ment requirements to successfully manage validation and re-deployment of any changed code. It is anticipated that all compliance issues will be resolved by December 1998. As of the date of this Prospectus, the Company has iden- tified and made available what it believes are the ap- propriate resources of hardware, people, and dollars, including the engagement of outside third parties, to assure that the Plan will be completed. The Year 2000 computer problem, and its resolution, is complex and multifaceted, and the success of a response plan cannot be conclusively known until the Year 2000 is reached (or an earlier date to the extent that the sys- tems or equipment addresses Year 2000 data prior to the Year 2000). Even with appropriate and diligent pursuit of a well conceived response plan, including testing procedures, there is no certainty that any company will achieve complete success. Further, notwithstanding its efforts or results, the Company's ability to function unaffected to and through the year 2000 may be adversely affected by actions (or failures to act) of third par- ties beyond its knowledge or control. --------------------------------------------------------- 34 AUDITORS Ernst & Young LLP serves as independent auditors for the Separate Account and the Company and will audit their financial statements annually. --------------------------------------------------------- LEGAL MATTERS Jorden Burt Boros Cicchetti Berenson & Johnson LLP, of Washington, D. C., has provided legal advice relating to the federal securities laws applicable to the issue and sale of the Contracts. All matters of New York law per- taining to the validity of the Contract and the Company's right to issue such Contracts have been passed upon by Gregory E. Miller-Breetz, Esquire, on behalf of the Company. - ------------------------------------------------------------------------------- 35 TABLE OF CONTENTS FOR THE VANGUARD VARIABLE ANNUITY PLAN CONTRACT STATEMENT OF ADDITIONAL INFORMATION
PAGE ---- THE CONTRACT............................................................ B-2 Computation of Variable Annuity Income Payments........................ B-2 Exchanges.............................................................. B-3 Joint Annuitant........................................................ B-3 GENERAL MATTERS......................................................... B-3 Non-Participating...................................................... B-3 Misstatement of Age or Sex............................................. B-3 Assignment............................................................. B-3 Annuity Data........................................................... B-4 Annual Report.......................................................... B-4 Incontestability....................................................... B-4 Ownership.............................................................. B-4 DISTRIBUTION OF THE CONTRACT............................................ B-4 PERFORMANCE INFORMATION................................................. B-4 Money Market Subaccount Yields......................................... B-4 30-Day Yield for Non-Money Market Subaccounts.......................... B-5 Standardized Average Annual Total Return for Non-Money Market Subaccounts........................................................... B-5 ADDITIONAL PERFORMANCE MEASURES......................................... B-7 Non-Standardized Cumulative Total Return and Non-Standardized Average Annual Total Return................................................... B-7 Non-Standardized Total Return Year-to-Date............................. B-8 Non-Standardized One Year Return....................................... B-8 SAFEKEEPING OF ACCOUNT ASSETS........................................... B-9 THE COMPANY............................................................. B-9 STATE REGULATION OF THE COMPANY......................................... B-9 RECORDS AND REPORTS..................................................... B-10 LEGAL PROCEEDINGS....................................................... B-10 OTHER INFORMATION....................................................... B-10 FINANCIAL STATEMENTS.................................................... B-10
36 AUSA LIFE INSURANCE COMPANY, INC. SEPARATE ACCOUNT B STATEMENT OF ADDITIONAL INFORMATION FOR THE VANGUARD VARIABLE ANNUITY PLAN CONTRACT OFFERED BY AUSA LIFE INSURANCE COMPANY, INC. (A NEW YORK STOCK COMPANY) ADMINISTRATIVE OFFICES 4 MANHATTANVILLE ROAD PURCHASE, NEW YORK 10577 ---------------- This Statement of Additional Information expands upon subjects discussed in the current Prospectus for the Vanguard Variable Annuity Plan Contract (the "Contract") offered by AUSA Life Insurance Company, Inc. (the "Company"). You may obtain a copy of the Prospectus dated October 1, 1998 by calling 1-800- 522-5555, or writing to Vanguard Variable Annuity Center, P.O. Box 1103, Val- ley Forge, PA 19482-1103. Terms used in the current Prospectus for the Con- tract are incorporated in this Statement. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACT. OCTOBER 1, 1998
TABLE OF CONTENTS PAGE ----------------- ---- THE CONTRACT............................................................ B-2 Computation of Variable Annuity Income Payments........................ B-2 Exchanges.............................................................. B-3 Joint Annuitant........................................................ B-3 GENERAL MATTERS......................................................... B-3 Non-Participating...................................................... B-3 Misstatement of Age or Sex............................................. B-3 Assignment............................................................. B-3 Annuity Data........................................................... B-4 Annual Report.......................................................... B-4 Incontestability....................................................... B-4 Ownership.............................................................. B-4 DISTRIBUTION OF THE CONTRACT............................................ B-4 PERFORMANCE INFORMATION................................................. B-4 Money Market Subaccount Yields......................................... B-4 30-Day Yield for Non-Money Market Subaccounts.......................... B-5 Standardized Average Annual Total Return for Non-Money Market Subaccounts........................................................... B-5 ADDITIONAL PERFORMANCE MEASURES......................................... B-7 Non-Standardized Cumulative Total Return and Non-Standardized Average Annual Total Return................................................... B-7 Non-Standardized Total Return Year-to-Date............................. B-8 Non-Standardized One Year Return....................................... B-8 SAFEKEEPING OF ACCOUNT ASSETS........................................... B-9 THE COMPANY............................................................. B-9 STATE REGULATION OF THE COMPANY......................................... B-9 RECORDS AND REPORTS..................................................... B-10 LEGAL PROCEEDINGS....................................................... B-10 OTHER INFORMATION....................................................... B-10 FINANCIAL STATEMENTS.................................................... B-10
THE CONTRACT In order to supplement the description in the Prospectus, the following pro- vides additional information about the Contract which may be of interest to Contract Owners. COMPUTATION OF VARIABLE ANNUITY INCOME PAYMENTS Variable Annuity Income Payments are computed as follows. First, the Accumu- lated Value (or the portion of the Accumulated Value used to provide variable payments) is applied under the Annuity Table contained in the Contract corre- sponding to the Annuity Option elected by the Contract Owner and based on an assumed interest rate of 4%. This will produce a dollar amount which is the first monthly payment. The Company may, at the time Annuity Income Payments are computed, offer more favorable rates in lieu of the guaranteed rates spec- ified in the Annuity Table. The amount of each Annuity Payment after the first is determined by means of Annuity Units. The number of Annuity Units is determined by dividing the first Annuity Payment by the Annuity Unit value for the selected Subaccount on the Annuity Date. The number of Annuity Units for the Subaccount then remains fixed, unless an exchange of Annuity Units (as set forth below) is made. After the first Annuity Payment, the dollar amount of each subsequent Annuity Pay- ment is equal to the number of Annuity Units multiplied by the Annuity Unit value for the Subaccount on the due date of the Annuity Payment. The Annuity Unit value for each Subaccount was initially established at $10.00 on the day money was first deposited in that Subaccount. The Annuity Unit value for any subsequent Business Day is equal to (a) times (b) times (c), where: (a) the Annuity Unit value for the immediately preceding Business Day; (b) the Net Investment Factor for the day; (c) the investment result adjustment factor (.99989255 per day), which recog- nizes an assumed interest rate of 4% per year used in determining the An- nuity Payment amounts. The Net Investment Factor is a factor applied to a Subaccount that reflects daily changes in the value of the Subaccount due to: (a) any increase or decrease in the value of the Subaccount due to investment results; (b) a daily charge for the mortality and expense risks assumed by the Company corresponding to an annual rate according to the following schedule:
RATE FOR NET ASSETS* ALL ASSETS ----------- ---------- Up to $2.5 Billion................................................ 0.30% Over $2.5 Billion and Up To $5 Billion............................ 0.28% Over $5 Billion................................................... 0.27%
- -------- * Based on combined net assets of the Separate Account and Separate Account IV of Peoples Benefit Life Insurance Company. (c) a daily charge for the cost of administering the Contract corresponding to an annual charge of .10%. (d) an annual charge of $25 for maintenance of Contracts valued at less than $25,000 at time of initial purchase and on the last business day of each year. The Annuity Tables contained in the Contract are based on the 1983 Table "A" Mortality Table projected for mortality improvement to the year 2000 using Projection Scale G and an interest rate of 4% a year. B-2 EXCHANGES After the Annuity Date, if a Variable Annuity Option has been chosen, the Contract Owner may, by written request, exchange the current value of the ex- isting Subaccount to Annuity Units of any other Subaccount then available. The request for the exchange must be received, however, at least 10 Business Days prior to the first payment date on which the exchange is to take effect. This exchange shall result in the same dollar amount of Annuity Payment on the date of exchange. The Contract Owner is limited to two substantive exchanges (at least 30 days apart) from a Portfolio (except the Money Market Portfolio) in any Contract Year, and the value of the Annuity Units exchanged must provide a monthly Annuity Payment of at least $100 at the time of the exchange. "Sub- stantive" means either a dollar amount large enough to have a negative impact on a Portfolio or a series of movements between Portfolios. Exchanges will be made using the Annuity Unit value for the Subaccounts on the date the request for exchange is received by the Company. On the exchange date, the Company will establish a value for the current Subaccount by multi- plying the Annuity Unit value by the number of Annuity Units in the existing Subaccount, and compute the number of Annuity Units for the new Subaccount by dividing the Annuity Unit value of the new Subaccount into the value previ- ously calculated for the existing Subaccount. JOINT ANNUITANT The Contract Owner may, in the Contract enrollment form or by written request at least 30 days prior to the Annuity Date, name a Joint Annuitant. Such Joint Annuitant must meet the Company's underwriting requirements. If approved by the Company, the Joint Annuitant shall be named on the Contract Schedule or added by endorsement. An Annuitant or Joint Annuitant may not be replaced. The Annuity Date shall be determined based on the date of birth of the Annui- tant. If the Annuitant or Joint Annuitant dies prior to the Annuity Date, the survivor shall be the sole Annuitant. Another Joint Annuitant may not be des- ignated. Payment to a Beneficiary shall not be made until the death of the surviving Annuitant. GENERAL MATTERS NON-PARTICIPATING The Contracts are non-participating. No dividends are payable and the Con- tracts will not share in the profits or surplus earnings of the Company. MISSTATEMENT OF AGE OR SEX The Company may require proof of age and sex before making Annuity Payments. If the Annuitant's stated age, sex or both in the Contract are incorrect, the Company will change the Annuity Benefits payable to those which the Purchase Payments would have purchased for the correct age and sex. In the case of cor- rection of the stated age or sex after payments have commenced, the Company will: (1) in the case of underpayment, pay the full amount due with the next payment; or (2) in the case of overpayment, deduct the amount due from one or more future payments. ASSIGNMENT Any Nonqualified Contract may be assigned by the Contract Owner prior to the Annuity Date and during the Annuitant's lifetime. The Company is not responsi- ble for the validity of any assignment. No assignment will be recognized until the Company receives written notice thereof. The interest of any Beneficiary which the assignor has the right to change shall be subordinate to the inter- est of an assignee. Any amount paid to the assignee shall be paid in one sum, notwithstanding any settlement agreement in effect at the time assignment was executed. The Company shall not be liable as to any payment or other settle- ment made by the Company before receipt of written notice. B-3 ANNUITY DATA The Company will not be liable for obligations which depend on receiving in- formation from a Payee until such information is received in a form satisfac- tory to the Company. ANNUAL REPORT Once each Contract Year, the Company will send the Contract Owner an annual report of the current Accumulated Value allocated to each Subaccount; and any Purchase Payments, charges, exchanges or withdrawals during the year. This re- port will also give the Contract Owner any other information required by law or regulation. The Contract Owner may ask for a report like this at any time. INCONTESTABILITY This Contract is incontestable from the Contract Date, subject to the "Mis- statement of Age or Sex" provision. OWNERSHIP The Owner of the Contract on the Contract Date is the Annuitant, unless oth- erwise specified in the enrollment form. The Owner may specify a new Owner by written notice at any time thereafter. The term Owner also includes any person named as a Joint Owner. A Joint Owner shares ownership in all respects with the Owner. During the Annuitant's lifetime all rights and privileges under this Contract may be exercised solely by the Owner. Upon the death of the Own- er(s), Ownership is retained by the surviving Joint Owner or passes to the Owner's Designated Beneficiary, if one has been designated by the Owner. If no Owner's Designated Beneficiary is designated or if no Owner's Designated Bene- ficiary is living, the Owner's Designated Beneficiary is the Owner's estate. From time to time the Company may require proof that the Owner is still liv- ing. DISTRIBUTION OF THE CONTRACT The Vanguard Group, Inc. through its wholly-owned subsidiary, Vanguard Mar- keting Corporation, is the principal distributor of the Contracts. For these services, the Fund paid a fee of .02% of the Funds' average net assets for its 1997 fiscal year. This fee is guaranteed not to exceed .20% of the Fund's av- erage month-end net assets. A complete description of these services is found in the "Management of the Fund" section of the Fund's Prospectus and in the Fund's Statement of Additional Information. PERFORMANCE INFORMATION Performance information for the Subaccounts, including the yield and effec- tive yield of the Money Market Subaccount, the yield of the remaining Subaccounts, and the total return of all Subaccounts, may appear in reports or promotional literature to current or prospective Contract Owners. The yield and total return performance information presented below reflects the opera- tions of the Subaccounts in connection with the individual variable annuity contracts offered through the First Providian Life & Health Insurance Company Separate Account B, which was acquired intact by AUSA Life Insurance Company, Inc., on October 1, 1998. As of October 1, 1998, new individual variable annu- ity contracts no longer are offered for sale. MONEY MARKET SUBACCOUNT YIELDS Current yield for the Money Market Subaccount will be based on the change in the value of a hypothetical investment (exclusive of capital changes) over a particular 7-day period, less a pro-rata share of Subaccount expenses accrued over that period (the "base-period"), and stated as a percentage of the in- vestment at the start of the base period (the "base period return"). The base period return is then annualized by multiplying by /365/7/, with the re- sulting yield figure carried to at least the nearest hundredth of one percent. B-4 Calculation of "effective yield" begins with the same "base period return" used in the calculation of yield, which is then annualized to reflect weekly compounding pursuant to the following formula: Effective Yield = [(Base Period Return +1)/365/7/] -1 The yield of the Money Market Subaccount for the 7-day period ended December 31, 1997, was 5.24%. 30-DAY YIELD FOR NON-MONEY MARKET SUBACCOUNTS Quotations of yield for the remaining Subaccounts will be based on all in- vestment income per Unit earned during a particular 30-day period, less ex- penses accrued during the period ("net investment income"), and will be com- puted by dividing net investment income by the value of a Unit on the last day of the period, according to the following formula: YIELD = 2[(a - b + 1)/6/ -1] ----- c X d Where: [a] equals the net investment income earned during the period by the Series attributable to shares owned by a Subaccount [b] equals the expenses accrued for the period (net of reimbursements) [c] equals the average daily number of Units outstanding during the period [d] equals the maximum offering price per Accumulation Unit on the last day of the period Yield on the Subaccount is earned from the increase in net asset value of shares of the Series in which the Subaccount invests and from dividends de- clared and paid by the Series, which are automatically reinvested in shares of the Series. The yield of each Subaccount for the 30-day period ended December 31, 1997, is set forth below. Yields are calculated daily for each Subaccount. Premiums and discounts on asset-backed securities are not amortized. High-Grade Bond Subaccount............................................. 5.73% High Yield Bond Subaccount............................................. 8.14% Balanced Subaccount.................................................... 3.26% Equity Income Subaccount............................................... 2.33% Equity Index Subaccount................................................ 1.15% Growth Subaccount...................................................... 0.41% International Subaccount............................................... -- Small Company Growth Subaccount........................................ 0.15%
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FOR NON-MONEY MARKET SUBACCOUNTS When advertising performance of the Subaccounts, the Company will show the "Standardized Average Annual Total Return," calculated as prescribed by the rules of the SEC, for each Subaccount. The Standardized Average Annual Total Return is the effective annual compounded rate of return that would have pro- duced the cash redemption value over the stated period had the performance re- mained constant throughout. The calculation assumes a single $1,000 payment made at the beginning of the period and full redemption at the end of the pe- riod. It reflects the deduction of all applicable sales loads, the Annual Con- tract Maintenance Fee and all other Portfolio, Separate Account and Contract level charges except Premium Taxes, if any. In calculating performance infor- mation, the Annual Contract Maintenance Fee is reflected as a percentage equal to the total amount of fees collected during a year divided by the total aver- age net assets of the Portfolios during the same year. The fee is assumed to remain the same in each year of the applicable period. The fee is prorated to reflect only the B-5 remaining portion of the calendar year of purchase. Thereafter, the fee is de- ducted on the last business day of the year for the following year, on a pro rata basis, from each of the Portfolios you have chosen. Quotations of average annual total return for any Subaccount will be ex- pressed in terms of the average annual compounded rate of return of a hypo- thetical investment in a Contract over a period of one, three, five and 10 years (or, if less, up to the life of the Subaccount) and year-to-date and quarter-to-date, calculated pursuant to the formula: P(1 + T)/n/ = ERV Where: (1) [P] equals a hypothetical Initial Purchase Payment of $1,000 (2) [T] equals an average annual total return (3) [n] equals the number of years (4) [ERV] equals the ending redeemable value of a hypothetical $1,000 Pur- chase Payment made at the beginning of the period (or fractional portion thereof) The following tables show the average annual total return for the Subaccounts for the period beginning at the inception of each Subaccount and ending on De- cember 31, 1997.
YEAR YEAR ENDED SINCE 1 YEAR 3 YEARS 5 YEARS TO DATE 12/31/97 INCEPTION* ------ ------- ------- ------- ---------- ---------- High-Grade Bond Subaccount............. 8.97% 5.11% 4.26% 8.97% 8.97% 4.13% High Yield Bond Subaccount............. 11.62% -- -- 11.62% 11.62% 13.04% Balanced Subaccount..... 22.58% 23.14% 15.73% 22.58% 22.58% 14.08% Equity Income Subaccount............. 33.77% 29.71% -- 33.77% 33.77% 19.39% Equity Index Subaccount. 32.58% 30.34% 19.43% 32.58% 32.58% 17.43% Growth Subaccount....... 26.10% 29.88% -- 26.10% 26.10% 21.13% International Subaccount............. 2.91% 10.59% -- 2.91% 2.91% 9.18% Small Company Growth Subaccount............. 12.79% -- -- 12.79% 12.79% 6.03%
- -------- * Since Inception: Equity Index Subaccount, Balanced Subaccount, and High-Grade Bond Subaccount--December 16, 1992 Equity Income Subaccount and Growth Subaccount--June 7, 1993 International Subaccount--June 3, 1994 High Yield Bond Subaccount and Small Company Growth Subaccount--June 3, 1996
MONTH- TO- QUARTER 6 MONTHS- DATE TO-DATE TO-DATE ------ ------- --------- High-Grade Bond Subaccount.......................... 1.03% 2.74% 6.05% High Yield Bond Subaccount.......................... 1.29% 2.27% 6.04% Balanced Subaccount................................. 1.61% 2.77% 9.06% Equity Income Subaccount............................ 2.62% 5.93% 14.22% Equity Index Subaccount............................. 1.07% 2.72% 10.27% Growth Subaccount................................... 1.53% 4.05% 7.28% International Subaccount............................ 0.50% -9.61% -11.42% Small Company Growth Subaccount..................... -1.00% -8.22% 9.59%
All total return figures reflect the deduction of the administrative charge, and the mortality and expense risk charge. The SEC requires that an assumption be made that the Contract Owner surrenders the entire Contract at the end of the 1-, 5- and 10-year periods (or, if less, up to the life of the Subaccount) for which performance is required to be calculated. B-6 Performance information for a Subaccount may be compared, in reports and pro- motional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Donoghue Money Market Institu- tional Averages, or other indices that measure performance of a pertinent group of securities so that investors may compare a Subaccount's results with those of a group of securities widely regarded by investors as representative of the securities markets in general; (ii) 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 companies by overall performance, investment objectives, and assets, or tracked by other services, companies, publications, or persons who rank such investment companies on overall performance or other criteria; and (iii) the Consumer Price Index (measure for inflation) to assess the real rate of return from an investment in the Contract. Unmanaged indices may assume the reinvestment of dividends but generally do not reflect deductions for adminis- trative and management costs and expenses. Performance information for any Subaccount reflects only the performance of a hypothetical Contract under which Accumulation Value is allocated to a Subaccount during a particular time period on which the calculations are based. Performance information should be considered in light of the investment objectives and policies, characteristics and quality of the portfolio of the Fund in which the Subaccount 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. Reports and marketing materials may, from time to time, include information concerning the rating of AUSA Life Insurance Company, Inc. as determined by A.M. Best, Moody's, Standard & Poor's or other recognized rating services. Re- ports and promotional literature may also contain other information including (i) the ranking of any Subaccount derived from rankings of variable annuity separate accounts or other investment products tracked by Lipper Analytical Services or by other rating services, companies, publications, or other per- sons who rank separate accounts or other investment products on overall per- formance or other criteria, and (ii) the effect of tax deferred compounding on a Subaccount's investment returns, or returns in general, which may be illus- trated by graphs, charts, or otherwise, and which may include a comparison, at various points in time, of the return from an investment in a Contract (or re- turns in general) on a tax-deferred basis (assuming one or more tax rates) with the return on a taxable basis. ADDITIONAL PERFORMANCE MEASURES NON-STANDARDIZED CUMULATIVE TOTAL RETURN AND NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN The Company may show Non-Standardized Cumulative Total Return (i.e., the per- centage change in the value of an Accumulation Unit) for one or more Subaccounts with respect to one or more periods. The Company may also show Non-Standardized Average Annual Total Return (i.e., the average annual change in Accumulation Unit Value) with respect to one or more periods. For one year and periods less than one year, the Non- Standardized Cumulative Total Return and the Non-Standardized Average Annual Total Return are effective annual rates of return and are equal. For periods greater than one year, the Non- Standardized Average Annual Total Return is the effective annual compounded rate of return for the periods stated. Because the value of an Accumulation Unit reflects the Separate Account and Portfolio expenses (see Fee Table in the Prospectus), the Non-Standardized Cumulative Total Return and Non-Stan- dardized Average Annual Total Return also reflect these expenses. However, these percentages do not reflect the Annual Contract Maintenance Fee or Pre- mium Taxes (if any), which, if included, would reduce the percentages reported by the Company. B-7 NON-STANDARDIZED CUMULATIVE TOTAL RETURN FOR PERIOD ENDING 12/31/97
MONTH- SINCE TO- QUARTER- 6 MONTHS- ONE SUBACCOUNT DATE TO-DATE TO-DATE YEAR INCEPTION ------ -------- --------- ------ ---------- High-Grade Bond Subaccount............. 1.03% 2.74% 6.05% 8.98% 41.17% High Yield Bond Subaccount............. 1.29% 2.27% 6.05% 11.63% 21.35% Balanced Subaccount..... 1.61% 2.77% 9.07% 22.60% 115.77% Equity Income Subaccount............. 2.62% 5.94% 14.23% 33.78% 125.03% Equity Index Subaccount. 1.67% 2.73% 10.27% 32.59% 152.68% Growth Subaccount....... 1.53% 4.05% 7.29% 26.12% 140.34% International Subaccount............. 0.50% -9.60% -11.47% 2.92% 37.08% Small Company Growth Subaccount............. -0.99% -8.22% 9.60% 12.80% 9.70%
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURNS FOR PERIOD ENDING 12/31/97
SINCE SUBACCOUNT ONE YEAR THREE YEAR FIVE YEAR INCEPTION -------- ---------- --------- ---------- High-Grade Bond Subaccount.......... 8.98% 9.69% 6.83% 7.51% High Yield Bond Subaccount.......... 11.63% -- -- 13.06% Balanced Subaccount................. 22.60% 23.17% 15.77% 14.13% Equity Income Subaccount............ 33.78% 29.74% -- 19.43% Equity Index Subaccount............. 32.59% 30.37% 19.47% 17.48% Growth Subaccount................... 26.12% 29.90% -- 21.17% International Subaccount............ 2.92% 10.62% -- 9.22% Small Company Growth Subaccount..... 12.80% -- -- 6.05%
NON-STANDARDIZED TOTAL RETURN YEAR-TO-DATE The Company may show Non-Standardized Total Return Year-to-Date as of a par- ticular date, or simply Total Return YTD, for one or more Subaccounts with re- spect to one or more non-standardized base periods commencing at the beginning of a calendar year. Total Return YTD figures reflect the percentage change in actual Accumulation Unit Values during the relevant period. These percentages reflect a deduction for the Separate Account and Portfolio expenses, but do not include the Annual Contract Maintenance Fee or Premium Taxes (if any), which, if included, would reduce the percentages reported by the Company.
TOTAL RETURN YTD AS OF 12/31/97 ---------------- High-Grade Bond Subaccount.................................. 8.98% High Yield Bond Subaccount.................................. 11.63% Balanced Subaccount......................................... 22.60% Equity Income Subaccount.................................... 33.78% Equity Index Subaccount..................................... 32.59% Growth Subaccount........................................... 26.12% International Subaccount.................................... 2.92% Small Company Growth Subaccount............................. 12.80%
NON-STANDARDIZED ONE YEAR RETURN The Company may show Non-Standardized One Year Return, for one or more Subaccounts with respect to one or more non-standardized base periods commenc- ing at the beginning of a calendar year (or date of inception, B-8 if during the relevant year) and ending at the end of such calendar year. One Year Return figures reflect the percentage change in actual Accumulation Unit Values during the relevant period. These percentages reflect a deduction for the Separate Account and Portfolio expenses, but do not include the Annual Contract Maintenance Fee or Premium Taxes (if any), which if included would reduce the percentages reported by the Company.
