485BPOS 1 a14-4631_1485bpos.txt 485BPOS File Nos. 333-81019 811-7767 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Post-Effective Amendment No. 19 REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 63 SEPARATE ACCOUNT KG OF COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (Exact Name of Registrant) COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (Name of Depositor) 132 Turnpike Road, Suite 210 Southborough, Massachusetts 01772 Telephone: (508) 460-2400 (Address of Depositor's Principal Executive Office) Scott D. Silverman, Senior Vice President, General Counsel and Corporate Secretary Commonwealth Annuity and Life Insurance Company 132 Turnpike Road, Suite 210 Southborough, Massachusetts 01772 Telephone: (508) 460-2408 It is proposed that this filing will become effective: [_] immediately upon filing pursuant to paragraph (b) of Rule 485 [X] on May 1, 2014 pursuant to paragraph (b) of Rule 485 [_] 60 days after filing pursuant to paragraph (a) (1) of Rule 485 [_] on (date) pursuant to paragraph (a) (1) of Rule 485 [_] this post-effective amendment designates a new effective date for a previously filed post-effective amendment VARIABLE ANNUITY CONTRACTS Pursuant to Reg. Section 270.24f 2 of the Investment Company Act of 1940 ("1940 Act"), Registrant has registered an indefinite amount of its securities under the Securities Act of 1933 ("1933 Act"). The Rule 24f-2 Notice for the issuer's fiscal year ended December 31, 2013 was filed before March 30, 2014. CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS ------------------------- ------------------------------------------------------------------------------------------- 1 Cover Page 2 Special Terms 3 Summary of Fees and Expenses; Summary of Contract Features 4 Condensed Financial Information; Performance Information 5 Description of the Company, the Variable Account and the Underlying Investment Companies 6 Charges and Deductions 7 Description of the Contract -- The Accumulation Phase 8 Electing the Annuity Date; Description of Annuity Payout Options; Annuity Benefit Payments 9 Death Benefit 10 Payments; Computation of Values; Distribution 11 Surrender and Withdrawals; Surrender Charge; Withdrawal Without Surrender Charge; Texas Optional Retirement Program 12 Federal Tax Considerations 13 Legal Matters 14 Statement of Additional Information - Table of Contents
FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION ------------------------- ------------------------------------------------------------------------------------------- 15 Cover Page 16 Table of Contents 17 General Information and History 18 Services 19 Underwriters 20 Underwriters 21 Performance Information 22 Annuity Benefit Payments 23 Financial Statements
COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY SOUTHBOROUGH, MASSACHUSETTS This Prospectus provides important information about the Scudder Gateway Plus variable annuity contract issued by Commonwealth Annuity and Life Insurance Company ("Commonwealth Annuity") (in all jurisdictions except New York). The contract is a flexible payment tax-deferred combination variable and fixed annuity offered on both a group and individual basis. As of the date of this Prospectus, the Company has ceased issuing new contracts except in connection with certain pre-existing contractual plans and programs. PLEASE READ THIS PROSPECTUS CAREFULLY BEFORE INVESTING AND KEEP IT FOR FUTURE REFERENCE. ANNUITIES INVOLVE RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL. A Statement of Additional Information ("SAI") dated May 1, 2014 containing more information about this annuity is on file with the Securities and Exchange Commission and is incorporated by reference into this Prospectus. A copy may be obtained free of charge by calling Annuity Client Services at 1-800-782-8380. The Table of Contents of the SAI is listed on page 3 of this Prospectus. This Prospectus and the SAI can also be obtained from the Securities and Exchange Commission's website (http://www.sec.gov). Separate Account KG is subdivided into Sub-Accounts. Each Sub-Account offered as an investment option under this contract invests exclusively in shares of one of the following portfolios (certain funds may not be available in all states): AIM VARIABLE INSURANCE FUNDS (INVESCO VARIABLE DWS VARIABLE SERIES II (CLASS A) INSURANCE FUNDS) (SERIES I SHARES) DWS Global Equity VIP Invesco V.I. Managed Volatility Fund DWS Small Mid Cap Value VIP THE ALGER PORTFOLIOS (CLASS I-2) DWS Global Income Builder VIP Alger Balanced Portfolio DWS Global Growth VIP Alger Capital Appreciation Portfolio DWS Government & Agency Securities VIP DWS INVESTMENT VIT FUNDS DWS High Income VIP DWS Equity 500 Index VIP DWS Large Cap Value VIP DWS VARIABLE SERIES I (CLASS A) DWS Money Market VIP DWS Bond VIP DWS Small Mid Cap Growth VIP DWS Capital Growth VIP DWS Unconstrained Income VIP DWS Core Equity VIP GOLDMAN SACHS VARIABLE INSURANCE TRUST (SERVICE DWS Global Small Cap VIP SHARES) DWS International VIP Goldman Sachs VIT Global Markets Navigator Fund
Effective November 15, 2010, no new payment allocations or transfers can be made to the Sub-Accounts that invest in the underlying funds listed below. DREYFUS INVESTMENT PORTFOLIOS Dreyfus IP MidCap Stock Portfolio THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. The Dreyfus Socially Responsible Growth Fund, Inc. You may contact our Service Office at 1-800-782-8380 to request any of the underlying funds that are available as investment options under your Contract. THIS CONTRACT INCLUDES A PAYMENT CREDIT (OR BONUS) ENHANCEMENT FEATURE. EXPENSES FOR THIS CONTRACT MAY BE HIGHER THAN A CONTRACT WITHOUT A PAYMENT CREDIT. OVER TIME, THE AMOUNT OF THE PAYMENT CREDIT MAY BE MORE THAN OFFSET BY THE ADDITIONAL FEES AND CHARGES ASSOCIATED WITH THE PAYMENT CREDIT. YOU SHOULD CONSIDER THIS POSSIBILITY BEFORE PURCHASING THE CONTRACT. THIS ANNUITY IS NOT A BANK DEPOSIT OR OBLIGATION; IS NOT FEDERALLY INSURED; AND IS NOT ENDORSED BY ANY BANK OR GOVERNMENTAL AGENCY. ANNUITIES INVOLVE RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED THAT THE INFORMATION IN THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. In most jurisdictions, values may be allocated to the Fixed Account, which is part of the Company's General Account. The Fixed Account is an investment option that pays an interest rate guaranteed for one year from the time a payment is received. The Guarantee Period Accounts, additional investment options available in most jurisdictions, offers fixed rates of interest for specified periods. A Market Value Adjustment is applied to payments removed from a Guarantee Period Account before the end of the specified period. The Market Value Adjustment may be positive or negative. Payments allocated to a Guarantee Period Account are held in the Company's Separate Account GPA (except in California where they are allocated to the General Account.) DATED MAY 1, 2014
TABLE OF CONTENTS SPECIAL TERMS.......................................................... 4 SUMMARY OF FEES AND EXPENSES........................................... 6 SUMMARY OF CONTRACT FEATURES........................................... 12 DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT AND THE UNDERLYING PORTFOLIOS................................................ 17 INVESTMENT OBJECTIVES AND POLICIES..................................... 19 PERFORMANCE INFORMATION................................................ 23 DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE.................... 25 DISRUPTIVE TRADING................................................... 25 PAYMENTS............................................................. 26 PAYMENT CREDITS...................................................... 27 COMPUTATION OF VALUES................................................ 27 RIGHT TO CANCEL...................................................... 28 TELEPHONE TRANSACTIONS PRIVILEGE..................................... 29 TRANSFER PRIVILEGE................................................... 29 AUTOMATIC TRANSFERS AND AUTOMATIC ACCOUNT REBALANCING OPTION......... 30 SURRENDERS AND WITHDRAWALS........................................... 31 DEATH BENEFIT........................................................ 33 THE SPOUSE OF THE OWNER AS BENEFICIARY............................... 34 OPTIONAL ENHANCED EARNINGS RIDER..................................... 34 ASSIGNMENT........................................................... 35 ANNUITIZATION--THE PAYOUT PHASE........................................ 36 ELECTING THE ANNUITY DATE............................................ 36 CHOOSING THE ANNUITY PAYOUT OPTION................................... 36 DESCRIPTION OF ANNUITY PAYOUT OPTIONS................................ 37 VARIABLE ANNUITY BENEFIT PAYMENTS.................................... 38 TRANSFERS OF ANNUITY UNITS........................................... 39 WITHDRAWALS AFTER THE ANNUITY DATE................................... 40 REVERSAL OF ANNUITIZATION............................................ 43 NORRIS DECISION...................................................... 43 CHARGES AND DEDUCTIONS................................................. 44 VARIABLE ACCOUNT DEDUCTIONS.......................................... 44 CONTRACT FEE......................................................... 45 OPTIONAL RIDER CHARGES............................................... 45 PREMIUM TAXES........................................................ 46 SURRENDER CHARGE..................................................... 46 WAIVER OF SURRENDER CHARGE(S) AND ADDITIONAL AMOUNTS CREDITED........ 50 TRANSFER CHARGE...................................................... 52 WITHDRAWAL ADJUSTMENT CHARGE......................................... 52 GUARANTEE PERIOD ACCOUNTS.............................................. 53 FEDERAL TAX CONSIDERATIONS............................................. 56 STATEMENTS AND REPORTS................................................. 65 ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS...................... 66 CHANGES TO COMPLY WITH LAW AND AMENDMENTS.............................. 67 VOTING RIGHTS.......................................................... 67 DISTRIBUTION........................................................... 67 LEGAL MATTERS.......................................................... 68 FURTHER INFORMATION.................................................... 68
2 APPENDIX A--MORE INFORMATION ABOUT THE FIXED ACCOUNT................. A-1 APPENDIX B--OPTIONAL ENHANCED DEATH BENEFIT RIDERS................... B-1 APPENDIX C--OPTIONAL ENHANCED EARNINGS RIDER......................... C-1 APPENDIX D--SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT........ D-1 APPENDIX E--CONDENSED FINANCIAL INFORMATION.......................... E-1 APPENDIX F--EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS........................................................ F-1 APPENDIX G--DISCONTINUATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER............................................... G-1
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS GENERAL INFORMATION AND HISTORY.......................................... 3 TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY........... 4 SERVICES................................................................. 4 UNDERWRITERS............................................................. 6 ANNUITY BENEFIT PAYMENTS AND ACCUMULATION UNIT CALCULATION............... 7 ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM.............. 8 PERFORMANCE INFORMATION.................................................. 8 TAX-DEFERRED ACCUMULATION................................................ 15 STATE PREMIUM TAX CHART.................................................. 16 FINANCIAL STATEMENTS..................................................... 16 FINANCIAL STATEMENTS OF COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY AND SEPARATE ACCOUNT KG........................................ F-1
3 SPECIAL TERMS ACCUMULATED VALUE: the total dollar amount of all values in the Sub-Accounts, the Fixed Account and the Guarantee Period Accounts credited to the Contract on any day before the Annuity Date. The Accumulated Value includes all Payment Credits applied to the Contract. ACCUMULATION UNIT: a measure used to calculate the value of a Sub-Account before annuity benefit payments begin. ANNUITANT: the person designated in the Contract whose life is used to determine the duration of annuity benefit payments involving a life contingency. Joint Annuitants are permitted and, unless otherwise indicated, any reference to Annuitant shall include Joint Annuitants. ANNUITY BENEFIT PAYMENT CHANGE FREQUENCY: the frequency (monthly, quarterly, semi-annually or annually) that changes due to investment performance will be reflected in the dollar value of an annuity benefit payment under a variable annuity payout option. ANNUITY DATE: the date specified in the Contract or a date elected later by the Owner to begin annuity benefit payments. For Contracts issued by Commonwealth Annuity and Life Insurance Company, this date must be at least two years after the issue date and may not be later than the Owner's (or youngest Joint Owner's) 99th birthday. ANNUITY UNIT: a measure used to calculate annuity benefit payments under a variable payout option. ANNUITY VALUE: the value of the amount applied under an annuity payout option. COMPANY: unless otherwise specified, any reference to the "Company" shall refer exclusively to Commonwealth Annuity and Life Insurance Company. CONTRACT YEAR: a period of twelve consecutive months starting on the Contract's Issue Date or on any anniversary of the Issue Date. CUMULATIVE EARNINGS: the Accumulated Value reduced by total payments not previously withdrawn. FIXED ACCOUNT: an investment option under the Contract that guarantees principal and a fixed minimum interest rate and which is part of the Company's General Account. FIXED ANNUITY PAYOUT: an annuity payout option with annuity benefit payments that are fixed in amount and guaranteed throughout the annuity benefit payment period. GENERAL ACCOUNT: all the assets of the Company other than those held in a separate account. GROSS PAYMENT BASE: the total of all payments invested in the Contract, less any withdrawals which exceed the Withdrawal Without Surrender Charge amount. GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is credited. GUARANTEE PERIOD ACCOUNT: an account that corresponds to a Guaranteed Interest Rate for a specified Guarantee Period. GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily compounding, credited to a Guarantee Period Account. ISSUE DATE: the date the Contract is issued and the date that is used to determine Contract days, Contract months, Contract years and Contract anniversaries. 4 MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any portion of a Guarantee Period Account is withdrawn or transferred prior to the end of its Guarantee Period. OWNER (YOU): the person, persons (Joint Owners) or entity entitled to exercise the rights and privileges under this Contract. Unless otherwise indicated, any reference to Owner shall include Joint Owners. PAYMENT CREDIT: an amount added to the Contract by the Company when a payment is made to the Contract. The amount will be a specified percentage of the payment. SERVICE OFFICE: se(2), Inc. (an affiliate of Security Distributors, Inc.) and its affiliates (collectively, "se(2)") provide administrative, accounting, and other services to the Company. The principal administrative offices of se(2) are located at One Security Benefit Place Topeka, KS 66675, Telephone 1-800-782-8380. SUB-ACCOUNT: a subdivision of the Variable Account investing exclusively in the shares of a corresponding Underlying Portfolio. SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after application of any applicable Contract fee, surrender charge, rider charge and Market Value Adjustment. VALUATION DATE: a day on which the unit values of the Sub-Accounts are determined. Valuation Dates currently occur on each day on which the New York Stock Exchange is open for trading, and on such other days (other than a day during which no payment, withdrawal or surrender of a Contract was received) when there is a sufficient degree of trading in an Underlying Portfolio's portfolio securities such that the current unit value of the Sub-Accounts may be affected materially. VALUATION PERIOD: The time span between the close of trading on the New York Stock Exchange from one Valuation Date to the next. VARIABLE ACCOUNT: Separate Account KG, one of the Company's separate accounts, consisting of assets segregated from other assets of the Company. The investment performance of the assets of the Variable Account is determined separately from the other assets of the Company. Assets of the Variable Account are not chargeable with liabilities arising out of any other business which the Company may conduct. VARIABLE ANNUITY PAYOUT: an annuity payout option providing for payments varying in amount in accordance with the investment experience of certain of the Underlying Portfolios. 5 SUMMARY OF FEES AND EXPENSES There are certain fees and expenses that you will incur directly or indirectly under the Scudder Gateway Plus Contract. The following tables describe the fees and expenses that you will pay when buying, owning and surrendering the contract. The purpose of the tables is to help you understand these various charges. TABLE I OWNER TRANSACTION EXPENSES TABLE I DESCRIBES THE FEES AND EXPENSES THAT YOU WILL PAY AT THE TIME THAT YOU BUY OR SURRENDER THE CONTRACT AND WHEN YOU TRANSFER VALUES AMONG THE INVESTMENT OPTIONS. (NOTE: THE COMPANY DOES NOT CHARGE A TRANSACTION CHARGE WHEN YOU PURCHASE THE CONTRACT AND DOES NOT CURRENTLY CHARGE WHEN YOU TRANSFER AMONG INVESTMENT OPTIONS.) STATE PREMIUM TAXES ARE APPLICABLE IN SOME STATES AND ARE DEDUCTED AS DESCRIBED IN "PREMIUM TAXES" UNDER CHARGES AND DEDUCTIONS.
MAXIMUM CHARGE --------------------------- SURRENDER CHARGE(1): (as a percentage of payments withdrawn)................. 8.5% TRANSFER CHARGE:........................................ None(2)
------------------ (1) During the accumulation phase, this charge may be assessed upon surrender, withdrawal or reversal of annuitization. The charge is a percentage ranging from 8.5% to 1.5% of payments withdrawn (in excess of any amount that is free of surrender charge) within the indicated time period. For purposes of calculating the Surrender Charge on partial withdrawals and surrenders, we assume that amounts are withdrawn from payments in the chronological order in which they were received.