1997 1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- ---- High-Grade Bond Subaccount.......... 8.98% 3.08% 17.47% -3.19% 8.92% 5.70% High Yield Bond Subaccount.......... 11.63% -- -- -- -- -- Balanced Subaccount................. 22.60% 15.68% 31.76% -1.13% 12.56% 6.59% Equity Income Subaccount............ 33.78% 18.13% 38.19% -1.76% -- -- Equity Index Subaccount............. 32.59% 22.27% 36.67% 0.61% 9.18% 6.77% Growth Subaccount................... 26.12% 26.29% 37.62% 3.74% -- -- International Subaccount............ 2.92% 14.05% 15.31% -- -- -- Small Company Growth Subaccount..... 12.80% -- -- -- -- --
SAFEKEEPING OF ACCOUNT ASSETS Title to assets of the Separate Account is held by the Company. The assets are kept physically segregated and held separate and apart from the Company's general account assets. Records are maintained of all purchases and redemp- tions of eligible Portfolio shares held by each of the Subaccounts. THE COMPANY On October 1, 1998, First Providian Life & Health Insurance Company ("First Providian") merged with and into the Company. First Providian was a stock life insurance company incorporated under the laws of the State of New York on March 23, 1970. Upon the merger, First Providian's existence ceased and the Company became the surviving company under the name AUSA Life Insurance Compa- ny, Inc. As a result of the merger, the Separate Account became a separate ac- count of the Company. All of the Contracts issued by First Providian before the merger were, at the time of the merger, assumed by the Company. The merger did not affect any provisions of, or rights or obligations under, those Con- tracts. In approving the merger on May 26, 1998, and May 29, 1998, respective- ly, the boards of directors of the Company and First Providian determined that the merger of two financially strong stock life insurance companies would re- sult in an overall enhanced capital position and reduced expenses, which, to- gether, would be in the long-term interests of the Contract Owners. On May 26, 1998, 100% of the stockholders of the Company voted to approve the merger, and on May 29, 1998, 100% of the stockholders of First Providian voted to approve the merger. In addition, the New York Insurance Department has approved the merger. The Company is a wholly-owned indirect subsidiary of AEGON USA, Inc., which in turn is wholly owned by AEGON U.S. Holding Corporation, a wholly owned sub- sidiary of AEGON International n.v. AEGON International n.v. is a wholly owned subsidiary of AEGON n.v. Vereniging AEGON (a Netherlands membership associa- tion) has a 53.63% interest in AEGON n.v. STATE REGULATION OF THE COMPANY The Company is subject to the laws of New York governing insurance companies and to regulation by the New York Department of Insurance. An annual statement in a prescribed form is filed with the Department of Insurance each year cov- ering the operation of the Company for the preceding year and its financial condition as of the end of such year. Regulation by the Department of Insur- ance includes periodic examination to determine the Company's contract liabil- ities and reserves so that the Department may determine if the items are cor- rect. The Company's books and accounts are subject to review by the Department of Insurance at all times. In B-9 addition, the Company is subject to regulation under the insurance laws of other jurisdictions in which it may operate. RECORDS AND REPORTS All records and accounts relating to the Separate Account will be maintained by the Company or by its administrator, The Vanguard Group, Inc. As presently required by the Investment Company Act of 1940 and regulations promulgated thereunder, the Company will mail to all Contract Owners at their last known address of record, at least semiannually, reports containing such information as may be required under that Act or by any other applicable law or regula- tion. LEGAL PROCEEDINGS There are no legal proceedings to which the Separate Account is a party or to which the assets of the Separate Account are subject. The Company is not in- volved in any litigation that is of material importance in relation to its to- tal assets or that relates to the Separate Account. OTHER INFORMATION A Registration Statement has been filed with the Securities and Exchange Com- mission, under the Securities Act of 1933 as amended, with respect to the Con- tracts discussed in this Statement of Additional Information. Not all of the information set forth in the Registration Statement, amendments and exhibits thereto has been included in this Statement of Additional Information. State- ments contained in this Statement of Additional Information concerning the content of the Contracts and other legal instruments are intended to be summa- ries. For a complete statement of the terms of these documents, reference should be made to the instruments filed with the Securities and Exchange Com- mission. FINANCIAL STATEMENTS The audited financial statements of the Separate Account for the years ended December 31, 1997 and December 31, 1996, including the Report of Independent Auditors thereon, are included in this Statement of Additional Information. The audited supplemental statutory-basis financial statements of the Company for the years ended December 31, 1997, December 31, 1996, and December 31, 1995, including the Report of Independent Auditors thereon, which are also in- cluded in this Statement of Additional Information, should be distinguished from the financial statements of the Separate Account and should be considered only as bearing on the ability of the Company to meet its obligations under the Contracts. They should not be considered as bearing on the investment per- formance of the assets held in the Separate Account. B-10 SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS AUSA LIFE INSURANCE COMPANY, INC. YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 WITH REPORT OF INDEPENDENT AUDITORS AUSA LIFE INSURANCE COMPANY, INC. SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 CONTENTS
PAGE ---- Report of Independent Auditors............................................. 1 Audited Supplemental Financial Statements Supplemental Balance Sheets--Statutory Basis............................. 2 Supplemental Statements of Operations--Statutory Basis................... 3 Supplemental Statements of Changes in Capital and Surplus--Statutory Basis................................................................... 4 Supplemental Statements of Cash Flows--Statutory Basis................... 5 Notes to Supplemental Financial Statements--Statutory Basis.............. 6
F-i REPORT OF INDEPENDENT AUDITORS The Board of Directors AUSA Life Insurance Company, Inc. We have audited the accompanying supplemental statutory-basis balance sheets of AUSA Life Insurance Company, Inc. (reflecting the consolidation of AUSA Life Insurance Company, Inc. and First Providian Life and Health Insurance Company as described in Note 1) as of December 31, 1997 and 1996 and the related supplemental statutory-basis statements of operations, changes in capital and surplus, and cash flows for each of the three years in the period ended December 31, 1997. The supplemental financial statements give retroactive effect to the merger of AUSA Life Insurance Company, Inc. and First Providian Life and Health Insurance Company on October 1, 1998, which has been accounted for using the pooling of interests method as described in the notes to the supplemental financial statements. These supplemental financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these supplemental financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1 to the supplemental financial statements, the Company presents its financial statements in conformity with accounting practices prescribed or permitted by the Department of Insurance of the State of New York, which practices differ from generally accepted accounting principles. The variances between such practices and generally accepted accounting principles also are described in Note 1. The effects on the supplemental financial statements of these variances are not reasonably determinable but are presumed to be material. In our opinion, because of the effects of the matters described in the preceding paragraph, the supplemental financial statements referred to above do not present fairly, in conformity with generally accepted accounting principles, the financial position of AUSA Life Insurance Company, Inc. at December 31, 1997 and 1996, or the results of its operations or its cash flows for each of the three years in the period ended December 31, 1997. Also, in our opinion, the supplemental financial statements referred to above present fairly, in all material respects, the financial position of AUSA Life Insurance Company, Inc. at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, after giving retroactive effect to the merger of First Providian Life and Health Insurance Company, as described in the notes to the supplemental financial statements, in conformity with accounting practices prescribed or permitted by the Department of Insurance of the State of New York. Ernst & Young LLP Des Moines, Iowa October 1, 1998 F-1 AUSA LIFE INSURANCE COMPANY, INC. SUPPLEMENTAL BALANCE SHEETS--STATUTORY BASIS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ----------------------- 1997 1996 ----------- ---------- ADMITTED ASSETS Cash and invested assets: Cash and short-term investments..................... $ 68,131 $ 28,114 Bonds............................................... 3,988,635 3,698,483 Stocks: Preferred......................................... 1,792 1,945 Common, at market (cost: $118 in 1997 and $13 in 1996)............................................ 144 18 Mortgage loans on real estate....................... 495,009 618,633 Real estate acquired in satisfaction of debt, at cost less accumulated depreciation ($1,816 in 1997 and $1,087 in 1996)................................ 45,695 58,100 Policy loans........................................ 3,046 2,916 Other invested assets............................... 22,414 3,454 ----------- ---------- Total cash and invested assets.................. 4,624,866 4,411,663 Short-term note receivable from affiliate............. 9,594 361 Premiums deferred and uncollected..................... 6,316 6,450 Accrued investment income............................. 69,989 65,806 Federal income taxes recoverable...................... -- 221 Other assets.......................................... 7,609 5,231 Separate account assets............................... 5,630,093 4,862,449 ----------- ---------- Total admitted assets........................... $10,348,467 $9,352,181 =========== ========== LIABILITIES AND CAPITAL AND SURPLUS Liabilities: Aggregate reserves for policies and contracts: Life.............................................. $ 103,370 $ 50,870 Annuity........................................... 911,075 845,093 Accident and health............................... 16,547 17,904 Policy and contract claim reserves: Life.............................................. 5,456 4,835 Accident and health............................... 11,125 12,818 Other policyholders' funds.......................... 3,181,719 3,088,311 Remittances and items not allocated................. 35,267 16,289 Asset valuation reserve............................. 67,324 46,878 Interest maintenance reserve........................ 25,882 14,316 Payable to affiliates............................... 2,247 8,109 Short-term note payable to affiliate................ -- 600 Deferred income..................................... 13,421 18,023 Payable under assumption reinsurance agreement...... 56,952 67,217 Other liabilities................................... 8,400 12,719 Federal income taxes due or accrued................. 1,010 -- Separate account liabilities........................ 5,608,364 4,829,292 ----------- ---------- Total liabilities............................... 10,048,159 9,033,274 Commitments and contingencies Capital and surplus: Common stock, $125 par value, 20 shares authorized, issued and outstanding............................. 2,500 2,500 Paid-in surplus..................................... 319,180 319,180 Special surplus fund................................ 1,607 1,473 Unassigned surplus (deficit)........................ (22,979) (4,246) ----------- ---------- Total capital and surplus....................... 300,308 318,907 ----------- ---------- Total liabilities and capital and surplus....... $10,348,467 $9,352,181 =========== ==========
See accompanying notes. F-2 AUSA LIFE INSURANCE COMPANY, INC. SUPPLEMENTAL STATEMENTS OF OPERATIONS--STATUTORY BASIS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- Revenues: Premiums and other considerations, net of reinsurance: Life.................................. $ 71,899 $ 21,120 $ 21,273 Annuity............................... 1,199,470 1,092,033 1,161,710 Accident and health................... 39,999 52,831 59,270 Net investment income................... 341,540 339,460 333,722 Amortization of interest maintenance reserve................................ 3,392 2,326 2,348 Commissions and expense allowances on reinsurance ceded...................... 374 438 418 Other income............................ 17,240 10,739 8,786 ---------- ---------- ---------- 1,673,914 1,518,947 1,587,527 Benefits and expenses: Benefits paid or provided for: Life and accident and health benefits............................. 39,045 50,647 51,972 Surrender benefits.................... 1,175,051 864,643 835,335 Other benefits........................ 14,316 11,699 9,402 Increase (decrease) in aggregate reserves for policies and contracts: Life................................ 52,500 2,492 2,902 Annuity............................. 65,982 53,136 114,330 Accident and health................. (1,357) (1,063) 702 Other............................... 580 609 609 Increase in liability for premium and other deposit type funds............. 92,280 93,893 229,485 ---------- ---------- ---------- 1,438,397 1,076,056 1,244,737 Insurance expenses: Commissions........................... 79,099 87,938 95,944 General insurance expenses............ 92,613 83,885 73,727 Taxes, licenses and fees.............. 3,717 3,335 2,527 Net transfers to separate accounts.... 42,490 255,672 154,080 Other expenses........................ 181 145 58 ---------- ---------- ---------- 218,100 430,975 326,336 ---------- ---------- ---------- 1,656,497 1,507,031 1,571,073 ---------- ---------- ---------- Gain from operations before federal income taxes and net realized capital gains (losses) on investments.................. 17,417 11,916 16,454 Federal income tax expense................ 5,247 5,719 10,147 ---------- ---------- ---------- Gain from operations before net realized capital gains (losses) on investments.... 12,170 6,197 6,307 Net realized capital gains (losses) on investments (net of related federal income taxes and amounts transferred to interest maintenance reserve)............ 831 (12,107) (3,377) ---------- ---------- ---------- Net income (loss)......................... $ 13,001 $ (5,910) $ 2,930 ========== ========== ==========
See accompanying notes. F-3 AUSA LIFE INSURANCE COMPANY, INC. SUPPLEMENTAL STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS (DOLLARS IN THOUSANDS)
SPECIAL UNASSIGNED TOTAL COMMON PAID-IN SURPLUS SURPLUS CAPITAL AND STOCK SURPLUS FUND (DEFICIT) SURPLUS ------ -------- ------- ---------- ----------- Balance at January 1, 1995...... $2,500 $278,180 $1,285 $ 12,195 $294,160 Capital contribution.......... -- 41,000 -- -- 41,000 Net income for 1995........... -- -- -- 2,930 2,930 Net unrealized capital losses....................... -- -- -- (447) (447) Change in non-admitted assets....................... -- -- 72 (985) (913) Change in reserves due to change in valuation basis.... -- -- -- 132 132 Surplus effect of reinsurance.................. -- -- -- (70) (70) Change in liability for reinsurance in unauthorized companies.................... -- -- -- (51) (51) Change in asset valuation reserve...................... -- -- -- (10,608) (10,608) Seed money contributed to separate account, net of redemptions.................. -- -- -- (1,000) (1,000) Change in surplus in separate account...................... 3,121 3,121 ------ -------- ------ -------- -------- Balance at December 31, 1995.... 2,500 319,180 1,357 5,217 328,254 Net loss for 1996............. -- -- -- (5,910) (5,910) Net unrealized capital losses....................... -- -- -- (460) (460) Change in non-admitted assets....................... -- -- 116 437 553 Change in liability for reinsurance in unauthorized companies.................... -- -- -- (42) (42) Change in asset valuation reserve...................... -- -- -- (6,217) (6,217) Seed money contributed to separate account, net of redemptions.................. -- -- -- (12,500) (12,500) Change in surplus in separate account...................... -- -- -- 14,783 14,783 Prior year federal income tax adjustment................... -- -- -- 446 446 ------ -------- ------ -------- -------- Balance at December 31, 1996.... 2,500 319,180 1,473 (4,246) 318,907 Net income for 1997........... -- -- -- 13,001 13,001 Net unrealized capital losses....................... -- -- -- (2,710) (2,710) Change in non-admitted assets....................... -- -- 134 (8,617) (8,483) Change in liability for reinsurance in unauthorized companies.................... -- -- -- 29 29 Change in asset valuation reserve...................... -- -- -- (20,446) (20,446) Seed money withdrawn from separate account, net of redemptions.................. -- -- -- 11,700 11,700 Change in surplus in separate account...................... -- -- -- (11,749) (11,749) Prior year federal income tax adjustment................... -- -- -- 59 59 ------ -------- ------ -------- -------- Balance at December 31, 1997.... $2,500 $319,180 $1,607 $(22,979) $300,308 ====== ======== ====== ======== ========
See accompanying notes. F-4 AUSA LIFE INSURANCE COMPANY, INC. SUPPLEMENTAL STATEMENTS OF CASH FLOWS--STATUTORY BASIS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------- 1997 1996 1995 ----------- ----------- ----------- OPERATING ACTIVITIES Premiums and other considerations, net of reinsurance....................... $ 1,340,757 $ 1,177,613 $ 1,251,733 Net investment income................. 340,150 345,153 332,660 Life and accident and health claims... (40,151) (52,590) (50,718) Surrender benefits and other fund withdrawals.......................... (1,175,051) (864,643) (835,335) Other benefits to policyholders....... (14,290) (11,697) (9,387) Commissions, other expenses and other taxes................................ (184,457) (193,405) (188,487) Net transfer to separate account...... (43,309) (257,467) (154,087) Federal income taxes paid............. (4,704) (4,490) (10,583) Other, net............................ (3,744) (14,431) 7,360 ----------- ----------- ----------- Net cash provided by operating activities....................... 215,201 124,043 343,156 INVESTING ACTIVITIES Proceeds from investments sold, matured or repaid: Bonds and preferred stocks.......... 968,184 777,107 645,889 Common stocks....................... -- 5,288 2,957 Mortgage loans on real estate....... 179,810 165,460 138,243 Real estate......................... 25,104 -- 4,953 Policy loans........................ 16 4 -- ----------- ----------- ----------- 1,173,114 947,859 792,042 Cost of investments acquired: Bonds and preferred stocks.......... (1,260,122) (1,101,918) (1,127,375) Common stocks....................... (103) (589) (5,174) Mortgage loans on real estate....... (60,722) (42,118) (54,140) Real estate......................... -- (521) -- Policy loans........................ (146) (153) (150) Other............................... (17,805) (2,695) (995) ----------- ----------- ----------- (1,338,898) (1,147,994) (1,187,834) ----------- ----------- ----------- Net cash used in investing activities....................... (165,784) (200,135) (395,792) FINANCING ACTIVITIES Issuance (payment) of intercompany notes, net........................... (9,400) (19,200) 14,600 Capital contribution.................. -- -- 41,000 ----------- ----------- ----------- Net cash provided by (used in) financing activities................. (9,400) (19,200) 55,600 ----------- ----------- ----------- Increase (decrease) in cash and short- term investments..................... 40,017 (95,292) 2,964 Cash and short-term investments at beginning of year...................... 28,114 123,406 120,442 ----------- ----------- ----------- Cash and short-term investments at end of year................................ $ 68,131 $ 28,114 $ 123,406 =========== =========== ===========
See accompanying notes. F-5 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization AUSA Life Insurance Company, Inc. ("the Company") is a stock life insurance company and is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First AUSA") which, in turn, is a wholly-owned subsidiary of AEGON USA ("AEGON"). AEGON is a wholly-owned subsidiary of AEGON N.V., a holding company organized under the laws of The Netherlands. On December 31, 1993, the Company entered into an assumption reinsurance agreement with Mutual of New York ("MONY") to transfer certain group pension business of MONY to the Company. In July 1996, the Company completed a merger with International Life Investors Insurance Company ("ILI"), a wholly-owned subsidiary of Life Investors Insurance Company of America, another wholly-owned subsidiary of First AUSA, whereby ILI was merged directly into the Company. The Company received assets of $688,233 and liabilities of $635,189. The difference between assets and liabilities was transferred directly to capital and surplus. In accordance with National Association of Insurance Commissioners ("NAIC") statutory accounting principles, all prior period financial statements presented have been restated as if the merger took place at the beginning of such periods. Historical book values carried over from the separate companies to the combined entity. On October 1, 1998, the Company completed a merger with First Providian Life and Health Insurance Company ("FPLH"), an indirect wholly-owned subsidiary of Commonwealth General Corporation which, in turn, is an indirect wholly-owned subsidiary of AEGON, whereby FPLH was merged directly into the Company. For the purposes of this presentation, these supplemental financial statements give retroactive effect as if the merger had occurred on January 1, 1995 in conformity with the practices of the NAIC and accounting practices prescribed or permitted by the Department of Insurance of the State of New York. This merger was accounted for under the pooling of interests method of accounting and, accordingly, the historical book values carried over from the separate companies to the combined entity. The financial information is not necessarily indicative of the results that would have been recorded had the merger actually occurred on January 1, 1995, nor is it indicative of future results. These financial statements do not extend through to the date of the merger; however, they will become the historical financial statements of the Company after financial statements covering the date of the merger have been issued. Summarized financial information for the Company and FPLH prior to the merger are as follows:
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 ---------- ---------- ---------- Revenues: The Company.......................... $1,585,260 $1,454,207 $1,535,596 FPLH................................. 88,654 64,740 51,931 ---------- ---------- ---------- Combined............................... $1,673,914 $1,518,947 $1,587,527 ========== ========== ========== Net income (loss): The Company.......................... $ 3,503 $ (13,714) $ (5,049) FPLH................................. 9,498 7,804 7,979 ---------- ---------- ---------- Combined............................... $ 13,001 $ (5,910) $ 2,930 ========== ========== ==========
F-6 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED) (DOLLARS IN THOUSANDS)
DECEMBER 31, ---------------------- 1997 1996 ----------- ---------- Assets: The Company...................................... $ 9,951,625 $9,028,321 FPLH............................................. 396,842 323,860 ----------- ---------- Combined........................................... $10,348,467 $9,352,181 =========== ========== Liabilities: The Company...................................... $ 9,745,504 $8,794,341 FPLH............................................. 302,655 238,933 ----------- ---------- Combined........................................... $10,048,159 $9,033,274 =========== ========== Capital and surplus: The Company...................................... $ 206,121 $ 233,980 FPLH............................................. 94,187 84,927 ----------- ---------- Combined........................................... $ 300,308 $ 318,907 =========== ==========
Nature of Business The Company primarily sells group fixed and variable annuities and group life coverages. The Company is licensed in 49 states and the District of Columbia and is actively in the process of becoming licensed in all 50 states. Sales of the Company's products are primarily through brokers. Basis of Presentation The preparation of financial statements of insurance companies requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates and assumptions are utilized in the calculation of aggregate policy reserves, policy and contract reserves, guarantee fund assessment accruals and valuation allowances on investments. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized which could have a material impact on the financial statements. The accompanying financial statements have been prepared on the basis of accounting practices prescribed or permitted by the Department of Insurance of the State of New York, which practices differ in some respects from generally accepted accounting principles. The more significant of these differences are as follows: (a) bonds are generally reported at amortized cost rather than segregating the portfolio into held-to-maturity (reported at amortized cost), available-for-sale (reported at fair value), and trading (reported at fair value) classifications; (b) acquisition costs of acquiring new business are charged to current operations as incurred rather than deferred and amortized over the life of the policies; (c) policy reserves on traditional life products are based on statutory mortality rates and interest which may differ from reserves based on reasonable assumptions of expected mortality, interest, and withdrawals which include a provision for possible unfavorable deviation from such assumptions; (d) policy reserves on certain investment products use discounting methodologies utilizing statutory interest rates rather than full account values; (e) reinsurance amounts are netted against the corresponding asset or liability rather than shown as gross amounts on the balance sheet; (f) deferred income taxes are not provided for the difference between the financial statement and income tax bases of assets and liabilities; (g) net realized gains or losses attributed to changes in the level of interest rates in the market are deferred and amortized over the remaining life of the bond or mortgage loan, rather than recognized as gains or losses in the statement of operations when the sale is completed; (h) declines in the estimated realizable value of investments are provided for through the establishment of a formula-determined statutory investment reserve (reported as a liability), changes to which are charged directly to surplus, rather than through recognition in the statement of operations for declines in value, when such declines are judged to be other than temporary; (i) certain assets designated as "non-admitted assets" have been charged to surplus rather than being F-7 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED) (DOLLARS IN THOUSANDS) reported as assets; (j) revenues for universal life and investment products consist of premiums received rather than policy charges for the cost of insurance, policy administration charges, amortization of policy initiation fees and surrender charges assessed; (k) pension expense is recorded as amounts are paid; (l) adjustments to federal income taxes of prior years are charged or credited directly to unassigned surplus, rather than reported as a component of expense in the statement of operations; and (m) gains or losses on dispositions of business are charged or credited directly to unassigned surplus rather than being reported in the statement of operations. The effects of these variances have not been determined by the Company. The National Association of Insurance Commissioners (NAIC) currently is in the process of recodifying statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. Accordingly, that project, which is not expected to be completed before 1999, will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that the Company uses to prepare its statutory-basis financial statements. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments with remaining maturity of one year or less when purchased to be cash equivalents. Investments Investments in bonds (except those to which the Securities Valuation Office of the NAIC has ascribed a value), mortgage loans on real estate and short-term investments are reported at cost adjusted for amortization of premiums and accrual of discounts. Amortized costs for bonds and mortgage loans on real estate that were acquired through the reinsurance agreement, described earlier, were initially recorded at market value, consistent with the aforementioned agreement and as prescribed by the Department of Insurance of the State of New York. Amortization is computed using methods which result in a level yield over the expected life of the security. The Company reviews its prepayment assumptions on mortgage and other asset backed securities at regular intervals and adjusts amortization rates retrospectively when such assumptions are changed due to experience and/or expected future patterns. Investments in preferred stocks in good standing are reported at cost. Investments in preferred stocks not in good standing are reported at the lower of cost or market. Common stocks, which may include shares of mutual funds (money market and other), are carried at market. Real estate is reported at cost less allowances for depreciation. Depreciation is computed principally by the straight-line method. Policy loans are reported at unpaid principal. Other invested assets consist principally of investments in various joint ventures and are recorded at equity in underlying net assets. Other "admitted assets" are valued, principally at cost, as required or permitted by New York Insurance Laws. Realized capital gains and losses are determined on the basis of specific identification and are recorded net of related federal income taxes. The Asset Valuation Reserve (AVR) is established by the Company to provide for anticipated losses in the event of default by issuers of certain invested assets. These amounts are determined using a formula prescribed by the NAIC and are reported as a liability. The formula for the AVR provides for a corresponding adjustment for realized gains and losses. Under a formula prescribed by the NAIC, the Company defers, in the Interest Maintenance Reserve (IMR), the portion of realized gains and losses on sales of fixed income investments, principally bonds and mortgage loans, attributable to changes in the general level of interest rates and amortizes those deferrals over the remaining period to maturity of the security. Interest income is recognized on an accrual basis. The Company does not accrue income on bonds in default, mortgage loans on real estate in default and/or foreclosure or which are delinquent more than twelve months, or real estate where rent is in arrears for more than three months. Further, income is not accrued when collection is uncertain. At December 31, 1997, 1996 and 1995, the Company excluded investment income due and accrued of $473, $469 and $216, respectively, with respect to such practices. F-8 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED) (DOLLARS IN THOUSANDS) The Company uses interest rate swaps as part of its overall interest rate risk management strategy for certain life insurance and annuity products. The Company entered into an interest rate swap contract to modify the interest rate characteristics of the underlying liabilities. The net interest effect of such swap transactions is reported as an adjustment of interest income from the hedged items as incurred. Deferred income for unrealized gains and losses on the securities valued at market at the time of the assumption reinsurance agreement (described in Note 4) are returned to MONY at the time of realization pursuant to the agreement. Aggregate Policy Reserves Life, annuity and accident and health benefit reserves are developed by actuarial methods and are determined based on published tables using statutorily specified interest rates and valuation methods that will provide, in the aggregate, reserves that are greater than or equal to the minimum required by law. The aggregate policy reserves for life insurance policies are based principally upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality Tables. The reserves are calculated using interest rates ranging from 2.50 to 6.50 percent and are computed principally on the Net Level Premium Valuation and the Commissioners' Reserve Valuation Methods. Reserves for universal life policies are based on account balances adjusted for the Commissioners' Reserve Valuation Method. Deferred annuity reserves are calculated according to the Commissioners' Annuity Reserve Valuation Method including excess interest reserves to cover situations where the future interest guarantees plus the decrease in surrender charges are in excess of the maximum valuation rates of interest. Reserves for immediate annuities and supplementary contracts with life contingencies are equal to the present value of future payments assuming interest rates ranging from 3.00 to 8.25 percent and mortality rates, where appropriate, from a variety of tables. Accident and health policy reserves are equal to the greater of the gross unearned premiums or any required midterminal reserves plus net unearned premiums and the present value of amounts not yet due on both reported and unreported claims. Policy and Contract Claim Reserves Claim reserves represent the estimated accrued liability for claims reported to the Company and claims incurred but not yet reported through the statement date. These reserves are estimated using either individual case-basis valuations or statistical analysis techniques. These estimates are subject to the effects of trends in claim severity and frequency. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes available. Separate Accounts Assets held in trust for purchases of separate account contracts and the Company's corresponding obligation to the contract owners are shown separately in the balance sheets. Income and gains and losses with respect to these assets accrue to the benefit of the policyholders and, accordingly, the operations of the separate accounts are not included in the accompanying financial statements. 2. FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the statutory-basis balance sheet, for which it is practicable to estimate that value. SFAS No. 119, Disclosures About Derivative Financial Instruments and Fair Value of Financial Instruments, requires additional disclosures about derivatives. In F-9 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED) (DOLLARS IN THOUSANDS) cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 and No. 119 exclude certain financial instruments and all nonfinancial instruments from their disclosure requirements and allow companies to forego the disclosures when those estimates can only be made at excessive cost. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and short-term investments: The carrying amounts reported in the statutory-basis balance sheet for these instruments approximate their fair values. Investment securities: Fair values for fixed maturity securities (including redeemable preferred stocks) are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments. The fair values for equity securities are based on quoted market prices. Mortgage loans and policy loans: The fair values for mortgage loans are estimated utilizing discounted cash flow analyses, using interest rates reflective of current market conditions and the risk characteristics of the loans. The fair value of policy loans is assumed to equal its carrying value. Investment contracts: Fair values for the Company's liabilities under investment-type insurance contracts are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. Interest rate swap: Estimated fair value of the interest rate swaps are based upon the pricing differential for similar swap agreements. Fair values for the Company's insurance contracts other than investment contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. The following sets forth a comparison of the fair values and carrying values of the Company's financial instruments subject to the provisions of Statement of Financial Accounting Standards No. 107 and No. 119:
DECEMBER 31, -------------------------------------------- 1997 1996 --------------------- ---------------------- CARRYING CARRYING VALUE FAIR VALUE VALUE FAIR VALUE ---------- ---------- ---------- ----------- ADMITTED ASSETS Bonds.................... $3,988,635 $4,083,280 $3,698,483 $ 3,736,999 Preferred stocks......... 1,792 1,892 1,945 1,940 Common stock............. 144 144 18 18 Mortgage loans on real estate.................. 495,009 504,947 618,633 619,479 Interest rate swap....... -- 391 -- -- Policy loans............. 3,046 3,046 2,916 2,916 Cash and short-term investments............. 68,131 68,131 28,114 28,114 Separate account assets.. 5,630,093 5,640,386 4,862,449 4,862,099 LIABILITIES Investment contract liabilities............. 4,091,938 4,011,465 3,932,668 3,804,240 Separate account annuities............... 5,594,880 5,577,854 4,814,853 4,784,574
F-10 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED) (DOLLARS IN THOUSANDS) 3. INVESTMENTS The carrying value and estimated market value of investments in debt securities were as follows:
GROSS GROSS ESTIMATED CARRYING UNREALIZED UNREALIZED FAIR VALUE GAINS LOSSES VALUE ---------- ---------- ---------- ---------- DECEMBER 31, 1997 Bonds: United States Government and agencies........... $ 102,628 $ 943 $ 255 $ 103,316 State, municipal and other government....... 60,427 1,413 1,761 60,079 Public utilities........ 251,071 4,943 892 255,122 Industrial and miscellaneous.......... 2,301,979 66,409 5,867 2,362,521 Foreign corporate*...... 22,363 474 557 22,280 Mortgage-backed securities and asset- backed................. 1,250,167 32,779 2,984 1,279,962 ---------- -------- ------- ---------- 3,988,635 106,961 12,316 4,083,280 Preferred stocks.......... 1,792 100 -- 1,892 ---------- -------- ------- ---------- $3,990,427 $107,061 $12,316 $4,085,172 ========== ======== ======= ==========
GROSS GROSS ESTIMATED CARRYING UNREALIZED UNREALIZED FAIR VALUE GAINS LOSSES VALUE ---------- ---------- ---------- ---------- DECEMBER 31, 1996 Bonds: United States Government and agencies........... $ 152,410 $ 1,236 $ 1,112 $ 152,534 State, municipal and other government....... 30,121 925 36 31,010 Public utilities........ 229,732 2,086 2,977 228,841 Industrial and miscellaneous.......... 2,156,463 38,067 15,854 2,178,676 Foreign corporate*...... 5,556 -- -- 5,556 Mortgage-backed securities and asset- backed................. 1,124,201 22,579 6,398 1,140,382 ---------- ------- ------- ---------- 3,698,483 64,893 26,377 3,736,999 Preferred stocks.......... 1,945 5 10 1,940 ---------- ------- ------- ---------- $3,700,428 $64,898 $26,387 $3,738,939 ========== ======= ======= ==========
- ------- *Substantially all are U. S. dollar denominated. The carrying value and estimated market value of bonds at December 31, 1997, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
ESTIMATED CARRYING FAIR VALUE VALUE ---------- ---------- Due in one year or less............................ $ 138,325 $ 138,396 Due after one year through five years.............. 1,388,726 1,415,687 Due after five years through ten years............. 964,444 988,714 Due after ten years................................ 246,973 260,521 ---------- ---------- 2,738,468 2,803,318 Mortgage-backed and asset-backed securities........ 1,250,167 1,279,962 ---------- ---------- $3,988,635 $4,083,280 ========== ==========
F-11 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED) (DOLLARS IN THOUSANDS) A detail of net investment income is presented below:
YEAR ENDED DECEMBER 31, --------------------------- 1997 1996 1995 -------- -------- -------- Interest on bonds and notes.................. $285,730 $267,510 $246,462 Mortgage loans............................... 57,659 83,511 98,653 Real estate.................................. 13,976 7,225 2,400 Dividends on equity investments.............. 223 220 269 Interest on policy loans..................... 168 154 152 Derivative instruments....................... 100 -- -- Other investment gain (loss)................. 1,543 (5,482) (3,765) -------- -------- -------- Gross investment income...................... 359,399 353,138 344,171 Investment expenses.......................... 17,859 13,678 10,449 -------- -------- -------- Net investment income........................ $341,540 $339,460 $333,722 ======== ======== ========
Proceeds from sales and maturities of debt securities and related gross realized gains and losses were as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 -------- -------- -------- Proceeds................................... $968,184 $777,107 $645,889 ======== ======== ======== Gross realized gains....................... $ 19,165 $ 9,697 $ 9,668 Gross realized losses...................... (11,997) (12,291) (16,405) -------- -------- -------- Net realized gains (losses)................ $ 7,168 $ (2,594) $ (6,737) ======== ======== ========
At December 31, 1997, investments with an aggregate carrying value of $3,970 were on deposit with regulatory authorities or were restrictively held in bank custodial accounts for the benefit of such regulatory authorities as required by statute. Realized investment gains (losses) and changes in unrealized gains (losses) for investments are summarized below:
REALIZED ---------------------------- YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 -------- -------- -------- Debt securities............................ $ 7,168 $ (2,594) $ (6,737) Common stock............................... -- 244 -- Preferred stock............................ (7) (44) -- Short-term investments..................... (6) (115) (26) Mortgage loans on real estate.............. 287 (12,415) (3,650) Real estate................................ 4,059 -- (628) Other invested assets...................... 5,035 6,872 11,109 -------- -------- -------- 16,536 (8,052) 68 Tax effect................................. (747) 87 343 Transfer to interest maintenance reserve... (14,958) (4,142) (3,788) -------- -------- -------- Total realized gains (losses).............. $ 831 $(12,107) $ (3,377) ======== ======== ======== CHANGE IN UNREALIZED ---------------------------- YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 -------- -------- -------- Debt securities............................ $ 56,129 $(87,888) $266,783 Equity securities.......................... 21 (190) 74 -------- -------- -------- Change in unrealized appreciation.......... $ 56,150 $(88,078) $266,857 ======== ======== ========
F-12 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED) (DOLLARS IN THOUSANDS) Gross unrealized gains and gross unrealized losses on equity securities at December 31, 1997, 1996 and 1995 were as follows:
YEAR ENDED DECEMBER 31, ---------------- 1997 1996 1995 ---- ---- ---- Unrealized gains........................................ $ 38 $ 16 $206 Unrealized losses....................................... (12) (11) (11) ---- ---- ---- Net unrealized gains.................................... $ 26 $ 5 $195 ==== ==== ====
During 1997, the Company issued mortgage loans with interest rates ranging from 8.10% to 8.72%. The maximum percentage of any one loan to the value of the underlying real estate at origination was 85%. No mortgage loans were non- income producing for the previous twelve months and, accordingly, no accrued interest related to these mortgage loans was excluded from investment income. During 1997, the Company refinanced the mortgage loans of one property with an aggregate carrying value of $24,888 to reduce the interest rates, as a result of the current interest rate environment. The Company requires all mortgage loans to carry fire insurance equal to the value of the underlying property. During 1997, 1996 and 1995, there were $4,427, $28,929 and $14,264, respectively, in foreclosed mortgage loans that were transferred to real estate. At December 31, 1997 and 1996, the Company held a mortgage loan loss reserve in the asset valuation reserve of $20,191 and $8,368, respectively. The mortgage loan portfolio is diversified by geographic region and specific collateral property type as follows:
GEOGRAPHIC DISTRIBUTION ----------------------- DECEMBER 31, -------------- 1997 1996 ------ ------ Pacific................. 20% 2% South Atlantic.......... 20 37 Mid-Atlantic............ 16 5 E. North Central........ 16 21 Mountain................ 15 15 New England............. 7 10 W. North Central........ 2 5 W. South Central........ 2 5 E. South Central........ 2 --
PROPERTY TYPE DISTRIBUTION -------------------------- DECEMBER 31, -------------- 1997 1996 ------ ------ Office.................. 30% 42% Apartment............... 23 10 Retail.................. 19 30 Other................... 15 17 Industrial.............. 13 1
At December 31, 1997, the Company had the following investments, excluding U. S. Government guaranteed or insured issues, which individually represented more than ten percent of capital and surplus and the asset valuation reserve:
CARRYING DESCRIPTION OF SECURITY VALUE ----------------------- -------- Bonds: Chase Manhattan Corp........................................... $37,953
The Company utilizes an interest rate swap agreement as part of its efforts to hedge and manage fluctuations in the market value of its investment portfolio attributable to changes in general interest rate levels and to manage duration mismatch of assets and liabilities. The contract or notional amounts of those instruments reflect the extent of involvement in the various types of financial instruments. The Company's exposure to credit risk is the risk of loss from a counterparty failing to perform according to the terms of the contract. That exposure includes settlement risk (i.e., the risk that the counterparty defaults after the Company F-13 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED) (DOLLARS IN THOUSANDS) has delivered funds or securities under terms of the contract) that would result in an accounting loss and replacement cost risk (i.e., the cost to replace the contract at current market rates should the counterparty default prior to settlement date). Credit loss exposure resulting from nonperformance by a counterparty for commitments to extend credit is represented by the contractual amounts of the instruments. At December 31, 1997 and 1996, the Company's outstanding financial instruments with on and off-balance sheet risks, shown in notional amounts, are summarized as follows:
NOTIONAL AMOUNT ------------ 1997 1996 ------- ---- Derivative securities: Interest rate swaps: Receive fixed--pay floating.............................. $50,800 $--
4. REINSURANCE The Company reinsures portions of risk on certain insurance policies which exceed its established limits, thereby providing a greater diversification of risk and minimizing exposure on larger risks. The Company remains contingently liable with respect to any insurance ceded, and this would become an actual liability in the event that the assuming insurance company became unable to meet its obligation under the reinsurance treaty. Premiums earned reflect the following reinsurance assumed and ceded amounts for the year ended December 31:
1997 1996 1995 ---------- ---------- ---------- Direct premiums....................... $1,309,731 $1,185,163 $1,244,902 Reinsurance assumed................... 6,905 9,962 37,423 Reinsurance ceded..................... (5,268) (29,141) (40,072) ---------- ---------- ---------- Net premiums earned................... $1,311,368 $1,165,984 $1,242,253 ========== ========== ==========
The Company received reinsurance recoveries in the amounts of $1,992, $1,758 and $1,417 during 1997, 1996 and 1995, respectively. The aggregate reserves for policies and contracts were reduced for reserve credits for reinsurance ceded at December 31, 1997 and 1996 of $153,092 and $157,421, respectively. On December 31, 1993, the Company and MONY entered into an assumption reinsurance agreement whereby all of the general account liabilities were novated to the Company from MONY as state approvals were received. In accordance with the agreement, MONY will receive payments relating to the performance of the assets and liabilities that exist at the date of closing for a period of nine years. These payments will be reduced for certain administrative expenses as defined in the agreement. The Company will recognize operating gains and losses on renewal premiums received after December 31, 1993 of the business in-force at December 31, 1993, and on all new business written after that date. At the end of nine years, the Company will purchase from MONY the remaining transferred business inforce based upon a formula described in the agreement. At December 31, 1997 and 1996, the Company owed MONY $56,952 and $67,217, respectively, which represents the amount earned by MONY under the gain sharing calculation and certain fees for investment management services for the respective years. In connection with the transaction, MONY purchased $150,000 and $50,000 in Series A and Series B notes, respectively, of AEGON. The proceeds were used to enhance the surplus of the Company. Both the Series A and Series B notes bear a market rate of interest and mature in nine years from the date of closing. F-14 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED) (DOLLARS IN THOUSANDS) AEGON provides general and administrative services for the transferred business under a related agreement with MONY. The agreement specifies prescribed rates for expenses to administer the business up to certain levels. In addition, AEGON also provides investment management services on the assets underlying the new business written by the Company while MONY continues to provide investment management services for assets supporting the remaining policy liabilities which were transferred at December 31, 1993. On October 1, 1995, the Company entered into a reinsurance agreement with a non-affiliate. As a result, the Company received $4,242 of assets, including $38 of cash, and $4,312 of liabilities. The difference between the assets and the liabilities of $70 was charged directly to unassigned surplus. 5. INCOME TAXES The Company files a separate federal income tax return. Federal income tax expense differs from the amount computed by applying the statutory federal income tax rate to gain from operations before federal income taxes and net realized capital gains (losses) on investments primarily due to differences in the statutory and tax treatment of certain investments, deferred policy acquisition costs, dividends received deduction, carryforward (utilization) of operating loss, and IMR amortization. Federal income tax expense (benefit) differs from the amount computed by applying the statutory federal income tax rate to realized gains (losses) due to the agreement between MONY and the Company, as discussed in Note 4 to the financial statements. In accordance with this agreement, these gains and losses are included in the net payments MONY will receive relating to the performance of the assets that existed at the date of closing. Accordingly, income taxes relating to gains and losses on such assets are not provided for on the income tax return filed by the Company. Prior to 1984, as provided for under the Life Insurance Company Tax Act of 1959, a portion of statutory income was not subject to current taxation but was accumulated for income tax purposes in a memorandum account referred to as the policyholders' surplus account. No federal income taxes have been provided for in the financial statements on income deferred in the policyholders' surplus account ($2,428 at December 31, 1997). To the extent dividends are paid from the amount accumulated in the policyholders' surplus account, net earnings would be reduced by the amount of tax required to be paid. Should the entire amount in the policyholders' surplus account become taxable, the tax thereon computed at current rates would amount to approximately $850. At December 31, 1997, the Company had net operating loss carryforwards of approximately $19,155 which expire through 2011. An examination by the Internal Revenue Service is underway for years 1993- 1995. F-15 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED) (DOLLARS IN THOUSANDS) 6. POLICY AND CONTRACT ATTRIBUTES A portion of the Company's policy reserves and other policyholders' funds relate to liabilities established on a variety of the Company's products that are not subject to significant mortality or morbidity risk; however, there may be certain restrictions placed upon the amount of funds that can be withdrawn without penalty. The amount of reserves on these products, by withdrawal characteristics, are summarized as follows:
DECEMBER 31, ------------------------------------- 1997 1996 ------------------ ------------------ PERCENT PERCENT OF OF AMOUNT TOTAL AMOUNT TOTAL ---------- ------- ---------- ------- Subject to discretionary withdrawal with market value adjustment....................... $ 910,528 9% $ 834,176 9% Subject to discretionary withdrawal at book value less surrender charge................. 1,045,807 11 1,619,210 18 Subject to discretionary withdrawal at market value....... 2,950,639 30 2,361,359 27 Subject to discretionary withdrawal at book value (minimal or no charges or adjustments).... 2,616,308 27 1,951,742 22 Not subject to discretionary withdrawal provision............. 2,317,823 23 2,139,682 24 ---------- --- ---------- --- 9,841,105 100% 8,906,169 100% === === Less reinsurance ceded............ 152,726 157,039 ---------- ---------- Total policy reserves on annuities and deposit fund liabilities.................. $9,688,379 $8,749,130 ========== ==========
F-16 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED) (DOLLARS IN THOUSANDS) Separate and variable account assets held by the Company represent contracts where the benefit is determined by the performance of the investments held in the separate account. Information regarding the separate accounts of the Company as of and for the years ended December 31, 1997, 1996 and 1995 is as follows:
GUARANTEED NON-GUARANTEED SEPARATE SEPARATE ACCOUNT ACCOUNT TOTAL ---------- -------------- ---------- Premiums, deposits and other considerations for the year ended December 31, 1997.................. $ 147,638 $ 648,056 $ 795,694 ========== ========== ========== Reserves for separate accounts with assets as of December 31, 1997 at: Fair value........................ $2,204,931 $2,767,245 $4,972,176 Amortized cost.................... 622,703 -- 622,703 ---------- ---------- ---------- Total........................... $2,827,634 $2,767,245 $5,594,879 ========== ========== ========== Premiums, deposits and other considerations for the year ended December 31, 1996.................. $ -- $ 747,506 $ 747,506 ========== ========== ========== Reserves for separate accounts with assets as of December 31, 1996 at: Fair value........................ $2,022,843 $2,178,445 $4,201,288 Amortized cost.................... 613,565 -- 613,565 ---------- ---------- ---------- Total........................... $2,636,408 $2,178,445 $4,814,853 ========== ========== ========== Premiums, deposits and other considerations for the year ended December 31, 1995.................. $ -- $ 553,110 $ 553,110 ========== ========== ========== Reserves for separate accounts with assets as of December 31, 1995 at: Fair value........................ $2,147,500 $1,557,952 $3,705,452 Amortized cost.................... 599,254 -- 599,254 ---------- ---------- ---------- Total........................... $2,746,754 $1,557,952 $4,304,706 ========== ========== ==========
F-17 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED) (DOLLARS IN THOUSANDS) There may be certain restrictions placed upon the amount of funds that can be withdrawn without penalty. The amount of separate account liabilities on these products, by withdrawal characteristics, are summarized as follows:
NON- GUARANTEED GUARANTEED SEPARATE SEPARATE ACCOUNT ACCOUNT TOTAL ---------- ---------- ---------- DECEMBER 31, 1997 Subject to discretionary withdrawal with market value adjustment........ $ 358,061 $ -- $ 358,061 Subject to discretionary withdrawal at book value less surrender charge.............................. 264,642 -- 264,642 Subject to discretionary withdrawal at market value..................... 180,802 2,767,245 2,948,047 Not subject to discretionary withdrawal.......................... 2,024,129 -- 2,024,129 ---------- ---------- ---------- $2,827,634 $2,767,245 $5,594,879 ========== ========== ========== DECEMBER 31, 1996 Subject to discretionary withdrawal with market value adjustment........ $ 269,991 $ -- $ 269,991 Subject to discretionary withdrawal at book value less surrender charge.............................. 279,399 -- 279,399 Subject to discretionary withdrawal at market value..................... 181,158 2,178,445 2,359,603 Not subject to discretionary withdrawal.......................... 1,905,860 -- 1,905,860 ---------- ---------- ---------- $2,636,408 $2,178,445 $4,814,853 ========== ========== ==========
A reconciliation of the amounts transferred to and from the separate accounts is presented below:
1997 1996 1995 -------- -------- -------- Transfers as reported in the summary of operations of the separate accounts statement: Transfers to separate accounts............. $795,663 $747,677 $553,110 Transfers from separate accounts........... 767,049 505,592 406,978 -------- -------- -------- Net transfers to (from) separate accounts.... 28,614 242,085 146,132 Reconciling adjustments--HUB level fees not paid to AUSA general account................ 13,756 13,520 7,904 Fees paid to external fund manager......... 120 67 44 -------- -------- -------- Net adjustments.............................. 13,876 13,587 7,948 -------- -------- -------- Transfers as reported in the summary of operations of the life, accident and health annual statement............................ $ 42,490 $255,672 $154,080 ======== ======== ========
F-18 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED) (DOLLARS IN THOUSANDS) Reserves on the Company's traditional life products are computed using mean reserving methodologies. These methodologies result in the establishment of assets for the amount of the net valuation premiums that are anticipated to be received between the policy's paid-through date to the policy's next anniversary date. At December 31, 1997 and 1996, these assets (which are reported as premiums deferred and uncollected) and the amounts of the related gross premiums and loadings, are as follows:
GROSS LOADING NET ------ ------- ------ DECEMBER 31, 1997 Ordinary direct first year business............. $ 460 $ 336 $ 124 Ordinary direct renewal business................ 6,138 1,081 5,057 Group life direct business...................... 1,267 433 834 Credit life..................................... 41 -- 41 Reinsurance ceded............................... (14) -- (14) ------ ------ ------ 7,892 1,850 6,042 Accident and health: Direct........................................ 325 -- 325 Reinsurance ceded............................. (51) -- (51) ------ ------ ------ Total accident and health................... 274 -- 274 ------ ------ ------ $8,166 $1,850 $6,316 ====== ====== ====== DECEMBER 31, 1996 Ordinary direct first year business............. $ 409 $ 226 $ 183 Ordinary direct renewal business................ 6,277 1,037 5,240 Group life direct business...................... 1,414 499 915 Credit life..................................... 5 -- 5 Reinsurance ceded............................... (163) -- (163) ------ ------ ------ 7,942 1,762 6,180 Accident and health: Direct........................................ 270 -- 270 Reinsurance ceded............................. -- -- -- ------ ------ ------ Total accident and health................... 270 -- 270 ------ ------ ------ $8,212 $1,762 $6,450 ====== ====== ======
At December 31, 1997 and 1996, the Company had insurance in force aggregating $597,855 and $615,025, respectively, in which the gross premiums are less than the net premiums required by the valuation standards established by the Department of Insurance of the State of New York. The Company established policy reserves of $1,476 and $1,520 to cover these deficiencies at December 31, 1997 and 1996, respectively. 7. DIVIDEND RESTRICTIONS Generally, an insurance company's ability to pay dividends is limited to the amount that their net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital requirements. However, payment of such amounts as dividends may be subject to approval by regulatory authorities. The Company is not entitled to pay out any dividends in 1998 without prior approval. 8. RETIREMENT AND COMPENSATION PLANS The Company's employees participate in a qualified benefit pension plan sponsored by AEGON. The Company has no legal obligation for the plan. The Company recognizes pension expense equal to its allocation from AEGON. The F-19 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED) (DOLLARS IN THOUSANDS) pension expense is allocated among the participating companies based on the FASB 87 expense as a percent of salaries. The benefits are based on years of service and the employee's compensation during the highest five consecutive years of employment. The Company was allocated $0, $13 and $14 of pension expense for the years ended December 31, 1997, 1996 and 1995, respectively. The plan is subject to the reporting and disclosure requirements of the Employee Retirement Income Security Act of 1974. The Company's employees also participate in a contributory defined contribution plan sponsored by AEGON which is qualified under Section 401(k) of the Internal Revenue Service Code. Employees of the Company who customarily work at least 1,000 hours during each calendar year and meet the other eligibility requirements, are participants of the plan. Participants may elect to contribute up to fifteen percent of their salary to the plan. The Company will match an amount up to three percent of the participant's salary. Participants may direct all of their contributions and plan balances to be invested in a variety of investment options. The plan is subject to the reporting and disclosure requirements of the Employee Retirement Income Security Act of 1974. The Company was allocated $12, $21 and $8 of expense for the years ended December 31, 1997, 1996 and 1995, respectively. AEGON sponsors supplemental retirement plans to provide the Company's senior management with benefits in excess of normal pension benefits. The plans are noncontributory and benefits are based on years of service and the employee's compensation level. The plans are unfunded and nonqualified under the Internal Revenue Service Code. In addition, AEGON has established incentive deferred compensation plans for certain key employees of the Company. AEGON also sponsors an employee stock option plan for individuals employed at least three years and a stock purchase plan for its producers, with the participating affiliated companies establishing their own eligibility criteria, producer contribution limits and company matching formula. These plans have been accrued or funded as deemed appropriate by management of AEGON and the Company. In addition to pension benefits, the Company participates in plans sponsored by AEGON that provide postretirement medical, dental and life insurance benefits to employees meeting certain eligibility requirements. Portions of the medical and dental plans are contributory. The expenses of the postretirement plans calculated on the pay-as-you-go basis are charged to affiliates in accordance with an intercompany cost sharing arrangement. The Company expensed $2 for each of the years ended December 31, 1996 and 1995. No expense related to these plans was recorded for 1997. 9. RELATED PARTY TRANSACTIONS In accordance with an agreement between AEGON and the Company, AEGON will ensure the maintenance of certain minimum tangible net worth, operating leverage and liquidity levels of the Company, as defined in the agreement, through the contribution of additional capital by the Company's parent as needed. The Company shares certain officers, employees and general expenses with affiliated companies. The Company receives data processing, investment advisory and management, marketing and administration services from certain affiliates. During 1997, 1996 and 1995, the Company paid $7,330, $5,739 and $6,761, respectively, for these services, which approximates their costs to the affiliates. Payable to affiliates and intercompany borrowings bear interest at the thirty- day commercial paper rate of 5.60% at December 31, 1997. During 1997, 1996 and 1995, the Company paid net interest of $142, $29 and $289, respectively, to affiliates. 10. COMMITMENTS AND CONTINGENCIES The Company is a party to legal proceedings incidental to its business. Although such litigation sometimes includes substantial demands for compensatory and punitive damages, in addition to contract liability, it is management's opinion, after consultation with counsel and a review of available facts, that damages arising from such demands will not be material to the Company's financial position. F-20 AUSA LIFE INSURANCE COMPANY, INC. NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONCLUDED) (DOLLARS IN THOUSANDS) The Company is subject to insurance guaranty laws in the states in which it writes business. These laws provide for assessments against insurance companies for the benefit of policyholders and claimants in the event of insolvency of other insurance companies. In accordance with the purchase agreement, assessments related to periods prior to the purchase of the Company will be paid by Dreyfus. Assessments attributable to business reinsured from MONY for premiums received prior to the date of the transaction will be paid by MONY. The Company will be responsible for assessments, if any, attributable to premium income after the date of purchase. Assessments are charged to operations when received by the Company except where right of offset against other taxes paid is allowed by law; amounts available for future offsets are recorded as an asset on the Company's balance sheet. Potential future obligations for unknown insolvencies are not determinable by the Company. The future obligation has been based on the most recent information available from the National Organization of Life and Health Insurance Guaranty Association. The guaranty fund expense was $586, $246 and $(204) for the years ended December 31, 1997, 1996 and 1995, respectively. 11. YEAR 2000 (UNAUDITED) AEGON has adopted and has in place a Year 2000 Assessment and Planning Project (the "Project") to review and analyze its information technology and systems to determine if they are Year 2000 compatible. The Company has begun to convert or modify, where necessary, critical data processing systems. It is contemplated that the plan will be substantially completed by early 1999. The Company does not expect this project to have a significant effect on operations. However, to mitigate the effect of outside influences upon the success of the project, the Company has undertaken communications with its significant customers, suppliers and other third parties to determine their Year 2000 compatibility and readiness. Management believes that the issues associated with the Year 2000 will be resolved with no material financial impact on the Company. Since the Year 2000 computer problem, and its resolution, is complex and multifaceted, the success of a response plan cannot be conclusively known until the Year 2000 is reached (or an earlier date to the extent that systems or equipment addresses Year 2000 date data prior to the Year 2000). Even with appropriate and diligent pursuit of a well-conceived project, including testing procedures, there is no certainty that any company will achieve complete success. Notwithstanding the efforts or results of the Company, its ability to function unaffected to and through the Year 2000 may be adversely affected by actions (or failure to act) of third parties beyond its knowledge or control. F-21 FINANCIAL STATEMENTS FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B Years ended December 31, 1997 and 1996 with Report of Independent Auditors FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997 AND 1996 CONTENTS Report of Independent Auditors............................................. F-3 Audited Financial Statements Statements of Assets and Liabilities....................................... F-4 Statements of Operations................................................... F-5 Statements of Changes in Net Assets........................................ F-9 Notes to Financial Statements.............................................. F-13
F-2 REPORT OF INDEPENDENT AUDITORS Contract Owners First Providian Life and Health Insurance Company Separate Account B We have audited the accompanying statements of assets and liabilities of First Providian Life and Health Insurance Company Separate Account B (compris- ing the Money Market, High-Grade Bond, Balanced, Equity Index, Growth, Equity Income, International, High Yield Bond and Small Company Growth Subaccounts) as of December 31, 1997 and 1996, and the related statements of operations and changes in net assets for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to ex- press an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements. Our proce- dures included confirmation of securities owned as of December 31, 1997 and 1996, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of each of the respective subaccounts constituting the First Providian Life and Health Insurance Company Separate Account B at December 31, 1997 and 1996, and the results of their op- erations and changes in their net assets for the years then ended in confor- mity with generally accepted accounting principles. /s/ Ernst & Young LLP Louisville, Kentucky April 24, 1998 F-3 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31 ------------------------- 1997 1996 ------------ ------------ ASSETS Investments: Money Market Portfolio (cost: $20,448,432 and $16,979,591 in 1997 and 1996, respectively)........ $ 20,448,432 $ 16,979,591 High-Grade Bond Portfolio (cost: $14,291,681 and $10,052,147 in 1997 and 1996, respectively)........ 14,793,669 10,253,364 Balanced Portfolio (cost: $20,127,638 and $13,721,750 in 1997 and 1996, respectively)........ 24,783,934 16,657,085 Equity Index Portfolio (cost: $29,563,753 and $17,674,415 in 1997 and 1996, respectively)........ 40,805,099 22,875,329 Growth Portfolio (cost: $22,102,380 and $13,823,615 in 1997 and 1996, respectively).................... 28,539,663 17,276,890 Equity Income Portfolio (cost: $14,059,358 and $7,174,320 in 1997 and 1996, respectively)......... 18,442,399 8,840,883 International Portfolio (cost: $12,399,847 and $8,405,989 in 1997 and 1996, respectively)......... 11,421,875 9,295,395 High Yield Bond Portfolio (cost: $7,696,607 and $2,701,505 in 1997 and 1996, respectively)......... 7,830,602 2,745,802 Small Company Growth Portfolio (cost: $7,976,350 and $2,417,280 in 1997 and 1996, respectively)......... 8,152,760 2,391,705 ------------ ------------ Total investments.................................... 175,218,433 107,316,044 Amounts due from Fund Manager........................ 2,073 1,753 ------------ ------------ TOTAL ASSETS......................................... 175,220,506 107,317,797 LIABILITIES Amounts due to First Providian Life and Health Insurance Company.................................. 43,424 33,164 ------------ ------------ NET ASSETS........................................... $175,177,082 $107,284,633 ============ ============ NET ASSETS ATTRIBUTABLE TO VARIABLE ANNUITY CONTRACT OWNERS Money Market Subaccount............................. $ 20,457,884 $ 16,986,272 High-Grade Bond Subaccount.......................... 14,791,141 10,248,835 Balanced Subaccount................................. 24,775,673 16,645,306 Equity Index Subaccount............................. 40,795,168 22,871,121 Growth Subaccount................................... 28,525,331 17,268,173 Equity Income Subaccount............................ 18,435,239 8,837,503 International Subaccount............................ 11,417,041 9,291,127 High Yield Bond Subaccount.......................... 7,829,900 2,745,296 Small Company Growth Subaccount..................... 8,149,705 2,391,000 ------------ ------------ Net assets attributable to variable annuity contract owners.............................................. $175,177,082 $107,284,633 ============ ============