COMPLETE YEARS FROM DATE OF PAYMENT CHARGE --------------------------------------------------------------- ------ Less than 4.................................................... 8.5% Less than 5.................................................... 7.5% Less than 6.................................................... 6.5% Less than 7.................................................... 5.5% Less than 8.................................................... 3.5% Less than 9.................................................... 1.5% Thereafter..................................................... 0%
(2) The Company currently does not charge for processing transfers and guarantees that the first 12 transfers in a Contract year will not be subject to a transfer charge. For each subsequent transfer, the Company reserves the right to assess a charge, guaranteed never to exceed $25, to reimburse the Company for the costs of processing the transfer. 6 TABLE II PERIODIC FEES AND EXPENSES OTHER THAN UNDERLYING PORTFOLIO EXPENSES THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU WILL PAY PERIODICALLY DURING THE TIME THAT YOU OWN THE CONTRACT, NOT INCLUDING THE FEES AND EXPENSES OF EACH UNDERLYING PORTFOLIO.
OTHER CONTRACTS ---------- ANNUAL CONTRACT FEE:................................................................ $35 ANNUAL VARIABLE SUB-ACCOUNT EXPENSES: (on an annual basis as a percentage of average daily net assets) Mortality and Expense Risk Charge:............................................. 1.25% Administrative Expense Charge.................................................. 0.15% ---------- Total Annual Expenses:......................................................... 1.40% OPTIONAL RIDER CHARGES: The charge for these riders on an annual basis as a percentage of Accumulated Value is: ENHANCED EARNINGS RIDER (EER) RIDER............................................ 0.30% ENHANCED DEATH BENEFIT (EDB) RIDERS Annual Step-Up Enhanced Death Benefit (EDB) Rider (Form 3265-99):............ 0.15% Annual Step-Up EDB Rider (Form 3309-02)(2)................................... 0.25% 7% Roll-Up EDB Rider (Form 3266-99 or Form 3303-01).......................... 0.30% Annual Step-Up with 7% Roll-Up EDB Rider (Form 3264-99 or Form 3304-01.............................................................. 0.35% Annual Step-Up with 5% Roll-Up EDB Rider (ONLY AVAILABLE IN TEXAS--either form 3311-02(2) or Form 3305-01.1........................... 0.35% 10% Breakthrough with 5% Roll-Up EDB Rider (Form 3317-02)(2)................. 0.40% Annual Step-Up with 7% Roll-Up EDB Rider (Form 3313-02)(2)................... 0.50% MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDERS(3) M-GAP Rider with a 15-year waiting period.................................... 0.20% M-GAP Rider with a 10-year waiting period.................................... 0.35%
WITHDRAWAL ADJUSTMENT CHARGE(4)--The AIR or interest rate used to determine annuity benefit payments when a withdrawal is taken after annuitization but within 5 years of the Issue Date is increased by one of the following adjustments:
OTHER CONTRACTS ---------- ADJUSTMENT TO AIR OR INTEREST RATE: If 15 or more years of annuity payments are being valued, the increase is:.. 1.00% If 10-14 years of annuity payments are being valued, the increase is:....... 1.50% If less than 10 years of annuity payments is being valued, the increase is:. 2.50%
------------------- (1) During the accumulation phase, the fee is deducted annually and upon surrender when Accumulated Value is less than $75,000. The fee is waived for Contracts issued to and maintained by the trustee of a 401(k) plan. The fee may be lower in some jurisdictions; see the Specification Page of your contract. (2) Total rider charges will be reduced by 0.05% if both the Enhanced Earnings Rider and this Enhanced Death Benefit Rider are in effect simultaneously. 7 (3) M-GAP riders were not offered after 1/31/02. For more information about the M-GAP Rider, see "APPENDIX G--DISCONTINUATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER." (4) During the Annuity Payout Phase and subject to certain limitations, you may request withdrawals that will result in a calculation by the Company of the Present Value of future annuity payments. For withdrawals taken within 5 years of the Issue Date, the Assumed Investment Return ("AIR") you have chosen (in the case of a variable annuity payout option) or the interest rate (in the case of a fixed annuity payout option) used to determine the Present Value is increased by the applicable Withdrawal Adjustment Charge shown above in the table. The increase to the AIR or the interest rate used to determine the Present Value results in a greater proportionate reduction in the number of Annuity Units (under a variable annuity payout option) or dollar amount (under a fixed annuity payout option), than if the increase had not been made. Because each variable annuity benefit payment is determined by multiplying the number of Annuity Units by the value of an Annuity Unit, the reduction in the number of Annuity Units will result in lower future variable annuity benefit payments. See "VARIABLE ANNUITY BENEFIT PAYMENTS" and "WITHDRAWALS AFTER THE ANNUITY DATE" under ANNUITIZATION--THE PAYOUT PHASE for additional information. 8 TABLE III TOTAL ANNUAL OPERATING EXPENSES OF THE UNDERLYING PORTFOLIOS TABLE III SHOWS THE MINIMUM AND MAXIMUM TOTAL OPERATING EXPENSES CHARGED BY THE PORTFOLIO COMPANIES THAT YOU MAY PAY PERIODICALLY DURING THE TIME THAT YOU OWN THE CONTRACT. MORE DETAIL CONCERNING EACH UNDERLYING PORTFOLIOS' FEES AND EXPENSES, INCLUDING INFORMATION ABOUT ANY EXPENSE CAPS OR REIMBURSEMENTS, IS CONTAINED IN THE PROSPECTUS FOR THE UNDERLYING PORTFOLIOS. The table below shows the minimum and maximum expenses of the Funds during 2013. The levels of fees and expenses vary among the Underlying Funds, and may vary from year to year.
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES MINIMUM MAXIMUM ------------------------------------------- --------------------------- ---------------------------- Expenses that are deducted from Annual charge of 0.34%(1) Annual charge of 1.51%(2) Underlying Portfolio assets, including of average daily net assets of average daily net assets management fees, distribution and/or service (12b-1) fees and other expenses.
----------------------------- The advisers and/or other service providers of certain Funds have agreed to reduce their fees and/or reimburse the Funds' expenses in order to keep the Funds' expenses below specified limits. The expenses of certain Funds are reduced by contractual fee reduction and expense reimbursement arrangements. Other Funds may have voluntary fee reduction and/or expense reimbursement arrangements, which may be guaranteed for periods of up to a year or more or which may be terminated at any time. (1) Through September 30, 2014, the Advisor has contractually agreed to waive all or a portion of its management fee and reimburse or pay certain operating expenses of the portfolio to the extent necessary to maintain the portfolio's total annual operating expenses at 0.33% for Class A and 0.58% for Class B shares and 0.68% for Class B2 shares, excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest. Effective October 1, 2014 through April 30, 2015, the Advisor has contractually agreed to waive all or a portion of its management fee and reimburse or pay certain operating expenses of the portfolio to the extent necessary to maintain the portfolio's total annual operating expenses at a ratio no higher than 0.37% for Class A and 0.62% for Class B shares and 0.72% for Class B2 shares, excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest. The agreement may only be terminated with the consent of the fund's Board. (2) The Investment Adviser has agreed to (i) reduce or limit "Other Expenses" (excluding acquired fund fees and expenses, transfer agency fees and expenses, taxes, interest, brokerage fees, litigation, indemnification, shareholder meeting and other extraordinary expenses) to 0.004% of the Fund's average daily net assets and (ii) waive a portion of its management fee payable by the Fund in an amount equal to any management fees it earns as an investment adviser to any of the affiliated funds in which the Fund invests. Each arrangement will remain in effect through at least April 30, 2014, and prior to such date the Investment Adviser may not terminate the arrangement without the approval of the Board of Trustees. The Fund's "Other Expenses" may be further reduced by any custody and transfer agency fee credits received by the Fund HIGHEST AND LOWEST EXPENSES AFTER FEE REDUCTIONS AND EXPENSE REIMBURSEMENTS. For the year ended December 31, 2013, the LOWEST Total Annual Fund Operating Expenses for all Funds, after all fee reductions and expense reimbursements, is 0.34%. Through September 30, 2014, the Advisor has contractually agreed to waive all or a portion of its management fee and reimburse or pay certain operating expenses of the portfolio to the extent necessary to maintain the portfolio's total annual operating expenses at 0.33% for Class A and 0.58% for Class B shares and 0.68% for Class B2 shares, excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest. Effective October 1, 2014 through April 30, 2015, the Advisor has contractually agreed to waive all or a portion of its management fee and reimburse or pay certain operating expenses of the portfolio to the extent necessary to maintain the portfolio's total annual 9 operating expenses at a ratio no higher than 0.37% for Class A and 0.62% for Class B shares and 0.72% for Class B2 shares, excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest. The agreement may only be terminated with the consent of the fund's Board. For the year ended December 31, 2013, the HIGHEST Total Annual Fund Operating Expenses for all Funds, after all fee reductions and expense reimbursements, is 1.04%. Through September 30, 2014, the Advisor has contractually agreed to waive all or a portion of its management fee and reimburse or pay certain operating expenses of the portfolio to the extent necessary to maintain the portfolio's total annual operating expenses at 1.00% excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest expense and acquired funds (underlying funds) fees and expenses (estimated at 0.02%). Effective October 1, 2014 through April 30, 2015, the Advisor has contractually agreed to waive all or a portion of its management fee and reimburse or pay certain operating expenses of the portfolio to the extent necessary to maintain the portfolio's total annual operating expenses at a ratio no higher than 1.02% excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest expense and acquired funds (underlying funds) fees and expenses (estimated at 0.02%). These agreements may only be terminated with the consent of the fund's Board. The Underlying Portfolio information is based on information provided by the Underlying Portfolios and is not independently verified by the Company. EXAMPLES THE FOLLOWING EXAMPLES ARE INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE CONTRACT WITH THE COST OF INVESTING IN OTHER VARIABLE ANNUITY CONTRACTS. THESE COSTS INCLUDE CONTRACT OWNER TRANSACTION EXPENSES, CONTRACT FEES, SEPARATE ACCOUNT ANNUAL EXPENSES, AND UNDERLYING PORTFOLIO FEES AND EXPENSES. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. MAXIMUM EXPENSE EXAMPLE The following example assumes that you invest $10,000 in the Contract for the time periods indicated and that your investment has a 5% return each year. The example also assumes the maximum fees and expenses of any of the Underlying Portfolios and assumes that these fees and expenses remain the same in each of the 1, 3, 5, and 10-year intervals. Finally, the example assumes that you have chosen the combination of optional riders with the maximum possible charges, which would be the Enhanced Earnings Rider at 0.30% and the Annual Step-Up with 7% Roll-Up EDB Rider (Form 3313-02) at 0.50% (for a combined charge of 0.75% with the 0.05% discount). Although your actual costs may be higher or lower, based on these assumptions, your costs would be: (1) If you surrender your Contract at the end of the applicable time period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------- ------- ------- -------- Portfolio with the maximum total operating expenses...... $1,169 $2,009 $2,774 $4,242
(2) If you do NOT surrender your Contract or you annuitize at the end of the applicable time period
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------- ------- ------- -------- Portfolio with the maximum total operating expenses...... $403 $1,222 $2,060 $4,242
10 MINIMUM EXPENSE EXAMPLE The following example assumes that you invest $10,000 in the Contract for the time periods indicated and that your investment has a 5% return each year. The example also assumes the minimum fees and expenses of any of the Underlying Portfolios and assumes that these fees and expenses remain the same in each of the 1, 3, 5, and 10-year intervals. It also assumes that you have not chosen any optional riders. Although your actual costs may be higher or lower, based on these assumptions, your costs would be: (1) If you surrender your Contract at the of the applicable time period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------- ------- ------- -------- Portfolio with the minimum total operating expenses...... $987 $1,471 $1,834 $2,344
(2) If you do NOT surrender your Contract or you annuitize at the end of the applicable time period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------- ------- ------- -------- Portfolio with the minimum total operating expenses...... $204 $630 $1,084 $2,344
11 SUMMARY OF CONTRACT FEATURES This Summary does not contain all information that may be important. States may require variations to the Contract. If a state variation applies, it will appear in the Contract, an endorsement to the Contract, or a supplement to this Prospectus. Although there may be state variations to the Contract, this prospectus discloses all the material features and benefits under the Contract. WHAT IS THE SCUDDER GATEWAY PLUS VARIABLE ANNUITY? The Scudder Gateway Plus variable annuity contract or certificate ("Contract") is an insurance contract designed to help you, the Owner, accumulate assets for your retirement or other important financial goals on a tax-deferred basis. The Contract combines the concept of professional money management with the attributes of an annuity contract. Features available through the Contract in most jurisdictions include: - a customized investment portfolio; - a Fixed Account; - Guarantee Period Accounts; - a Payment Credit equal to 4% of your payment, added to the Contract's Accumulated Value as soon as your payment is applied; - Experienced professional investment advisers; - tax deferral on earnings; - guarantees that can protect your family; - withdrawals during the accumulation and annuitization phases; and - income that you can receive for life. WHAT HAPPENS IN THE ACCUMULATION PHASE? The Contract has two phases: an accumulation phase and, if you choose to annuitize, an annuity payout phase (described below). During the accumulation phase, you may allocate any payment to the combination of portfolios of securities ("Underlying Portfolios") under your Contract and, in most jursidictions, to the Guarantee Period Accounts and to the Fixed Account (collectively the "investment options"). You select the investment options most appropriate for your investment needs. As those needs change, you may also change your allocation without incurring any tax consequences. Your Contract's Accumulated Value is based on the investment performance of the Underlying Portfolios and any accumulations in the Guarantee Period Accounts and the Fixed Account. You do not pay taxes on any earnings under the Contract until you withdraw money. In addition, during the accumulation phase, your beneficiaries receive certain protections in the event of your death. See discussion below: WHAT HAPPENS UPON MY DEATH DURING THE ACCUMULATION PHASE? WHAT HAPPENS UPON MY DEATH DURING THE ACCUMULATION PHASE? If you or a Joint Owner die before the Annuity Date and you did not elect an Enhanced Death Benefit Rider at issue, a standard death benefit will be paid to the beneficiary. See "DEATH BENEFIT" under DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE. (No death benefit is payable at the death of any Annuitant except when the Owner is not a natural person.) For a discussion of the available Enhanced Death Benefit Riders, see APPENDIX B--OPTIONAL ENHANCED DEATH BENEFIT RIDERS. In addition, if you elected the optional Enhanced Earnings Rider at issue, additional amounts may be payable to your beneficiary. For a detailed discussion of the benefits under the Enhanced Earnings Rider, see APPENDIX C--OPTIONAL ENHANCED EARNINGS RIDER. 12 WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE? During the annuity payout phase, you, or the payee you designate, can receive income based on one of the numerous annuity payout options available under the Contract. You choose: - the annuity payout option; - the date annuity benefit payments begin but no earlier than two years after the Issue Date in all jurisdictions except New York where payments may begin one year after purchasing the Contract; and - whether you want variable annuity benefit payments based on the investment performance of the Underlying Portfolios, fixed-amount annuity benefit payments with payment amounts guaranteed by the Company, or a combination of fixed-amount and variable annuity benefit payments. - whether you want certain protections provided under optional riders. Under certain annuity payout options, you may also take withdrawals during the annuity payout phase. The type of withdrawal and the number of withdrawals that may be available each calendar year will differ depending upon whether the Owner annuitizes under an annuity payout option with payments based on the life of one or more Annuitants with no guaranteed payments (a "Life" annuity payout option), under a life annuity payout option that in part provides for a guaranteed number of payments (a "Life With Period Certain" or "Life With Cash Back" annuity payout option), or an annuity payout option based on a guaranteed number of payments (a "Period Certain" annuity payout option). For more information, see "WITHDRAWALS AFTER THE ANNUITY DATE" under ANNUITIZATION--THE PAYOUT PHASE. In addition, if you choose a variable payout option, you may transfer among the available Sub-Accounts. WHO ARE THE KEY PERSONS UNDER THE CONTRACT? The Contract is between you, (the "Owner"), and us, Commonwealth Annuity and Life Insurance Company. Each Contract has an Owner (or an Owner and a Joint Owner), an Annuitant (or an Annuitant and a Joint Annuitant) and one or more beneficiaries. As Owner, you may: - make payments - choose investment allocations - choose annuity payout options - receive annuity benefit payments (or designate someone else to receive annuity benefit payments) - select the Annuitant and beneficiary. The Annuitant is the person whose life is used to determine the duration of annuity benefit payments involving a life contingency. There must be at least one Annuitant at all times. If an Annuitant dies and a replacement is not named, the Owner will become the new Annuitant. The beneficiary is the person(s) or entity entitled to the death benefit at the death of a sole Owner prior to the Annuity Date. In the case of the death of a Joint Owner, the surviving Joint Owner will receive the death benefit. Under certain circumstances, the beneficiary may be entitled to annuity benefit payments upon the death of an Owner on or after the Annuity Date. HOW MUCH CAN I INVEST AND HOW OFTEN? During the Accumulation Phase, you may make additional payments. Total payments under the Contract can exceed $5,000,000 only with the Company's prior approval. The number and frequency of your payments are flexible, subject only to a $5,000 minimum for your initial payment and a $100 minimum for any additional payments. A lower initial payment may be permitted where monthly payments are being forwarded directly from a financial institution. A minimum of $1,000 is always required to establish a Guarantee Period Account. 13 Each time you make a payment, you will immediately receive a Payment Credit equal to 4% of your payment. This Payment Credit will be immediately invested along with your payment. However, if you cancel the Contract under its "Right to Examine" provision, your refund will be reduced by the amount of the Payment Credit. For more information, see "RIGHT TO CANCEL" under DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE. WHAT ARE MY INVESTMENT CHOICES? You may choose among the Sub-Accounts investing in the Underlying Portfolios, the Guarantee Period Accounts, and the Fixed Account. Each Underlying Portfolio operates pursuant to different investment objectives, and this range of investment options enables you to allocate your money among the Underlying Portfolios to meet your particular investment needs. For a more detailed description of the Underlying Portfolios, see INVESTMENT OBJECTIVES AND POLICIES. Assets supporting the guarantees under the Guarantee Period Accounts are held in the Company's Separate Account GPA, a non-unitized insulated separate account (except in California where assets are held in the Company's General Account). Values and benefits calculated on the basis of Guarantee Period Account allocations, however, are obligations of the Company's General Account. Amounts allocated to a Guarantee Period Account earn a Guaranteed Interest Rate declared by the Company. The level of the Guaranteed Interest Rate depends on the number of years of the Guarantee Period selected. The Company may offer up to nine Guarantee Periods ranging from two to ten years in duration. Once declared, the Guaranteed Interest Rate will not change during the duration of the Guarantee Period. If amounts allocated to a Guarantee Period Account are transferred, surrendered or applied to any annuity payout option at any time other than the day following the last day of the applicable Guarantee Period, a Market Value Adjustment will apply that may increase or decrease the value. However, this adjustment will never be applied against your principal. In addition, earnings in the GPA AFTER application of the Market Value Adjustment will not be less than an effective annual rate of 3%. For more information about the Guarantee Period Accounts and the Market Value Adjustment, see GUARANTEE PERIOD ACCOUNTS. THE GUARANTEE PERIOD ACCOUNTS ARE NOT AVAILABLE IN ALL STATES AND ARE NOT OFFERED AFTER ANNUITIZATION. SOME OF THE SUB-ACCOUNTS MAY NOT BE AVAILABLE IN ALL STATES. The Fixed Account is part of the General Account, which consists of all the Company's assets other than those allocated to the Variable Account and any other separate account. Allocations to the Fixed Account are guaranteed as to principal and a minimum rate of interest. Additional excess interest may be declared periodically at the Company's discretion. The initial rate in effect on the date an amount is allocated to the Fixed Account will be guaranteed for one year from that date. For more information about the Fixed Account, see APPENDIX A--MORE INFORMATION ABOUT THE FIXED ACCOUNT. CAN I MAKE TRANSFERS AMONG THE INVESTMENT OPTIONS? Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts investing in the Underlying Portfolios, the Guarantee Period Accounts, and the Fixed Account. On and after the Annuity Date, if you have elected a variable option, you may transfer only among the Sub-Accounts. You will incur no current taxes on transfers while your money remains in the Contract. See "TRANSFER PRIVILEGE" under DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE and "TRANSFERS OF ANNUITY UNITS" under ANNUITIZATION--THE PAY-OUT PHASE. The first 12 transfers in a Contract year are guaranteed to be free of a transfer charge. For each subsequent transfer in a Contract year, the Company does not currently charge but reserves the right to assess a processing charge guaranteed never to exceed $25. If you authorize automatic periodic transfers (under an Asset Allocation Model Reallocation program, Automatic Transfers program (Dollar Cost Averaging) or Automatic Account Rebalancing program), the 14 first automatic transfer or rebalancing under a request counts as one transfer for purposes of the 12 transfers guaranteed to be free of a transfer charge in each Contract year. Each subsequent automatic transfer or rebalancing under that request in the same or a subsequent Contract year is without charge and does not reduce the remaining number of transfers which may be made free of charge. WHAT IF I NEED MY MONEY BEFORE THE ANNUITY PAYOUT PHASE BEGINS? Before the annuity payout phase begins, you may surrender your Contract or make withdrawals at any time. A 10% tax penalty may apply on all amounts deemed to be earnings if you are under age 59 1/2. Each calendar year, you can withdraw without a surrender charge the Withdrawal Without Surrender Charge Amount. The Withdrawal Without Surrender Charge Amount in each calendar year will be the greater of: (1) 100% of Cumulative Earnings (excluding Payment Credits); or (2) 15% of the Gross Payment Base. When the first withdrawal is taken, the Gross Payment Base is equal to total payments made to the Contract. When subsequent withdrawals are taken, the Gross Payment Base reduces. For a detailed discussion of how the Withdrawal Without Surrender Charge Amount is calculated, please see CHARGES AND DEDUCTIONS, "SURRENDER CHARGE." Each calendar year, the Owner of a qualified Contract or a Contract issued under a Section 457 Deferred Compensation Plan may take without a surrender charge the Withdrawal Without Surrender Charge Amount described above or, if greater, an amount calculated by the Company based on his or her life expectancy In addition, WHERE PERMITTED BY LAW, the Company will waive surrender charges if, after the Contract is issued: - you become disabled before you attain age 65; or - you are diagnosed with a fatal illness or are confined in a medical care facility for the later of 90 consecutive days or one year after the Issue Date. Additional amounts may be withdrawn at any time. However, the withdrawal of payments that have not been invested in the Contract for more than nine years may be subject to a surrender charge. A Market Value Adjustment will apply to withdrawals from a Guarantee Period Account prior to the expiration of the Guarantee Period. CAN I EXAMINE THE CONTRACT? Yes. Your Contract will be delivered to you after your purchase. If you return the Contract to the Company within ten days of receipt, the Contract will be cancelled. There may be a longer period in certain jurisdictions; see the "Right to Examine" provision on the cover of your Contract. If you cancel the Contract, you will receive the Contract's Accumulated Value adjusted for any Market Value Adjustment for amounts allocated to a Guarantee Period Account, plus any fees or charges that may have been deducted, less the Payment Credit(s). However, if required in your state or if the Contract was issued as an Individual Retirement Annuity (IRA), you will generally receive a refund of your gross payment(s). In certain jurisdictions this refund may be the greater of (1) your gross payment(s) or (2) the Accumulated Value adjusted for any Market Value Adjustment, less any Payment Credit(s), plus any fees or charges previously deducted. See "RIGHT TO CANCEL" under DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE. Each time you make a payment, you will receive a Payment Credit equal to 4% of the payment. The Payment Credit will be immediately invested along with your payment. However, if you cancel the Contract under its "Right to Examine" provision, your refund will be reduced by the amount of the Payment 15 Credit(s). If the "Right to Examine" provision in your state provides that you will receive the Accumulated Value of the Contract (adjusted as described above), this means that you receive any gains and bear any losses attributable to the Payment Credit. For more information, see "RIGHT TO CANCEL" under DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE. CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT? You can make several changes after receiving your Contract: - You may assign your ownership to someone else, except under certain qualified plans. - You may change the beneficiary, unless you have designated an irrevocable beneficiary. - You may change your allocation of payments. - You may make transfers among the Sub-Accounts without any tax consequences. - You may cancel your Contract within ten days of delivery (or longer if required by state law). 16 DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT AND THE UNDERLYING PORTFOLIOS THE COMPANY. Unless otherwise specified, any reference to the "Company" refers to Commonwealth Annuity and Life Insurance Company ("Commonwealth Annuity"). The Company's Principal Office is located at 132 Turnpike Road, Suite 210, Southborough, MA 01772, Telephone 508-460-2400 The Company is a life insurance company organized under the laws of Delaware in July 1974. Prior to December 31, 2002, the Company was a direct subsidiary of First Allmerica Financial Life Insurance Company ("First Allmerica"), which in turn was a direct subsidiary of The Hanover Insurance Group ("THG," formerly Allmerica Financial Corporation). Effective December 31, 2002, the Company became a Massachusetts domiciled insurance company and a direct subsidiary of THG. On December 30, 2005, THG completed the closing of the sale of the Company to The Goldman Sachs Group, Inc. ("Goldman Sachs"), 200 West Street, New York, NY 10282. Effective September 1, 2006, the Company changed its name from Allmerica Financial Life Insurance and Annuity Company to Commonwealth Annuity and Life Insurance Company. Effective April 30, 2013, Goldman Sachs completed the transfer of the common stock of the Company to Global Atlantic (Fin) Company, which is a wholly- owned indirect subsidiary of Global Atlantic Financial Group Limited ("GAFGL"). Currently, Goldman Sachs owns approximately 22% of the outstanding ordinary shares of Global Atlantic, Goldman Sachs and Global Atlantic employees own approximately 4.5% of the outstanding ordinary shares, and unaffiliated investors, none of whom own more than 9.9%, own the remaining 73.5% of the outstanding ordinary shares. The registered office of Global Atlantic Financial Group Limited is located at Appleby Services (Bermuda) Ltd., Canon's Court, 22 Victoria Street, Hamilton HM 12 Bermuda. Commonwealth Annuity is subject to the laws of the Commonwealth of Massachusetts governing insurance companies and to regulation by the Commissioner of Insurance of Massachusetts. In addition, it is subject to the insurance laws and regulations of other states and jurisdictions in which it is licensed to operate. At this time, we are relying on an exemption from the periodic reporting requirements of the Securities Exchange Act of 1934, as amended ("Securities Exchange Act"), as provided by Rule 12h-7 under the Securities Exchange Act, to avoid any such periodic reporting obligation. We reserve the right to stop relying on this exemption at any time. THE VARIABLE ACCOUNT. The Company maintains a separate investment account called Separate Account KG (the "Variable Account"). The Variable Account of Separate Account KG was authorized by vote of the Board of Directors of the Company on June 13, 1996. Each Variable Account is registered with the SEC as a unit investment trust under the 1940 Act. This registration does not involve the supervision or management of investment practices or policies of the Variable Accounts by the SEC. The Variable Account is a separate investment account of the Company. The assets used to fund the variable portions of the Contracts are set aside in the Sub-Accounts of the Variable Account, and are kept separate and apart from the general assets of the Company. The Sub-Account is administered and accounted for as part of the general business of the Company. The income, capital gains or capital losses of the Sub-Account, however, are allocated to each Sub-Account, without regard to any other income, capital gains, or capital losses of the Company. Obligations under the Contracts are obligations of the Company. Under Massachusetts law, the assets of the Variable Account may not be charged with any liabilities arising out of any other business of the Company. Subject to the provisions of the Contract, units of the Sub-Accounts are offered on a continuous basis. The Company reserves the right, subject to compliance with applicable law, to change the names of the Variable Account and the Sub-Accounts. The Company also offers other variable annuity contracts investing in the Variable Account which are not discussed in this Prospectus. In addition, the Variable Account may invest in other underlying portfolios which are not available to the Contracts described in this Prospectus. 17 UNDERLYING PORTFOLIOS. Each Sub-Account invests in a corresponding investment portfolio ("Underlying Portfolio") of an open-end management investment company. The Underlying Portfolios available through this policy are NOT publicly traded. They are only available as variable investment options in variable life insurance policies or variable annuity contracts issued by life insurance companies or, in some cases, through participation in certain qualified pension or retirement plans. The investment advisers of the Underlying Portfolios may manage publicly traded mutual funds with similar names and objectives. However, the Underlying Portfolios are NOT directly related to any publicly traded mutual fund. Consequently, the investment performance of the Underlying Portfolios and any similarly named publicly traded mutual fund may differ substantially. Certain Underlying Portfolios have similar investment objectives and/or policies. Therefore, to choose the Sub-Accounts which best meet your needs and objectives, carefully read the prospectuses of the Underlying Portfolios, along with this Prospectus. There can be no assurance that the investment objectives of the Underlying Portfolios can be achieved. In some states, insurance regulations may restrict the availability of particular Portfolios. 18 INVESTMENT OBJECTIVES AND POLICIES A summary of investment objectives of each of the Underlying Portfolios is set forth below. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES, RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING PORTFOLIOS AND OTHER RELEVANT INFORMATION REGARDING THE PORTFOLIOS MAY BE FOUND IN THEIR RESPECTIVE PROSPECTUSES, WHICH SHOULD BE READ CAREFULLY BEFORE INVESTING. THE PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION OF THE UNDERLYING PORTFOLIOS ARE AVAILABLE FROM THE SERVICE OFFICE UPON REQUEST. There can be no assurance that the investment objectives of the Underlying Portfolios can be achieved or that the value of the Contract will equal or exceed the aggregate amount of payments made under the Contract. Sub-Account values will fluctuate; even a Sub-Account investing in a money market fund may have negative returns, particularly if fees and charges are deducted at the Sub-Account level. AIM VARIABLE INSURANCE FUNDS (INVESCO VARIABLE INSURANCE FUNDS) (SERIES I SHARES) ADVISER: INVESCO ADVISERS, INC. INVESCO V.I. MANAGED VOLATILITY FUND--The Fund's investment objective is both capital appreciation and current income while managing portfolio volatility. THE ALGER PORTFOLIOS (CLASS I-2) ADVISER: FRED ALGER MANAGEMENT, INC. ALGER BALANCED PORTFOLIO--seeks current income and long-term capital appreciation. ALGER CAPITAL APPRECIATION PORTFOLIO--seeks long-term capital appreciation. DWS INVESTMENT VIT FUNDS ADVISER: DEUTSCHE INVESTMENT MANAGEMENT AMERICAS INC. DWS EQUITY 500 INDEX VIP--The fund seeks to replicate, as closely as possible, before the deduction of expenses, the performance of the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500(R) Index"), which emphasizes stocks of large U.S. companies. Under normal circumstances, the fund intends to invest at least 80% of assets, determined at the time of purchase, in stocks of companies included in the S&P 500(R) Index and in derivative instruments, such as futures contracts and options, that provide exposure to the stocks of companies in the S&P 500(R) Index. Northern Trust Investments, Inc. ("NTI") is the subadvisor for the fund. DWS VARIABLE SERIES I ADVISER: DEUTSCHE INVESTMENT MANAGEMENT AMERICAS INC. DWS BOND VIP--The fund seeks to maximize total return consistent with preservation of capital and prudent investment management, by investing for both current income and capital appreciation. Under normal circumstances, the fund invests at least 80% of net assets, plus the amount of any borrowings for investment purposes, in bonds of any maturity. DWS CAPITAL GROWTH VIP--The fund seeks to provide long-term growth of capital. The fund normally invests at least 65% of total assets in equities, mainly common stocks of U.S. companies. The fund generally focuses on established companies that are similar in size to the companies in the S&P 500(R) Index (generally 500 of the largest companies in the U.S.) or the Russell 1000(R) Growth Index (generally those stocks among the 1,000 largest U.S. companies that have above-average price-to-earnings ratios). DWS CORE EQUITY VIP--The fund seeks long-term growth of capital, current income and growth of income. Under normal circumstances, the fund invests at least 80% of total assets, determined at the time of purchase, in equities, mainly common stocks. Although the fund can invest in companies of any size and 19 from any country, it invests primarily in large U.S. companies. Portfolio management may favor securities from different industries and companies at different times. DWS GLOBAL SMALL CAP VIP--The fund seeks above-average capital appreciation over the long term. The fund invests at least 80% of net assets, plus the amount of any borrowings for investment purposes, in common stocks and other equities of small and mid cap companies throughout the world (companies with market values similar to the smallest 30% of the aggregate market capitalization of the S&P Developed Broad Market Index). This Series was formerly known as DWS Global Small Cap Growth VIP. DWS INTERNATIONAL VIP--The fund seeks long-term growth of capital. Although the fund can invest in companies of any size and from any country, it invests mainly in common stocks of established companies in countries with developed economies (other than the United States). DWS VARIABLE SERIES II ADVISER: DEUTSCHE INVESTMENT MANAGEMENT AMERICAS INC. DWS GLOBAL EQUITY VIP--The fund seeks capital appreciation. Under normal circumstances, the fund invests at least 80% of its assets, determined at the time of purchase, in equity securities and other securities with equity characteristics. In addition to common stock, other securities with equity characteristics include preferred stock, convertible securities, warrants and exchange-traded funds (ETFs). Although the fund can invest in companies of any size and from any country, it invests mainly in common stocks of established companies in countries with developed economies. The fund may also invest a portion of its assets (typically not more than 35% of its net assets) in securities of companies located in emerging markets, such as those of many countries in Latin America, the Middle East, Eastern Europe, Asia and Africa. The fund may also invest up to 20% of its assets in cash equivalents and U.S. investment-grade fixed-income securities. QS Investors, LLC ("QS Investors") is the subadvisor for the fund. This Series was formerly known as DWS Diversified International Equity VIP. DWS GLOBAL INCOME BUILDER VIP--The fund seeks to maximize income while maintaining prospects for capital appreciation. The fund invests in a broad range of both traditional asset classes (such as equity and fixed income investments) and alternative asset classes (such as real estate, infrastructure, convertibles, commodities, currencies and absolute return strategies). The fund can buy many types of securities, among them common stocks, including dividend-paying stocks, convertible securities, corporate bonds, government bonds, municipal securities, inflation-indexed bonds, mortgage- and asset-backed securities and exchange-traded funds (ETFs). The fund can invest in securities of any size, investment style category, or credit quality, and from any country (including emerging markets). The fund will generally invest in at least three different countries and will normally have investment exposure to foreign securities, foreign currencies and other foreign investments equal to at least 40% of the fund's net assets. The fund invests at least 25% of net assets in fixed income senior securities. DWS SMALL MID CAP VALUE VIP--The fund seeks long-term capital appreciation. Under normal circumstances, the