See accompanying notes. F-4 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997
HIGH-GRADE MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH ------------ ---------- ---------- ------------ ---------- Investment income: Dividends.............. $ 1,089,090 $ 769,546 $1,843,845 $ 890,735 $ 944,982 Expenses: Mortality and expense risk and administrative charges................ 81,133 58,126 92,353 108,854 106,904 ----------- ---------- ---------- ----------- ---------- Net investment income... 1,007,957 711,420 1,751,492 781,881 838,078 Realized and unrealized gain on investments: Net realized gain from investment transactions: Proceeds from sales... 31,197,423 2,169,456 3,342,976 7,191,384 5,978,798 Cost of investments sold................. 31,197,423 2,132,105 2,673,312 5,239,158 4,572,591 ----------- ---------- ---------- ----------- ---------- -- 37,351 669,664 1,952,226 1,406,207 Net unrealized appreciation (depreciation) of investments: At end of year........ -- 501,988 4,656,296 11,241,346 6,437,283 At beginning of year.. -- 201,217 2,935,335 5,200,914 3,453,275 ----------- ---------- ---------- ----------- ---------- -- 300,771 1,720,961 6,040,432 2,984,008 ----------- ---------- ---------- ----------- ---------- Net gain (loss) on in- vestments.............. -- 338,122 2,390,625 7,992,658 4,390,215 ----------- ---------- ---------- ----------- ---------- Net increase in net assets resulting from operations............. $ 1,007,957 $1,049,542 $4,142,117 $ 8,774,539 $5,228,293 =========== ========== ========== =========== ==========
See accompanying notes. F-5 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B STATEMENT OF OPERATIONS--(CONTINUED) YEAR ENDED DECEMBER 31, 1997
SMALL EQUITY HIGH YIELD COMPANY INCOME INTERNATIONAL BOND GROWTH TOTAL ---------- ------------- ---------- ---------- ----------- Investment income: Dividends.............. $ 685,609 $ 294,038 $ 445,874 $ 30,364 $ 6,994,083 Expenses: Mortality and expense risk and administrative charges................ 62,508 55,141 17,899 22,515 605,433 ---------- ----------- ---------- ---------- ----------- Net investment income... 623,101 238,897 427,975 7,849 6,388,650 Realized and unrealized gain on investments: Net realized gain from investment transactions: Proceeds from sales... 2,431,683 7,434,769 4,397,959 4,538,459 68,682,907 Cost of investments sold................. 1,873,506 5,669,815 4,392,502 4,292,039 62,042,451 ---------- ----------- ---------- ---------- ----------- 558,177 1,764,954 5,457 246,420 6,640,456 Net unrealized appreciation (depreciation) of investments: At end of year........ 4,383,041 (977,972) 133,995 176,410 26,552,387 At beginning of year.. 1,666,563 889,406 44,297 (25,575) 14,365,432 ---------- ----------- ---------- ---------- ----------- 2,716,478 (1,867,378) 89,698 201,985 12,186,955 ---------- ----------- ---------- ---------- ----------- Net gain (loss) on in- vestments.............. 3,274,655 (102,424) 95,155 448,405 18,827,411 ---------- ----------- ---------- ---------- ----------- Net increase in net assets resulting from operations............. $3,897,756 $ 136,473 $ 523,130 $ 456,254 $25,216,061 ========== =========== ========== ========== ===========
See accompanying notes. F-6 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996
HIGH-GRADE MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH ------------ ---------- ---------- ------------ ---------- Investment income: Dividends.............. $ 700,008 $ 614,949 $1,118,903 $ 466,230 $ 786,684 Expenses: Mortality and expense risk and administrative charges............... 61,227 45,105 49,446 88,387 65,020 ----------- ---------- ---------- ---------- ---------- Net investment income... 638,781 569,844 1,069,457 377,843 721,664 Realized and unrealized gain (loss) on investments: Net realized gain (loss) from investment transactions: Proceeds from sales... 13,240,998 1,801,202 2,323,702 4,613,638 4,258,500 Cost of investments sold................. 13,240,998 1,808,041 1,922,381 3,745,134 3,324,278 ----------- ---------- ---------- ---------- ---------- -- (6,839) 401,321 868,504 934,222 Net unrealized appreciation (depreciation) of investments: At end of year........ -- 201,217 2,935,335 5,200,914 3,453,275 At beginning of year.. -- 457,473 2,243,733 2,661,479 2,004,154 ----------- ---------- ---------- ---------- ---------- -- (256,256) 691,602 2,539,435 1,449,121 ----------- ---------- ---------- ---------- ---------- Net gain (loss) on investments............ -- (263,095) 1,092,923 3,407,939 2,383,343 ----------- ---------- ---------- ---------- ---------- Net increase in net assets resulting from operations............. $ 638,781 $ 306,749 $2,162,380 $3,785,782 $3,105,007 =========== ========== ========== ========== ==========
See accompanying notes. F-7 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B STATEMENT OF OPERATIONS--(CONTINUED) YEAR ENDED DECEMBER 31, 1996
EQUITY HIGH YIELD SMALL COMPANY INCOME INTERNATIONAL BOND GROWTH TOTAL ---------- ------------- ---------- ------------- ----------- Investment income: Dividends.............. $ 349,987 $ 323,226 $ 61,355 $ 5,016 $ 4,426,358 Expenses: Mortality and expense risk and administrative charges............... 33,328 38,473 2,732 2,347 386,065 ---------- ---------- -------- -------- ----------- Net investment income... 316,659 284,753 58,623 2,669 4,040,293 Realized and unrealized gain (loss) on investments: Net realized gain (loss) from investment transactions: Proceeds from sales... 1,256,081 2,597,230 768,131 686,636 31,546,118 Cost of investments sold................. 1,005,412 2,340,779 757,465 622,015 28,766,503 ---------- ---------- -------- -------- ----------- 250,669 256,451 10,666 64,621 2,779,615 Net unrealized appreciation (depreciation) of investments: At end of year........ 1,666,563 889,406 44,297 (25,575) 14,365,432 At beginning of year.. 982,236 468,578 -- -- 8,817,653 ---------- ---------- -------- -------- ----------- 684,327 420,828 44,297 (25,575) 5,547,779 ---------- ---------- -------- -------- ----------- Net gain (loss) on investments............ 934,996 677,279 54,963 39,046 8,327,394 ---------- ---------- -------- -------- ----------- Net increase in net assets resulting from operations............. $1,251,655 $ 962,032 $113,586 $ 41,715 $12,367,687 ========== ========== ======== ======== ===========
See accompanying notes. F-8 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B STATEMENT OF CHANGES IN NET ASSETS YEAR ENDED DECEMBER 31, 1997
HIGH-GRADE MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH ------------ ----------- ----------- ------------ ----------- Balances at January 1, 1997................... $16,986,272 $10,248,835 $16,645,306 $22,871,121 $17,268,173 Increase in net assets resulting from opera- tions: Net investment income.. 1,007,957 711,420 1,751,492 781,881 838,078 Net realized gain on investments........... -- 37,351 669,664 1,952,226 1,406,207 Net unrealized appreciation (depreciation) of investments........... -- 300,771 1,720,961 6,040,432 2,984,008 ----------- ----------- ----------- ----------- ----------- Net increase in net assets resulting from operations............. 1,007,957 1,049,542 4,142,117 8,774,539 5,228,293 Changes from variable annuity contract transactions: Transfers of net premiums.............. 14,421,833 1,377,598 4,587,067 8,423,168 6,911,182 Transfers for terminations.......... (2,115,310) (434,184) (500,566) (896,111) (535,567) Transfers for annuity benefits.............. -- -- (2,347) -- (1,307) Net transfers within Separate Account B.... (9,842,868) 2,549,350 (95,904) 1,622,451 (345,443) ----------- ----------- ----------- ----------- ----------- Net increase in net assets derived from variable annuity contract transactions.. 2,463,655 3,492,764 3,988,250 9,149,508 6,028,865 ----------- ----------- ----------- ----------- ----------- Net increase in net assets................. 3,471,612 4,542,306 8,130,367 17,924,047 11,257,158 ----------- ----------- ----------- ----------- ----------- Balances at December 31, 1997................... $20,457,884 $14,791,141 $24,775,673 $40,795,168 $28,525,331 =========== =========== =========== =========== ===========
See accompanying notes. F-9 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B STATEMENT OF CHANGES IN NET ASSETS--(CONTINUED) YEAR ENDED DECEMBER 31, 1997
SMALL EQUITY HIGH YIELD COMPANY INCOME INTERNATIONAL BOND GROWTH TOTAL ----------- ------------- ---------- ---------- ------------ Balances at January 1, 1997................... $ 8,837,503 $ 9,291,127 $2,745,296 $2,391,000 $107,284,633 Increase in net assets resulting from operations: Net investment income.. 623,101 238,897 427,975 7,849 6,388,650 Net realized gain on investments........... 558,177 1,764,954 5,457 246,420 6,640,456 Net unrealized appreciation (depreciation) of investments........... 2,716,478 (1,867,378) 89,698 201,985 12,186,955 ----------- ----------- ---------- ---------- ------------ Net increase in net assets resulting from operations............. 3,897,756 136,473 523,130 456,254 25,216,061 Changes from variable annuity contract transactions: Transfers of net premiums.............. 4,104,689 3,093,905 3,211,308 2,724,977 48,855,727 Transfers for terminations.......... (485,849) (578,487) (561,540) (68,071) (6,175,685) Transfers for annuity benefits.............. -- -- -- -- (3,654) Net transfers within Separate Account B.... 2,081,140 (525,977) 1,911,706 2,645,545 -- ----------- ----------- ---------- ---------- ------------ Net increase in net assets derived from variable annuity contract transactions.. 5,699,980 1,989,441 4,561,474 5,302,451 42,676,388 ----------- ----------- ---------- ---------- ------------ Net increase in net assets................. 9,597,736 2,125,914 5,084,604 5,758,705 67,892,449 ----------- ----------- ---------- ---------- ------------ Balances at December 31, 1997................... $18,435,239 $11,417,041 $7,829,900 $8,149,705 $175,177,082 =========== =========== ========== ========== ============
See accompanying notes. F-10 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B STATEMENT OF CHANGES IN NET ASSETS YEAR ENDED DECEMBER 31, 1996
HIGH-GRADE MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH ------------ ----------- ----------- ------------ ----------- Balances at January 1, 1996................... $10,812,397 $ 8,977,751 $12,941,393 $14,162,330 $ 9,362,795 Increase in net assets resulting from operations: Net investment income.. 638,781 569,844 1,069,457 377,843 721,664 Net realized gain (loss) on investments. -- (6,839) 401,321 868,504 934,222 Net unrealized appreciation (depreciation) of investments........... -- (256,256) 691,602 2,539,435 1,449,121 ----------- ----------- ----------- ----------- ----------- Net increase in net assets resulting from operations............. 638,781 306,749 2,162,380 3,785,782 3,105,007 Changes from variable annuity contract transactions: Transfers of net premiums.............. 10,511,308 1,774,783 2,843,338 5,374,799 4,096,267 Transfers for terminations.......... (1,010,844) (85,829) (617,555) (452,158) (547,857) Transfers for annuity benefits.............. -- -- (3,326) -- -- Net transfers within Separate Account B.... (3,965,370) (724,619) (680,924) 368 1,251,961 ----------- ----------- ----------- ----------- ----------- Net increase in net assets derived from variable annuity contract transactions.. 5,535,094 964,335 1,541,533 4,923,009 4,800,371 ----------- ----------- ----------- ----------- ----------- Net increase in net assets................. 6,173,875 1,271,084 3,703,913 8,708,791 7,905,378 ----------- ----------- ----------- ----------- ----------- Balances at December 31, 1996................... $16,986,272 $10,248,835 $16,645,306 $22,871,121 $17,268,173 =========== =========== =========== =========== ===========
See accompanying notes. F-11 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B STATEMENT OF CHANGES IN NET ASSETS--(CONTINUED) YEAR ENDED DECEMBER 31, 1996
SMALL EQUITY HIGH YIELD COMPANY INCOME INTERNATIONAL BOND GROWTH TOTAL ---------- ------------- ---------- ---------- ------------ Balances at January 1, 1996................... $5,417,621 $5,053,032 $ -- $ -- $ 66,727,319 Increase in net assets resulting from operations: Net investment income.. 316,659 284,753 58,623 2,669 4,040,293 Net realized gain (loss) on investments. 250,669 256,451 10,666 64,621 2,779,615 Net unrealized appreciation (depreciation) of investments........... 684,327 420,828 44,297 (25,575) 5,547,779 ---------- ---------- ---------- ---------- ------------ Net increase in net assets resulting from operations............. 1,251,655 962,032 113,586 41,715 12,367,687 Changes from variable annuity contract transactions: Transfers of net premiums.............. 2,218,053 2,218,577 1,371,311 743,223 31,151,659 Transfers for terminations.......... (89,349) (154,927) (64) (123) (2,958,706) Transfers for annuity benefits.............. -- -- -- -- (3,326) Net transfers within Separate Account B.... 39,523 1,212,413 1,260,463 1,606,185 -- ---------- ---------- ---------- ---------- ------------ Net increase in net assets derived from variable annuity contract transactions.. 2,168,227 3,276,063 2,631,710 2,349,285 28,189,627 ---------- ---------- ---------- ---------- ------------ Net increase in net assets................. 3,419,882 4,238,095 2,745,296 2,391,000 40,557,314 ---------- ---------- ---------- ---------- ------------ Balances at December 31, 1996................... $8,837,503 $9,291,127 $2,745,296 $2,391,000 $107,284,633 ========== ========== ========== ========== ============
See accompanying notes. F-12 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 1. ACCOUNTING POLICIES ORGANIZATION OF THE ACCOUNT First Providian Life and Health Insurance Company Separate Account B (the "Separate Account") is a separate account of First Providian Life and Health Insurance Company ("FPLH"), and is registered as a unit investment trust under the Investment Company Act of 1940, as amended. The Separate Account was es- tablished for the purpose of funding variable annuity contracts issued by FPLH. Prior to June 10, 1997, FPLH was an indirect, wholly owned subsidiary of Providian Corporation ("Providian"). On June 10, 1997, Providian's insurance operations, including the operations of FPLH, were merged with an indirect, wholly owned subsidiary of AEGON N.V., an international insurance organization headquartered in The Hague, The Netherlands. Providian was the surviving cor- poration in the merger. Effective October 15, 1997, Providian's name was changed to Commonwealth General Corporation ("CGC"). Effective December 31, 1997, ownership of CGC was transferred to AEGON USA, Inc., an indirect, wholly owned subsidiary of AEGON N.V. FPLH expects to merge with AUSA Life Insurance Company, an affiliate, in 1998. Upon approval and completion of the merger, AUSA Life Insurance Company will be the surviving company. As of December 31, 1997, the Separate Account has nine subaccounts which in- vest exclusively in shares of a corresponding portfolio of the Vanguard Vari- able Insurance Fund (the "Fund"), an open-end diversified investment company offered by The Vanguard Group, Inc. ("Vanguard"). The portfolios available in the Fund as of December 31, 1997 are as follows: VANGUARD VARIABLE INSURANCE FUND Money Market Portfolio High-Grade Bond Portfolio Balanced Portfolio Equity Index Portfolio Growth Portfolio Equity Income Portfolio International Portfolio High Yield Bond Portfolio Small Company Growth Portfolio Each portfolio has different investment objectives and policies as outlined in the prospectus of the Separate Account. There is no assurance that a port- folio will achieve its stated investment objective. The contract owner's initial premium is automatically allocated to the Money Market Subaccount until the end of the free look period (typically a minimum of ten days or, for replacement, 20 days). Subsequent to the free look period and a five day grace period, a contract owner may allocate all or a portion of the initial premium and additional premiums, if any, to one or more subaccounts of the Separate Account. INVESTMENTS The Separate Account purchases shares of the portfolios at net asset value in connection with premium payments allocated to the subaccounts in accordance with contract owners' directions and redeems shares of the port- F-13 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B NOTES TO FINANCIAL STATEMENTS--(CONTINUED) folios to process transfers and to meet policy contract obligations. Gains and losses resulting from the redemption of shares are computed on the basis of average cost. Investment transactions are recorded on the trade dates. All dividends and capital gains earned on the portfolios are reinvested in the portfolios and are reflected in the unit values of the subaccounts of the Separate Account. Investments in the portfolios are valued at market which is calculated daily on each day the New York Stock Exchange is open for trading. Income and both realized and unrealized gains or losses from assets of each subaccount will be credited to, or charged against, that subaccount without regard to income, gains or losses from any other subaccount of the Separate Account or arising out of any other business FPLH may conduct. The contract's accumulated value varies with the investment performance of the corresponding portfolios. Investment results are not guaranteed by the Separate Account or FPLH. Although the assets in the Separate Account are the property of FPLH, the assets in the Separate Account attributable to the contracts cannot be used to discharge the liabilities arising out of any other business which FPLH may conduct. The assets of the Separate Account are available to cover the general liabilities of FPLH only to the extent that the Separate Account's assets ex- ceed its liabilities under the contracts. 2. INVESTMENTS The following is a summary of shares and amounts outstanding for each of the respective portfolios as of December 31, 1997 and 1996:
DECEMBER 31, 1997 ------------------------------------- NET ASSET FAIR PORTFOLIO SHARES VALUE VALUE - --------- -------------- --------- ------------ Money Market.............................. 20,448,431.510 $ 1.00 $ 20,448,432 High-Grade Bond........................... 1,382,585.888 10.70 14,793,669 Balanced.................................. 1,457,878.471 17.00 24,783,934 Equity Index.............................. 1,605,235.995 25.42 40,805,099 Growth.................................... 1,321,280.694 21.60 28,539,663 Equity Income............................. 982,023.376 18.78 18,442,399 International............................. 888,861.868 12.85 11,421,875 High Yield Bond........................... 739,433.617 10.59 7,830,602 Small Company Growth...................... 743,864.964 10.96 8,152,760 ------------ $175,218,433 ============
DECEMBER 31, 1996 ------------------------------------- NET ASSET FAIR PORTFOLIO SHARES VALUE VALUE - --------- -------------- --------- ------------ Money Market.............................. 16,979,591.191 $ 1.00 $ 16,979,591 High-Grade Bond........................... 983,064.587 10.43 10,253,364 Balanced.................................. 1,109,732.540 15.01 16,657,085 Equity Index.............................. 1,170,093.530 19.55 22,875,329 Growth.................................... 976,647.283 17.69 17,276,890 Equity Income............................. 605,539.909 14.60 8,840,883 International............................. 729,622.842 12.74 9,295,395 High Yield Bond........................... 265,808.560 10.33 2,745,802 Small Company Growth...................... 246,313.599 9.71 2,391,705 ------------ $107,316,044 ============
F-14 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The aggregate cost of shares purchased during the years ended December 31, 1997 and 1996 for each of the respective portfolios is as follows:
1997 1996 ------------ ----------- Money Market........................................... $ 34,666,264 $19,420,627 High-Grade Bond........................................ 6,371,639 3,335,200 Balanced............................................... 9,079,200 4,914,940 Equity Index........................................... 17,128,496 9,918,289 Growth................................................. 12,851,356 9,785,079 Equity Income.......................................... 8,758,544 3,743,104 International.......................................... 9,663,673 6,160,156 High Yield Bond........................................ 9,387,604 3,458,971 Small Company Growth................................... 9,851,109 3,039,296 ------------ ----------- $117,757,885 $63,775,662 ============ ===========
3. FEDERAL INCOME TAXES Operations of the Separate Account are included in the federal income tax return of FPLH, which is taxed as a life insurance company under the Internal Revenue Code. The Separate Account will not be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code. Under current federal income tax law, no federal income taxes are payable with respect to the Sepa- rate Account. 4. ADVISORY AND SERVICE FEES Vanguard furnishes corporate management, administrative, marketing and dis- tribution services. Additionally, Vanguard furnishes investment advisory serv- ices to certain Funds' portfolios. The net asset value of the portfolios is net of the advisory and service fees. 5. EXPENSES An annual charge is deducted from the unit values of the subaccounts of the Separate Account for FPLH's assumption of certain mortality and expense risks incurred in connection with the contract and for the cost of administering the contract. It is assessed daily based on the Fund's combined net assets attrib- utable to the Separate Account and Separate Account IV of Providian Life and Health Insurance Company ("PLH"), an affiliate of FPLH. For the year ended De- cember 31, 1995 and through April 29, 1996, the annual rate on the first $500 million of combined net assets in the Fund was .45% and was .40% on the next $250 million of combined net assets in the Fund. This charge was reduced in various increments to .30% on combined net assets in the Fund in excess of $1.5 billion. Effective April 30, 1996 and through November 30, 1997, the an- nual rate changed to .375% on the first $1.5 billion of combined net assets in the Fund and is reduced to .30% of combined net assets in the Fund in excess of $1.5 billion. Effective December 1, 1997, the annual rate changed to .30% on the first $2.5 billion of combined net assets in the Fund, is reduced to .28% of combined net assets in the Fund over $2.5 billion and up to $5 bil- lion, and is further reduced to .27% of combined net assets in the Fund in ex- cess of $5 billion. For the years ended December 31, 1997 and 1996, the effective annual rate for this mortality and expense charge was .33% and .37%, respectively, and the total charge was $485,197 and $319,868, respectively. In addition, an annual administrative charge of .10% is deducted from the unit value of the subaccounts of the Separate Account. This charge is assessed daily by Vanguard based on the Fund's net assets attributable to the Separate Account and Separate Account IV of PLH. Additionally, an annual maintenance fee of $25 per contract F-15 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B NOTES TO FINANCIAL STATEMENTS--(CONTINUED) is charged for contracts valued at less than $25,000 at the time of initial purchase and on the last business day of each year. The maintenance fee is de- ducted proportionately from the contract's accumulated value. These deductions represent reimbursement to Vanguard for the costs expected to be incurred for issuing and maintaining each contract and the Separate Account. The total of these costs for the years ended December 31, 1997 and 1996 was $120,237 and $66,197, respectively. 6. CONTRACT OWNER TRANSACTIONS Transactions with contract owners during 1997 and 1996 and end of period values for each of the respective subaccounts were as follows:
1997 1996 ---------------- ---------------- MONEY MARKET Outstanding units at beginning of period.... 13,589,800.233 9,080,164.861 Issuance of units........................... 26,256,533.646 15,271,388.654 Redemption of units......................... (24,273,458.794) (10,761,753.282) ---------------- ---------------- Outstanding units at end of period.......... 15,572,875.085 13,589,800.233 ================ ================ End of period: Unit value................................. $ 1.313687 $ 1.249928 ================ ================ Subaccount value........................... $ 20,457,884 $ 16,986,272 ================ ================ HIGH-GRADE BOND Outstanding units at beginning of period.... 688,685.283 621,861.498 Issuance of units........................... 361,675.682 189,611.380 Redemption of units......................... (138,380.457) (122,787.595) ---------------- ---------------- Outstanding units at end of period.......... 911,980.508 688,685.283 ================ ================ End of period: Unit value................................. $ 16.218703 $ 14.881740 ================ ================ Subaccount value........................... $ 14,791,141 $ 10,248,835 ================ ================ BALANCED Outstanding units at beginning of period.... 852,209.437 766,458.776 Issuance of units........................... 332,091.843 211,350.350 Redemption of units......................... (149,646.867) (125,599.689) ---------------- ---------------- Outstanding units at end of period.......... 1,034,654.413 852,209.437 ================ ================ End of period: Unit value................................. $ 23.945844 $ 19.531943 ================ ================ Subaccount value........................... $ 24,775,673 $ 16,645,306 ================ ================ EQUITY INDEX Outstanding units at beginning of period.... 1,034,963.491 783,606.794 Issuance of units........................... 624,661.863 474,338.097 Redemption of units......................... (267,342.618) (222,981.400) ---------------- ---------------- Outstanding units at end of period.......... 1,392,282.736 1,034,963.491 ================ ================ End of period: Unit value................................. $ 29.300922 $ 22.098481 ================ ================ Subaccount value........................... $ 40,795,168 $ 22,871,121 ================ ================
F-16 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1997 1996 -------------- ------------- GROWTH Outstanding units at beginning of period......... 906,140.118 620,485.748 Issuance of units................................ 558,643.385 526,957.808 Redemption of units.............................. (277,928.123) (241,303.438) -------------- ------------- Outstanding units at end of period............... 1,186,855.380 906,140.118 ============== ============= End of period: Unit value...................................... $ 24.034378 $ 19.056846 ============== ============= Subaccount value................................ $ 28,525,331 $ 17,268,173 ============== ============= EQUITY INCOME Outstanding units at beginning of period......... 525,405.637 380,466.275 Issuance of units................................ 412,755.767 225,146.289 Redemption of units.............................. (118,921.677) (80,206.927) -------------- ------------- Outstanding units at end of period............... 819,239.727 525,405.637 ============== ============= End of period: Unit value...................................... $ 22.502863 $ 16.820343 ============== ============= Subaccount value................................ $ 18,435,239 $ 8,837,503 ============== ============= INTERNATIONAL Outstanding units at beginning of period......... 697,571.102 432,692.144 Issuance of units................................ 658,115.586 467,326.158 Redemption of units.............................. (522,836.330) (202,447.200) -------------- ------------- Outstanding units at end of period............... 832,850.358 697,571.102 ============== ============= End of period: Unit value...................................... $ 13.708394 $ 13.319255 ============== ============= Subaccount value................................ $ 11,417,041 $ 9,291,127 ============== ============= HIGH YIELD BOND Outstanding units at beginning of period......... 252,538.898 -- Issuance of units................................ 779,271.325 324,832.566 Redemption of units.............................. (386,577.523) (72,293.668) -------------- ------------- Outstanding units at end of period............... 645,232.700 252,538.898 ============== ============= End of period: Unit value...................................... $ 12.135002 $ 10.870783 ============== ============= Subaccount value................................ $ 7,829,900 $ 2,745,296 ============== ============= SMALL COMPANY GROWTH Outstanding units at beginning of period......... 245,862.203 -- Issuance of units................................ 921,518.831 317,488.323 Redemption of units.............................. (424,466.620) (71,626.120) -------------- ------------- Outstanding units at end of period............... 742,914.414 245,862.203 ============== ============= End of period: Unit value...................................... $ 10.969911 $ 9.724958 ============== ============= Subaccount value................................ $ 8,149,705 $ 2,391,000 ============== =============
F-17 FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT B NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. NET ASSETS Net assets at December 31, 1997 for each of the respective subaccounts are summarized in the following tables:
HIGH-GRADE MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH ------------- ------------- ----------- ------------ ------------ Contract owner transactions........... $18,080,284 $12,213,143 $15,133,347 $24,796,887 $ 17,856,388 Accumulated net investment income...... 2,377,600 2,141,006 3,821,988 1,704,258 1,753,786 Accumulated net realized gain (loss) on investments............ -- (64,996) 1,164,041 3,052,678 2,477,874 Net unrealized appreciation on investments............ -- 501,988 4,656,297 11,241,345 6,437,283 ----------- ----------- ----------- ----------- ------------ $20,457,884 $14,791,141 $24,775,673 $40,795,168 $ 28,525,331 =========== =========== =========== =========== ============ HIGH YIELD COMPANY EQUITY INCOME INTERNATIONAL BOND GROWTH TOTAL ------------- ------------- ----------- ------------ ------------ Contract owner transactions........... $11,992,251 $ 9,767,242 $ 7,193,184 $ 7,651,736 $124,684,462 Accumulated net investment income...... 1,261,010 573,485 486,598 10,518 14,130,249 Accumulated net realized gain on investments.... 798,937 2,054,286 16,123 311,041 9,809,984 Net unrealized appreciation (depreciation) on investments............ 4,383,041 (977,972) 133,995 176,410 26,552,387 ----------- ----------- ----------- ----------- ------------ $18,435,239 $11,417,041 $ 7,829,900 $ 8,149,705 $175,177,082 =========== =========== =========== =========== ============
8. YEAR 2000 (UNAUDITED) CGC's parent has adopted and has in place a Year 2000 Assessment and Plan- ning Project (the "Project") to review and analyze its information technology and systems to determine if they are Year 2000 compatible. CGC and FPLH have begun to convert or modify, where necessary, critical data processing systems. It is contemplated that the Project will be substantially completed by early 1999. CGC and FPLH do not expect this Project to have a significant effect on operations. However, to mitigate the effect of outside influences upon the success of the Project, CGC and FPLH have undertaken communications with their significant customers, suppliers and other third parties to determine their Year 2000 compatibility and readiness. Management believes that the issues as- sociated with the Year 2000 will be resolved with no material financial impact on CGC and FPLH. Since the Year 2000 computer problem, and its resolution, is complex and multifaceted, the success of a response plan cannot be conclusively known un- til the Year 2000 is reached (or an earlier date to the extent that systems or equipment addresses Year 2000 date data prior to the Year 2000). Even with ap- propriate and diligent pursuit of a well-conceived project, including testing procedures, there is no certainty that any company will achieve complete suc- cess. Notwithstanding the efforts or results of CGC and FPLH, their ability to function unaffected to and through the Year 2000 may be adversely affected by actions (or failure to act) of third parties beyond their knowledge or con- trol. F-18 OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (A) FINANCIAL STATEMENTS Part A None Part B Audited Financial Statements of AUSA Life Insurance Company, Inc. Separate Account B (formerly First Providian Life and Health Insurance Company Separate Account B), for the Period Since Inception Through Years ended December 31, 1997 and 1996, with Report of Independent Auditors/6/ Supplemental Financial Statements--Statutory Basis of AUSA Life Insurance Company, Inc. for the Years ended December 31, 1997, 1996 and 1995, with Report of Independent Auditors/6/ Part C None (B) EXHIBITS (1) Resolution of the Board of Directors of First Providian Life and Health Insurance Company ("First Providian") authorizing establishment of the Separate Account./3/ (2) Not Applicable. (3) Not Applicable. (4) Form of variable annuity contract/6/ (5) Form of enrollment form/6/ (6) (a) Articles of Incorporation of AUSA Life Insurance Company, Inc./4/ (b) By-Laws of AUSA Life Insurance Company, Inc./4/ (7) Not applicable. (8) (a) Participation Agreement for the Vanguard Variable Insurance Fund/6/ (b) Administration Services Agreement/5/ (9) (a) Opinion and Consent of Counsel/6/ (b) Consent of Counsel/6/ (10) Consent of Independent Auditors/6/ (11) No financial statements are omitted from item 23. (12) Not applicable. (13) Performance computation/2/ (14) (a) None. (b) Not applicable. - -------- /1/Incorporated by reference from Pre-Effective Amendment No. 1 to the Regis- tration Statement of National Home Life Assurance Company Separate Account IV, File No. 33-36073. /2/Incorporated by reference from Post-Effective Amendment No. 5 to the Regis- tration Statement of First Providian Life & Health Insurance Company Sepa- rate Account B, File No. 33-39946. /3/Incorporated by reference from Pre-Effective Amendment No. 1 to the Regis- tration Statement of First Providian Life & Health Insurance Company Sepa- rate Account C, File No. 33-94204. /4/Incorporated by reference from Initial Registration Statement on Form N-4 of AUSA Life Insurance Company, Inc.-- AUSA Endeavor Variable Annuity Account, File No. 33-83560 (as filed on September 1, 1994). /5/Incorporated by reference from Post-Effective Amendment No. 10 to the Regis- tration Statement on Form N-4 of First Providian Life & Health Insurance Company, File No. 33-39946, filed on April 30, 1998. /6/ Filed herewith. C-1 ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR OFFICERS: Director and President.......................... Tom A. Schlossberg 4 Manhattanville Road Purchase, NY 10577 Director and Chairman of the Board.............. Larry G. Brown 201 Highland Avenue Largo, FL 33770 Director and Vice President..................... William L. Busler 4333 Edgewood Road NE Cedar Rapids, IA 52499 Vice President and Chief Financial Officer...... Patrick S. Baird 4333 Edgewood Road NE Cedar Rapids, IA 52499 Secretary....................................... Craig D. Vermie 4333 Edgewood Road NE Cedar Rapids, IA 52499 Director and Chief Actuary...................... Colette B. Vargas 4 Manhattanville Road Purchase, NY 10577 Treasurer....................................... Brenda K. Clancy 4333 Edgewood Road NE Cedar Rapids, IA 52499 Director........................................ Jack R. Dykhouse Brown Trail, Suite 302 Bedford, TX 76021 Director........................................ Steven E. Frushtick 500 Fifth Avenue New York, NY 10110 Director........................................ Carl Thor Hanson 900 Birdseye Road P.O. Box 112 Orient, NY 11957-0112 Director and Vice President..................... B. Larry Jenkins 2 East Chase Street Baltimore, MD 21202 Director and Vice President..................... Vera F. Mihaic 666 Fifth Avenue New York, NY 10103-0001 Director........................................ Peter P. Post 415 Madison Avenue New York, NY 10017 Director........................................ Cor H. Verhagen 51 JFK Parkway Short Hills, NJ 07078 Director........................................ E. Kirby Warren 725 Uris Hall 116th Street & Broadway New York, NY 10027
C-2 ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR REGISTRANT. The Depositor, AUSA Life Insurance Company, Inc. ("AUSA Life"), is indirectly wholly owned by AEGON USA, Inc. The Registrant is a segregated asset account of AUSA Life. The following chart indicates the persons controlled by or under common con- trol with AUSA Life.