fund invests at least 80% of net assets, plus the amount of any borrowings for investment purposes, in undervalued common stocks of small and mid-size U.S. companies. While the fund invests mainly in US stocks, it could invest up to 20% of net assets in foreign securities. The fund's equity investments are mainly common stocks, but may also include other types of equities such as preferred or convertible stocks. The fund may also invest in initial public offerings. DWS GLOBAL GROWTH VIP--The fund seeks long-term capital growth. Under normal circumstances, the fund invests at least 80% of net assets, plus the amount of any borrowings for investment purposes, in common stocks and other equities of companies throughout the world that portfolio management considers to be "blue chip" companies. DWS GOVERNMENT & AGENCY SECURITIES VIP--The fund seeks high current income consistent with preservation of capital. Under normal circumstances, the fund invests at least 80% of net assets, plus the amount of any borrowings for investment purposes, in U.S. government securities and repurchase agreements of U.S. government securities. The fund normally invests all of its assets in securities issued or 20 guaranteed by the U.S. government, its agencies or instrumentalities, except the fund may invest up to 10% of its net assets in cash equivalents, such as money market funds, and short-term bond funds. These securities may not be issued or guaranteed by the U.S. government, its agencies or instrumentalities. DWS HIGH INCOME VIP--The fund seeks to provide a high level of current income. Under normal circumstances, the fund generally invests at least 65% of net assets, plus the amount of any borrowings for investment purposes, in junk bonds, which are those rated below the fourth highest credit rating category (that is, grade BB/Ba and below). The fund may invest up to 50% of total assets in bonds denominated in U.S. dollars or foreign currencies from foreign issuers. DWS LARGE CAP VALUE VIP--The fund seeks to achieve a high rate of total return. Under normal circumstances, the fund invests at least 80% of net assets, plus the amount of any borrowings for investment purposes, in common stocks and other equity securities of large U.S. companies that are similar in size to the companies in the Russell 1000(R) Value Index and that portfolio management believes are undervalued. Although the fund can invest in stocks of any economic sector (which is comprised of two or more industries), at times it may emphasize certain sectors, even investing more than 25% of total assets in any one sector. The fund may invest up to 20% of total assets in foreign securities. DWS MONEY MARKET VIP--The fund seeks maximum current income to the extent consistent with stability of principal. The fund pursues its objective by investing in high quality, short-term securities, as well as repurchase agreements that are backed by high-quality securities. Under normal market conditions, the fund will invest more than 25% of its total assets in the obligations of banks and other financial institutions that satisfy the fund's eligibility requirements. DWS SMALL MID CAP GROWTH VIP--The fund seeks long-term capital appreciation. Under normal circumstances, the fund invests at least 80% of net assets, plus the amount of any borrowings for investment purposes, in common stocks and other equity securities of small and mid-sized U.S. companies. The fund defines small companies as those that are similar in market capitalization to those in the Russell 2000(R) Growth Index. The fund defines mid-sized companies as those that are similar in market capitalization to those in the Russell Midcap(R) Growth Index. The fund invests primarily in common stocks but may invest in other types of equity securities such as preferred stocks or convertible securities. While the fund invests mainly in U.S. stocks, it could invest up to 20% of total assets in foreign securities. The fund may invest in initial public offerings. DWS UNCONSTRAINED INCOME VIP--The fund seeks a high total return. Under normal circumstances, the fund invests mainly in fixed income securities issued by both U.S. and foreign corporations and governments. The credit quality of the fund's investments may vary; the fund may invest up to 100% of total assets in either investment-grade fixed income securities or in junk bonds, which are those below the fourth highest credit rating category (that is, grade BB/Ba and below). The fund may also invest in emerging markets securities, mortgage- and asset-backed securities, adjustable rate loans that have a senior right to payment ("senior loans") and other floating rate debt securities and dividend-paying common stocks. QS Investors, LLC ("QS Investors") is the subadvisor for the fund. GOLDMAN SACHS VARIABLE SACHS VARIABLE INSURANCE TRUST (SERVICE SHARES) ADVISER: GOLDMAN SACHS ASSET MANAGEMENT, L.P. GOLDMAN SACHS VIT GLOBAL MARKETS NAVIGATOR FUND--seeks to achieve investment results that approximate the performance of the GS Global Markets Index(TM). PLEASE NOTE THAT THERE CAN BE NO ASSURANCE THAT ANY MONEY MARKET FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE PER SHARE. DURING EXTENDED PERIODS OF LOW INTEREST RATES, AND DUE IN PART TO CONTRACT FEES AND EXPENSES, THE YIELDS OF ANY SUBACCOUNT INVESTING IN A MONEY MARKET FUND MAY ALSO BECOME EXTREMELY LOW AND POSSIBLY NEGATIVE. If, pursuant to SEC rules, the Goldman Sachs VIT Money Market Fund suspends payment of redemption proceeds in connection with a liquidation of the Fund, we will delay payment of any transfer, partial withdrawal, surrender, loan, or death benefit from the sub-account investing in DWS Money Market VIP Sub-Account until the Fund is liquidated. 21 Certain Underlying Portfolios have investment objectives and/or policies similar to those of other Underlying Portfolios. To choose the Sub-Accounts which best meet individual needs and objectives, carefully read the Underlying Portfolio prospectuses. In some states, insurance regulations may restrict the availability of particular Sub-Accounts. If there is a material change in the investment policy of a Sub-Account or the Underlying Portfolio in which it invests, the Owner will be notified of the change. If the Owner has values allocated to that Sub-Account, the Company will transfer it without charge on written request by the Owner to another Sub-Account or to the Fixed Account. The Company must receive such written request within 60 days of the later of (1) the effective date of the change in the investment policy, or (2) the receipt of the notice of the Owner's right to transfer. 22 PERFORMANCE INFORMATION This Contract was first offered to the public by Commonwealth Annuity and Life Insurance Company in October 1999. However, in order to help people understand how investment performance can affect money invested in the Sub-Accounts, the Company may advertise total return and "average annual total return" performance information based on (1) the periods that the Sub-Accounts have been in existence and (2) the periods that the Underlying Portfolios have been in existence. Performance tables are included in the SAI. The "total return" of a Sub-Account refers to the total of the income generated by an investment in the Sub-Account and of the changes in the value of the principal (due to realized and unrealized capital gains or losses) for a specified period, reduced by Variable Account charges, and expressed as a percentage. The "average annual total return" represents the average annual percentage change in the value of an investment in the Sub-Account over a given period of time. It represents averaged figures as opposed to the actual performance of a Sub-Account, which will vary from year to year. The yield of the Sub-Account investing in the DWS Money Market Portfolio refers to the income generated by an investment in the Sub-Account over a seven-day period (which period will be specified in the advertisement). This income is then "annualized" by assuming that the income generated in the specific week is generated over a 52-week period. This annualized yield is shown as a percentage of the investment. The "effective yield" calculation is similar but, when annualized, the income earned by an investment in the Sub-Account is assumed to be reinvested. Thus the effective yield will be slightly higher than the yield because of the compounding effect of this assumed reinvestment. The yield of a Sub-Account investing in a Portfolio other than the DWS Money Market Portfolio refers to the annualized income generated by an investment in the Sub-Account over a specified 30-day or one-month period. The yield is calculated by assuming that the income generated by the investment during that 30-day or one-month period is generated each period over a 12-month period and is shown as a percentage of the investment. PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS THE PERFORMANCE OF A HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE CALCULATIONS ARE BASED AS WELL AS CONTRACT LEVEL CHARGES (IF ANY) AND WITHDRAWAL CHARGES (FOR MORE INFORMATION, SEE THE SAI). PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE UNDERLYING PORTFOLIO IN WHICH THE SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT MAY BE ACHIEVED IN THE FUTURE. Performance information for a Sub-Account may be compared, in reports and promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price Index (S&P 500), Dow Jones Industrial Average (DJIA), Shearson Lehman Aggregate Bond Index or other unmanaged indices, so that investors may compare the Sub-Account results with those of a group of unmanaged securities widely regarded by investors as representative of the securities markets in general; or (2) other groups of variable annuity separate accounts or other investment products tracked by Lipper Analytical Services, a widely used independent research firm which ranks mutual funds and other investment products by overall performance, investment objectives, and assets, or tracked by other services, companies, publications, or persons, who rank such investment products on overall performance or other criteria; or (3) the Consumer Price Index (a measure for inflation) to assess the real rate of return from an investment in the Sub-Account. Unmanaged indices may assume the reinvestment of dividends but generally do not reflect deductions for administrative and management costs and expenses. In addition, relevant broad-based indices and performance from independent sources may be used to illustrate the performance of certain Contract features. 23 At times, the Company may also advertise the ratings and other information assigned to it by independent rating organizations such as A.M. Best Company ("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's ratings reflect their current opinion of the Company's relative financial strength and operating performance in comparison to the norms of the life/health insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an insurance company to meet its obligations under insurance policies it issues and do not measure the ability of such companies to meet other non-policy obligations. The ratings also do not relate to the performance of the Underlying Portfolios. 24 DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE As of the date of this Prospectus, the Company has ceased issuing new Contracts except in connection with certain pre-existing contractual plans and programs. References to issue requirements and initial payments are included as information regarding general Company procedures. This Prospectus provides only a very brief overview of the more significant aspects of the Contract and of the Company's administrative procedures for the benefit of the Company's current Owners. DISRUPTIVE TRADING This Contract is not designed for use by individuals, professional market timing organizations, or other entities that engage in short-term trading, frequent transfers, programmed transfers or transfers that are large in relation to the total assets of an Underlying Portfolio (collectively, "Disruptive Trading"). These activities may require the Underlying Fund to maintain undesirable large cash positions or frequently buy or sell portfolio securities. Such transfers may dilute the value of the Underlying Portfolio's shares, interfere with the efficient management of the Underlying Portfolio's portfolio, and increase brokerage and administrative costs of the Underlying Portfolios. As a result, Disruptive Trading may adversely affect an Underlying Portfolio's ability to invest effectively in accordance with its investment objectives and policies, and may harm other Contract Owners. In order to protect our Contract Owners and the Underlying Portfolios from potentially harmful trading activity, we utilize certain policies and procedures that are designed to detect and prevent disruptive trading among the Underlying Portfolios (the "Disruptive Trading Procedures"). Our Disruptive Trading Procedures consider certain factors in order to identify Disruptive Trading activity, including the following: - the number of transfers made over a period of time; - the length of time between transfers; - whether the transfers follow a pattern that appears to be designed to take advantage of short term market fluctuations, particularly within certain Underlying Portfolios; - the dollar amount(s) requested for transfers; and - whether the transfers are part of a group of transfers made by a third party on behalf of several individual Contract Owners; and - the investment objectives and/or size of the Underlying Portfolios. We may increase our monitoring of Contract Owners who engage in what we perceive to be disruptive trading, including investigating the transfer patterns within multiple contracts owned by the same Contract Owners. We may also investigate any patterns of disruptive trading identified by the Underlying Portfolios that may not have been captured by our Disruptive Trading Procedures. Our Disruptive Trading Procedures may vary from Sub-Account to Sub-Account. The Disruptive Trading Procedures limit the number of transfers a Contract Owner may make during a given period, limit the number of times a Contract Owner may transfer into particular funds during a given period, and place restrictions as to the time and means of transfers (for example, transfer instructions are required by a certain daily time cutoff), among other things. Subject to the terms of the Contract, the Company reserves the right to impose, without prior notice, additional or alternate restrictions on allocations and transfers that it determines, in its sole discretion, will disadvantage or potentially hurt the rights or interests of other Contract Owners or other holders of the Underlying Portfolios. Some of the Underlying Portfolios have reserved the right to temporarily or permanently refuse payments or transfer requests from the Company if, in the judgment of the Underlying Portfolio's investment adviser, the Underlying Portfolio would be unable to invest effectively in accordance with its investment objective or policies, or would otherwise potentially be adversely affected. If an Underlying Portfolio refuses a transfer request from the Company, the Company may not be able to effect certain allocations or transfers that a 25 Contract Owner has requested. In the future, some Underlying Portfolios may impose redemption fees on short-term trading (i.e., redemptions of mutual fund shares within a certain number of business days after purchase). We reserve the right to administer and collect any such redemption fees on behalf of the Underlying Portfolios. We will apply our Disruptive Trading Procedures consistently without special arrangement, waiver, or exception. However, the Company's ability to detect and deter Disruptive Trading and to consistently apply the Disruptive Trading Procedures may be limited by operational systems and technological limitations. Contract Owners seeking to engage in such transfer activities may employ a variety of strategies to avoid detection. Because identifying Disruptive Trading involves judgments that are inherently subjective, the Company cannot provide assurances that its Disruptive Trading Procedures will detect every Contract Owner who engages in disruptive trading. In addition, the terms of some contracts previously issued by the Company, historical practices or actions, litigation, or certain regulatory restrictions may limit the Company's ability to apply transfer or other restrictions. If we are unable to detect Disruptive Trading or are unable to restrict Disruptive Trading because of contract provisions or other reasons, you may experience dilution in the value of your Underlying Portfolio shares. There may be increased brokerage and administrative costs within the Underlying Portfolios, which may result in lower long-term returns for your investments. Additionally, because other insurance companies and/or retirement plans may invest in the Underlying Portfolios, we cannot guarantee that the Underlying Portfolios will not suffer harm from disruptive trading within the variable contracts issued by other insurance companies or among investment options available to retirement plan participants. Under rules recently adopted by the Securities and Exchange Commission, effective April 16, 2007, we will be required to: (1) enter into a written agreement with each Underlying Portfolio or its principal underwriter that will obligate us to provide to the Underlying Portfolio promptly upon request certain information about the trading activity of individual Contract Owners, and (2) execute instructions from the Underlying Portfolio to restrict or prohibit further purchases or transfers by specific Contract Owners who violate the frequent trading policies established by the Underlying Portfolio. PAYMENTS The latest Issue Date is the day prior to the 86th birthday of the oldest Owner or, if the Owner is not a natural person, the oldest Annuitant. The Company will issue a Contract when its underwriting requirements are met. These requirements include receipt of the initial payment and allocation instructions by the Company at its Service Office and may include the proper completion of an application; however, where permitted by law, the Company may issue a Contract without completion of an application. If all issue requirements are not completed within five business days of the Company's receipt of the initial payment, the payment will be returned immediately unless the applicant authorizes the Company to retain it pending completion of all issue requirements. The Company reserves the right to reject an application or request to issue a Contract. Any such rejection will not discriminate unfairly among purchasers. (Note: Throughout this Prospectus, the terms "payment(s)" and "gross payment(s)" refer solely to monies the Owner submits to the Company to be applied to the Contract. These terms do not include any Payment Credits allocated to the Contract by the Company.) Payments may be made to the Contract at any time prior to the Annuity Date, or prior to the death of an Owner, subject to certain minimums: - Currently the initial payment must be at least $5,000 ($2,000 for IRA's). A lower minimum amount may be permitted if monthly automatic payments are being forwarded directly from a financial institution. - Each subsequent payment must be at least $100. - The minimum allocation to a Guarantee Period Account is $1,000. If less than $1,000 is allocated to a Guarantee Period Account, the Company reserves the right to apply that amount to the DWS Money Market Portfolio. 26 Payments are to be made payable to the Company. The Company may reduce a payment by any applicable premium tax before applying it to the Contract. The initial net payment is credited to the Contract and allocated among the requested investment options as of the date that all issue requirements are properly met. The allocation instructions for the initial net payment will serve as the allocation instructions for all future payments unless changed. You also have the option of specifying how a specific payment should be allocated. This will not change the allocation instructions for any subsequent payment. For a discussion of future payments to an Automatic Transfer Program (Dollar Cost Averaging), please see "Automatic Transfers (Dollar Cost Averaging)" below. PAYMENT CREDITS A Payment Credit will be added to the Contract's Accumulated Value each time a payment is made. The Payment Credit is funded from the Company's General Account and is currently equal to 4% of each payment received. The Company guarantees that the Payment Credit will never be less than 4%. Payment Credits are not considered to be "investment in the contract" for income tax purposes. See FEDERAL TAX CONSIDERATIONS. Each Payment Credit is immediately allocated among the investment options in the same proportion as the applicable payment. However, if you cancel the Contract under its "Right to Examine" provision, the amount refunded to you will be reduced by the amount of the Payment Credit(s). If the applicable "Right to Examine" provision in your state provides that you will receive the adjusted Accumulated Value of the Contract, this means that you receive any gains and bear any losses attributable to the Payment Credit. For more information, see "RIGHT TO CANCEL," below. The Company uses a portion of the mortality and expense risk charge and surrender charge to help recover the expenses associated with the Payment Credit under this Contract. See CHARGES AND DEDUCTIONS. Under certain circumstances (such as a period of poor market performance) a contract without a Payment Credit (or a bonus) may provide greater values than this Contract, which contains the Payment Credit. In addition, due to the generally larger surrender charge for a contract with a Payment Credit, an annuity contract without a Payment Credit may provide greater values upon surrender than a Contract that contains the Payment Credit. You should consider these possibilities before purchasing the Contract. COMPUTATION OF VALUES The Owner may allocate payments among the Sub-Accounts, Guarantee Period Accounts, and the Fixed Account. Allocations to the Guarantee Period Accounts and the Fixed Account are not converted into Accumulation Units, but are credited interest at a rate periodically set by the Company. See GUARANTEE PERIOD ACCOUNTS and APPENDIX A--MORE INFORMATION ABOUT THE FIXED ACCOUNT. The Accumulated Value under the Contract is determined by: (1) multiplying the number of Accumulation Units in each Sub-Account by the value of an Accumulation Unit of that Sub-Account on the Valuation Date, (2) adding together the values of each Sub-Account, and (3) adding the amount of the accumulations in the Fixed Account and Guarantee Period Accounts, if any. THE ACCUMULATION UNIT. Allocations to the Sub-Accounts are credited to the Contract in the form of Accumulation Units. Accumulation Units are credited separately for each Sub-Account. The number of Accumulation Units of each Sub-Account credited to the Contract is equal to the portion of the payment and Payment Credit allocated to the Sub-Account, divided by the dollar value of the applicable Accumulation Unit as of the Valuation Date. The number of Accumulation Units resulting from each 27 payment and Payment Credit will remain fixed unless changed by a subsequent split of Accumulation Unit value, a transfer, a withdrawal, or surrender. The dollar value of an Accumulation Unit of each Sub-Account varies from Valuation Date to Valuation Date based on the investment experience of that Sub-Account, and will reflect the investment performance, expenses and charges of its Underlying Portfolios. The value of an Accumulation Unit was arbitrarily set at $1.00 on the first Valuation Date for each Sub-Account. NET INVESTMENT FACTOR. The net investment factor is an index that measures the investment performance of a Sub-Account from one Valuation Period to the next. This factor is equal to 1.000000 plus the result (which may be positive or negative) from dividing (1) by (2) and subtracting the sum of (3) and (4) where: (1) is the investment income of a Sub-Account for the Valuation Period, including realized or unrealized capital gains and losses during the Valuation Period, adjusted for provisions made for taxes, if any; (2) is the value of that Sub-Account's assets at the beginning of the Valuation Period; (3) is a charge for mortality and expense risks equal to 1.25% on Contracts issued by Commonwealth Annuity on an annual basis of the daily value of the Sub-Account's assets; and (4) is an administrative charge equal to 0.15% on an annual basis of the daily value of the Sub-Account's assets. The dollar value of an Accumulation Unit as of a given Valuation Date is determined by multiplying the dollar value of the corresponding Accumulation Unit as of the immediately preceding Valuation Date by the appropriate net investment factor. For an illustration of an Accumulation Unit calculation using a hypothetical example see the SAI. RIGHT TO CANCEL An Owner may cancel the Contract at any time within ten days after receipt of the Contract (or longer if required by law) and receive a refund. In order to cancel the Contract, the Owner must mail or deliver it to the Company's Service Office, se2, an affiliate of Security Benefit Life Insurance Company, located at One Security Benefit Place, Topeka, KS 66675, Telephone 1-800-782-8380, or to an authorized representative. Mailing or delivery must occur within ten days after receipt of the Contract for cancellation to be effective. In most states, the Company will pay the Owner the Contract's Accumulated Value adjusted for any Market Value Adjustment for amounts allocated to a Guarantee Period Account, plus any amounts deducted for taxes, charges or fees, minus any Payment Credit(s). However, if the Contract was purchased as an IRA or issued in a state that requires a full refund of the initial payment(s), the Company will provide a refund equal to your gross payment(s). In some states, the refund may equal the greater of (a) your gross payment(s) or (b) the Accumulated Value adjusted for any Market Value Adjustment, plus any amounts deducted for taxes, charges or fees, minus any Payment Credit(s). At the time the Contract is issued, the "Right to Examine" provision on the cover of the Contract will specifically indicate what the refund will be and the time period allowed to exercise the right to cancel. Each time you make a payment, you receive a Payment Credit equal to 4% of the payment. If you cancel the Contract under its "Right to Examine" provision, your refund will be reduced by the amount of the Payment Credit(s). If the "Right to Examine" provision in your state provides that you will receive the Accumulated Value of the Contract (adjusted as described above), this means that you receive any gains and bear any losses attributable to the Payment Credit. The liability of the Variable Account under this provision is limited to the Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any additional amounts refunded to the Owner will be paid by the Company. 28 TELEPHONE TRANSACTIONS PRIVILEGE Subject to state law, you, or anyone you authorize, may initiate transactions over the telephone, unless you notify the Company of your election not to have this privilege. The policy of the Company and its agents and affiliates is that we will not be responsible for losses resulting from acting upon telephone requests reasonably believed to be genuine. The Company will employ reasonable procedures to confirm that instructions communicated by telephone are genuine; otherwise, the Company may be liable for any losses due to unauthorized or fraudulent instructions. Such procedures may include, among other things, requiring some form of personal identification prior to acting upon instructions received by telephone. All telephone instructions are tape-recorded. The Company reserves the right to modify or discontinue this privilege at any time without prior notice. The Company cannot guarantee that you, or any other person you authorize, will always be able to reach us to complete a telephone transaction. Under these circumstances, you should submit your request in writing or other form acceptable to us. TRANSFER PRIVILEGE Prior to the Annuity Date and subject to the Disruptive Trading limitations described above under DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE, the Owner may transfer amounts among investment options upon written or telephone request to the Company. Transfer values will be based on the Accumulated Value next computed after receipt of the transfer request. Transfers to and from the Fixed Account may be subject to additional restrictions; see APPENDIX A--MORE INFORMATION ABOUT THE FIXED ACCOUNT. Transfers to a Guarantee Period Account must be at least $1,000. If the amount to be transferred to a Guarantee Period Account is less than $1,000, the Company may transfer that amount to the DWS Money Market Portfolio. Transfers from a Guarantee Period Account prior to the expiration of the Guarantee Period will be subject to a Market Value Adjustment. If the Owner requests a transfer of an amount from a Sub-Account that is higher than the amount in the Sub-Account on the Valuation Date (for example, if a request is made to transfer $100 from a Sub-Account but the Accumulated Value in the Sub-Account on the Valuation Date is only $98), the Company will transfer all of the Accumulated Value in the Sub-Account. Currently, the Company does not charge for transfers. The first 12 transfers in a Contract year are guaranteed to be free of any transfer charge. For each subsequent transfer in a Contract year, the Company reserves the right to assess a charge, guaranteed never to exceed $25, to reimburse it for the expense of processing transfers. The first automatic transfer or rebalancing under an Asset Allocation Model Reallocation program, Automatic Transfers (Dollar Cost Averaging) program, or Automatic Account Rebalancing program counts as one transfer for purposes of the twelve transfers guaranteed to be free of a transfer charge in each Contract year. Each subsequent automatic transfer or rebalancing under that request in the same or a subsequent Contract year is without charge and does not reduce the remaining number of transfers which may be made free of charge. The Company also reserves the right to restrict transfer privileges when exercised by a market timing firm or any other third party authorized to initiate allocations, transfers or exchanges on behalf of Contract Owners. The Company may, among other things, not accept: - the transfer or exchange instructions of any agent acting under a power of attorney on behalf of more than one Owner, or - the transfer or exchange instructions of individual Owners who have executed pre-authorized transfer or exchange forms which are submitted by market timing firms or other third parties on behalf of more than one Owner at the same time. 29 The Owner may authorize an independent third party to transact allocations and transfers in accordance with an asset allocation strategy or other investment strategy. The Company may provide administrative or other support services to these independent third parties, however, the Company does not engage any third parties to offer allocation or other investment services under this Contract, does not endorse or review any allocation or transfer recommendations and is not responsible for the investment results of such allocations or transfers transacted on the Owner's behalf. In addition, the Company reserves the right to discontinue services or limit the number of Portfolios that it may provide such services for as well as to restrict such transactions altogether when exercised by a market timing firm or any other third party authorized to initiate allocations, transfers or exchanges on behalf of Contract owners. The Company does not charge the Owner for providing additional support services. AUTOMATIC TRANSFERS AND AUTOMATIC ACCOUNT REBALANCING AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING). You may elect automatic transfers of a predetermined dollar amount on a periodic basis from the Fixed Account or the Sub-Accounts investing in the DWS Money Market Portfolio and the DWS Government & Agency Securities Portfolio ("source accounts"). The Company reserves the right to discontinue offering Dollar Cost Averaging options that utilize the Fixed Account as the source account. You may elect these automatic transfers to one or more Sub-Accounts, subject to the following: - the predetermined dollar amount may not be less than $100; - the periodic basis may be monthly, quarterly, semi-annually or annually; - automatic transfers may not be made into the selected source account, the Fixed Account, or the Guarantee Period Accounts; and - if an automatic transfer would reduce the balance in the source account(s) to less than $100, the entire balance will be transferred proportionately to the chosen Sub-Accounts. Automatic transfers from a particular source account will continue until the earlier of: - the amount in the source account on a transfer date is zero; or - the Owner's request to terminate the option is received by the Company. If additional amounts are allocated to a source account before its balance has fallen to zero, those additional amounts will also be automatically transferred. The original automatic transfer allocations will apply to all amounts in that source accounts unless you provide new allocation instructions. New allocation instructions will apply to the entire balance in the source account. If additional amounts are allocated to a source account after its balance has fallen to zero, automatic transfers will not begin again unless you specifically notify the Company to do so. To the extent permitted by law, the Company reserves the right, from time to time, to credit an enhanced interest rate to an initial and/or subsequent payment made to the Fixed Account, when it is being used as the source account from which to process automatic transfers. For more information see "ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM" in the SAI. AUTOMATIC ACCOUNT REBALANCING. The Owner may request automatic rebalancing of Sub-Account allocations on a monthly, quarterly, semi-annual or annual basis in accordance with his/her specified percentage allocations. As frequently as elected by the Owner, the Company will review the percentage allocations in the Underlying Portfolios and, if necessary, transfer amounts to ensure conformity with the designated percentage allocation mix. If the amount necessary to re-establish the mix on any scheduled date is less than $100, no transfer will be made. 30 Automatic Account Rebalancing will continue until (1) the Owner's request to terminate or change the option is received by the Company or (2) the end date designated by the Owner when the option was elected. If a subsequent payment is allocated in a manner different from the percentage allocation mix in effect on the date the payment is received, on the next scheduled rebalancing date the payment will be reallocated in accordance with the existing mix. LIMITATIONS. Currently, Dollar Cost Averaging and Automatic Account Rebalancing may not be in effect simultaneously. Either option may be elected at no additional charge when the Contract is purchased or at a later date. The Company reserves the right to limit the number of Sub-Accounts that may be utilized for automatic transfers and rebalancing, and to discontinue either option upon advance written notice. SURRENDERS AND WITHDRAWALS Before the Annuity Date, an Owner may surrender the Contract for its Surrender Value or withdraw a portion of its Accumulated Value. The request for surrender must be made on Company forms. The request for surrender or withdrawal must be made on Company forms. You may obtain Company forms by calling 1-800-782-8380. You may also obtain a Company withdrawal form at our Company web site, https://cwannuity.se2.com. In the case of surrender, the Owner must send the Contract and a signed written request for surrender on a Company surrender form to the Service Office. The Surrender Value will be calculated based on the Contract's Accumulated Value as of the Valuation Date on which the request and Contract are received at the Service Office. In the case of a withdrawal, the Owner must submit to the Service Office a signed, written request on a Company withdrawal form indicating the desired dollar amount and the investment options from which such amount is to be withdrawn. A withdrawal from a Sub-Account will result in cancellation of a number of units equivalent in value to the amount withdrawn. The amount withdrawn will equal the amount requested by the Owner plus any applicable surrender charge. Each withdrawal must be a minimum of $100. Any withdrawal made pursuant to these instructions will be made as of the Valuation Date that the response is received. A surrender charge, a Contract fee and, if applicable, a rider charge, may apply when a withdrawal is made or a Contract is surrendered. See CHARGES AND DEDUCTIONS. However, each calendar year prior to the Annuity Date, an Owner may withdraw a portion of the Contract's Accumulated Value without any applicable surrender charge; see "SURRENDER CHARGE," "Withdrawal Without Surrender Charge" under CHARGES AND DEDUCTIONS). Amounts withdrawn from a Guarantee Period Account prior to the end of the applicable Guarantee Period will be subject to a Market Value Adjustment, as described under GUARANTEE PERIOD ACCOUNTS. Any distribution is normally payable within seven days following the Company's receipt of the surrender or withdrawal request. The Company reserves the right to defer surrenders and withdrawals of amounts allocated to the Company's Fixed Account and Guarantee Period Accounts for a period not to exceed six months. The Company reserves the right to defer surrenders and withdrawals of amounts in each Sub-Account in any period during which: - trading on the New York Stock Exchange is restricted as determined by the SEC or such Exchange is closed for other than weekends and holidays, - the SEC has by order permitted such suspension, or - an emergency, as determined by the SEC, exists such that disposal of portfolio securities or valuation of assets of a separate account is not reasonably practicable. The surrender and withdrawal rights of Owners who are participants under Section 403(b) plans or who are participants in the Texas Optional Retirement Program (Texas ORP) are restricted; see FEDERAL TAX CONSIDERATIONS. 