JURISDICTION OF PERCENT OF VOTING NAME INCORPORATION SECURITIES OWNED BUSINESS ---- --------------- ----------------- -------- AEGON N.V. Netherlands Corporation 53.63% of Vereniging Holding company AEGON Netherlands Membership Association Groninger Financieringen Netherlands Corporation 100% of AEGON N.V. Holding company B.V. Netherlands Corporation AEGON Netherland N.V. Netherlands Corporation 100% of AEGON N.V. Holding company Netherlands Corporation AEGON Nevak Holding B.V. Netherlands Corporation 100% of AEGON N.V. Holding company Netherlands Corporation AEGON International N.V. Netherlands Corporation 100% of AEGON N.V. Holding company Netherlands Corporation Voting Trust Trustees: Delaware Voting Trust K.J. Storm Donald J. Shepard H.B. Van Wijk Dennis Hersch AEGON U.S. Holding Delaware 100% of Voting Trust Holding company Corporation Short Hills Management New Jersey 100% of AEGON U.S. Holding company Company Holding Corporation CORPA Reinsurance New York 100% of AEGON U.S. Holding company Company Holding Corporation AEGON Management Company Indiana 100% of AEGON U.S. Holding company Holding Corporation RCC North America Inc. Delaware 100% of AEGON U.S. Holding company Holding Corporation AEGON USA, Inc. Iowa 100% AEGON U.S. Holding Holding company Corporation AUSA Holding Company Maryland 100% AEGON USA, Inc. Holding company Monumental General Maryland 100% AUSA Holding Co. Holding company Insurance Group, Inc. Trip Mate Insurance Kansas 100% Monumental General Sale/admin. of travel Agency, Inc. Insurance Group, Inc. insurance Monumental General Maryland 100% Monumental General Provides management Administrators, Inc. Insurance Group, Inc. srvcs. to unaffiliated third party administrator Executive Management and Maryland 100% Monumental General Provides actuarial Consultant Services, Administrators, Inc. consulting services Inc. Monumental General Mass Maryland 100% Monumental General Marketing arm for sale Marketing, Inc. Insurance Group, Inc. of mass marketed insurance coverages
C-3
JURISDICTION OF PERCENT OF VOTING NAME INCORPORATION SECURITIES OWNED BUSINESS ---- --------------- ----------------- -------- Diversified Investment Delaware 100% AUSA Holding Co. Registered investment Advisors, Inc. advisor Diversified Investors Delaware 100% Diversified Broker-Dealer Securities Corp. Investment Advisors, Inc. AEGON USA Securities, Iowa 100% AUSA Holding Co. Broker-Dealer Inc. Supplemental Ins. Tennessee 100% AUSA Holding Co. Insurance Division, Inc. Creditor Resources, Inc. Michigan 100% AUSA Holding Co. Credit insurance CRC Creditor Resources Canada 100% Creditor Resources, Insurance agency Canadian Dealer Network Inc. Inc. AEGON USA Investment Iowa 100% AUSA Holding Co. Investment advisor Management, Inc. AEGON USA Realty Iowa 100% AUSA Holding Co. Provides real estate Advisors, Inc. administrative and real estate investment services Quantra Corporation Delaware 100% AEGON USA Realty Real estate and Advisors, Inc. financial software production and sales Quantra Software Delaware 100% Quantra Corporation Manufacture and sell Corporation mortgage loan and security management software Landauer Realty Iowa 100% AEGON USA Realty Real estate counseling Advisors, Inc. Advisors, Inc. Landauer Associates, Delaware 100% AEGON USA Realty Real estate counseling Inc. Advisors, Inc. Realty Information Iowa 100% AEGON USA Realty Information Systems for Systems, Inc. Advisors, Inc. real estate investment management AEGON USA Realty Iowa 100% AEGON USA Realty Real estate management Management, Inc Advisors, Inc. USP Real Estate Iowa 21.89% First AUSA Life Real estate investment Investment Trust Ins. Co. trust 13.11% PFL Life Ins. Co. 4.86% Bankers United Life Assurance Co. RCC Properties Limited Iowa AEGON USA Realty Limited Partnership Partnership Advisors, Inc. is General Partner and 5% owner. AUSA Financial Markets, Iowa 100% AUSA Holding Co. Marketing Inc. Endeavor Investment California 49.9% AUSA Financial General Partnership Advisors Markets, Inc. Universal Benefits Iowa 100% AUSA Holding Co. Third party Corporation administrator Investors Warranty of Iowa 100% AUSA Holding Co. Provider of automobile America, Inc. extended maintenance contracts Massachusetts Fidelity Iowa 100% AUSA Holding Co. Trust company Trust Co. Money Services, Inc. Delaware 100% AUSA Holding Co. Provides financial counseling for employees and agents of affiliated companies
C-4
JURISDICTION OF PERCENT OF VOTING NAME INCORPORATION SECURITIES OWNED BUSINESS ---- --------------- ----------------- -------- Zahorik Company, Inc. California 100% AUSA Holding Co. Broker-Dealer ZCI, Inc. Alabama 100% Zahorik Company, Insurance agency Inc. AEGON Asset Management Delaware 100% AUSA Holding Co. Registered investment Services, Inc. advisor Intersecurities, Inc. Delaware 100% AUSA Holding Co. Broker-Dealer ISI Insurance Agency, California 100% Western Reserve Insurance agency Inc. Life Assurance Co. of Ohio ISI Insurance Agency of Ohio 100% ISI Insurance Insurance agency Ohio, Inc. Agency, Inc. ISI Insurance Agency of Texas 100% ISI Insurance Insurance agency Texas, Inc. Agency, Inc. ISI Insurance Agency of Massachusetts 100% ISI Insurance Insurance Agency Massachusetts, Inc. Agency Inc. Associated Mariner Michigan 100% Intersecurities, Holding co./management Financial Group, Inc. Inc. services Mariner Financial Michigan 100% Associated Broker/Dealer Services, Inc. Mariner Financial Group, Inc. Mariner Planning Michigan 100% Mariner Financial planning Corporation Financial Services, Inc. Associated Mariner Michigan 100% Associated Insurance agency Agency, Inc. Mariner Financial Group, Inc. Associated Mariner Hawaii 100% Associated Insurance agency Agency of Hawaii, Inc. Mariner Agency, Inc. Associated Mariner Ins. Massachusetts 100% Associated Insurance agency Agency of Mariner Agency, Inc. Massachusetts, Inc. Associated Mariner Ohio 100% Associated Insurance agency Agency Ohio, Inc. Mariner Agency, Inc. Associated Mariner Texas 100% Associated Insurance agency Agency Texas, Inc. Mariner Agency, Inc. Associated Mariner New Mexico 100% Associated Insurance agency Agency New Mexico, Inc. Mariner Agency, Inc. Mariner Mortgage Corp. Michigan 100% Associated Mortgage origination Mariner Financial Group, Inc. Idex Investor Services, Florida 100% AUSA Holding Co. Shareholder services Inc. Idex Management, Inc. Delaware 50% AUSA Holding Co. Investment advisor 50% Janus Capital Corp. IDEX Series Fund Massachusetts Various Mutual fund First AUSA Life Maryland 100% AEGON USA, Inc. Insurance holding Insurance Company company AUSA Life Insurance New York 100% First AUSA Life Insurance Company, Inc. Insurance Company Life Investors Insurance Iowa 100% First AUSA Life Insurance Company of America Ins. Co. Life Investors Alliance, Delaware 100% LIICA Purchase, own, and hold LLC the equity interest of other entities Bankers United Life Iowa 100% Life Investors Insurance Assurance Company Ins. Company of America
C-5
JURISDICTION OF PERCENT OF VOTING NAME INCORPORATION SECURITIES OWNED BUSINESS ---- --------------- ----------------- -------- Life Investors Agency Iowa 100% Life Investors Marketing Group, Inc. Ins. Company of America PFL Life Insurance Iowa 100% First AUSA Life Insurance Company Ins. Co. AEGON Financial Services Minnesota 100% PFL Life Marketing Group, Inc. Insurance Co. AEGON Assignment Kentucky 100% AEGON Financial Administrator of Corporation of Kentucky Services Group, Inc. structured settlements AEGON Assingment Illinois 100% AEGON Financial Administrator of Corporation Services Group, Inc. structured settlements Southwest Equity Life Arizona 100% of Common Voting Insurance Ins. Co. Stock First AUSA Life Ins. Co. Iowa Fidelity Life Arizona 100% of Common Voting Insurance Insurance Co. Stock First AUSA Life Ins. Co. Western Reserve Life Ohio 100% First AUSA Life Insurance Assurance Co. of Ohio Ins. Co. AEGON Equity Group, Inc. Florida 100% Western Reserve Insurance Agency Life Assurance Co. of Ohio WRL Series Fund, Inc. Maryland Various Mutual fund WRL Investment Services, Florida 100% Western Reserve Provides administration Inc. Life Assurance Co. of for affiliated mutual Ohio fund WRL Investment Florida 100% Western Reserve Registered investment Management, Inc. Life Assurance Co. of advisor Ohio Monumental Life Maryland 100% First AUSA Life Insurance Insurance Co. Ins. Co. AEGON Special Markets Maryland 100% Monumental Life Marketing Group, Inc. Ins. Co. Monumental General Maryland 100% First AUSA Life Insurance Casualty Co. Ins. Co. United Financial Maryland 100% First AUSA Life General agency Services, Inc. Ins. Co. Bankers Financial Life Arizona 100% First AUSA Life Insurance Ins. Co. Ins. Co. The Whitestone Maryland 100% First AUSA Life Insurance agency Corporation Ins. Co. Cadet Holding Corp. Iowa 100% First AUSA Life Holding company Insurance Company Commonwealth General Delaware 100% AEGON USA, Inc. Holding company Corporation ("CGC") PB Series Trust Massachusetts N/A Mutual fund Monumental Agency Group, Kentucky 100% CGC Provider of srvcs. to Inc. ins. cos. Benefit Plans, Inc. Delaware 100% CGC TPA for Peoples Security Life Insurance Company Durco Agency, Inc. Virginia 100% Benefit Plans, General agent Inc. Commonwealth General. Kentucky 100% CGC Administrator of Assignment Corporation structured settlements
C-6
JURISDICTION OF PERCENT OF VOTING NAME INCORPORATION SECURITIES OWNED BUSINESS ---- --------------- ----------------- -------- AFSG Securities Pennsylvania 100% CGC Broker-Dealer Corporation PB Investment Advisors, Delaware 100% CGC Registered investment Inc. advisor Diversified Financial Delaware 100% CGC Provider of investment, Products Inc. marketing and admin. services to ins. cos. AEGON USA Real Estate Delaware 100% Diversified Real estate and mortgage Services, Inc. Financial Products Inc holding company Capital Real Estate Delaware 100% CGC Furniture and equipment Development Corporation lessor Capital General Delaware 100% CGC Holding company Development Corporation Commonwealth Life Kentucky 100% Capital General Insurance company Insurance Company Development Corporation Peoples Security Life North Carolina 100% Capital General Insurance company Insurance Company Development Corporation JMH Operating Company, Mississippi 100% Peoples Security Real estate holdings Inc. Life Insurance Company Capital Security Life North Carolina 100% Capital General Insurance company Ins. Co. Development Corporation Independence Automobile Florida 100% Capital Security Automobile Club Association, Inc. Life Insurance Company Independence Automobile Georgia 100% Capital Security Automobile Club Club, Inc. Life Insurance Company Capital 200 Block Delaware 100% CGC Real estate holdings Corporation Capital Broadway Kentucky 100% CGC Real estate holdings Corporation Southlife, Inc. Tennessee 100% CGC Investment subsidiary Ampac Insurance Agency, Pennsylvania 100% CGC Provider of management Inc. (EIN 23-1720755) support services National Home Life Pennsylvania 100% Ampac Insurance Special-purpose Corporation Agency, Inc. subsidiary Compass Rose Development Pennsylvania 100% Ampac Insurance Special-purpose Corporation Agency, Inc. subsidiary Frazer Association Illinois 100% Ampac Insurance TPA license-holder Consultants, Inc. Agency, Inc. Valley Forge Associates, Pennsylvania 100% Ampac Insurance Furniture & equipment Inc. Agency, Inc. lessor Veterans Benefits Plans, Pennsylvania 100% Ampac Insurance Administrator of group Inc. Agency, Inc. insurance programs Veterans Insurance Delaware 100% Ampac Insurance Special-purpose Services, Inc. Agency, Inc. subsidiary Financial Planning Dist. Columbia 100% Ampac Insurance Special-purpose Services, Inc. Agency, Inc. subsidiary Providian Auto and Home Missouri 100% CGC Insurance company Insurance Company Academy Insurance Group, Delaware 100% CGC Holding company Inc. Academy Life Missouri 100% Academy Insurance Insurance company Insurance Co. Group, Inc. Pension Life Insurance New Jersey 100% Academy Insurance Insurance company Company of America Group, Inc.
C-7
JURISDICTION OF PERCENT OF VOTING NAME INCORPORATION SECURITIES OWNED BUSINESS ---- --------------- ----------------- -------- Academy Services, Inc. Delaware 100% Academy Insurance Special-purpose Group, Inc. subsidiary Ammest Development Corp. Kansas 100% Academy Insurance Special-purpose Inc. Group, Inc. subsidiary Ammest Insurance Agency, California 100% Academy Insurance General agent Inc. Group, Inc. Ammest Massachusetts Massachusetts 100% Academy Insurance Special-purpose Insurance Agency, Inc. Group, Inc. subsidiary Ammest Realty, Inc. Pennsylvania 100% Academy Insurance Special-purpose Group, Inc. subsidiary Ampac, Inc. Texas 100% Academy Insurance Managing general agent Group, Inc. Ampac Insurance Agency, Pennsylvania 100% Academy Insurance Special-purpose Inc. Group, Inc. subsidiary (EIN 23-2364438) Data/Mark Services, Inc. Delaware 100% Academy Insurance Provider of mgmt. Group, Inc. services Force Financial Group, Delaware 100% Academy Insurance Special-purpose Inc. Group, Inc. subsidiary Force Financial Massachusetts 100% Force Fin. Group, Special-purpose Services, Inc. Inc. subsidiary Military Associates, Pennsylvania 100% Academy Insurance Special-purpose Inc. Group, Inc. subsidiary NCOA Motor Club, Inc. Georgia 100% Academy Insurance Automobile club Group, Inc. NCOAA Management Company Texas 100% Academy Insurance Special-purpose Group, Inc. subsidiary Unicom Administrative Pennsylvania 100% Academy Insurance Provider of admin. Services, Inc. Group, Inc. services Unicom Administrative Germany 100% Unicom Provider of admin. Services, GmbH Administrative services Services, Inc. Providian Property and Kentucky 100% Providian Auto and Insurance company Casualty Insurance Home Insurance Company Company Providian Fire Insurance Kentucky 100% Providian Property Insurance company Co. and Casualty Insurance Co. Capital Liberty, L.P. Delaware 79.2% Commonwealth Life Holding Company Insurance Company 19.8% Peoples Security Life Insurance Company 1% CGC Commonwealth General LLC Turks & 100% CGC Special-purpose Caicos Islands subsidiary Peoples Benefit Life Missouri 3.7% CGC Insurance company Insurance Company 15.3% Peoples Security Life Insurance Company 20% Capital Liberty, L.P. 61% Commonwealth Life Insurance Company Veterans Life Insurance Illinois 100% Peoples Benefit Insurance company Co. Life Insurance Company Peoples Benefit Pennsylvania 100% Veterans Life Ins. Special-purpose Services, Inc. Co. subsidiary
C-8 ITEM 27. NUMBER OF CONTRACT OWNERS As of the filing of the Registration Statement there were no contract owners. ITEM 28. INDEMNIFICATION The New York Code (Section 721 et seq.) provides for permissive indemnifica- tion in certain situations, mandatory indemnification in other situations, and prohibits indemnification in certain situations. The Code also specifies pro- cedures for determining when indemnification payments can be made. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended ( the "1933 Act"), may be permitted to directors, offi- cers, and controlling persons of the Depositor pursuant to the foregoing pro- visions, or otherwise, the Depositor 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 the Depositor of expenses incurred or paid by a director, offi- cer, or controlling person in connection with the securities being regis- tered), the Depositor 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 adjudi- cation of such issue. ITEM 29. PRINCIPAL UNDERWRITERS (a) None. (b) Not Applicable. ITEM 30. LOCATION OF ACCOUNTS AND RECORDS The books, accounts and other documents required by Section 31(a) under the Investment Company Act and the rules promulgated thereunder will be maintained in the physical possession of The Continuum Company, Inc., Kansas City, Mis- souri, The Vanguard Group, Inc., Valley Forge, Pennsylvania and AUSA Life In- surance Company, Inc., New York, New York. ITEM 31. MANAGEMENT SERVICES All management contracts are discussed in Part A or Part B. ITEM 32. UNDERTAKINGS (a) Registrant undertakes that it will file a post-effective amendment to this registration statement as frequently as necessary to ensure that the au- dited financial statements in the registration statement are never more than 16 months old for so long as Premiums under the Policy may be accepted. (b) Registrant undertakes that it will include either (i) a postcard or simi- lar written communication affixed to or included in the Prospectus that the applicant can remove to send for a Statement of Additional Information or (ii) a space in the Policy application that an applicant can check to request a Statement of Additional Information. (c) Registrant undertakes to deliver any Statement of Additional Information and any financial statements required to be made available under this Form promptly upon written or oral request to AUSA Life Insurance Company, Inc., at the address or phone number listed in the Prospectus. (d) AUSA Life Insurance Company, Inc. hereby represents that the fees and charges deducted under the policies described in this registration statement, in the aggregate, are reasonable in relation to the services rendered, the ex- penses expected to be incurred, and the risks assumed by AUSA Life Insurance Company, Inc. C-9 SECTION 403(B) REPRESENTATIONS AUSA Life represents that it is relying on a no-action letter dated November 28, 1988, to the American Council of Life Insurance (Ref. No. IP-6-88), re- garding Sections 22(e), 27(c)(1), and 27(d) of the Investment Company Act of 1940, as amended, in connection with redeemability restrictions on Section 403(b) Policies, and that paragraphs numbered (1) through (4) of that letter will be complied with. C-10 SIGNATURES As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant hereby certifies that this Amendment to the Registration Statement meets the requirements for effectiveness pursuant to paragraph (b) of Rule 485 and has caused this Registration Statement to be signed on its behalf, in the City of Purchase and State of New York, on this 28th day of September, 1998. AUSA LIFE INSURANCE COMPANY, INC. SEPARATE ACCOUNT C Registrant AUSA LIFE INSURANCE COMPANY, INC. Depositor /s/ Tom A. Schlossberg ------------------------- Tom A. Schlossberg President As required by the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the duties indicated.
Signatures Title Date /s/ William Brown, Jr. Director September 28, 1998 - ----------------------------------- William Brown, Jr. /s/ Larry G. Brown Director September 28, 1998 - ----------------------------------- Larry G. Brown /s/ William L. Busler Director September 28, 1998 - ----------------------------------- William L. Busler /s/ Jack R. Dykhouse Director September 28, 1998 - ----------------------------------- Jack R. Dykhouse /s/ Steven E. Frushtick Director September 28, 1998 - ----------------------------------- Steven E. Frushtick /s/ Carl T. Hanson Director September 28, 1998 - ----------------------------------- Carl T. Hanson /s/ B. Larry Jenkins Director September 28, 1998 - ----------------------------------- B. Larry Jenkins /s/ Colette Vargas Director September 28, 1998 - ----------------------------------- Colette Vargas /s/ Vera F. Mihaic Director September 28, 1998 - ----------------------------------- Vera F. Mihaic /s/ Peter P. Post Director September 28, 1998 - ----------------------------------- Peter P. Post /s/ Tom A. Schlossberg Director (Principal September 28, 1998 - ----------------------------------- Executive Officer) Tom A. Schlossberg /s/ Cor H. Verhagen Director September 28, 1998 - ----------------------------------- Cor H. Verhagen /s/ E. Kirby Warren Director September 28, 1998 - ----------------------------------- E. Kirby Warren /s/ Brenda K. Clancy Treasurer (Chief September 28, 1998 - ----------------------------------- Accounting Officer Brenda K. Clancy
SEPARATE ACCOUNT B VANGUARD VARIABLE ANNUITY PLAN CONTRACT INDEX TO EXHIBITS EXHIBIT 4 FORM OF VARIABLE ANNUITY CONTRACT EXHIBIT 5 FORM OF ENROLLMENT FORM EXHIBIT 8(a) PARTICIPATION AGREEMENT FOR THE VANGUARD VARIABLE INSURANCE FUND EXHIBIT 9(a) OPINION AND CONSENT OF COUNSEL EXHIBIT 9(b) CONSENT OF COUNSEL EXHIBIT 10 CONSENT OF INDEPENDENT AUDITORS EX-4 2 FORM OF VARIABLE ANNUITY CONTRACT AUSA LIFE INSURANCE COMPANY, INC. AUSA Life Insurance Company, Inc. Home Office: 4 Manhattanville Road Purchase, New York 10577 AUSA Life Insurance Company, Inc. ("the Company") has issued this Certificate in consideration of the enrollment form and the Initial Purchase Payment. This Plan provides a monthly Annuity Payment for the life of the Annuitant. Payments start on the Annuity Date. Benefits under this Certificate are on a variable basis. They are based on the investment experience of a separate account and are not guaranteed as to amount. The smallest annual rate of investment return which would have to be earned on the assets of the Separate Account so that the dollar amount of variable Annuity Payments will not decrease is 4.835%. A daily charge corresponding to a maximum annual charge of .30% per year is applied to the assets of the Separate Account by the Company, plus a yearly charge of .10% plus $25 to cover the cost of administering the account. See the "Separate Account" section of this ------------------------------------------ Certificate, beginning on page 7, for more details. - --------------------------------------------------- FREE LOOK PERIOD - RIGHT TO CANCEL If for any reason the Certificate Owner is not satisfied with this Certificate, he may return it to the Company within 20 days from the date of receipt along with a written request to cancel. It may be returned by delivering it or mailing it to the agent, person or entity from whom it was purchased. If returned, this Certificate shall be void from the Certificate Date. The Company will refund the Purchase Payment(s) and any fees or charges or, if greater, the Accumulated Value. READ THIS CERTIFICATE CAREFULLY. The Company has caused this Certificate to be signed by its President and Secretary. [ILLEGIBLE SIGNATURE APPEARS HERE] [ILLEGIBLE SIGNATURE APPEARS HERE] Secretary President GROUP FLEXIBLE PREMIUM MULTI-FUNDED VARIABLE ANNUITY CERTIFICATE. PREMIUM SUBJECT TO MAXIMUM AS SHOWN ON PAGE 7. NONPARTICIPATING. AV423 101 109 498 CRT Index Page No. Right to Cancel 1 Certificate Schedule Page 3 Glossary 4-6 Purchasing and Exchanging Shares 7 The Separate Account 7,8 Accumulated Value 8,9 Withdrawals 9 Death Benefit 10,11 Ownership, Assignment and Beneficiary 11-13 Required Distribution pursuant to IRC Section 72(s) 14 Annuity Payment Options 14,15 General Provisions 15-17 Annuity Tables 17,18 2 CERTIFICATE SCHEDULE PAGE Please address all correspondence to the address listed below. Include the certificate number on all correspondence in order to facilitate the processing of the request. Vanguard Variable Annuity Center P.O. Box 1103 Valley Forge, PA 19482-1103 or AUSA Life Insurance Company, Inc. 4 Manhattanville Rd. Purchase, NY 10577 CERTIFICATE SCHEDULE CERTIFICATE OWNER: John Doe SOCIAL SECURITY NUMBER: 123-45-6789 ANNUITANT: John Doe BENEFICIARY: Jane Doe GROUP CONTRACT OWNER: GROUP CONTRACT NUMBER: NY000N1 CERTIFICATE NUMBER: NYNNN01 CERTIFICATE DATE: MARCH 1, 1998 ANNUITY DATE: APRIL 10, 2037 INITIAL PURCHASE PAYMENT: $25,000.00 The allocation of the Initial Purchase Payment that the Certificate Owner has chosen is shown below. The Initial Purchase Payment will be invested as shown below: Money Market Portfolio 0% High-Grade Bond Portfolio 0% High Yield Bond Portfolio 0% Balanced Portfolio 0% Equity Index Portfolio 50% Equity Income Portfolio 0% Growth Portfolio 0% Small Company Growth Portfolio 0% International Portfolio 50% Each Subaccount of the AUSA Life Insurance Company, Inc. Separate Account B invests in a corresponding portfolio of the "Variable Annuity Fund" and are listed below. Money Market Portfolio High-Grade Bond Portfolio Balanced Portfolio High Yield Bond Portfolio Equity Index Portfolio Equity Income Portfolio Growth Portfolio Small Company Growth Portfolio International Portfolio Administrative charges: . Annual charge of .10% of Accumulated Value, plus $25. . A daily Mortality and Expense Risk Charge corresponding to a maximum annual charge of .30% of the Accumulated Value per year. The actual charge may be less than .30%. 3 GLOSSARY Whenever used in this Certificate, the following shall mean: Annuitant- The person or persons on whose life expectancy the duration of any Annuity Payments is determined, and, subject to the provision dealing with Joint Annuitants, upon whose death prior to the Annuity Date benefits under this Certificate are paid. Annuity Date- The date on which Annuity Payments begin. The Annuity Date is always the first day of the month. Annuity Payment Option- One of several ways in which the Accumulated Value of this Certificate can be paid. Under a Fixed Annuity Option, the dollar amount of each Annuity Payment does not change over time. Annuity Payments are based on this Certificate's Accumulated Value as of the Annuity Date. Under a Variable Annuity Option, the dollar amount of each Annuity Payment may change over time, depending upon the investment experience of the underlying Portfolio or Portfolios the Certificate Owner chooses. Annuity Payment- One of a series of payments made under an Annuity Payment Option. Annuity payments are based on the lifetime or life expectancy of the Annuitant unless, after the Certificate Date, an Annuity Income option which pays for a Period Certain only is elected. Annuity Unit- Unit of measure used to calculate Variable Annuity Payments. Beneficiary- The person or persons to whom any benefits are due upon the Annuitant's death. If the Certificate Owner and the Annuitant are not the same person, the Certificate Owner may also name a beneficiary (the "Owner's Designated Beneficiary") to receive the Owner's interest if the Certificate Owner dies before the Annuity Date, as defined in the Required Distribution Pursuant to IRC Section 72(s) Provision. Business Day- A day when the New York Stock Exchange is open for trading. Certificate Owner- The owner of this annuity Certificate, and the person who makes Purchase Payments under the Group Contract. Unless otherwise specified on the Certificate Schedule Page, the Annuitant and the Certificate Owner shall be one and the same person. The term shall also include any person named as Joint Certificate Owner. A Joint Certificate Owner shares ownership in all respects with the Certificate Owner. The Certificate Owner has the right to assign ownership to a person or party other than himself/herself. 4 Certificate Anniversary means any anniversary of the Certificate Date. Certificate Year means a period of 12 months starting with the Certificate Date or any Certificate Anniversary. Due Proof of Death- (a) A certified death certificate; (b) a certified decree of a court of competent jurisdiction as to the finding of death; (c) a written statement by a medical doctor who attended the deceased; or (d) any other proof satisfactory to the Company. Free Look Period- The period during which this Certificate can be canceled and treated as void from the Certificate Date. Fund- The fund available on the Certificate Date or as later changed by the Company and disclosed by prospectus. The Fund and portfolios which are available on the Certificate Date are shown on the Certificate Schedule page. The Fund has several portfolios. There is a portfolio that corresponds to each of the Subaccounts of the Separate Account. Group Contract- The contract that is issued to the Group Contract Owner, from which Certificates are issued. Group Contract Date- The date of issue of the Group Contract. Group Contract Owner - The entity designated as the Owner in the application for the Group Contract. Initial Purchase Payment- The first payment made to purchase this Certificate. The Initial Purchase Payment must be at least $5,000. Payee- The Certificate Owner, Annuitant, Beneficiary, or any other person, estate, or legal entity to whom benefits are to be paid. Period Certain (or Payments Certain)- An Annuity Payment Option under which Annuity Payments will be paid for a minimum period of time. If the Annuitant dies, his named Beneficiary is paid for the balance of that period. Premium Tax- A regulatory tax that may be assessed on the Purchase Payments made on this Certificate. The percentage which the Company must pay as Premium Tax will be deducted from each Purchase Payment. Purchase Payment-Any amount the Certificate Owner invests in this Certificate. Purchase Payments after the Initial Purchase Payment may be made at any time prior to the Annuity Date as long as the Annuitant is living. SEC- The Securities and Exchange Commission. 5 Separate Account- The Separate Account consists of assets that are segregated by the Company and invested in the Fund. The investment performance of the Separate Account is independent of the performance of the general assets of the Company. Subaccount- That portion of the Separate Account which invests in shares of the Portfolios. Each Subaccount will invest only in a single Portfolio. The investment performance of each Subaccount is linked directly to the investment performance of the underlying Portfolios of the Fund. Valuation Period- A period between two successive Business Days commencing at the close of business on the First Business Day and ending at the close of business of the following Business Day. 6 PURCHASING AND EXCHANGING SHARES Purchases An Initial Purchase Payment must be at least $5,000. Subsequent investments may be made during the accumulation period by mail ($250 minimum per Portfolio). The total of all Purchase Payments under this Certificate may not exceed $1,000,000. All Purchase Payments will be reduced by any Premium Tax as required. Maintenance Fee Each Certificate will be assessed an annual account maintenance fee of .10% plus $25 to offset the costs of maintaining Certificate Owner accounts. Exchanges Should the Certificate Owner's investment goals change during the accumulation period, he may exchange the Accumulated Value in one Subaccount for Accumulated Value in a different Subaccount. Exchanges are to be made in writing. Exchange Privilege Limitations The Certificate Owner may make no more than two transfers (at least 30 days apart) from any Subaccount within a calendar year. _______________________________________________________________________ THE SEPARATE ACCOUNT Nature of the Separate Account The Separate Account is a segregated asset account of the Company registered with the SEC under the Investment Company Act of 1940 as a Unit Investment Trust. It is also subject to the laws of New York. The Separate Account was established by AUSA Life Insurance Company, Inc., to support Group Variable Annuity Contracts. The Company owns the assets of the Separate Account and keeps them separate from the assets of its general investment account. The Company uses the assets of the Separate Account to buy shares in the Fund. The Separate Account has Subaccounts which are invested in corresponding specific Portfolios of the Fund. Income and realized and unrealized gains and losses from assets in each Subaccount are credited to, or charged against, the Subaccount without regard to income, gains or losses in the Company's other investment accounts. 