31 For important tax consequences, which may result from surrender or withdrawals, see FEDERAL TAX CONSIDERATIONS. Pursuant to new tax regulations, we generally are required to confirm, with your 403(b) plan sponsor or otherwise, that withdrawals, transfers or surrenders you request from a 403(b) Contract comply with applicable tax requirements before we process your request. For information about Withdrawals after the Annuity Date, see "WITHDRAWALS AFTER THE ANNUITY DATE" under ANNUITIZATION--THE PAYOUT PHASE. SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the Fixed Account on a periodic basis (monthly, bi-monthly, quarterly, semi-annually or annually). Systematic withdrawals from Guarantee Period Accounts are not available. The Owner may request: - the withdrawal of a SPECIFIC DOLLAR AMOUNT and the percentage of this amount to be taken from each designated Sub-Account and/or the Fixed Account; or - the withdrawal of a SPECIFIC PERCENTAGE of the Accumulated Value calculated as of the withdrawal dates, and may designate the percentage of this amount which should be taken from each account. The first withdrawal will take place on the latest of 16 days after the Issue Date, the date the written request is received at the Service Office, or on a date specified by the Owner. Systematic withdrawals will first be taken from amounts available as a "Withdrawal Without Surrender Charge" (see "SURRENDER CHARGE," "Withdrawal Without Surrender Charge" under CHARGES AND DEDUCTIONS); then from any applicable payments not subject to a surrender charge, if any; then from payments subject to a surrender charge; and last, from Payment Credits. Any applicable surrender charge will be deducted from the Contract's remaining Accumulated Value. The minimum amount of each automatic withdrawal is $100 and the Accumulated Value immediately following the withdrawal may not be reduced to less than $1,000. If a withdrawal would cause the remaining Accumulated Value to be less than $1,000, systematic withdrawals may be discontinued. Systematic withdrawals will cease automatically on the Annuity Date. The Owner may change or terminate systematic withdrawals only by written request to the Principal Office. LIFE EXPECTANCY DISTRIBUTIONS. (For Qualified Contracts and Contracts issued under Section 457 Deferred Compensation Plans only.) Each calendar year, prior to the Annuity Date, an Owner may take without surrender charge a series of systematic withdrawals from the Contract according to the Company's life expectancy distribution ("LED") option. The Owner must return a properly signed LED request form to the Principal Office. Where the Owner is a trust or other nonnatural person, the Owner may elect the LED option based on the Annuitant's life expectancy. If an Owner elects the Company's LED option, (which is based on the applicable IRS table), in each calendar year a fraction of the Accumulated Value is withdrawn without a surrender charge based on the Owner's life expectancy (or the joint life expectancy of the Owner and a beneficiary.) The numerator of the fraction is 1 (one). The denominator of the fraction will be either: - the remaining life expectancy of the Owner (or Owner and beneficiary), as determined annually by the Company; or - the prior year's life expectancy, minus one. The resulting fraction, expressed as a percentage, is then applied to the Accumulated Value at the beginning of the year to determine the amount to be distributed during the year. The Owner may choose to have the applicable life expectancy redetermined each year or use the prior year's life expectancy, minus one. Under the Company's LED option, the amount withdrawn from the Contract changes each year. 32 The Owner may elect periodic LED distributions on a monthly, bi-monthly, quarterly, semi-annual, or annual basis. The Owner may terminate the LED option at any time. The LED option will terminate automatically on the maximum Annuity Date permitted under the Contract, at which time an annuity payout option must be selected. The LED option may not produce annual distributions that meet the definition of "substantially equal periodic payments" as defined under Code Section 72(t). The withdrawals may be treated by the Internal Revenue Service (IRS) as premature distributions from the Contract and may be subject to a 10% federal tax penalty. Owners seeking distributions over their life under this definition should consult their tax advisor. For more information, see FEDERAL TAX CONSIDERATIONS. IN ADDITION, IF THE AMOUNT NECESSARY TO MEET THE "SUBSTANTIALLY EQUAL PERIODIC PAYMENT" DEFINITION IS GREATER THAN THE COMPANY'S LED AMOUNT, A SURRENDER CHARGE MAY APPLY TO THE AMOUNT IN EXCESS OF THE LED AMOUNT. SYSTEMATIC LEVEL FREE OF SURRENDER CHARGE WITHDRAWAL PROGRAM. In order to receive withdrawals without application of any surrender charge, the Owner may preauthorize level periodic withdrawals under the Systematic Level Free of Surrender Charge Withdrawal Program. Withdrawals under this program may be made on a monthly, bi-monthly, quarterly, semi-annual or annual basis. In order to ensure that no surrender charge is ever applied to withdrawals made under this program, the periodic withdrawals in any calendar year are limited to 15% of the total of all payments invested in the Contract as reduced by certain prior withdrawal(s) of payments. For more information on how this amount is calculated, see "SURRENDER CHARGE," "Withdrawal Without Surrender Charge" under CHARGES AND DEDUCTIONS. The program will automatically terminate if a withdrawal that is not part of the program is made. Otherwise, withdrawals will continue until all available Accumulated Value has been exhausted or until the Owner terminates the program by written request. DEATH BENEFIT A death benefit is payable if the Owner or the first of either Joint Owner dies prior to the Annuity Date. If the Owner is a natural person, no death benefit is payable at the death of any Annuitant. If the Owner is not a natural person, a death benefit will be paid upon the death of any Annuitant. A spousal beneficiary may elect to continue the Contract rather than receive the death benefit as provided in "THE SPOUSE OF THE OWNER AS BENEFICIARY." STANDARD DEATH BENEFIT. Unless an enhanced death benefit is elected at issue, the standard death benefit will be paid. The standard death benefit under Contracts issued by Commonwealth Annuity and Life Insurance Company is equal to the greater of : (a) the Contract's Accumulated Value on the Valuation Date that the Company receives both the death certificate and all necessary claim paperwork, increased by any positive Market Value Adjustment; and (b) gross payments prior to the date of death, proportionately reduced to reflect withdrawals. OPTIONAL ENHANCED DEATH BENEFIT RIDERS. When applying for the Contract, an Owner may elect one of the available optional Enhanced Death Benefit (EDB) Riders as long as the oldest Owner has not yet attained age 80 (a later age may apply to certain Riders as specified in APPENDIX B--OPTIONAL ENHANCED DEATH BENEFIT RIDERS). A separate charge for an EDB Rider is made against the Contract's Accumulated Value on the last day of each Contract month for the coverage provided during that month. The charge is made through a pro-rata reduction (based on relative values) of Accumulation Units in the Sub-Accounts and dollar amounts in the Fixed and Guarantee Period Accounts. For more information about the benefits available under each of the EDB Riders, see APPENDIX B--OPTIONAL ENHANCED DEATH BENEFIT RIDERS. For specific charges and more detail, see "OPTIONAL RIDER CHARGES" under CHARGES AND DEDUCTIONS. 33 PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit generally will be paid to the beneficiary in one sum upon receipt of both the death certificate and all necessary claim paperwork at the Principal Office. Instead of payment in one sum, the beneficiary may, by written request, elect to: (1) defer distribution of the death benefit for a period no more than five years from the date of death; or (2) receive distributions over the life of the beneficiary or for a period certain not extending beyond the beneficiary's life expectancy, with annuity benefit payments beginning within one year from the date of death. However, if the Owner has specified a death benefit annuity option, the death benefit will be paid out accordingly. Any death benefit annuity option specified by the Owner must comply with the requirements set forth in paragraph (2) above. If distribution of the death benefit is deferred under (1) or (2), any value in the Guarantee Period Accounts will be transferred to the Sub-Account investing in the DWS Money Market VIP. The excess, if any, of the death benefit over the Accumulated Value also will be transferred to the Sub-Account investing in the DWS Money Market VIP. The beneficiary may, by written request, effect transfers and withdrawals during the deferral period and prior to annuitization under (2), but may not make additional payments. The death benefit will reflect any earnings or losses experienced during the deferral period. If there are multiple beneficiaries, the consent of all is required. THE SPOUSE OF THE OWNER AS BENEFICIARY If the sole beneficiary is the deceased Owner's spouse, he or she may, by written request, continue the Contract rather than receiving payment of the death benefit. The spouse will then become the Owner and Annuitant subject to the following: (1) any value in the Guarantee Period Accounts will be transferred to the Sub-Account investing in the DWS Money Market VIP; and (2) the excess, if any, of the death benefit over the Contract's Accumulated Value also will be added to the Sub-Account investing in the DWS Money Market VIP. The resulting value will never be subject to a surrender charge when withdrawn. The new Owner may also make additional payments, but a surrender charge will apply to these additional amounts if they are withdrawn before they have been invested in the Contract for at least nine years. All other rights and benefits provided in the Contract will continue, except that any subsequent spouse of the new Owner, if named as beneficiary, will not be entitled to continue the Contract when the new Owner dies. FEDERAL DEFENSE OF MARRIAGE ACT. The right of a spouse to continue the Contract, and all Contract provisions relating to spousal continuation are available only to a person who meets the definition of "spouse" under Federal law. The U.S. Supreme Court has held Section 3 of the Federal Defense of Marriage Act (which purportedly did not recognize same-sex marriages, even those which are permitted under individual state laws) to be unconstitutional. Therefore, same-sex marriages recognized under state law will be recognized for federal law purposes. The Department of Treasury and the Internal Revenue Service have recently determined that for federal tax purposes, same-sex spouses will be determined based on the law of the state in which the marriage was celebrated irrespective of the law of the state in which the person resides. However, as some uncertainty remains regarding the treatment of same-sex spouses, you should consult a tax advisor for more information on this subject. OPTIONAL ENHANCED EARNINGS RIDER An optional Enhanced Earnings Rider (EER) may have been elected at issue for a separate monthly charge (See "OPTIONAL RIDER CHARGES" under CHARGES AND DEDUCTIONS.) This Rider provides for additional amounts to be paid to the beneficiary under certain circumstances in the event that an Owner, 34 or an Annuitant if the Owner is a nonnatural person, dies prior to the Annuity Date. For a discussion of the benefits and conditions of the Rider, see APPENDIX C--OPTIONAL ENHANCED EARNINGS RIDER. ASSIGNMENT The Contract, other than one sold in connection with certain qualified plans, provides that it may be assigned by the Owner at any time prior to the Annuity Date and prior to the death of an Owner (see FEDERAL TAX CONSIDERATIONS). The Company will not be deemed to have knowledge of an assignment unless it is made in writing on a Company approved form and filed at the Principal Office. The Company will not assume responsibility for determining the validity of any assignment. If an assignment of the Contract is in effect on the Annuity Date, the Company reserves the right to pay to the assignee, in one sum, that portion of the Surrender Value of the Contract to which the assignee appears to be entitled. The Company will pay the balance, if any, in one sum to the Owner in full settlement of all liability under the Contract. The interest of the Owner and of any beneficiary will be subject to any assignment. 35 ANNUITIZATION--THE PAYOUT PHASE Subject to certain restrictions discussed below, at annuitization the Owner has the right: - to select the annuity payout option under which annuity benefit payments are to be made; - to determine whether those payments are to be made on a fixed basis, a variable basis, or a combination fixed and variable basis. If a variable annuity payout option is selected, the Owner must choose an Annuity Benefit Payment Change Frequency (Change Frequency) and the date the first Change Frequency will occur; - to select one of the available Assumed Investment Returns (AIR) for a variable option (see VARIABLE ANNUITY BENEFIT PAYMENTS below for details); and - to elect to have the Death Benefit applied under any annuity payout option not extending beyond the beneficiary's life expectancy. The beneficiary may not change such an election. ELECTING THE ANNUITY DATE Generally, annuity benefit payments under the Contract will begin on the Annuity Date. The Annuity Date: - may not be earlier than the second Contract Anniversary; and - must occur before the Owner's 99th birthday. If the Owner does not select an Annuity Date, the default Annuity Date will be (a) one month before the Owner's 85th birthday (for Contracts issued prior to or on the Owner's 76th birthday) or (b) the Issue Date plus 10 years (for Contracts issued after the Owner's 76th birthday). In no event, however, will the default Annuity Date be later than the latest possible Annuity Date under the Contract. If there are Joint Owners, the age of the YOUNGER Owner will determine the latest possible Annuity Date and the default Annuity Date. The Owner may elect to change the Annuity Date by sending a written request to the Principal Office at least one month before the earlier of the new Annuity Date or the currently scheduled date. TAX CONSIDERATIONS RELATING TO THE ANNUITY DATE. If the Annuity Date under a non-qualified Contract is deferred until the Owner reaches an age that is significantly beyond the Owner's life expectancy, it is possible that the Contract will not be considered an annuity for federal tax purposes. In addition, the Internal Revenue Code ("the Code") and/or the terms of qualified plans may impose limitations on the age at which annuity benefit payments may commence and the type of annuity payout option that may be elected. The Owner should carefully review the selection of the Annuity Date with his/her tax adviser. See also FEDERAL TAX CONSIDERATIONS for further information. CHOOSING THE ANNUITY PAYOUT OPTION Regardless of how payments were allocated during the accumulation phase, the Owner may choose a variable annuity payout option, a fixed annuity payout option or a combination fixed and variable annuity payout option. Currently, all of the variable annuity payout options described below are available and may be funded through all of the variable Sub-Accounts. In addition, each of the variable annuity payout options is also available on a fixed basis. The Company may offer other annuity payout options. The Owner may change the annuity payout option up to one month before the Annuity Date. If the Owner fails to choose an annuity payout option, monthly benefit payments will be made under a variable Life with Cash Back annuity payout option. The annuity payout option selected must result in an initial payment of at least $50 (a lower amount may be required in certain jurisdictions.) The Company reserves the right to increase this minimum amount. If the annuity payout option selected does not produce an initial payment which meets this minimum, a single payment may be made. 36 VARIABLE ANNUITY PAYOUT OPTIONS. If the Owner selects a variable annuity payout option, he/she will receive monthly payments equal to the value of the fixed number of Annuity Units in the chosen Sub-Account(s). The first variable annuity benefit payment will be based on the current annuity option rates made available by the Company at the time the variable annuity payout option is selected. Annuity option rates determine the dollar amount of the first payment for each $1,000 of applied value. The annuity option rates are based on the Annuity 2000 Mortality Table and a 3% AIR. Since the value of an Annuity Unit in a Sub-Account reflects the investment performance of the Sub-Account, the amount of each monthly annuity benefit payment will usually vary. However, under this Contract, if the Owner elects a variable payout option, he or she must also select a monthly, quarterly, semi-annual or annual Change Frequency. The Change Frequency is the frequency that changes resulting from the Sub-Account's investment performance will be reflected in the dollar value of a variable annuity benefit payment. As such, the Change Frequency chosen will determine how frequently monthly variable annuity payments will vary. For example, if a monthly Change Frequency is in effect, payments may vary on a monthly basis. If a quarterly Change Frequency is selected, the amount of each monthly payment may change every three months and will be level within each three month cycle. At the time the Change Frequency is elected, the Owner must also select the date the first change is to occur. This date may not be later than the length of the Change Frequency elected. For example, if a semi-annual Change Frequency is elected, the date of the first change may not be later than six months after the Annuity Date. If a quarterly Change Frequency is elected, the date of the first change may not be later than three months after the Annuity Date. DESCRIPTION OF ANNUITY PAYOUT OPTIONS The Company currently provides the following annuity payout options: LIFE ANNUITY PAYOUT OPTION - SINGLE LIFE ANNUITY--Monthly payments during the Annuitant's life. Payments cease with the last annuity benefit payment due prior to the Annuitant's death. - JOINT AND SURVIVOR ANNUITIES--Monthly payments during the Annuitant's and Joint Annuitant's joint lifetimes. Upon the first death, payments will continue for the remaining lifetime of the survivor at a previously elected level of 100%, two-thirds or one-half of the total number of Annuity Units. LIFE WITH PERIOD CERTAIN ANNUITY PAYOUT OPTION - SINGLE LIFE--Monthly payments guaranteed for a specified number of years and continuing thereafter during the Annuitant's lifetime. If the Annuitant dies before all guaranteed payments have been made, the remaining payments continue to the Owner or the Beneficiary (whichever is applicable). - JOINT AND SURVIVOR ANNUITIES--Monthly payments guaranteed for a specified number of years and continuing during the Annuitant's and Joint Annuitant's joint lifetimes. Upon the first death, payments continue for the survivor's remaining lifetime at the previously elected level of 100%, 66 2/3% or 50% of the Annuity Units. The greater the percentage provided to the surviving Annuitant, the lower the amount of the original monthly payments. If the surviving Annuitant dies before all guaranteed payments have been made, the remaining payments continue to the Owner or the Beneficiary (whichever is applicable). LIFE WITH CASH BACK ANNUITY PAYOUT OPTION - SINGLE LIFE--Monthly payments during the Annuitant's life. Thereafter, any excess of the original applied Annuity Value, over the total amount of annuity benefit payments made and withdrawals taken, will be paid to the Owner or the Beneficiary (whichever is applicable). 37 - JOINT AND SURVIVOR ANNUITIES--Monthly payments during the Annuitant's and Joint Annuitant's joint lifetimes. At the first death, payments continue for the survivor's remaining lifetime at the previously elected level of 100%, 66 2/3% or 50% of the Annuity Units. Thereafter, any excess of the original applied Annuity Value, over the total amount of annuity benefit payments made and withdrawals taken, will be paid to the Owner or the Beneficiary (whichever is applicable). PERIOD CERTAIN ANNUITY PAYOUT OPTION (PAYMENTS GUARANTEED FOR A SPECIFIC NUMBER OF YEARS) Monthly annuity benefit payments for a chosen number of years ranging from five to thirty are paid. If the Annuitant dies before the end of the period, remaining payments will continue. The period certain option does not involve a life contingency. In the computation of the payments under this option, the charge for annuity rate guarantees, which includes a factor for mortality risks, is made. VARIABLE ANNUITY BENEFIT PAYMENTS THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure of the value of the monthly annuity benefit payments under a variable annuity payout option. The value of an Annuity Unit in each Sub-Account on its inception date was set at $1.00. The value of an Annuity Unit of a Sub-Account on any Valuation Date thereafter is equal to the value of the Annuity Unit on the immediately preceding Valuation Date multiplied by the product of: (a) a discount factor equivalent to the AIR and (b) the Net Investment Factor of the Sub-Account funding the annuity benefit payments for the applicable Valuation Period. Annuity benefit payments will increase from one payment date to the next if the annualized net rate of return during that period is greater than the AIR and will decrease if the annualized net rate of return is less than the AIR. Where permitted by law, the Owner may select an AIR of 3%, 5% or 7%. A higher AIR will result in a higher initial payment. However, subsequent payments will increase more slowly during periods when actual investment performance exceeds the AIR and will decrease more rapidly during periods when investment performance is less than the AIR. The election of an AIR that is significantly higher or lower than prevailing investment returns could affect the treatment of annuity payments under a Contract with regard to (i) compliance with the "substantially equal payment" exception to the penalty for withdrawals from a Contract prior to age 59 1/2, (ii) compliance with the minimum distribution requirements of the Code applicable to qualified Contracts, and/or (iii) compliance with the death benefit distribution requirements of the Code applicable to non-qualified Contracts. THE OWNER SHOULD CAREFULLY REVIEW THE SELECTION OF THE AIR WITH HIS/HER TAX ADVISER. DETERMINATION OF THE FIRST ANNUITY BENEFIT PAYMENT. The amount of the first periodic variable annuity benefit payment depends on the: - annuity payout option chosen; - length of the annuity payout option elected; - age of the Annuitant; - gender of the Annuitant (if applicable, see "NORRIS DECISION"); - value of the amount applied under the annuity payout option; - applicable annuity option rates based on the Annuity 2000 Mortality Table; and - AIR selected. 38 The dollar amount of the first periodic annuity benefit payment is determined by multiplying (1) the Accumulated Value applied under that option after application of any Market Value Adjustment and less premium tax, if any, (or the amount of the death benefit, if applicable) divided by $1,000, by (2) the applicable amount of the first monthly payment per $1,000 of value. DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first variable annuity benefit payment is then divided by the value of an Annuity Unit of the selected Sub-Account(s) to determine the number of Annuity Units represented by the first payment. The number of Annuity Units remains fixed under all annuity payout options (except for the survivor annuity benefit payment under the joint and two-thirds or joint and one-half option) unless the Owner transfers among Sub-Accounts, makes a withdrawal, or units are split. DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. For each subsequent payment, the dollar amount of the variable annuity benefit payment is determined by multiplying this fixed number of Annuity Units by the value of an Annuity Unit on the applicable Valuation Date. The dollar amount of each periodic variable annuity benefit payment after the first will vary with subsequent variations in the value of the Annuity Unit of the selected Sub-Account(s). For an illustration of the calculation of a variable annuity benefit payment using a hypothetical example, see "Annuity Benefit Payments" in the SAI. PAYMENT OF ANNUITY BENEFIT PAYMENTS. The Owner will receive the annuity benefit payments unless he/she requests in writing that payments be made to another person, persons, or entity. If the Owner (or, if there are Joint Owners, the surviving Joint Owner) dies on or after the Annuity Date, the beneficiary will become the Owner of the Contract. Any remaining annuity benefit payments will continue to the beneficiary in accordance with the terms of the annuity benefit payment option selected. If there are Joint Owners on or after the Annuity Date, upon the first Owner's death, any remaining annuity benefit payments will continue to the surviving Joint Owner in accordance with the terms of the annuity benefit payment option selected. If an Annuitant dies on or after the Annuity Date but before all guaranteed annuity benefit payments have been made, any remaining guaranteed payments will continue to be paid to the Owner or the payee designated by the Owner. Unless otherwise indicated by the Owner, the present value of any remaining guaranteed annuity benefit payments may be paid in a single sum to the Owner. For discussion of present value calculation, see "Calculation of Present Value" below. TRANSFERS OF ANNUITY UNITS After the Annuity Date and prior to the death of the Annuitant, the Owner may transfer among the available Sub-Accounts upon written or telephone request to the Company. Transfers will be subject to the same Disruptive Trading restrictions discussed under DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE. A designated number of Annuity Units equal to the dollar amount of the transfer requested will be exchanged for an equivalent dollar amount of Annuity Units of another Sub-Account. Transfer values will be based on the Annuity Value next computed after receipt of the transfer request. Currently, the Company does not charge for transfers. The first 12 transfers in a Contract year are guaranteed to be free of any transfer charge. For each subsequent transfer in a Contract year, the Company reserves the right to assess a charge, guaranteed never to exceed $25, to reimburse it for the expense of processing transfers. As of the date of this Prospectus, transfers may be made to all of the Sub-Accounts; however, the Company reserves the right to limit the number of Sub-Accounts to which transfers may be made. Automatic Rebalancing (AAR) is available during the annuitization phase subject to the same rules described in "TRANSFER PRIVILEGE" under DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE. 39 WITHDRAWALS AFTER THE ANNUITY DATE WITHDRAWALS AFTER THE ANNUITY DATE FROM QUALIFIED AND NON-QUALIFIED CONTRACTS MAY HAVE ADVERSE TAX CONSEQUENCES. BEFORE MAKING A WITHDRAWAL, PLEASE CONSULT YOUR TAX ADVISOR. After the Annuity Date and prior to the death of the Annuitant, the Owner may take withdrawals from the Contract. The Owner must submit to the Principal Office a signed, written request indicating the desired dollar amount of the withdrawal. The minimum amount of a withdrawal is $1,000. If the amount requested is greater than the maximum amount that may be withdrawn at that time, the Company will allow the withdrawal only up to the maximum amount. The type of withdrawal and the number of withdrawals that may be made each calendar year depend upon whether the Owner annuitizes under an annuity payout option with payments based on the life of one or more Annuitants with no guaranteed payments (a "Life" annuity payout option), under a life annuity payout option that in part provides for a guaranteed number of payments (a "Life With Period Certain" or "Life With Cash Back" annuity payout option), or an annuity payout option based on a guaranteed number of payments (a "Period Certain" annuity payout option). The amount of each Payment Withdrawal or Present Value Withdrawal represents a portion of the present value of the remaining annuity benefit payments or remaining guaranteed annuity benefit payments, respectively, and proportionately reduces the number of Annuity Units (under a variable annuity payout option) or dollar amount (under a fixed annuity payout option) applied to future annuity benefit payments. Because each variable annuity benefit payment is determined by multiplying the number of Annuity Units by the value of an Annuity Unit, the reduction in the number of Annuity Units will result in lower future variable annuity benefit payments. See Calculation of Proportionate Reduction, below. The present value is calculated with a discount rate that will include an additional charge if a withdrawal is taken within 5 years of the Issue Date. See "Calculation of Present Value," below. PAYMENT WITHDRAWALS UNDER LIFE ANNUITY PAYOUT OPTIONS The Owner may make one Payment Withdrawal in each calendar year. A Payment Withdrawal cannot exceed the previous monthly annuity benefit payment multiplied by ten (10). The amount of each Payment Withdrawal represents a percentage of the present value of the remaining annuity benefit payments. PAYMENT AND PRESENT VALUE WITHDRAWALS UNDER LIFE WITH PERIOD CERTAIN OR LIFE WITH CASH BACK ANNUITY PAYOUT OPTIONS The Owner may make one Payment Withdrawal in each calendar year. A Payment Withdrawal cannot exceed the previous monthly annuity benefit payment multiplied by ten (10). The amount of each Payment Withdrawal represents a percentage of the present value of the remaining annuity benefit payments. The Owner may make one Present Value Withdrawal in each calendar year, if there are remaining GUARANTEED annuity benefit payments. The amount of each Present Value Withdrawal represents a percentage of the present value of the remaining guaranteed annuity benefit payments. Each year a Present Value Withdrawal is taken, the Company records the percentage of the present value of the then remaining guaranteed annuity benefit payments that was withdrawn. The total percentage withdrawn over the life of the Contract cannot exceed 75%. This means that each Present Value Withdrawal is limited by the REMAINING AVAILABLE PERCENTAGE (For example, assume that in year three the Owner withdraws 15% of the then current present value of the remaining guaranteed annuity benefit payments. In year seven, the Owner withdraws 20% of the then current present value of the remaining guaranteed annuity benefit payments. Through year seven the total percentage withdrawn is 35%. After year seven, the Owner may make Present Value Withdrawal(s) of up to 40% (75%--35%) of the present value of any remaining guaranteed annuity benefit payments). If the Annuitant is still living after the guaranteed annuity benefit payments have been made, the number of Annuity Units or dollar amount applied to future annuity benefit payments will be restored as if no Present Value Withdrawal(s) had taken place. See "Calculation of Proportionate Reduction--Present Value Withdrawals," below. 40 PRESENT VALUE WITHDRAWALS UNDER PERIOD CERTAIN ANNUITY PAYOUT OPTIONS The Owner may make multiple Present Value Withdrawals in each calendar year, up to 100% of the present value of the guaranteed annuity benefit payments. Withdrawal of 100% of the present value of the guaranteed annuity benefit payments will result in termination of the Contract. CALCULATION OF PROPORTIONATE REDUCTION. Each Payment Withdrawal proportionately reduces the number of Annuity Units applied to each future variable annuity benefit payment or the dollar amount applied to each future fixed annuity benefit payment. Each Present Value Withdrawal proportionately reduces the number of Annuity Units applied to each future GUARANTEED variable annuity benefit payment or the dollar amount applied to each future GUARANTEED fixed annuity benefit payment. Because each variable annuity benefit payment is determined by multiplying the number of Annuity Units by the value of an Annuity Unit, the reduction in the number of Annuity Units will result in lower future variable annuity benefit payments. - PAYMENT WITHDRAWALS. Payment Withdrawals are available under Life, Life with Period Certain, or Life with Cash Back annuity payout options. The Owner may make one Payment Withdrawal in each calendar year. Under a variable annuity payout option, the proportionate reduction in Annuity Units is calculated by multiplying the number of Annuity Units in each future variable annuity benefit payment (determined immediately prior to the withdrawal) by the following fraction: Amount of the variable withdrawal --------------------------------------------------------- Present value of all remaining variable annuity benefit payments immediately prior to the withdrawal Because each variable annuity benefit payment is determined by multiplying the number of Annuity Units by the value of an Annuity Unit, the reduction in the number of Annuity Units will result in lower future variable annuity benefit payments. If a withdrawal is taken within 5 years of the Issue Date, the discount rate used to calculate the present value will include an additional charge. See "Calculation of Present Value," below. - PRESENT VALUE WITHDRAWALS. Present Value Withdrawals are available under a Period Certain annuity payout option. Under this option the Owner may make multiple Present Value Withdrawals in each calendar year. In addition, if a Life with Period Certain or Life with Cash Back annuity payout option is elected, the Owner may make one Present Value Withdrawal in each calendar year, if there are remaining guaranteed annuity benefit payments. Under a variable annuity payout option, the proportionate reduction in Annuity Units is calculated by multiplying the number of Annuity Units in each future variable guaranteed annuity benefit payment (determined immediately prior to the withdrawal) by the following fraction: Amount of the variable withdrawal --------------------------------------------------------- Present value of remaining guaranteed variable annuity benefit payments immediately prior to the withdrawal Under a fixed annuity payout option, the proportionate reduction is calculated by multiplying the dollar amount of each future fixed annuity benefit payment by a similar fraction, which is based on the amount of the fixed withdrawal and present value of remaining guaranteed fixed annuity benefit payments. Because each variable annuity benefit payment is determined by multiplying the number of Annuity Units by the value of an Annuity Unit, the reduction in the number of Annuity Units will result in lower variable annuity benefit payments with respect to the guaranteed payments. Under a fixed annuity payout option, the proportionate reduction will result in lower fixed annuity benefit payments with respect to the guaranteed payments. However, under a Life with Period Certain 41 annuity payout option or Life with Cash Back annuity payout option, if the Annuitant is still living after the guaranteed number of annuity benefit payments has been made, the number of Annuity Units or dollar amount of future annuity benefit payments will be restored as if no Present Value Withdrawal(s) had taken place. If a withdrawal is taken within 5 years of the Issue Date, the discount rate used to calculate the present value will include an additional charge. See "Calculation of Present Value," below. CALCULATION OF PRESENT VALUE. When a withdrawal is taken, the present value of future annuity benefit payments is calculated based on an assumed mortality table and a discount rate. The mortality table that is used will be equal to the mortality table used at the time of annuitization to determine the annuity benefit payments (currently the Annuity 2000 Mortality Table with male, female, or unisex rates, as appropriate). The discount rate is the AIR (for a variable annuity payout option) or the interest rate (for a fixed annuity payout option) that was used at the time of annuitization to determine the annuity benefit payments. If a withdrawal is made within 5 years of the Issue Date, the discount rate is increased by a "Withdrawal Adjustment Charge." The charge will range from 2% to 1% based on the following: - 15 or more years of annuity benefit payments being valued: 1.00% - 10-14 years of annuity benefit payments being valued: 1.50% - Less than 10 years of annuity benefit payments being valued: 2.00%
The Withdrawal Adjustment Charge does not apply if a withdrawal is made in connection with the death of an Annuitant or if a withdrawal is made 5 or more years after the Issue Date. For each Payment Withdrawal, the number of years of annuity benefit payments being valued depends upon the life expectancy of the Annuitant at the time of the withdrawal. The life expectancy will be determined by a mortality table that will be equal to the mortality table used at the time of annuitization to determine the annuity benefit payments (currently the Annuity 2000 Mortality Table). Because the impact of the Withdrawal Adjustment Charge will depend on the type of withdrawal taken, you should carefully consider the following before making a withdrawal (especially if you are making the withdrawal under a Life with Period Certain or Life with Cash Back annuity payout option): - For a Payment Withdrawal, the present value calculation (including any applicable adjustments) affects the proportionate reduction of the remaining number of Annuity Units (under a variable annuity payout option) or dollar amount (under a fixed annuity payout option), applied to each future annuity benefit payment, as explained in "Calculation of Proportionate Reduction--Payment Withdrawals," above. If a Withdrawal Adjustment Charge applies, there will be a larger proportionate reduction in the number of Annuity Units or the dollar amount applied to each future annuity benefit payment. This will result in lower future annuity benefit payments, all other things being equal. - For a Present Value Withdrawal, the discount factor is used in determining the maximum amount that can be withdrawn under the present value calculation. If a Withdrawal Adjustment Charge applies, the discount factor will be higher, and the maximum amount that can be withdrawn will be lower. In addition, there will be a larger proportionate reduction in the number of Annuity Units or the dollar amount applied to each future guaranteed annuity benefit payment. This will result in lower future annuity benefit payments with respect to the guaranteed payments, all other things being equal. See "Calculation of Proportionate Reduction--Present Value Withdrawals," above. For examples comparing a Payment Withdrawal and a Present Value Withdrawal, see APPENDIX F-- EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS. DEFERRAL OF WITHDRAWALS. A withdrawal is normally payable within seven days following the Company's receipt of the withdrawal request. However, the Company reserves the right to defer withdrawals of amounts in each Sub-Account in any period during which: - trading on the New York Stock Exchange is restricted as determined by the SEC or such Exchange is closed for other than weekends and holidays; 42 - the SEC has by order permitted such suspension; or - an emergency, as determined by the SEC, exists such that disposal of portfolio securities or valuation of assets of a separate account is not reasonably practicable. The Company reserves the right to defer withdrawals of amounts allocated to the Company's Fixed Account for a period not to exceed six months. REVERSAL OF ANNUITIZATION The Owner may reverse the decision to annuitize by written request to the Company within 90 days of the Annuity Date. Upon receipt of such request, the Company will return the Contract to the Accumulation Phase, subject to the following: (1) The value applied under a fixed annuity payout option at the time of annuitization will be treated as if it had been invested in the Fixed Account of the Contract on that same date. (For Owners who elected the M-GAP Rider prior to its discontinuance on January 31, 2002 (see "DISCONTINUATION OF THE OPTIONAL M-GAP RIDER" in the SAI) and who exercise their rights under that Rider at annuitization, the value applied to the Fixed Account upon reversal of annuitization will not include any excess value of the M-GAP Benefit Base over the Annuity Value.) (2) The Sub-Account allocations that were in effect at the time of annuitization will first be used for calculating the reversal. Any transfers between variable Sub-Accounts during the Annuity Payout phase will then be treated as transfers during the Accumulation Phase. As a result, the Contract's Accumulated Value after the reversal will reflect the same Sub-Account allocations that were in effect immediately prior to the reversal. (3) Any annuity benefit payments paid and any withdrawals taken during the Annuity Payout phase will be treated as a withdrawal of the Surrender Value in the Accumulation Phase, as of the date of the payment or withdrawal. Surrender charges may apply to these withdrawals and there may be adverse tax consequences. (The IRS has generally recognized the rescission of sales or other transactions resulting in the receipt of taxable payments as effective retroactively only if all of the following events have taken place within a single taxable year: the initial transaction, the receipt of all taxable payments, the rescission of the transaction and the repayment of all the amounts received.) The Owner should carefully review the tax considerations applicable to a reversal of annuitization with his/her tax adviser before taking such action. If the Company learns of the Owner's decision to reverse annuitization after the latest possible Annuity Date permitted under the Contract, the Company will contact the Owner. The Owner must then immediately select an annuity payout option (either the original annuity payout option or a different annuity payout option). If the Owner does not select an annuity payout option, payments will begin under a variable Life with Cash Back annuity payout option. NORRIS DECISION In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme Court ruled that, in connection with retirement benefit options offered under certain employer-sponsored employee benefit plans, annuity payout options based on sex-distinct actuarial tables are not permissible under Title VII of the Civil Rights Act of 1964. The ruling requires that benefits derived from contributions paid into a plan after August 1, 1983 be calculated without regard to the sex of the employee. Annuity benefits attributable to payments received by the Company under a Contract issued in connection with an employer-sponsored benefit plan affected by the NORRIS decision will be based on unisex rates. 