7 The Company will determine the value of the assets in the Separate Account at the end of each Business Day. In order to determine the value of an asset on a day that is not a Business Day, the Company will use the value of that asset as of the end of the next Business Day on which trading takes place. The Company will always keep assets in the Separate Account with a value at least equal to the total Investment Amount under Group Contracts the same as this one. To the extent those assets do not exceed this total, the Company uses them to support only those Group Contracts and does not use those assets to support any other business. The Company may use any excess over this amount in its discretion. Subaccounts The Separate Account has several Subaccounts. The Subaccounts available on the Certificate Date are listed on the Certificate Schedule Page. Allocations to the Subaccounts The Certificate Owner determines what portion of the Accumulated Value will be allocated among the Subaccounts. The Certificate Schedule Page will show the initial allocation percentages. The Certificate Owner may choose to allocate nothing to a particular Subaccount. Any allocation must be at least 10% of the total Accumulated Value. The Certificate Owner may not choose a fractional percent. The Certificate Owner may change the allocation percentages for additional Purchase Payments at any time. The change will take effect on the date the Company receives written notice. Accumulated Value- On the Certificate Date, the Accumulated Value is equal to the Initial Purchase Payment received, less any maintenance fees or premium tax, if applicable. On any day after the Certificate Date, the Accumulated Value is equal to the Initial Purchase Payment: PLUS: 1. Any additional Purchase Payments received; and 2. Any increase in the value of the Subaccount(s), due to investment results, to which the Accumulated Value is allocated. LESS: 1. Any decrease in the value of the Subaccount(s), due to investment results, to which the Accumulated Value is allocated; 8 2. A daily charge corresponding to a maximum annual charge of .30% of the Accumulated Value per year for mortality and expense risks assumed by the Company. (The actual charge may be less than .30%.); 3. A yearly charge of .10% plus $25 to cover the cost of administering the account; 4. Any amount charged against the Accumulated Value for premium taxes or other taxes; and 5. Any withdrawals. Valuation Days The value of the Fund is determined as of the close of the New York Stock Exchange on each day that it is open. Withdrawals Partial or full withdrawals may be made at any time before the Annuity Date. No partial or full withdrawal may be made after the Annuity Date. Any withdrawal amount may be made in a lump sum, or, if elected, all or any part may be paid out under an Annuity Payment Option. As of the date the Company receives the Certificate Owner's written request for partial withdrawal, the Accumulated Value will be reduced by an amount equal to the withdrawal amount, subject to the following: 1. Partial withdrawals will be deducted as directed by the Certificate Owner in the written request for partial withdrawal. In the absence of specific direction from the Certificate Owner, all deductions will be made from all Subaccounts on a pro rata basis. 2. The minimum partial withdrawal is $250. 3. If a partial withdrawal or exchange would reduce the Accumulated Value in a Portfolio to less than $1,000, the remaining balance will be transferred to the other Portfolios under this Certificate on a pro rata basis. If the balance under this Certificate is less than $1,000, and if no premium has been received within three years, the Company reserves the right to liquidate the account. The Certificate Owner will be notified if his balance is below the minimum, and will then have 60 days in which to make an Additional Purchase Payment. As of the date the Company receives the Certificate Owner's written request for full withdrawal, the amount payable is the Accumulated Value. 9 Proceeds Normal Annuity Date: The Normal Annuity Date is either the ------------------- first day of the month after 10 full certificate years or the first day of the month following the Annuitant's 65th birthday, whichever is later. In no event may the Annuity Date be later than the month following the Annuitant's 90th birthday. Advanced or Deferred Annuity Date: The Certificate Owner may --------------------------------- choose to advance or defer the Annuity Date. This request must be made in writing at least 30 days prior to the requested Annuity Date, and may only be made during the Annuitant's lifetime. In no event may the Annuity Date be deferred to a date later than the first day of month following the Annuitant's 90th birthday. Annuity Payments Annuity payments are made monthly starting on the Annuity Date. The minimum payment is $100. The number of payments made in a year may be adjusted to maintain this minimum. If the Accumulated Value is less than $2,000, the Company has the right to pay that amount in a lump sum. The Company may require proof of the Annuitant's age before making payments. From time to time, the Company may require proof that the Annuitant is living. The Certificate Owner May Name a Joint Annuitant The Certificate Owner may, in the application or by written request at least 30 days prior to the Annuity Date, name a Joint Annuitant. The Joint Annuitant must meet the Company's underwriting requirements. If approved by the Company, the Joint Annuitant shall be named on the Certificate Schedule Page or added by endorsement. An Annuitant or Joint Annuitant may not be replaced. The Annuity Date shall be determined based on the date of birth of the Annuitant. If, prior to the Annuity Date, the Certificate Owner directs that Annuity Payments be made solely to either the Annuitant or Joint Annuitant, all rights under this Certificate shall terminate as to the Annuitant or Joint Annuitant to whom no Annuity Payments are to be made. If the Annuitant or Joint Annuitant (other than an Annuitant who is the Certificate Owner) dies prior to the Annuity Date, the survivor shall be the sole Annuitant. Another Joint Annuitant may not be designated. Payment to a Beneficiary shall not be made until the death of the surviving Annuitant. Death Benefit Prior to the Annuity Date Subject to the provision dealing with Joint Annuitants, the Death Benefit is calculated and is payable upon receipt of Due Proof of Death of the Annuitant, as well as proof that the Annuitant died prior to the Annuity Date. 10 The Death Benefit may be paid as: 1. A Lump Sum Cash Benefit: A lump sum cash benefit will equal the greater of: (a) The Accumulated Value as of the date of Due Proof of Death and proof that the Annuitant died prior to the Annuity Date; or (b) the sum of all Purchase Payments, less the sum of all partial withdrawals and premium taxes, if any. 2. An Annuity Payment Benefit: An Annuity Payment Option will be based on the greater of: (a) the Accumulated Value on the Annuity Date elected by the Beneficiary (and approved by the Company); or (b) the sum of all Purchase Payments, less the sum of all partial withdrawals and premium taxes, if any. The Certificate Owner may elect an Annuity Payment Option for the beneficiary prior to the Annuitant's death. If he does not and a cash benefit has not already been paid, the Beneficiary may make this election after the Annuitant's death. The Beneficiary has the right to choose a payment option upon the death of the Annuitant if the Certificate Owner has not done otherwise. The above options are also available in the event of the termination of the Group Contract. A death benefit is payable as a result of the death of the Certificate Owner prior to the annuity date, if (a) the Certificate Owner and the Annuitant are not the same person, and (b) the Certificate Owner dies before the Annuitant. The distribution of this death benefit is subject to the Required Distribution Pursuant to IRC Section 72(s) Provision of this Contract and the Certificate. This death benefit is equal to the Accumulated Value of the Certificate on the date of distribution. OWNERSHIP, ASSIGNMENT AND BENEFICIARY Ownership of the Certificate The owner of this Certificate on the Certificate Date is the Annuitant, unless otherwise specified in the application. The Certificate Owner may specify a new Certificate Owner by written notice at any time thereafter. During the Annuitant's lifetime, all rights and privileges under this Certificate may be exercised solely by the Certificate Owner. From time to time, the Company may require proof that the Certificate Owner is still living. 11 Assignment of the Certificate The Company is not responsible for the validity of any assignment. No assignment will be recognized until the Company receives written notice. The interest of any Beneficiary which the assignor has the right to change shall be subordinate to the interest of an assignee. Any amount paid to the assignee shall be paid in one sum, notwithstanding any settlement agreement in effect at the time assignment was executed. The Company shall not be liable as to any payment or other settlement made by it before receipt of written notice. Beneficiary The Certificate Owner must name a beneficiary on the enrollment form. This designation may be made irrevocable by a written notice filed and approved by the Company. An irrevocable Beneficiary may be changed only with his own written consent. Changes in Beneficiary must be made by written notice to the Company. Such change will take effect on the date the notice is signed. The Company will acknowledge in writing receipt of this notice. The change will not affect any payment made or action taken before the Company acknowledged the notice. Certificate Owner's or Annuitant's Death Prior to Annuity Date If the Certificate Owner or the Annuitant dies prior to the Annuity Date, the following will apply unless the Certificate Owner has made other provisions: 1. If there is more than one Beneficiary, each will share equally. 2. If one of two or more Beneficiaries has already died, that share of the death benefit will be paid equally to the survivor(s). 3. If no Beneficiary is living, the proceeds will be paid to the Certificate Owner, his legal representatives or assigns. 4. If a Beneficiary dies at the same time as the Certificate Owner or the Annuitant, the proceeds will be paid as though the Beneficiary had died first. 5. If a Beneficiary dies within 15 days after the Certificate Owner's or the Annuitant's death and before the Company received due proof of the Certificate Owner's or the Annuitant's death, proceeds will be paid as though the Beneficiary had died first. The Beneficiary may choose a Payment Option Available under the Certificate. 12 Certificate Owner's or Annuitant's Death After Annuity Date If the Annuitant dies on or after the Annuity Date, any unpaid Payments Certain will be paid to the Beneficiary; If the Certificate Owner dies on or after the Annuity Date, the Annuitant will continue to receive Annuity Payments such that the remaining interest in the Certificate will be distributed as rapidly as under the method of distribution being used as of the date of the Certificate Owner's death. Death of Beneficiary If a Beneficiary who is currently receiving Annuity Payments dies, any remaining Payments Certain will be paid to that Beneficiary's named Beneficiary as they come due. - -------------------------------------------------------------------------------- REQUIRED DISTRIBUTION PURSUANT TO IRC SECTION 72(S) If either the Certificate Owner or Joint Owner dies before the entire interest in the Certificate is distributed: 1. The following applies: (a) If death occurs on or after the Annuity Date, the remaining portion of such interest will be distributed at least as rapidly as under the method of distribution being used as of the date of death; and (b) If death occurs before the Annuity Date, the entire interest in this Certificate will be distributed within five years after the date of death. 2. There is an exception to (1) above if the person to whom ownership of this Certificate passes by reason of such death (hereafter referred to as the "Owner's Designated Beneficiary"), chooses to take any portion of his interest in this Certificate as an Annuity to be paid to himself or for his benefit, then such portion shall be distributed on the date distributions begin, provided: (a) such distributions begin no later than one year after the death of the Certificate Owner or Joint Owner, whichever is first, or such later date as may be prescribed by federal regulations; and (b) such portion will be distributed, in accordance with regulations, either over the lifetime of the owner's designated beneficiary or over a period not extending beyond his life expectancy. 3. Special rule where surviving spouse is the Certificate Owner's Designated Beneficiary: If the Certificate Owner's Designated Beneficiary is the surviving spouse of the deceased Certificate Owner or Joint Owner, then paragraphs (1) and (2) above shall be applied by treating such spouse as the original Certificate Owner. The surviving spouse may elect to become the owner under the Certificate and to treat the Certificate as his or her own. 13 - --------------------------------------------------------------------------- ANNUITY PAYMENT OPTIONS The Certificate Owner may elect that Annuity Payments be received on a fixed basis, a variable basis, or some combination of both. Payment Options 1. Life Annuity- Monthly Annuity Payments are paid for the life of the Annuitant, ceasing with the last payment due prior to his death. 2. Life Annuity with 120, 180 or 240 Monthly Payments Certain - Monthly Annuity Payments are paid for the life of the Annuitant for 120, 180 or 240 months as elected. If, at any given age, the same amount would be payable for different periods certain, the Company will deem an election to have been made for the longest period certain which could have been elected at such age for such amount. 3. Installment or Unit Refund Life Annuity - Monthly Annuity Payments are paid for the life of an Annuitant, with a Period Certain determined by dividing the Accumulated Value by the first Annuity Payment. 4. Joint and Last Survivor Annuity - Monthly Annuity Payments are paid for the life of two Annuitants and thereafter for the life of the Survivor, ceasing with the last payment due prior to the Survivor's death. 5. Designated Period Annuity - Monthly Annuity Payments are paid for a Period Certain, as elected, which may be for 10 to 30 years. - --------------------------------------------------------------------------- GENERAL PROVISIONS Certificate We will issue Certificates to each Certificate Owner. Such Certificates are not a part of the Group Contract. The Group Contract The Group Contract, together with the application for such Group Contract if a copy is attached to the Group Contract when issued,.and any attached Riders, shall constitute the entire contract between the parties. Nothing in the Group Contract invalidates or impairs any right granted to the Certificate Owner by Section 3219 of the Insurance Law or the Certificate. Incontestability This Certificate is incontestable from the Certificate Date, except in cases where the Annuitant's age or sex has been misstated. Nonparticipating This Certificate does not pay dividends. It will not share in the profits or surplus earnings of the Company. 14 Protection of Proceeds and Payments To the extent permitted by law, neither the proceeds nor any payments under this Certificate shall be subject to the claims of creditors or legal process. Annual Statement The Certificate Owner will receive an annual statement once each year. It will show such things as the Accumulated Value of the Subaccount, as well as any Additional Purchase Payments, withdrawals, exchanges or charges for the year that apply to this Certificate. The statement shall contain additional information required by law or regulation. Misstatement of Age or Sex If the Annuitant's age or sex has been misstated, payments will be adjusted to the amount which would have been provided for the correct age or sex. If payments have already commenced and the misstatement has caused an underpayment, the full amount due plus interest, will be paid with the next scheduled payment. If the misstatement has caused an overpayment, the amount due plus interest, will be deducted from one or more future payments. Such underpayment or overpayment shall bear interest at 5% per year, from the date of the wrong payment to the date of the adjustment. The Company will not make or change payments which depend on receiving information from a Payee until this information is received from the Payee in a satisfactory manner. Deferment of Payment If a lump sum or cash withdrawal is to be paid from the Separate Account, payment will be made within seven days from the date the election becomes effective. The Company may defer payment in cases where the New York Stock Exchange is closed or trading has been restricted by the SEC, or when the SEC allows the Company to defer payments in order to protect its Certificate Owners. Contract Amendment The Company will Amend the Group Contract and this Certificate from time to time in cases where the Company is acting to comply with the United States Internal Revenue Code and/or regulations of the United States Treasury Department, or is acting to maintain the tax-deferred status of the Group Contract and this Certificate, pursuant to those provisions or regulations. Such amendment shall be subject to applicable notice and approval requirements of state insurance regulatory authorities. 15 Rights Reserved by the Company Subject to any prior approval by the SEC, the New York Insurance Department, and any other regulatory authority, the Company reserves the right to take certain actions. These actions include: 1. To deregister the Separate Account under the Investment Company Act of 1940; 2. To combine any two or more Separate Accounts; 3. To operate the Separate Account as a management investment company or any other form permitted by law. 4. To substitute shares of another fund or units of a trust if shares of the Fund are not available, or if, in the judgment of the Company, further investment in such shares is no longer appropriate; and 5. To add or delete Funds, Portfolios and corresponding Subaccounts. - --------------------------------------------------------------------------- ANNUITY TABLES The Annuity Tables show the guaranteed minimum amount of monthly Annuity Payment for each $1,000 of Accumulated Value for each Fixed Annuity Option. The amount of each Annuity Payment will depend on the payee's sex and age on the birthday nearest to when the first Annuity Payment is due. The Company bases the tables for the first four Options on the 1983 Table "A" Mortality Table projected for mortality improvement to the year 2000 using Projection Scale G and an interest rate of 4% a year. The table for Option 5 is based on an interest rate of 4% a year. On request the Company will furnish the amount of monthly Annuity Payment per $1,000 applied for any ages not shown. The Company will treat any Payee who is over age 85 at the date Annuity Payments begin as being age 85 on that date. Fixed Payment Amounts With respect to a Fixed Payment Option, the amounts shown on the tables represent the guaranteed minimum for each Annuity Payment. Variable Payment Amounts With respect to a Variable Payment Option, the amounts shown on the tables represent the first Annuity Payment, based on the assumed interest rate of 4%. The amount of each Annuity Payment after the first is determined by use of Annuity Units. 16 The number of Annuity Units is determined by dividing the first Annuity Payment by the Annuity Unit value for the selected Subaccount on the Annuity Date. The number of Annuity Units for the Subaccount then remains fixed, unless an exchange of Annuity Units is made. After the first Annuity Payment, the dollar amount of each subsequent Annuity Payment is equal to the number of Annuity Units multiplied by the Annuity Unit Value for the Subaccount on the due date of the Annuity Payment. The Annuity Unit Value for each Subaccount was established at $10. The Annuity Unit Value for any subsequent Business Day is equal to (a) times (b) times (c), where: (a) is the Annuity Unit Value on the immediately preceding Business Day; (b) is the Net Investment Factor for the day; (c) is the Investment Result Adjustment Factor (.99989255 per day), which recognizes an assumed interest rate of 4% per year used in determining the Annuity Payment Amounts. The Net Investment Factor is a factor applied to a Subaccount that reflects daily changes in the value of the Subaccount due to: (a) Any increase or decrease in the value of the Subaccount due to investment results. (b) A daily charge corresponding to a maximum annual charge of .30% per year for mortality and expense risks assumed by the Company and for the cost of administering this Certificate. (c) A yearly charge of .10% plus $25 to cover the cost of administering the account. When Annuity Payments begin, neither expenses actually incurred other than taxes on the investment return, nor mortality actually experienced, shall adversely affect the dollar amount of variable annuity payments to any Annuitant for whom such payments have commenced. Alternate Annuity Payment Option Rates The Company may, at the time of election of an Annuity Payment Option, offer more favorable rates in lieu of the guaranteed rates shown in the Annuity Tables. This option will in no event be less favorable than that of any individual immediate annuity then being sold by the Company. 17 Annuity Tables Options One Guaranteed Minimum Two and Three Amount of Monthly Payment For Each $1,000 Applied
Male Single Life Annuities - ------------------------------------------------------------------------------------------------------------------------------------ Monthly Monthly Install- Monthly Install- Age of Payments Certain Age of Payments Certain ment Age of Payments Certain ment Payee 120 240 Payee None 120 180 240 Refund Payee None 120 180 240 Refund - ------------------------------------------------------------------------------------------------------------------------------------ 20 3.73 3.72 43 4.29 4.27 4.25 4.22 4.22 65 6.28 6.05 5.77 5.41 5.84 21 3.74 3.73 44 4.34 4.32 4.29 4.26 4.26 66 6.45 6.18 5.86 5.47 5.97 22 3.75 3.74 45 4.39 4.36 4.34 4.30 4.31 67 6.63 6.32 5.96 5.53 6.10 23 3.76 3.75 46 4.44 4.42 4.38 4.34 4.35 68 6.83 6.47 6.06 5.58 6.25 24 3.77 3.76 47 4.49 4.47 4.43 4.38 4.40 69 7.04 6.62 6.16 5.63 6.40 25 3.78 3.77 48 4.55 4.52 4.48 4.43 4.45 70 7.27 6.78 6.26 5.68 6.56 26 3.80 3.78 49 4.61 4.58 4.54 4.48 4.50 71 7.51 6.94 6.35 5.72 6.72 27 3.81 3.80 50 4.68 4.64 4.59 4.53 4.56 72 7.76 7.10 6.44 5.76 6.90 28 3.83 3.81 51 4.75 4.70 4.65 4.58 4.62 73 8.03 7.27 6.53 5.80 7.09 29 3.84 3.83 52 4.82 4.77 4.71 4.63 4.68 74 8.32 7.44 6.62 5.83 7.28 30 3.86 3.85 53 4.89 4.84 4.78 4.69 4.74 75 8.63 7.61 6.70 5.86 7.49 31 3.88 3.87 54 4.97 4.92 4.84 4.74 4.81 76 8.97 7.78 6.78 5.89 7.71 32 3.91 3.89 55 5.06 4.99 4.91 4.80 4.88 77 9.32 7.96 6.85 5.91 7.95 33 3.93 3.91 56 5.15 5.08 4.99 4.86 4.96 78 9.71 8.13 6.92 5.93 8.20 34 3.95 3.93 57 5.24 5.16 5.06 4.92 5.03 79 10.12 8.30 6.98 5.95 8.46 35 3.98 3.96 58 5.34 5.25 5.14 4.98 5.12 80 10.56 8.46 7.04 5.96 8.74 36 4.01 3.99 59 5.45 5.35 5.22 5.04 5.20 81 11.02 8.62 7.09 5.98 9.04 37 4.04 4.01 60 5.57 5.45 5.31 5.10 5.30 82 11.53 8.77 7.14 5.99 9.36 38 4.08 4.04 61 5.69 5.56 5.39 5.17 5.39 83 12.06 8.92 7.18 5.99 9.69 39 4.11 4.07 62 5.82 5.67 5.48 5.23 5.50 84 12.63 9.06 7.21 6.00 10.04 40 4.15 4.11 63 5.96 5.79 5.58 5.29 5.60 85& 41 4.19 4.14 64 6.11 5.92 5.67 5.35 5.72 Over 13.23 9.19 7.24 6.00 10.42 42 4.23 4.18 Female - ------------------------------------------------------------------------------------------------------------------------------------ Monthly Monthly Install- Monthly Install- Age of Payments Certain Age of Payments Certain ment Age of Payments Certain ment Payee 120 240 Payee None 120 180 240 Refund Payee None 120 180 240 Refund - ------------------------------------------------------------------------------------------------------------------------------------ 20 3.67 3.67 43 4.05 4.05 4.04 4.02 4.02 65 5.60 5.49 5.36 5.16 5.36 21 3.68 3.67 44 4.09 4.08 4.07 4.06 4.06 66 5.73 5.61 5.46 5.23 5.46 22 3.68 3.68 45 4.13 4.12 4.11 4.09 4.09 67 5.87 5.73 5.56 5.30 5.58 23 3.69 3.68 46 4.17 4.16 4.15 4.13 4.13 68 6.02 5.86 5.66 5.37 5.70 24 3.69 3.69 47 4.21 4.20 4.19 4.17 4.17 69 6.18 6.00 5.76 5.43 5.83 25 3.70 3.70 48 4.26 4.24 4.23 4.20 4.21 70 6.36 6.15 5.87 5.50 5.96 26 3.71 3.70 49 4.30 4.29 4.27 4.25 4.25 71 6.55 6.30 5.98 5.56 6.11 27 3.72 3.71 50 4.35 4.34 4.32 4.29 4.30 72 6.76 6.46 6.09 5.62 6.26 28 3.73 3.72 51 4.41 4.39 4.37 4.33 4.34 73 6.98 6.63 5.67 5.67 6.43 29 3.74 3.73 52 4.46 4.44 4.42 4.38 4.39 74 7.22 6.80 6.31 5.72 6.61 30 3.75 3.75 53 4.52 4.50 4.47 4.43 4.45 75 7.49 6.98 6.41 5.77 6.79 31 3.77 3.76 54 4.59 4.56 4.53 4.48 4.50 76 7.77 7.17 6.52 5.81 6.99 32 3.78 3.77 55 4.65 4.63 4.59 4.53 4.56 77 8.07 7.36 6.61 5.84 7.21 33 3.80 3.79 56 4.72 4.69 4.65 4.59 4.62 78 8.40 7.55 6.71 5.87 7.43 34 3.81 3.80 57 4.80 4.76 4.72 4.65 4.69 79 8.75 7.75 6.79 5.90 7.68 35 3.83 3.82 58 4.88 4.84 4.78 4.71 4.75 80 9.14 7.95 6.87 5.92 7.93 36 3.85 3.84 59 4.96 4.92 4.86 4.77 4.83 81 9.55 8.14 6.95 5.94 8.21 37 3.88 3.86 60 5.05 5.00 4.93 4.83 4.90 82 10.00 8.33 7.01 5.96 8.51 38 3.90 3.89 61 5.15 5.09 5.01 4.89 4.98 83 10.49 8.51 7.07 5.97 8.82 39 3.93 3.91 62 5.25 5.18 5.09 4.96 5.07 84 11.02 8.69 7.12 5.98 9.16 40 3.95 3.94 63 5.36 5.28 5.18 5.03 5.16 85& 41 3.98 3.96 64 5.47 5.38 5.27 5.10 5.26 Over 11.59 8.86 7.17 5.99 9.51 42 4.01 3.99
18 Guaranteed Minimum Amount of Monthly Payment for Each $1,000 Applied, cont'd
Option Four Joint and Last Survivor Annuity - ------------------------------------------------------------------------------------------------------------------------------------ Age Age of Female Payee Age of of --------------------------------------------------------------------------------------------------------------------------- Male Male Payee 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 Payee - ------------------------------------------------------------------------------------------------------------------------------------ 50 4.21 4.23 4.25 4.28 4.30 4.32 4.34 4.36 4.38 4.40 4.42 4.43 4.45 4.47 4.48 4.50 4.51 4.52 4.54 4.55 4.56 50 51 4.23 4.25 4.28 4.30 4.33 4.35 4.37 4.39 4.42 4.44 4.46 4.48 4.49 4.51 4.53 4.54 4.56 4.58 4.59 4.60 4.61 51 52 4.25 4.28 4.30 4.33 4.36 4.38 4.40 4.43 4.45 4.47 4.50 4.52 4.54 4.56 4.58 4.59 4.61 4.63 4.64 4.66 4.67 52 53 4.27 4.30 4.33 4.36 4.38 4.41 4.44 4.46 4.49 4.51 4.54 4.56 4.58 4.60 4.62 4.64 4.66 4.68 4.70 4.71 4.73 53 54 4.29 4.32 4.35 4.38 4.41 4.44 4.47 4.50 4.53 4.55 4.58 4.60 4.63 4.65 4.67 4.70 4.72 4.74 4.76 4.77 4.79 54 55 4.31 4.35 4.38 4.41 4.44 4.47 4.50 4.53 4.56 4.59 4.62 4.65 4.67 4.70 4.72 4.75 4.77 4.79 4.82 4.84 4.85 55 56 4.33 4.37 4.40 4.43 4.47 4.50 4.53 4.57 4.60 4.63 4.66 4.69 4.72 4.75 4.78 4.80 4.83 4.85 4.88 4.90 4.92 56 57 4.35 4.39 4.42 4.46 4.50 4.53 4.57 4.60 4.64 4.67 4.70 4.74 4.77 4.80 4.83 4.86 4.89 4.91 4.94 4.96 4.99 57 58 4.37 4.41 4.45 4.48 4.52 4.56 4.60 4.64 4.67 4.71 4.75 4.78 4.82 4.85 4.88 4.91 4.95 4.97 5.00 5.03 5.06 58 59 4.39 4.43 4.47 4.51 4.55 4.59 4.63 4.67 4.71 4.75 4.79 4.83 4.86 4.90 4.94 4.97 5.01 5.04 5.07 5.10 5.13 59 60 4.41 4.45 4.49 4.53 4.57 4.62 4.66 4.70 4.74 4.79 4.83 4.87 4.91 4.95 4.99 5.03 5.07 5.10 5.14 5.17 5.20 60 61 4.43 4.47 4.51 4.55 4.60 4.64 4.69 4.73 4.78 4.83 4.87 4.92 4.96 5.00 5.05 5.09 5.13 5.17 5.21 5.24 5.28 61 62 4.44 4.49 4.53 4.58 4.62 4.67 4.72 4.77 4.81 4.86 4.91 4.96 5.01 5.05 5.10 5.15 5.19 5.24 5.28 5.32 5.36 62 63 4.46 4.50 4.55 4.60 4.65 4.70 4.75 4.80 4.85 4.90 4.95 5.00 5.05 5.11 5.16 5.21 5.25 5.30 5.35 5.39 5.44 63 64 4.47 4.52 4.57 4.62 4.67 4.72 4.77 4.83 4.88 4.94 4.99 5.05 5.10 5.16 5.21 5.26 5.32 5.37 5.42 5.47 5.52 64 65 4.48 4.53 4.58 4.64 4.69 4.74 4.80 4.86 4.91 4.97 5.03 5.09 5.15 5.21 5.27 5.32 5.38 5.44 5.49 5.55 5.60 65 66 4.50 4.55 4.60 4.65 4.71 4.77 4.82 4.88 4.94 5.01 5.07 5.13 5.19 5.26 5.32 5.38 5.44 5.51 5.57 5.63 5.69 66 67 4.51 4.56 4.62 4.67 4.73 4.79 4.85 4.91 4.97 5.04 5.10 5.17 5.24 5.30 5.37 5.44 5.51 5.57 5.64 5.71 5.77 67 68 4.52 4.57 4.63 4.69 4.75 4.81 4.87 4.94 5.00 5.07 5.14 5.21 5.28 5.35 5.42 5.50 5.57 5.64 5.71 5.79 5.85 68 69 4.53 4.59 4.64 4.70 4.76 4.83 4.89 4.96 5.03 5.10 5.17 5.25 5.32 5.40 5.47 5.55 5.63 5.71 5.79 5.86 5.94 69 70 4.54 4.60 4.66 4.72 4.78 4.85 4.91 4.98 5.05 5.13 5.20 5.28 5.36 5.44 5.52 5.60 5.69 5.77 5.86 5.94 6.02 70 71 4.55 4.61 4.67 4.73 4.80 4.86 4.93 5.00 5.08 5.16 5.23 5.31 5.40 5.48 5.57 5.66 5.75 5.84 5.93 6.02 6.11 71 72 4.56 4.62 4.68 4.74 4.81 4.88 4.95 5.02 5.10 5.18 5.26 5.35 5.43 5.52 5.61 5.71 5.80 5.90 5.99 6.09 6.19 72 73 4.57 4.63 4.69 4.75 4.82 4.89 4.97 5.04 5.12 5.20 5.29 5.38 5.47 5.56 5.66 5.76 5.86 5.96 6.06 6.16 6.27 73 74 4.58 4.64 4.70 4.77 4.83 4.91 4.98 5.06 5.14 5.23 5.32 5.41 5.50 5.60 5.70 5.80 5.91 6.02 6.12 6.24 6.35 74 75 4.58 4.64 4.71 4.78 4.85 4.92 5.00 5.08 5.16 5.25 5.34 5.43 5.53 5.63 5.74 5.85 5.96 6.07 6.19 6.30 6.42 75 76 4.59 4.65 4.72 4.78 4.86 4.93 5.01 5.09 5.18 5.27 5.36 5.46 5.56 5.67 5.77 5.89 6.00 6.12 6.25 6.37 6.50 76 77 4.59 4.66 4.72 4.79 4.87 4.94 5.02 5.11 5.19 5.29 5.38 5.48 5.59 5.70 5.81 5.93 6.05 6.17 6.30 6.44 6.57 77 78 4.60 4.66 4.73 4.80 4.87 4.95 5.03 5.12 5.21 5.30 5.40 5.51 5.61 5.73 5.84 5.96 6.09 6.22 6.36 6.50 6.64 78 79 4.61 4.67 4.74 4.81 4.88 4.96 5.04 5.13 5.22 5.32 5.42 5.53 5.64 5.75 5.87 6.00 6.13 6.27 6.41 6.56 6.71 79 80 4.61 4.67 4.74 4.81 4.89 4.97 5.05 5.14 5.24 5.33 5.44 5.55 5.66 5.78 5.90 6.03 6.17 6.31 6.46 6.61 6.77 80
Monthly payment for ages not shown will be furnished by the Company on request.
------------------------------------------------------------------------------------------------------------------------------- Option Five Payment for a Designated Period ------------------------------------------------------------------------------------------------------------------------------- Amount of Amount of Amount of Years of Monthly Years of Monthly Years of Monthly Payments Payment Payments Payment Payments Payment 10 10.06 17 6.71 24 5.35 11 9.31 18 6.44 25 5.22 12 8.69 19 6.21 26 5.10 13 8.17 20 6.00 27 4.99 14 7.72 21 5.81 28 4.90 15 7.34 22 5.64 29 4.80 16 7.00 23 5.49 30 4.72
19 EX-5 3 FORM OF ENROLLMENT FORM Vanguard Variable Annuity Enrollment Form Enrollment Form for AUSA Life Insurance Company, Inc. Complete this Enrollment Form and mail to: Vanguard Variable Annuity Center P.O. Box 1103, Valley Forge, PA 19482-1103 1. Certificate Owner Information [_] [_] ------------------------------------------------- Name (First, Initial, Last) Male Female ---------------------------------------------------------------------------- Mailing Address ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- City State Zip ----------------------------------------------------------------------------- Social Security Number Birth Date ----------------------------------------------------------------------------- Daytime Telephone Evening Telephone 2. Annuitant Information [_] Same as Certificate Owner [_] [_] ------------------------------------------------- Name (First, Initial, Last) Male Female ---------------------------------------------------------------------------- Mailing Address ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- City State Zip ----------------------------------------------------------------------------- Social Security Number Birth Date ----------------------------------------------------------------------------- Daytime Telephone Evening Telephone 3. Joint Certificate Owner Information (Not applicable to Qualified Certificates) [_] [_] ------------------------------------------------- Name (First, Initial, Last) Male Female ---------------------------------------------------------------------------- Mailing Address ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- City State Zip ----------------------------------------------------------------------------- Social Security Number Birth Date ----------------------------------------------------------------------------- Daytime Telephone Evening Telephone 4. Joint Annuitant Information (Not applicable as Qualified Certificates) [_] Same as Certificate Owner [_] [_] ------------------------------------------------- Name (First, Initial, Last) Male Female ---------------------------------------------------------------------------- Mailing Address ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- City State Zip ----------------------------------------------------------------------------- Social Security Number Birth Date ----------------------------------------------------------------------------- Daytime Telephone Evening Telephone For A Flexible Premium Multi-Funded Variable Annuity For help with this Enrollment Form or for more information call us toll-free at: 1-800-522-5555 5. Annuitant's Beneficiaries (a) Primary Beneficiary(ies) ----------------------------------------------------------------------------- Name ----------------------------------------------------------------------------- Social Security Number ----------------------------------------------------------------------------- Relationship Birth Date ----------------------------------------------------------------------------- Name ----------------------------------------------------------------------------- Social Security Number ----------------------------------------------------------------------------- Relationship Birth Date (b) Secondary Beneficiary(ies) (in the event your Primary Beneficiary(ies) predeceases you) ----------------------------------------------------------------------------- Name ----------------------------------------------------------------------------- Social Security Number ----------------------------------------------------------------------------- Relationship Birth Date ----------------------------------------------------------------------------- Name ----------------------------------------------------------------------------- Social Security Number ----------------------------------------------------------------------------- Relationship Birth Date 6. Certificate Owner's Beneficiaries (a) Primary Beneficiary(ies) ----------------------------------------------------------------------------- Name ----------------------------------------------------------------------------- Social Security Number ----------------------------------------------------------------------------- Relationship Birth Date ----------------------------------------------------------------------------- Name ----------------------------------------------------------------------------- Social Security Number ----------------------------------------------------------------------------- Relationship Birth Date (b) Secondary Beneficiary(ies) (in the event your Primary Beneficiary(ies) predeceases you) ----------------------------------------------------------------------------- Name ----------------------------------------------------------------------------- Social Security Number ----------------------------------------------------------------------------- Relationship Birth Date ----------------------------------------------------------------------------- Name ----------------------------------------------------------------------------- Social Security Number ----------------------------------------------------------------------------- Relationship Birth Date VA-ENROLL 7/98(V) 7. Your Initial Purchase Payment You may allocate your Purchase payment to as many of the Annuity's nine Portfolios as you like. Please indicate each allocation below as a percentage of your Initial Purchase Payment; note that the minimum allocation per Portfolio selected is 10% and must be at least $1,000. Please use whole percentages and be sure that your allocations total 100%. Money Market Portfolio ________ High-Grade Bond Portfolio ________ High Yield Bond Portfolio ________ Balanced Portfolio ________ Equity Income Portfolio ________ Equity Index Portfolio ________ Growth Portfolio ________ International Portfolio ________ Small Company Growth Portfolio ________ Total ________ Future purchases may be allocated as shown above, or, if you prefer, at the time of your purchase you may select a different allocation. I understand that my Initial Purchase payment will be allocated to the Money Market Portfolio until the end of my Free Look Period, at which point it will be allocated as shown above. 8. Your Method of Purchase [_] Check for $ ________________________________________________ (payable to AUSA Life Insurance Company, Inc.) is enclosed. 9. Commencement of Annuity Payments The Annuitant will begin receiving Annuity Payments on the first day of the month after ten full years from the date of this Certificate, or the first day of the month which follows the Annuitant's 65th birthday, whichever is later. Or, if you prefer, you may at this time request either a specific age or year in which you wish the Annuitant to begin receiving Annuity Payments. Please indicate this preference below. You may amend this election in the future. [_] I/We wish to receive payments upon reaching age ______. [_] I/We wish to begin receiving payments on the anniversary date of this certificate in the year ___________________. 10. Replacement Annuity Will the annuity applied for here replace any life insurance or annuity from this or any other company? [_]Yes [_]No If Yes, I have given the company name and policy information below: --------------------------------------------------------------------------- Company Name --------------------------------------------------------------------------- Policy Number --------------------------------------------------------------------------- Face amount 11. Is This a Rollover? [_] Yes, this is a rollover to a Qualified Certificate. My Initial Purchase Payment is a rollover of a distribution from a qualified retirement plan or an Individual Retirement Account, and I intend to establish this annuity as a Qualified Certificate. I acknowledge having received and read the prospectus, which contains the Disclosure Statement that applies to Qualified Certificates. [_] No, this is not a rollover to a Qualified Certificate. 12. Signatures I/We acknowledge receipt of a current prospectus, declare that all statements in this Enrollment Form are true to the best of my/our knowledge and belief, and agree that this Enrollment Form shall be a part of the Annuity Certificate issued by AUSA Life Insurance Company, Inc. I/We certify that the Social Security Number, as listed on this Enrollment Form, is correct. I/We understand that all payments and values provided by the Certificate may vary as to dollar amount to the extent they are based on the investment experience of the selected Portfolio(s). With this in mind, I/We feel the Certificate applied for will meet anticipated financial needs. --------------------------------------------------------------------------- Owner's Signature --------------------------------------------------------------------------- Joint Owner's Signature --------------------------------------------------------------------------- Dated On At (Place) VA-ENROLL/98(V)-B EX-8.(A) 4 PARTICIPATION AGREEMENT Participation, Market Consulting and Administration Agreement AMONG VANGUARD VARIABLE INSURANCE FUND, INC. AND THE VANGUARD GROUP, INC. AND PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY AND FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY THIS AGREEMENT, made and entered into this 22nd day of June 1998, by and among Providian Life and Health Insurance Company ("Providian"), on its own behalf and on behalf of Providian Life and Health Insurance Company Separate Account IV ("Separate Account IV"), First Providian Life and Health Insurance Company ("First Providian"), on its own behalf and on behalf of First Providian Life and Health Insurance Company Separate Account B, ("Separate Account B" and, collectively with Separate Account IV, the "Accounts") (Providian, First Providian and the Accounts collectively, the "Company") and The Vanguard Group, Inc. ("Sponsor") and Vanguard Variable Insurance Fund, Inc. ("Fund") (collectively, "Parties"). WHEREAS, the Company and Sponsor are also parties to one certain Administrative Services Agreement dated September, 1997, which is incorporated by reference. Company, Sponsor and Fund, intending to be legally bound, hereby agree as follows: 1. Sales of the Contracts ---------------------- 1.1 Company, Sponsor, and Fund hereby agree to perform the duties and assume the responsibilities set forth herein in connection with the offering of certain mutually agreed upon variable annuity contracts ("Contracts"), to be called the Vanguard Variable Annuity Plan, which are to be offered by the Company and use the Fund as its underlying investment vehicle. Company shall establish and maintain subdivisions of the Accounts as required by law to perform Company's obligations under the Contracts, including the obligation to establish a subdivision for each portfolio lawfully offered by Sponsor and Fund, and accepted by Company for the Contracts, acceptance of which will not be unreasonably withheld. 1.2 Company hereby appoints Sponsor, acting through its wholly-owned subsidiary, Vanguard Marketing Corporation ("Consultant"), as its exclusive representative to design and implement a marketing program, consisting principally of direct mail marketing, whereby the Contracts shall be marketed directly to certain of Sponsor's customers, selected by Sponsor, and to the general public to the fullest extent permitted by all applicable federal and state laws and regulations. Sponsor agrees to use reasonable diligence and to cooperate fully with 1 Company to successfully market the Contracts, and to communicate openly with Company prior to any decisions by Sponsor to cease or slow Sponsor's or Consultant's assistance or participation in such marketing efforts; provided, however, that neither Sponsor nor Consultant has any obligation to sell any minimum number or amount of Contracts. 1.3 Company agrees to use reasonable diligence to maintain fixed annuitization rates for the Contracts which are no less than the median rates of insurance carriers which have the same or better credit ratings as the Company; provided, however, that Company has no obligation to offer any minimum level of payout rates except as required by state or federal law. Company further agrees to a competitive analysis by the Sponsor of the fixed annuitization rates offered by Company. The Company will provide Sponsor with the same information that the Company uses to perform its own competitive analysis for rate setting purposes. Such competitive analysis shall occur on a semi-annual basis, in May and October. Should this analysis demonstrate that the fixed annuitization rates offered by the Company have fallen below the median, then the Company and Sponsor will engage in discussions to set an appropriate rate. 1.4 Company and Sponsor agree that, during the term of this Agreement, applications to purchase the Contracts will not be accepted or rejected, and Contracts will not be issued unless approved or rejected by Sponsor or its designee pursuant to underwriting standards initially agreed upon by Company and Sponsor and set forth in the procedures manual prepared for the third party administrator and which will be reviewed and approved by the Company prior to commencement of Contract sales. Furthermore, the procedures manual will be made available to Company for review on a quarterly basis for as long as Sponsor is acting as third party administrator for existing business. 1.5 (a) Company agrees that, during the term of this Agreement, neither it nor any of its United States domiciled affiliates will offer, or participate directly or indirectly in the offering of proprietary variable annuity contracts (which are not intended to include single premium immediate variable annuity contracts),sponsored by investment companies by direct 2 marketing. Except as expressly limited by this section, Company and its affiliates may offer any product to the public. The Company and its affiliates may offer any proprietary variable annuity by direct marketing that was offered on or before the date of this Agreement. A "proprietary" variable annuity contract shall mean a variable annuity offering the funds of a single investment company and which bears an annual mortality and expense risk fee less than 0.75% of the daily net assets of the account. "Direct Marketing" shall mean the marketing of variable annuity contracts primarily by mail or telephone or Internet and shall not include the marketing of products: (i) through a commissioned force of distributors, primarily engaged in face-to-face solicitations; (ii) to legitimate affinity groups(e.g., to members of the Professional Golfers Association, auto clubs, etc.); (iii) primarily through individuals with a professional relationship with the person being solicited(e.g., investment advisers, certified public accountants and financial planners, etc. ); (iv) as part of a conservation effort or to existing policyowners of the Company or its affiliates as to products with no relationship to Fund or Sponsor; (v) primarily through investment companies that are owned by or affiliated with a bank or other federally insured depository financial institution, or a registered national or regional broker/dealer firm (e.g., Merrill Lynch, Smith Barney, Raymond James, etc.); (vi) directly or indirectly to pension funds, employer-employee plans, deferred compensation plans or employer-employee trusts; (b) Sponsor agrees that during the term of this Agreement, it will not by Direct Marketing offer, or participate directly or indirectly in the offering of, variable annuity contracts (which are not intended to include single premium immediate variable annuity contracts), other than the Contract; provided that Sponsor may participate directly or indirectly 3 in the offering and issuance of variable annuity contracts to pension funds, employer-employee plans, deferred compensation plans or employer-employee trusts and, provided further, that Sponsor may offer any financial products by Direct Marketing except as limited by this section. Fund agrees that it will offer shares in connection with variable annuity contracts only to separate accounts of Company during the term of this Agreement. Fund will continue to offer shares for contracts in force at the termination of this Agreement for so long as any Fund shares are held by the Accounts. Nothing in this Agreement shall be construed to apply to variable life insurance policies or single premium immediate variable annuity contracts. (c) The exclusive arrangement set forth in Section 1.5(a) of this Agreement shall be effective as long as the Company reasonably determines that the Sponsor is "actively promoting" the annuity. Without requiring Sponsor to commit to a minimum level of sales, Sponsor would be considered to be "actively promoting" the annuity if it engages in activities including but not limited to the following: (1) continuing to maintain a marketing staff at or above substantially the same levels in place as of the date of this Agreement; (2) maintaining its in-bound 800 telephone line and the staff to support continued offers and sales of the annuity; (3) continuing to market and advertise the product at or above substantially the same annual advertising expense levels as of the date of this Agreement, and (4) maintaining inventories of marketing materials and prospectuses and related materials to enable Sponsor to process inquiries regarding the annuity. (d) (1) If the Company or any of its affiliated U.S. companies (i) offers a proprietary variable annuity contract by Direct Marketing, or (ii) acquires a company that offers a proprietary variable annuity contract by Direct Marketing and such contract constitutes more than 10% of the acquired company's annual net income or has been sold for less than two years prior to the date of the acquisition; or (2) Sponsor breaches Section 1.5(b) of this Agreement, then the Parties will meet within ninety (90) days after the offering or completion of the acquisition in order to renegotiate in good faith the pricing structure and terms and conditions of this Agreement. If the parties are unable to reach a mutual agreement within 4 ninety (90) days after the commencement of such negotiations, then the nonbreaching party may terminate this Agreement as of the end of such second ninety (90) day period. If the Agreement is not terminated as provided herein it shall continue until otherwise terminated according to its provisions. If termination of this Agreement occurs because of a breach of section 1.5(d)(1)(i) by the Company, Company shall pay Sponsor, as liquidated damages for such breach and termination, the sum of Two hundred fifty thousand Dollars ($250,000) as full and complete satisfaction of any and all losses, damages or claims due to such breach and termination. Liquidated damages as provided in this section shall not apply to any other breach or reason for termination under this Agreement. 1.6 (a) Sponsor and Company agree that the Contracts shall be sold principally through Direct Marketing methods and that no employee, agent or representative of Sponsor or Consultant (collectively, "Representatives") shall engage in any solicitation activities regarding the Contracts, unless duly licensed and appointed as an insurance agent of the Company pursuant to procedures formulated by Company and agreed to by Sponsor. Neither Sponsor nor any such Representatives will be paid any commission or other compensation based upon the volumes of sales of the Contracts. Company will be responsible for promptly processing any applicable licensing and appointment forms. Company agrees to provide licensing advice and assistance to Sponsor and the Representatives, including ongoing advice as to licensing requirements and access to Company personnel knowledgeable in licensing procedures. Company further agrees to provide ongoing training to Sponsor regarding its efforts to market the Contracts and to provide such ongoing assistance as Sponsor may reasonably require. The Parties will be responsible for licensing and appointment fees as set forth in the August 12, 1997 letter agreement between the Parties, which agreement should be read to include First Providian as a party and is hereby incorporated by reference. (b) Recognizing Company's obligation to provide for proper administration of the Contracts and consistent with obligations of the parties set forth in the September 1997 Administrative Services Agreement among Providian, First Providian and Sponsor, Sponsor is 5 hereby additionally authorized and responsible, at its own expense, to deliver to each Contract purchaser ("Owner") current prospectuses for the Contract and the Fund as required by law and, at initial purchase, the appropriate form of the Contract. (c) Sponsor may not delegate to any third party all or part of the services to be performed by it hereunder except with Company's written consent which shall not be unreasonably withheld. 1.7 The Company and Sponsor agree to add a stable value fund, or similar fund, at Sponsor's discretion should Sponsor deem such a fund necessary. The terms and conditions of such offering shall be mutually beneficial to the Company, Sponsor and the contract purchasers. The Parties shall negotiate in good faith to reach agreement as to the required terms and conditions. 1.8 Sponsor has no authority as the Company's agent to, and shall not (a) make any promise or incur any debt on behalf of Company; (b) hold itself out as an employee of Company; (c) misrepresent, add, alter, waive, discharge, or omit any material provision(s) of the Contracts or the then current prospectuses for the Contracts or the Fund or confirmation statements or any other Company materials; (d) recommend an exchange of any Contract for another deferred annuity Contract except as permitted under Section 9 (pertaining to termination); (e) pay or allow to be paid to any Owner or potential purchaser any rebate or other inducement not specified in the Contracts; (f) give or offer to give, on Company's behalf, any specific advice or opinion regarding any specific tax result for any individual or entity in connection with the purchase of any Contract (although Sponsor may appropriately explain general principles of taxation and the Company's obligations to report certain transactions to taxing authorities); or (g) take any other action beyond the scope of the authority granted under this Agreement. 1.9 Except as required by law, Sponsor and Company each agree that all information communicated to it by the other, including, without limitation, the names and addresses of Owners (which are acknowledged to be a valuable trade asset developed and owned by 6 Sponsor), shall be received in strict confidence, shall be used by the recipient Party only for the purposes of this Agreement and that no such information shall be disclosed by the recipient Party, its agent or employees without the prior written consent of the other Party. 1.10 Except with the written permission of Sponsor, Company shall not engage in any sales or solicitation activity to customers of Sponsor except as part of a solicitation to the general public; provided that, after the termination hereof, Company shall engage in such communications with Owners only as may be required by law as determined in Company's reasonable discretion or otherwise as mutually agreed to in writing by Company and Sponsor. Use by the Company of a list of Sponsor's customers or Owners to make a solicitation to the general public shall constitute a violation of this Section 1.10. 1.11 To the extent required by law, including the administrative requirements of regulatory authorities, Company reserves the right to modify any of the Contracts in any respect whatsoever, or to suspend the sale of any of the Contracts, in whole or in part. Company agrees to notify Sponsor promptly in writing upon the occurrence of any event Company believes might necessitate a material modification or suspension. During the term of this Agreement, Company agrees not to modify materially the Contracts without Sponsor's written consent, which shall not be unreasonably withheld. 1.12 The Company shall not assign or transfer by any method, including, without limitation, reinsurance and assumption or otherwise, any of its rights and duties arising under this Agreement or with respect to any of the Contracts without the prior written consent of Sponsor. Reinsurance ceded by the Company to its affiliated insurance companies in respect of the Contracts (excluding assumption reinsurance) shall not require the consent of Sponsor. 1.13 Company agrees that if the ratings of any outside reinsurer, if any, decrease below Standard & Poor's AA or its equivalent, then Company shall reshop such reinsurance to obtain reinsurance with a company with ratings at least equal to the ratings before the decrease. Company also agrees to provide Sponsor with copies of any and all reinsurance treaties which affect the Contracts. 7 1.14 Company and Sponsor agree that, except to the extent prohibited by contract or policy provisions, existing and new Owners shall be treated substantially similarly. 1.15 Sponsor agrees that Sponsor and its Representatives will be bound by the Ethics Code (attached as Exhibit A), as amended from time to time. Company is responsible for providing Sponsor any such amendments. 1.16 The Company or its designee have the right under this Agreement to conduct at least annually a market conduct review of all of Vanguard's activities with respect to the Contracts 2. Sales of Fund Shares -------------------- 2.1 Fund shares shall be sold by the respective portfolios of Fund and purchased by Company for the appropriate sub-account at the net asset value next computed after receipt by Fund or its designee of each order of the Accounts or its designee, in accordance with the provisions of this Agreement and of the then current prospectuses of the Fund and the Contracts. Company may purchase Fund shares for its own account subject to (a) receipt of prior written approval by Sponsor; and (b) such purchases being in accordance with the then current prospectuses of the Fund and the Contracts. For purposes of this Section and Section 1.6, each Owner shall be a designee of the Accounts for placing such orders, to the extent that such Owner's orders are consistent with the provisions of the applicable Contract, and Sponsor shall be designee of Fund for receipt of such orders. Orders or payments for shares purchased will be sent promptly to Fund and will be made payable in the manner established from time to time by Fund for the receipt of such payments. Fund reserves the right to delay transfer of its shares until the payment check has cleared the depository account. 2.2 Fund will redeem the shares when requested on behalf of the corresponding subdivision of the Accounts at the net asset value next computed after receipt of each request for redemption, as established in accordance with the provisions of the then current prospectuses of the Fund and the Contracts. Fund will make payment in the manner established from time to time by Fund for the receipt of such redemption requests, but in no 8 event shall payment be delayed for a greater period than permitted by the Investment Company Act of 1940 (the "1940 Act"). The Board of Trustees of Fund ("Trustees") may refuse to sell shares of any particular portfolio of Fund ("Portfolio") to any person, or suspend or terminate the offering of shares of any particular Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is determined by the Trustees, in their reasonable business judgment exercised in compliance with all applicable laws or regulations, to be in the best interests of the Owners. 2.3 Company agrees to purchase and redeem the shares of each Portfolio in accordance with the provisions of this Agreement, of the Contracts and of the then current prospectuses for the Contracts and Fund. Except as necessary to implement Owner initiated transactions, or as required by state and/or federal laws or regulations, Company shall not redeem Fund shares attributable to the Contracts. Company agrees that all net amounts available under the Contracts shall be invested exclusively in Fund shares during the term of this Agreement. 2.4 Issuance and transfer of Fund shares will be by book entry only. Stock certificates will not be issued to the Company or the Accounts. Shares ordered from Fund will be recorded in appropriate book entry titles for the Accounts. 2.5 Fund shall furnish prompt notice followed by written confirmation to Company or its delegates of any income, dividends or capital gains distributions payable on the Fund's shares. Company hereby elects to receive all such dividends and distributions as are payable on shares of a Portfolio in additional shares of that Portfolio, provided that Company continues to receive in cash any mortality and expense charges which are due to Company. Fund shall notify Company or its delegate of the number of shares so issued as payment of such dividends and distributions. 2.6 With respect to the "free look" period, Company agrees to direct investment into all subaccounts during that period as provided for in the policy form approved by each state. With respect to contracts redeemed during this period in states whose regulations require return of premium, Sponsor shall refund to Contract holders the premium paid unless otherwise 9 required by state law or the policy approved in that state and any resulting gain or loss on such premiums during this free look period shall be borne by Company. For states which allow return of accumulated value, Sponsor shall refund to Contract holders the accumulated value, unless otherwise required by the policy. Accumulated Value shall mean the value of all amounts accumulated under the Contract prior to the Annuity Date, equivalent to the Accumulation Units multiplied by the Accumulation Unit Value. This is analogous to the current market value of a mutual fund account. 3. Proxy Solicitations and Voting ------------------------------ 3.1 Sponsor shall solicit proxies relative to each Portfolio and tabulate voting instructions from Owners, in compliance with all applicable laws and regulations. 3.2 Company shall vote: (a) Fund shares owned by Company; and (b) Fund shares for which no instructions have been received from Owners as certified in writing by Sponsor, in the same proportion as Fund shares of the Portfolio for which instructions have been received. 4. Representations and Warranties ------------------------------ 4.1 Company represents and warrants that it is an insurance company duly organized and in good standing under applicable law and that it has legally and validly established the Accounts prior to any issuance or sale thereof as segregated asset accounts under applicable state law and that it has and will maintain the capacity to issue all Contracts that may be sold; and that it is properly licensed, qualified and in good standing to sell the Contracts in all 50 states and the District of Columbia. 4.2 Company represents and warrants that the Contracts are registered under the Securities Act of 1933 (the "1933 Act"). 4.3 Company represents and warrants that it has registered the Accounts as unit investment trusts in accordance with the provisions of the 1940 Act to serve as segregated investment accounts for the Contracts. 4.4 Company represents that the Contracts are currently treated as annuity contracts under applicable provisions of the Internal Revenue Code of 1986, as amended ("Code"), and 10 under the Insurance Laws of the fifty states and the District of Columbia, and that it will maintain such treatment and that it will notify Sponsor and Fund promptly upon having reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 4.5 Sponsor and Fund represent and warrant that the Fund is lawfully established and validly existing under the laws of the state of Pennsylvania and that Fund complies and will continue to comply in all material respects with the 1940 Act. 4.6 Sponsor and Fund represent and warrant that Fund shares sold pursuant to this Agreement are registered under the 1933 Act and duly authorized for issuance; that Fund will sell such shares in compliance with all applicable federal and state laws; and that Fund is and will remain registered under the 1940 Act. Fund shall register and qualify the shares for sale in accordance with the securities laws of the various states only if and to the extent deemed advisable by Fund. 4.7 Sponsor and Fund represent and warrant that Fund will invest money from the Contracts in such a manner as to ensure that the Contracts will be treated as variable annuity contracts under the Code and the regulations issued thereunder, and that Fund will comply with Section 817(h) of the Code as amended from time to time and with all applicable regulations promulgated thereunder. Fund agrees to provide Company a statement of each Portfolio's assets within 14 days after the end of each calendar quarter and to provide to Company a copy of Fund's procedures for complying with such diversification requirements upon reasonable request. 4.8 Sponsor and Fund represent and warrant that each Portfolio of the Fund will qualify as a Regulated Investment Company under Subchapter M of the Code, and that such Portfolio will maintain such qualification (under Subchapter M or any successor or similar provision) and that it will promptly notify Company upon having any reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 11 4.9 Sponsor and Fund represent that Fund's investment policies, fees and expenses are in compliance with the investment restrictions of applicable state law for separate accounts of domestic insurers and with any other applicable state insurance laws of which Company has made it aware in writing at the date hereof. Company shall promptly notify Sponsor and Fund in writing of subsequent changes in such investment restrictions, including any communications received by the Company from the insurance department of the state of domicile, and upon receipt of such notice, Sponsor and Fund shall bring the Fund into compliance therewith at the earliest time practicable under the circumstances. 4.10 Sponsor represents and warrants that Consultant is and will remain a member in good standing of the National Association of Securities Dealers, Inc. ("NASD") and is and will be registered as a broker-dealer with the SEC. Subject to the Parties' mutual agreement under Section 1.6(a), to the extent applicable, Sponsor further represents that it will advertise, sell and distribute Fund shares and the Contracts in accordance with all applicable state and federal laws, including without limitation, the 1933 Act, the Securities Exchange Act of 1934 (the "1934 Act") and the 1940 Act. 4.11 Sponsor represents and warrants that it and Consultant are and will remain duly registered in all material respects under all applicable federal and state securities laws and shall perform their obligations hereunder in compliance in all material respects with any applicable state and federal laws. 4.12 Sponsor and Fund represent and warrant that all of their directors, officers, employees, investment advisers, and other individuals/entities dealing with the money and/or securities of Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of Fund in an amount not less than the amount required by the applicable rules of the NASD and the federal securities laws. The aforesaid bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 12 4.13 Company represents and warrants that all of its directors, officers, employees, investment advisers, and other individuals/entities dealing with the money and/or securities of Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of Fund, in an amount not less than the amount required by the applicable rules of the NASD and the federal securities laws. The aforesaid bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 4.14 Company represents and warrants that its reserve calculation will be based on records established and maintained by Sponsor and will comply with relevant actuarial guidelines and standards of practice in the industry. 4.15 Company and Sponsor represent and warrant that they currently are engaged in projects to ensure that operations and performance shall continue without interruption before, during and after January 1, 2000. The Parties shall provide to each other more specific information concerning these plans at a mutually agreed upon schedule, but no later than June 30, 1998. 5. Sales Material and Information ------------------------------ 5.1 Company shall file the Contracts in all jurisdictions in which it is licensed (the "States") and use its best efforts to secure approval for sale of the Contracts in the States, and Company further agrees to maintain such approvals. 5.2 All sales material prepared by Sponsor will be filed by Company with the appropriate state regulatory authorities as required in the States and Company will use its best efforts to effect prompt review of such material in the States and to provide Sponsor with such assistance as Sponsor may reasonably require in order to develop sales literature in compliance with the laws and regulations of the States. Sponsor shall be responsible for filing all such material in compliance with the Federal securities laws and the rules of the NASD. 5.3 Company shall promptly inform Sponsor as to the status of all such sales literature filings and shall promptly notify Sponsor of all approvals or disapprovals of sales literature filings in the States. Company will promptly provide Sponsor with copies of all 13 correspondence relating to the Contracts with Owners, regulatory authorities or any other person and will promptly advise Sponsor of the substance of any telephone conversations or meetings with such persons relating to the Contracts. Sponsor shall promptly provide Company with copies of correspondence and reports of inquiries, meetings and discussions concerning regulation of the Contracts and Owner complaints respecting the Contracts. 5.4 Sponsor shall furnish to Company each piece of sales literature or other promotional material in which Company is named at the earliest practical stage of its development. Company commits to comment, approve or disapprove of all proposed advertising within four (4) business days of being requested to do so by Sponsor. All Parties agree to cooperate with the others to facilitate each other's ongoing efforts to comply with all applicable laws and regulations. 5.5 Except with Company's consent, Fund and Sponsor shall not give any information or make any representations on behalf of Company or concerning Company, the Accounts, or the Contracts other than the information or representations contained in: (a) a registration statement or prospectus for the Contracts, as amended or supplemented from time to time; (b) published reports for the Accounts which are in the public domain or approved by Company for distribution to Contract Owners; or (c ) sales literature or other promotional material approved by Company. 5.6 No Party shall use any other Party's names, logos, trademarks or service marks, whether registered or unregistered, without the prior consent of such Party. Sponsor owns and possesses all right, title and interest in and to the name "Vanguard Variable Annuity Plan" and any trademarks or tradenames associated therewith. 5.7 Fund or Sponsor will provide to Company at least one complete copy of all registration statements, prospectuses, Statements of Additional Information, reports, solicitations for voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to the above, that relate to Fund or its shares, (a) in draft form prior to the filing of such document with the 14 SEC or other regulatory authorities with reasonable time allowed for Company to provide Fund with its comments and (b) in final form as filed. 5.8 Company will provide to Sponsor and Fund at least one complete copy of all registration statements, prospectuses, Statements of Additional Information, reports, solicitations for voting instructions, sales literature, reports, solicitations for voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no-action letters and all amendments to any of the above, that relate to the Contracts or the Accounts, (a) in draft form prior to the filing of such document with the SEC with reasonable time allowed for Sponsor to provide Company with its comments and (b) in final form as filed. If requested by Sponsor in lieu thereof, Company shall provide such documentation (including a final copy of the new prospectus as set in type at Sponsor's expense) and other assistance as is reasonably necessary in order for Sponsor once each year (or more frequently if the prospectus for Company is amended) to have the prospectus for the Contracts and Fund's prospectus printed together in one document (such printing to be at Sponsor's expense). In the event of an SEC, NASD or state insurance department audit, both Sponsor and Company agree to cooperate in responding to requests for information and agree to provide such reasonable support as may be necessary without charge. 5.9 For purposes of this Section 5, the phrase "sales literature or other promotional material" includes, but is not limited to, advertisements, sales literature, scripts, educational or training materials or other communications. 5.10 Company will calculate appropriate reserves for the Contracts. That reserve calculation will be at least as great as required by the state of domicile. 5.11 The Parties agree to review the Contracts during the last calendar quarter of each year for possible changes and will make their personnel reasonably available for this purpose. 6. Fees and Expenses ----------------- 6.1 The mortality and expense risk ("M&E") charges with respect to the Contracts shall be as set forth in the November 26, 1997, letter from Providian and First Providian to Sponsor 15 which is hereby incorporated by reference. In the event the assumptions upon which the M&E charges were based change materially, parties agree to negotiate in good faith to arrive at a mutually acceptable level of M&E charges with respect to the Contracts. Any reduction in the M&E charges referred to in the letter will be lowered at the time a new asset breakpoint is reached. In addition, prior to the filing of each annual post-effective amendment to the registration statements for the Contracts, the parties agree to review the asset amounts and growth trends. If the trend indicates a new breakpoint would be reached in the three months after the date of the post-effective amendment, the M&E will be lowered at the time of the annual post-effective amendment filings.. The administration charges with respect to the Contracts shall be as set forth in Schedule 6.1 attached hereto. 6.2 Fund shall pay no fee or other compensation to Consultant except as permitted under the then current prospectus of Fund. 6.3 Fund or Sponsor shall bear the cost of registration and qualification of Fund's shares; preparation and filing of Fund's prospectus and registration statement, proxy materials and reports; preparation of all other statements and notices relating to Fund, Consultant or Sponsor required by federal or state law; and payment of all applicable fees, including, without limitation, all fees due under Rule 24f-2 relating to Fund; all taxes on the issuance or transfer of Funds; and the expenses for the solicitation and sale of the contracts, including all costs of printing and distributing all copies of advertisements, prospectuses, Statements of Additional Information, proxy materials, and reports to Owners or potential purchasers of the Contracts as required by applicable state and federal law. 6.4 Company shall see to it that the Contracts are registered under the 1933 Act, and that the Accounts are registered as unit investment trusts in accordance with the 1940 Act. Company shall bear the expenses for the costs of preparation and filing of Company's prospectus and registration statement with respect to the Contracts; preparation of all other statements and notices relating to the Accounts or the Contracts required by any federal or state law; payment of all applicable fees, including, without limitation, all fees due under Rule 16 24f-2 relating to the Contracts; all costs of drafting, filing, and obtaining approvals of the Contracts in the various states under applicable insurance laws; filing of annual reports on form N-SAR, and all other costs associated with ongoing compliance with all such laws and its obligations hereunder. 7. Fixed Annuitization Service Charge for Administration ----------------------------------------------------- In connection with any Owner's election under any Contract to receive a fixed annuity payout option, Company agrees to pay to Sponsor for the life of the Contract a fixed annuitization service charge for administration in the form of twelve (12) basis points per year of the amount remaining in the reserves for each such Contract. One-fourth of such payment will be made at the end of each calendar quarter based on the reserves held on such contracts at the end of such quarter. Such fees will not be payable with respect to any Contract for which the payment amount was determined by use of the Contract's guaranteed factor due to current factors being less favorable than such guaranteed factors. 8. Indemnification --------------- 8.1 Indemnification By Company (a) Company agrees to indemnify and hold harmless Fund and each of its directors and officers, Sponsor and each person, if any, who controls Fund within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 8.1) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of Company) or litigation (including legal fees and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, and which: (i) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the Registration Statement or prospectus for the Contracts or contained in the Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein 17 not misleading, provided that this paragraph 8.1(a) shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and conformity with information furnished to Company by or on behalf of Fund or Sponsor for use in the Registration Statement or prospectus for the Contracts or in the Contracts (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (ii) arise out of, or as a result of, statements or misrepresentations or wrongful conduct of Company or persons under its control, with respect to the sale or distribution of the Contracts or Fund shares; or (iii) arise out of any untrue statements or alleged untrue statement of a material fact contained in a Registration Statement, prospectus, or sales literature covering the Fund or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, if such a statement or omission was made in reliance upon information furnished to Fund by or on behalf of Company; or (iv) arise out of , or as a result of, any failure by Company or persons under its control to provide the services and furnish the materials under the terms of this Agreement; or (v) arise out of, or result from, any material breach of any representation and/or warranty made by Company or persons under its control in this Agreement or arise out of or result from any other material breach of this Agreement by Company or persons under its control, as limited by and in accordance with the provisions of sections 8.1(b) and 8.1(c ) hereof. (b) Company shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation to which Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason 18 of such Indemnified Party's reckless disregard of obligations or duties under this Agreement or to Fund, whichever is applicable, or to the extent of such Indemnified Party's negligence. (c ) Company shall not be liable under this Indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified Company in writing within a reasonable time after the summons or after first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify Company of any such claim shall not relieve Company from any liability which it may have to the Indemnified Party otherwise than on account of this Indemnification provision. In case any such action is brought against the Indemnified Parties, Company shall be entitled to participate, at its own expense, in the defense of such action. Company also shall be entitled to assume and to control the defense thereof. After notice from Company to such Indemnified Party of Company's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and Company will not be liable to such Indemnified Party under this Agreement for any legal fees or other expenses subsequently incurred by such Indemnified Party independently in connection with the defense thereof other than reasonable costs of investigation. (d) The Indemnified Parties will promptly notify Company of the commencement of any litigation or proceedings against them in connection with the issuance or sale of Fund shares or the Contracts or the operation of the Fund. 8.2 Indemnification by Sponsor (a) Sponsor agrees to indemnify and hold harmless Company and each of its directors and officers and each person, if any, who controls Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 8.2) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of Sponsor) or litigation (including legal fees and other 19 expenses) to which the Indemnified Parties may become subject under any statute, at common law or otherwise, and which: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or prospectus or sales literature of Fund (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this Section 8.2(a) shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to Sponsor or Fund by or on behalf of Company for use in the Registration Statement or prospectus for Fund or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (ii) arise out of, or as a result of, statements or representations or wrongful conduct of Fund or Sponsor or persons under their control, with respect to the sale or distribution of the Contracts or Fund shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement, prospectus, or sales literature covering the Contracts, or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, if such statement or omission was made in reliance upon information furnished to Company by or on behalf of Fund, or Sponsor; or (iv) arise out of, or as a result of, any failure by Fund or Sponsor or persons under their control to provide the services and furnish the materials under the terms of this Agreement; or (v) arise out of or result from any material breach of any representation and/or warranty made by Fund, Sponsor or persons under their control in this Agreement or 20 arise out of or result from any other material breach of this Agreement by Fund, Sponsor or persons under their control; (vi) arise out of Sponsor's performance, nonperformance or breach of Sponsor's duties under Section 1.6(b) of this Agreement, except to the extent that such losses, claims, damages, liabilities or litigation is caused by Sponsor's compliance with Company's written interpretations of state insurance laws or regulations; as limited by and in accordance with the provisions of Sections 8.2(b) and 8.2(c) hereof. (b) Sponsor shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to Company or the Accounts, whichever is applicable, or to the extent of such Indemnified Party's negligence. (c ) Sponsor shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified Sponsor in writing within a reasonable time after the summons or other first legal process giving information on the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify Sponsor of any such claim shall not relieve Sponsor from any liability which it may have to the Indemnified Party otherwise than on account of this Indemnification provision. In case any such action is brought against the Indemnified Parties, Sponsor will be entitled to participate, at its own expense, in the defense thereof. Sponsor also shall be entitled to assume and to control the defense thereof. After notice from Sponsor to such Indemnified Party of Sponsor's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and Sponsor will not be liable to such Indemnified Party under this Agreement 21 for any legal fees or other expenses subsequently incurred by such Indemnified Party independently in connection with the defense thereof other than reasonable costs of investigation. (d) The Indemnified Parties will promptly notify Sponsor of the commencement of any litigation or proceedings against them in connection with the issuance or sale of the Contracts or the operation of the Accounts. 9. Potential Conflicts ------------------- 9.1 The Trustees of the Fund will monitor the Fund for the existence of any material irreconcilable conflict between the interests of the contract owners of all separate accounts investing in the Fund. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c ) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; or (f) a decision by an insurer to disregard the voting instructions of contract owners. The Trustees shall inform the Company promptly and in writing if they determine that an irreconcilable material conflict exists and the implications thereof. 9.2 The Company will report any potential or existing conflicts of which it is aware to the Trustees. The Company will assist the Trustees in carrying out their responsibilities under the mixed and shared funding exemptive order received by the Fund (Investment Company Act Release Nos. 21526 (Notice) and 21611 (Order), November 20, 1995 and December 19, 1995, respectively), by providing the Trustees with all information reasonably necessary for the Trustees to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Trustees whenever contract owner voting instructions are disregarded. 22 9.3 If it is determined by a majority of the Trustees, or a majority of the disinterested trustees ("Disinterested Trustees"), that a material irreconcilable conflict exists, the Company and other participating insurance companies ("Participating Insurance Companies") shall, at their expense, take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (a) withdrawing the assets allocable to some or all of the separate accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Fund, or submitting the question whether such segregation should be implemented to a vote of all affected contract owners and, as appropriate, segregating the assets of any appropriate group (i.e., annuity ---- contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected contract owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. 9.4 If a material irreconcilable conflict arises because of a decision by the Company to disregard contract owner voting instructions and that decision represents a minority position or would preclude a majority, the Company may be required, at the Fund's election, to withdraw an Account's investment in the Fund and no charge or penalty will be imposed against the separate account as a result of such a withdrawal. Any such withdrawal must take place within six (6) months after the Fund gives notice that this provision is being implemented, and until the end of that six-month period the Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 9.5 If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the Accounts' investment in the Fund within six months after the Trustees inform the Company that they have determined that such decision has created an irreconcilable material conflict, and until the end of the six-month period the 23 Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 9.6 For purposes of Section 9.3 of this Agreement, a majority of the Disinterested Trustees shall determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 9.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract owners materially adversely affected by the irreconcilable material conflict. 10. Term and Termination -------------------- 10.1 The initial term of this Agreement shall be for a term of five years, commencing on June 22, 1998. This Agreement shall thereafter automatically renew from year to year, provided that, during such renewal periods, either Company or Sponsor may terminate this Agreement without cause upon six months' advance written notice to the other. 10.2 Notwithstanding any other provision of this Agreement, Sponsor or the Fund, without payment of any amount, may terminate this Agreement for cause on not less than thirty (30) days' prior written notice to the Company, unless Company has cured such cause within 30 days of receiving such notice, for any one of the following reasons: (a) Material breach by Company of any representation, warranty, covenant or obligation hereunder or under the Contracts. (b) Change in control of Company or Company's ultimate controlling person. For purposes of this Section 10.2, control and changes in control shall be determined in accordance with applicable state insurance law (Missouri Insurance Holding Company System Act, Title XXIV, Chap. 382, MO. Ins. Code; NY Insurance Law Ch. 28, Sec. 1501). Company will provide Sponsor, as soon as practicable, with notice of any proposed merger or other corporate reorganization involving Company. Sponsor agrees that it will not object to the assumption by AUSA Life during 1998 or 1999 of First Providian's rights and obligations under this agreement upon merger of First Providian into AUSA Life. 24 (c) A material change in, or other material revision to the Contracts not previously accepted in writing by Sponsor. (d) Any action taken by federal or state regulatory authorities of competent jurisdiction which, in Sponsor or Fund's reasonable judgment, either (i) materially and adversely alters the terms, advantages and/or benefits of the Contracts to current or prospective purchasers; or (ii) materially and adversely alters the terms or conditions of Sponsor's and/or Funds' participation in the subject matter of this Agreement. (e) Any material suspension or withdrawal, or any revision downward of the Company's published claims paying ratings to "A+" or lower by Standard & Poor's, or to "A" or lower by Duff & Phelps, or to "A" or lower by - ------------------ ------------- Best's Insurance Reports, "A-" or lower by Best's Insurance Reports for First - ------------------------ Providian and, subsequent to the merger, AUSA Life. (f) Commencement of delinquency proceedings by or against Company including, but not limited to, application for, or entry of, an order of supervision, suspension, rehabilitation, receivership, liquidation or reorganization in respect of Company. At any time after Sponsor has given notice of termination for cause, Sponsor without prejudice to Company's rights or remedies, may take such otherwise lawful steps as it deems necessary or appropriate to protect the interests of Owners, including ceasing to offer Contracts and/or additional Contract investments and advising Owners of such notice of termination and of their rights and alternatives. Following the effective date of such termination notice (if the cause for such has not been cured), Sponsor may offer the Owners different variable annuity contracts in exchange for Contracts. 10.3 Notwithstanding any other provision of this Agreement, Company may terminate this Agreement for cause on not less than thirty (30) days' prior written notice to Fund and Sponsor, unless Fund or Sponsor has cured such cause within thirty (30) days of receiving such notice, for any one of the following reasons: 25 (a) Material breach by Fund or Sponsor of any representation, warranty, covenant or obligation hereunder. (b) Any action taken by federal or state regulatory authorities of competent jurisdiction which, in Company's reasonable judgment, either (i) materially and adversely alters the terms, advantages and/or benefits of the Contracts to current or prospective purchasers; or (ii) materially and adversely alters the terms or conditions of Company's participation in the subject matter of this Agreement. 10.4 Notwithstanding the termination of this Agreement, each Party shall continue for so long as any Contracts remain outstanding to perform such of its duties hereunder as are necessary to ensure the continued tax deferred status thereof and the payment of benefits thereunder. 11. Notices ------- 11.1 Any notice shall be deemed sufficiently given when sent by registered or certified mail to the other Party at the address of such Party set forth below or at such other address as such Party may from time to time specify in writing to the other Party. If to Fund or Sponsor: Ellen Rinaldi The Vanguard Group, Inc. P.O. Box 2600 Valley Forge, PA 19482 with a copy to: R. Gregory Barton The Vanguard Group, Inc. P.O. Box 2600 Valley Forge, PA 19482 If to Company: Sarah J. Strange Financial Markets Division Providian Life & Health Insurance Company 400 West Market Street Louisville, KY 40232 26 With a copy to: Frank A. Camp General Counsel Financial Markets Division Providian Life & Health Insurance Company 4333 Edgewood Road, N.E. Cedar Rapids, IA 52499 12. Miscellaneous ------------- 12.1 The captions in this Agreement are included for convenience of reference only and in no way affect the construction or effect of any provisions hereof. 12.2 If any portion of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 12.3 Each Party shall cooperate with each other Party and all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement. Company shall promptly provide Sponsor, and Sponsor shall promptly provide Company, a copy of any substantive communications received from all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) relating to the subject matter of this Agreement. 12.4 Each Party hereto grants to the other the right to audit its records relating to the terms and conditions of this Agreement upon reasonable notice during reasonable business hours in order to confirm compliance with this Agreement. 12.5 The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the Parties hereto are entitled to under state and federal laws. 12.6 The terms of this Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of Pennsylvania; provided, however, that all 27 performances rendered hereunder shall be subject to compliance with all applicable state and federal laws and regulations. 12.7 During the term of this Agreement, Company shall promptly provide Sponsor with copies of Company's annual and quarterly financial statements, as published, to include both those prepared using statutory accounting principles and the requisite NAIC convention blank forms, and also those prepared on the basis of generally accepted accounting principles. 12.8 Sections 1.6(b), 1.8, 1.9, 1.11, 5.6, 7, 8, and 9.5 hereof shall survive termination of this Agreement. 12.9 Sponsor agrees that, during the term of this Agreement and for a period of one year following termination of this Agreement, neither it nor any of its affiliates will, directly or indirectly, solicit for employment or hire any employee of the Company or any of its affiliates engaged in the development, distribution or administration of the Contracts. Company agrees that during the term of this Agreement, and for a period of one year following termination of this Agreement, neither it nor any of its affiliates will, directly or indirectly, solicit for employment or hire any employee of the Sponsor or any of its affiliates engaged in the development, distribution or administration of the Contracts. 12.10 The "Work Product" shall be the sole and exclusive property of Sponsor and all rights, title and interest therein shall vest in Sponsor; provided that Company may disclose Work Product if required by law, regulation, subpoena, court order or other lawful authority. For purpose of this Section 12.10, Work Product means all concepts, designs, files, reports, programs, manuals, listings, databases and any other material developed or prepared, whether in hard copy or electronic media, by Company for Sponsor which is unique to Sponsor or Fund, and which is the subject of prior notice by Sponsor to Company that Sponsor considers the material to be Work Product, but does not include any such material if it applies, or may be applied, generally to variable annuities (such as, among other things, insurance features, separate account charges, annuitization options, software programs). Sponsor shall have the right to obtain from Company and to hold in its own name copyrights, trademark registrations, 28 patents or whatever protection Sponsor may deem appropriate for the Work Product. Company agrees to give Sponsor, at Sponsor's expense, all assistance reasonably required to protect the rights set forth in this Section 12.10. The Parties intend the Work Product to be deemed "works made for hire" as defined in the United States Copyright Act. In the event and to the extent that they are deemed not to constitute works made for hire, Company assigns to Sponsor the copyright to the Work Product in perpetuity. 12.11 This Agreement, including all reference to exhibits hereto, constitutes the entire agreement between the Parties on this subject matter and may not be modified or amended except in a writing signed by both Parties; all prior agreements, representations, statements, negotiations and understandings between the Parties are superseded hereby, except for those attached as exhibits hereto. 12.12 In the event that any dispute, controversy or claim arising out of this Agreement cannot be resolved in the normal course of discussion between the Parties, then within ten (10) days of request by either Party, the issue will be submitted to a committee comprised of representatives of Sponsor's Legal and Corporate Planning Departments and Company. If agreement cannot be reached by such committee within ten (10) days thereafter, the dispute shall be settled by arbitration in accordance with the rules then in effect of the American Arbitration Association. The arbitration shall be held in the City of Philadelphia, Commonwealth of Pennsylvania, unless Company and Sponsor agree to hold the arbitration in a different location. Any judgment upon the award rendered may be entered in any court having jurisdiction and shall be final and unappealable. Without limiting the foregoing, Company consents to the jurisdiction of the Court of Common Pleas of Philadelphia County and the United States District Court for the Eastern District of Pennsylvania if arbitration is unavailable for any reason. Company and Sponsor also consent to service of process by first class mail. 12.13 Company may not sell the block of business relating hereto without Sponsor's consent. 29 12.14 In the event that Company or Sponsor come under investigation by regulatory authorities for fraud, illegal activities or improper market conduct which allegedly misled Owners, then the other Party may communicate with Owners in order to advise them of their options with respect to the Contracts. 12.15 On an annual basis, the Parties agree to meet to discuss the levels of service being provided hereunder, specifically the levels of responsiveness and assistance. If Sponsor is not satisfied with the service provided by Louisville, then Sponsor may, in its discretion, move the service to Cedar Rapids. 30 IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to be duly executed as of the date first set forth above. COMPANY: PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY By:/s/ Larry N. Norman ---------------------- Title: Vice President -------------- FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY By: /s/ Larry N. Norman ---------------------- Title: Vice President -------------- Fund: VANGUARD VARIABLE INSURANCE FUND, INC. By: /s/ Raymond J. Klapinsky -------------------------- Title: Secretary --------- Sponsor: THE VANGUARD GROUP, INC. By: /s/ John E. Barth ----------------- Title: Principal --------- 31 Schedule 6.1 SCHEDULE OF ADMINISTRATIVE CHARGES ---------------------------------- Vanguard Variable Annuity Plan - Deferred and Annuitized Contracts - ------------------------------------------------------------------ Administrative Charge Payable to Sponsor An annual administrative charge shall be assessed daily equal to .10% of the net asset value of the Company's Separate Accounts IV and B. Additionally, a $25.00 Contract charge, payable to Sponsor, shall be assessed on all Contracts under $25,000. 32 Exhibit A ETHICS CODE Providian Life and Health Insurance Company and First Providian Life and Health Insurance Company (together, "Company") have committed to the Principles of Ethical Market Conduct and Code of Life Insurance Ethical Market Conduct developed by the American Council of Life Insurance and endorsed by its Board of Directors. As part of the implementation of those principles and code, Company requires that registered representatives ("RR") and registered principals ("RP") of Vanguard Marketing Corporation, who are involved in the sale of the Vanguard Variable Annuity Plan (the "Plan"), adopt, abide by and enforce the following Ethics Code: 1. RR will conduct business according to high standards of honesty and fairness and render that service to his or here customers which, in the same circumstances, he or she would apply to or demand for himself or herself. To conduct its business according to high standards of honesty and fairness, RR will: A. Make reasonable efforts to determine the insurable needs or financial objectives of his or her customers based upon relevant information obtained from the customer and enter into transactions which assist the customer in meeting his or her insurable needs or financial objectives. B. Maintain compliance with applicable laws and regulations. C. In cooperation with consumers, regulators and others, affirmatively seek to improve the practices for sales and marketing of the Plan. D. Reflect this Code of Ethics in everyday practices. 2. RR will provide competent and customer-focused sales and service. To provide for competent sales and service of the Plan, RR will make certain that: A. He or she is of good character and business repute, and have appropriate qualifications and experience. B. He or she is duly licensed or otherwise qualified under state law. C. He or she has adequately trained to focus on customers' needs and objectives. D. He or she has adequate knowledge of the Plan and its operation. E. He or she is trained in the need to comply with applicable insurance laws and regulations and the concepts in this Code of Ethics. F. He or she participates in continuing education. 3. RR will engage in active and fair competition. To maintain and enhance competition in the marketplace, RR will: A. Maintain compliance with applicable state and federal laws fostering fair competition. B. Not replace existing life insurance policies and annuity contracts without first communicating to the customer, in a manner consistent with Ethics Principle 4 below, information that he or she needs in order to ascertain whether such replacement of existing policies or contracts may or may not be in his or her best interest. C. Refrain from disparaging competitors. 4. RR will provide advertising and sales materials that comply with this Agreement and that are clear as to purpose and honest and fair as to content. To comply with this principle, RR will make certain that: A. Presentation of any material designed to lead to sales or solicitation of annuity PLANS is done in a manner consistent with the best interests of the customer. All such sales or solicitation communications should be based upon the principles of fair dealing and good faith, and will have a sound basis in fact. B. Materials presented as part of a sale are comprehensible in light of the complexity of the Plan. C. He or she maintains compliance with applicable laws and regulations related to advertising, unfair trade practices, sales illustrations and other similar provisions. D. Illustrations of premiums and consideration, costs, values and benefits are accurate and fair, and contain appropriate disclosure of amount which are not guaranteed and those which are guaranteed in the policy or contract. 5. RR will provide a means for fair and expeditious handling of customer complaints and disputes. To assist in the resolution of any complaints and disputes that may arise concerning market conduct, RR will: A. Notify his or her RP immediately of any customer complaints. B. Assist in identifying, evaluating and handling complaints in compliance with applicable state law and regulations related to consumer complaint handling. C. Make good faith efforts to resolve complaints and disputes without resorting to civil litigation. 6. The RPs will maintain a system of supervision that is reasonably designed to achieve compliance with this Ethics Code. In so doing, they will: A. Establish and enforce policies and procedures reasonable designed to comply with this Ethics Code. B. Implement an adequate system of supervision of the market activities of RRs in order to monitor their compliance with this Ethics Code and applicable laws and regulations. C. Conduct compliance training sessions. D. Audit and monitor RRs' sales practices. E. Provide each RR with a copy of this Ethics Code. EX-9.(A) 5 OPINION AND CONSENT OF COUNSEL EXHIBIT 9(a) September 28, 1998 AUSA Life Insurance Company, Inc. AEGON Financial Services Group, Inc. 400 West Market Street Louisville, Kentucky 40202 RE: AUSA Life Insurance Company, Inc. Separate Account B-- Opinion and Consent To Whom It May Concern: This opinion and consent is furnished in connection with the filing of the Initial Registration Statement on Form N-4 under the Securities Act of 1933, as amended (the "1933 Act"), and Amendment No. 14 to the Registration Statement on Form N-4 under the Investment Company Act of 1940, as amended (the "1940 Act"), File No. 811-6298 (the "Registration Statement"), of AUSA Life Insurance Company, Inc. Separate Account B (Vanguard) ("Separate Account B"). Separate Account B receives and invests premiums allocated to it under a group flexible premium multi-funded annuity contract, the Vanguard Variable Annuity Plan Contract (the "Annuity Contract"). The Annuity Contract is offered in the manner described in the prospectus contained in the Registration Statement (the "Prospectus"). In my capacity as legal adviser to AUSA Life Insurance Company, Inc. ("AUSA Life"), I hereby confirm the establishment of Separate Account B as a separate account for assets applicable to the Annuity Contract, pursuant to the provisions of Section 4240 of the New York Insurance Statutes. First Providian will be merged with and into AUSA Life on October 1, 1998. In addition, I have made such examination of the law in addition to consultation with outside counsel and have examined such corporate records and such other documents as I consider appropriate as a basis for the opinion hereinafter expressed. On the basis of such examination, it is my professional opinion that: 1. AUSA Life Insurance Company, Inc. is a corporation duly organized and validly existing under the laws of the State of New York. 2. Effective as of October 1, 1998, Separate Account B will be an account maintained by AUSA Life Insurance Company, Inc. pursuant to the laws of the State of New York, under which income, capital gains, and capital losses incurred on the assets of Separate Account B will be credited to or charged against the assets of Separate Account B, without regard to the income, capital gains or capital losses arising out of any other business which AUSA Life Insurance Company, Inc. may conduct. 3. Assets allocated to Separate Account B will be owned by AUSA Life Insurance Company, Inc. The assets in Separate Account B attributable to the Annuity Contract generally will not be chargeable with liabilities arising out of any other business which AUSA Life Insurance Company, Inc. may conduct. Effective as of October 1, 1998, the assets of Separate Account B will be available to cover the general liabilities of AUSA Life Insurance Company, Inc. only to the extent that the assets of Separate Account B exceed the liabilities arising under the Annuity Contracts. 4. The Annuity Contracts will have been duly authorized by AUSA Life Insurance Company, Inc. and, when sold in jurisdictions authorizing such sales, in accordance with the Registration Statement, will constitute validly issued and binding obligations of AUSA Life Insurance Company, Inc. in accordance with their terms. 5. Owners of the Annuity Contracts, as such, will not be subject to any deductions, charges, or assessments imposed by AUSA Life Insurance Company, Inc. other than those provided in the Annuity Contract. I hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to my name under the heading "Legal Matters" in the Prospectus. Very truly yours, /s/ Gregory E. Miller-Breetz - ---------------------------- Gregory E. Miller-Breetz Attorney 2 EX-9.(B) 6 CONSENT OF COUNSEL Exhibit 9(b) September 28, 1998 AUSA Life Insurance Company, Inc. 4333 Edgewood Road, N.E. Cedar Rapids, Iowa 52499 Ladies and Gentlemen: We hereby consent to the reference to our name under the caption "Legal Matters" in the Prospectus contained in the Initial Registration Statement on Form N-4 under the Securities Act of 1933, as amended (the "1933 Act"), and Amendment No.14 to the Registration Statement on Form N-4 under the Investment Company Act of 1940, as amended (the "1940 Act"), File No. 811-6298 (the "Registration Statement"), filed on or around October 1, 1998 by AUSA Life Insurance Company, Inc. and AUSA Life Insurance Company, Inc. Separate Account B (funding the Vanguard Variable Annuity Plan--group contract) with the Securities and Exchange Commission under the 1933 Act and the 1940 Act. Very truly yours, /s/ Jorden Burt Boros Cicchetti Berenson & Johnson LLP JORDEN BURT BOROS CICCHETTI BERENSON & JOHNSON LLP EX-10 7 CONSENT OF INDEPENDENT AUDITORS [LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE] Consent of Independent Auditors We consent to the reference to our firm under the captions "Financial Statements" and "Auditors" and to the use of our report dated April 24, 1998, with respect to the financial statements of First Providian Life and Health Insurance Company Separate Account B and to the use of our report dated October 1, 1998 with respect to the supplemental statutory-basis financial statements of AUSA Life Insurance Company, Inc. in the Registration Statement (Form N-4) for AUSA Life Insurance Company, Inc. Separate Account B and related Prospectus of the Vanguard Variable Annuity Plan Contract for the registration of group variable annuity contracts. /s/ Ernst & Young LLP Des Moines, Iowa October 1, 1998 -----END PRIVACY-ENHANCED MESSAGE-----