43 CHARGES AND DEDUCTIONS Deductions under the Contract and charges against the assets of the Sub-Accounts are described below. The Company uses a portion of the mortality and expense risk charge and the surrender charge described below to recover expenses associated with the Payment Credit. Even though the Payment Credit is credited during the accumulation phase only, the mortality and expense risk charge applies during both the accumulation phase and the annuity payout phase. The Company expects to make a profit from the charges it makes to recover the expenses of the Payment Credit. Other deductions and expenses paid out of the assets of the Underlying Portfolios are described in the prospectuses and SAIs of the Underlying Portfolios. VARIABLE ACCOUNT DEDUCTIONS MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a charge against the assets of each Sub-Account to compensate for certain mortality and expense risks it has assumed. The mortality and expense risk charge is assessed daily at an annual rate of 1.25% of each Sub-Account's assets. The charge is imposed during both the accumulation phase and the annuity payout phase. The mortality risk arises from the Company's guarantee that it will make annuity benefit payments in accordance with annuity rate provisions established at the time the Contract is issued for the life of the Annuitant (or in accordance with the annuity payout option selected), no matter how long the Annuitant lives and no matter how long all Annuitants as a class live. The mortality charge is deducted during the annuity payout phase on all Contracts, including those that do not involve a life contingency, even though the Company does not bear direct mortality risk with respect to variable annuity settlement options that do not involve life contingencies. The expense risk arises from the Company's guarantee that the charges it makes will not exceed the limits described in the Contract and in this Prospectus. If the charge for mortality and expense risks is not sufficient to cover actual mortality experience and expenses, the Company will absorb the losses. If expenses are less than the amounts provided to the Company by the charge, the difference will be a profit to the Company. To the extent this charge results in a profit to the Company, such profit will be available for use by the Company for, among other things, the payment of distribution, sales and other expenses, and to partially recover the expenses associated with the Payment Credit. This charge may not be increased. Since mortality and expense risks involve future contingencies that are not subject to precise determination in advance, it is not feasible to identify specifically the portion of the charge which is applicable to each. ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a daily Administrative Expense Charge at an annual rate of 0.15% of the average daily net assets of the Sub-Account. This charge may not be increased. The charge is imposed during both the accumulation phase and the annuity payout phase. The daily Administrative Expense Charge is assessed to help defray administrative expenses actually incurred in the administration of the Sub-Account. There is no direct relationship, however, between the amount of administrative expenses imposed on a given Contract and the amount of expenses actually attributable to that Contract. Deductions for the Contract fee (described below under "CONTRACT FEE") and for the Administrative Expense Charge are designed to reimburse the Company for the cost of administration and related expenses and are not expected to be a source of profit. The administrative functions and expense assumed by the Company in connection with the Variable Account and the Contract include, but are not limited to, clerical, accounting, actuarial and legal services, rent, postage, telephone, office equipment and supplies, expenses of preparing and printing registration statements, expense of preparing and typesetting prospectuses and the cost of printing prospectuses not allocable to sales expense, filing and other fees. OTHER CHARGES. Because the Sub-Accounts purchase shares of the Underlying Portfolios, the value of the net assets of the Sub-Accounts will reflect the investment advisory fee and other expenses incurred by the Underlying Portfolios. Management fee waivers and/or reimbursements may be in effect for certain or all of the Underlying Portfolios. The prospectuses and SAIs of the Underlying Portfolios contain additional information concerning expenses of the Underlying Portfolios and should be read in conjunction with this Prospectus. 44 The prospectuses and SAIs for the Underlying Portfolios also contain additional information concerning expenses of the Underlying Portfolios and should be read in conjunction with this Prospectus. CONTRACT FEE A $35 Contract fee (a lower fee may apply in some states) currently is deducted during the accumulation phase, on the Contract anniversary date and upon full surrender of the Contract, if the Accumulated Value on any of these dates is less than $75,000. The Contract fee is currently waived for Contracts issued to and maintained by the trustee of a 401(k) plan. The Company reserves the right to impose a Contract Fee up to $35 on Contracts issued to 401(k) plans but only with respect to Contracts issued after the date the waiver is no longer available. Where amounts have been allocated to more than one investment option, a percentage of the total Contract fee will be deducted from the value in each. The portion of the charge deducted from each investment option will be equal to the percentage that the value in that option bears to the Accumulated Value under the Contract. The deduction of the Contract fee from a Sub-Account will result in cancellation of a number of Accumulation Units equal in value to the portion of the charge deducted from that Sub-Account. Where permitted by law, the Contract fee also may be waived for Contracts where, on the issue date, either the Owner or the Annuitant is within the following class of individuals: 1. employees and registered representatives of any broker-dealer which has entered into a sales agreement with the Company to sell the Contract; 2. employees of the Company, its affiliates and subsidiaries; 3. officers, directors, trustees and employees of any of the Underlying Portfolios; 4. investment managers or sub-advisers of the Underlying Portfolios; and 5. the spouses of and immediate family members residing in the same household with such eligible persons. "Immediate family members" means children, siblings, parents and grandparents. OPTIONAL RIDER CHARGES Subject to state availability, the Company offers a number of riders that are only available if elected by the Owner at issue. A separate monthly charge is made for each Rider through a pro-rata reduction of the Accumulated Value of the Sub-Accounts, the Fixed Account and the Guarantee Period Accounts. The pro-rata reduction is based on the relative value that the Accumulation Units of the Sub-Accounts, the dollar amounts in the Fixed Account and the dollar amounts in the Guarantee Period Accounts bear to the total Accumulated Value. CHARGE FOR THE ENHANCED DEATH BENEFIT (EDB) RIDERS: The applicable charge for each of the following Riders is assessed on the Accumulated Value on the last day of each Contract month, multiplied by 1/12th of the following annual percentage rates: 1. Annual Step-Up EDB Rider (Form 3309-02)*............................. 0.25% 2. Annual Step-Up with 5% Roll-Up EDB Rider (Form 3311-02* or Form 3305-01.1--ONLY AVAILABLE IN TEXAS).......................... 0.35% 3. 10% Breakthrough with 5% Roll-Up EDB Rider (Form 3317-02)*........... 0.40% 4. Annual Step-Up with 7% Roll-Up EDB Rider (Form 3313-02)*............. 0.50% 5. Annual Step-Up EDB Rider (Form 3265-99):............................. 0.15% 6. 7% Roll-Up EDB Rider (Form 3266-99 or Form 3303-01).................. 0.30% 7. Annual Step-Up with 7% Roll-Up EDB Rider (Form 3264-99 or Form 3304-01)........................................................ 0.35%
------------------ * Total rider charges will be reduced by 0.05% if both this Enhanced Death Benefit Rider and the Enhanced Earnings Rider are in effect simultaneously. 45 CHARGE FOR THE ENHANCED EARNINGS RIDER (EER): The Company will assess a monthly rider charge for the EER, which will be deducted Pro Rata on the last day of each Contract month prior to the Annuity Date. The monthly rider charge will be equal to 1/12th of 0.30% of the Accumulated Value on that date. If the EER is in effect simultaneously with one of the referenced Enhanced Death Benefit Riders (see table above), the total aggregate charge for the Riders will be reduced by 0.05%. For a description of the Riders, see APPENDIX B--OPTIONAL ENHANCED DEATH BENEFIT RIDERS and APPENDIX C--OPTIONAL ENHANCED EARNINGS RIDER. CHARGE FOR DISCONTINUED MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDERS: If you elected one of the M-GAP Riders prior to their discontinuance on January 31, 2002, the following charges apply: Minimum Guaranteed Annuity Payout (M-GAP) Rider with a 15-year waiting period: 0.20% Minimum Guaranteed Annuity Payout (M-GAP) Rider with a 10-year waiting period: 0.35%
For more information about the M-GAP Rider see "APPENDIX G--DISCONTINUATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER". PREMIUM TAXES Some states and municipalities impose a premium tax on variable annuity contracts. State premium taxes currently range up to 3.5%. The Company makes a charge for state and municipal premium taxes, when applicable, and deducts the amount paid as a premium tax charge. The current practice of the Company is to deduct the premium tax charge in one of two ways: 1. if the premium tax was paid by the Company when payments were received, the premium tax charge may be deducted on a pro-rata basis when withdrawals are made, upon surrender of the Contract, or when annuity benefit payments begin (the Company reserves the right instead to deduct the premium tax charge for a Contract at the time payments are received); or 2. the premium tax charge is deducted when annuity benefit payments begin. In no event will a deduction be taken before the Company has incurred a tax liability under applicable state law. If no amount for premium tax was deducted at the time the payment was received, but subsequently tax is determined to be due prior to the Annuity Date, the Company reserves the right to deduct the premium tax from the Contract's Accumulated Value at the time such determination is made. SURRENDER CHARGE No charge for sales expense is deducted from payments at the time the payments are made. A surrender charge, however, may be deducted from the Accumulated Value in the case of surrender or withdrawal within certain time limits described below. The Company uses a portion of the surrender charge to recover expenses associated with the Payment Credit. CALCULATION OF SURRENDER CHARGE. For purposes of determining the surrender charge, the Accumulated Value is divided into four categories: - The amount available under the Withdrawal Without Surrender Charge provision, described below; - Old Payments--total payments invested in the Contract for more than nine years; - New Payments--payments received by the Company during the nine years preceding the date of the surrender or withdrawal; and - Payment Credits. Amounts available as a Withdrawal Without Surrender Charge, followed by Old Payments, may be withdrawn from the Contract at any time without the imposition of a surrender charge. However, if a withdrawal or surrender is attributable all or in part to New Payments, a surrender charge may be imposed. 46 The amount of the charge will depend upon the number of years that any New Payments to which the withdrawal is attributed have remained credited under the Contract. For the purpose of calculating surrender charges for New Payments, all amounts withdrawn are assumed to be deducted first from the oldest New Payment and then from the next oldest New Payment and so on, until all New Payments have been exhausted pursuant to the first-in-first-out ("FIFO") method of accounting. (See FEDERAL TAX CONSIDERATIONS for a discussion of how withdrawals are treated for income tax purposes.) The following surrender charge table outlines these charges:
COMPLETE YEARS FROM DATE OF PAYMENT CHARGE --------------------------------------------------------------- ------- Less than 4.................................................... 8.5% Less than 5.................................................... 7.5% Less than 6.................................................... 6.5% Less than 7.................................................... 5.5% Less than 8.................................................... 3.5% Less than 9.................................................... 1.5% Thereafter..................................................... 0%
The amount withdrawn equals the amount requested by the Owner plus the surrender charge, if any. The charge is applied as a percentage of the New Payments withdrawn. The total charge equals the aggregate of all applicable surrender charges for a surrender and withdrawals, including the Withdrawal Adjustment Charge that may apply if a withdrawal is taken during the Annuity Payout phase (see "WITHDRAWALS AFTER THE ANNUITY DATE" under ANNUITIZATION--THE PAYOUT PHASE). In no event will the total surrender and withdrawal charges exceed a maximum limit of 8.5% of total gross New Payments. WITHDRAWAL WITHOUT SURRENDER CHARGE: Each calendar year prior to the Annuity Date, an Owner may withdraw a portion of the Contract's Surrender Value without any applicable surrender charge ("Withdrawal Without Surrender Charge Amount" or "WWSC amount"). The WWSC amount is equal to the greater of A or B where: A is earnings at the time of withdrawal excluding Payment Credits and B is 15% times (X less Y)* less Z where: X is the total gross payments made to the contract Y is any previous withdrawals that exceed the WWSC amount Z is any previous WWSC amount withdrawn in the same CALENDAR year * In the contract, X less Y is referred to as the Gross Payment Base To illustrate how this works assume the following: - The issue date is February 1, 2000. - The initial payment to the contract is $100,000. - No subsequent payments are made to the contract. 47 THE OWNER MAKES THE FOLLOWING WITHDRAWALS:
CONTRACT YEAR IN WHICH EARNINGS AT DATE OF WITHDRAWAL THE TIME OF AMOUNT OF WITHDRAWAL MADE WITHDRAWAL WITHDRAWAL -------------- -------------- ----------- ---------- Withdrawal #1....................... April 1, 2000 1st $2,000 $ 8,000 Withdrawal #2....................... August 1, 2000 1st $3,680 $ 8,000 Withdrawal #3....................... April 1, 2001 2nd $7,414 $15,000 Withdrawal #4....................... August 1, 2001 2nd $3,404 $ 2,000
WITHDRAWAL #1 First, determine the WWSC amount available at the time of the withdrawal: A is $2,000 B is 15% times (X less Y) less Z where: X is $100,000 Y is $0 (no previous withdrawals made) Z is $0 (no withdrawal in same CALENDAR year made) 15% times ($100,000 less $0) less $0 = 15% times ($100,000) less $0 = $15,000 less $0 = $15,000 The greater of A or B is $15,000. This is the available WWSC amount at the time of Withdrawal #1. Second, compare the amount withdrawn to the available WWSC amount: Withdrawal #1 of $8,000 is less than the WWSC amount of $15,000. Thus, it is not subject to surrender charges. WITHDRAWAL #2 First, determine the WWSC amount available at the time of the withdrawal: A is $3,680 B is 15% times (X less Y) less Z where: X is $100,000 Y is $0 (Withdrawal #1, did not exceed the WWSC amount) Z is $8,000 (Withdrawal #1 made in the same CALENDAR year) 15% times ($100,000 less $0) less $8,000 = 15% times ($100,000) less $8,000 = $15,000 less $8,000 = $7,000 The greater of A or B is $7,000. This is the available WWSC amount at the time of Withdrawal #2. Second, compare the amount withdrawn to the available WWSC amount: Withdrawal #2 of $8,000 exceeds the available WWSC amount of $7,000. Only $7,000 of Withdrawal #2 is part of the WWSC amount and $1,000 exceeds the WWSC amount. 48 WITHDRAWAL #3 First, determine the WWSC amount available at the time of the withdrawal: A is $7,414 B is 15% times (X less Y) less Z where: X is $100,000 Y is $1,000 ($1,000 of Withdrawal #2 exceeded the WWSC amount) Z is $0 (This is the first withdrawal of this CALENDAR year) 15% times ($100,000 less $1,000) less $0 = 15% times ($99,000) less $0 = $14,850 less $0 = $14,850 The greater of A or B is $14,850. This is the available WWSC amount at the time of Withdrawal #3. Second, compare the amount withdrawn to the available WWSC amount: Withdrawal #3 of $15,000 exceeds the available WWSC amount of $14,850. Only $14,850 of Withdrawal #3 is part of the WWSC amount and $150.00 exceeds the WWSC amount. WITHDRAWAL #4 First, determine the WWSC amount available at the time of the withdrawal: A is $3,404 B is 15% times (X less Y) less Z where: X is $100,000 Y is $1,150 ($1,000 of Withdrawal #2 and $150 of Withdrawal #3 exceeded the WWSC amount) Z is $9,900 (Withdrawal #3 was made in the same CALENDAR year. $9,900 of the total withdrawal of 15,000 was a withdrawal of the WWSC amount.) 15% times ($100,000 less $6,100) less $9,900 = 15% times ($93,900) less $9,900 = $14,085 less $9,900 = $4,185 The greater of A or B is $4,185. This is the available WWSC amount at the time of Withdrawal #4. Second, compare the amount withdrawn to the available WWSC amount: Withdrawal #4 of $2,000 is less than the available WWSC amount of $4,185. Thus it, is not subject to surrender charges. IF YOU NEVER MAKE A WITHDRAWAL IN ANY CALENDAR YEAR THAT EXCEEDS THE WWSC AMOUNT, THEN THE MAXIMUM AVAILABLE WWSC AMOUNT EACH CALENDAR YEAR WILL NEVER BE LESS THAN 15% TIMES THE GROSS PAYMENTS MADE TO THE CONTRACT. EFFECT OF WITHDRAWAL WITHOUT SURRENDER CHARGE AMOUNT. When a withdrawal is taken, the Company initially determines the Withdrawal Without Surrender Charge Amount in the following order: - The Company first deducts the Withdrawal Without Surrender Charge Amount from Cumulative Earnings. - If the Withdrawal Without Surrender Charge Amount exceeds cumulative earnings, the Company will deem the excess to be withdrawn from New Payments on a last-in-first-out (LIFO) basis, so that 49 the newest New Payments are withdrawn first. This results in those New Payments, which are otherwise subject to the highest surrender charge at that point in time, being withdrawn first without a surrender charge. - If more than one withdrawal is made during the year, on each subsequent withdrawal the Company will waive the surrender charge, if any, until the entire Withdrawal Without Surrender Charge Amount has been withdrawn. After the entire Withdrawal Without Surrender Charge Amount available in a calendar year has been withdrawn, for the purposes of determining the amount of the surrender charge, if any, withdrawals will be deemed to be taken in the following order: 1. First from Old Payments - The surrender charge table is applicable, but because Old Payments have been invested in the Contract for more than 9 years, the surrender charge is 0%. 2. Second from New Payments - The surrender charge table is applicable. - Payments are now withdrawn from this category on a first-in-first-out (FIFO) basis, so that the oldest New Payments are now withdrawn first. This results in the withdrawal of New Payments with the lowest surrender charge first. 3. Third from Payment Credits. - The surrender charge table is not applicable to the withdrawal of Payment Credits. For Qualified Contracts and Contracts issued under Section 457 Deferred Compensation Plans only, the maximum amount available without a surrender charge during any calendar year will be the greatest of (a), (b) and (c) where (a) and (b) are the same as above and (c) is the amount available as a Life Expectancy Distribution less any Withdrawal Without Surrender Charge taken during the same calendar year. (see "Life Expectancy Distributions" under DESCRIPTION OF THE CONTACT--THE ACCUMULATION PHASE. For further information on surrender and withdrawals, including minimum limits on amount withdrawn and amount remaining under the Contract in the case of withdrawals, and important tax considerations, see "SURRENDER AND WITHDRAWALS" under DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE. WAIVER OF SURRENDER CHARGE(S) AND ADDITIONAL AMOUNTS CREDITED PHYSICAL DISABILITY OR ADMISSION TO MEDICAL CARE FACILITY. Where permitted by law, the Company will waive the surrender charge in the event that the Owner (or the Annuitant, if the Owner is not an individual) becomes physically disabled after the Issue Date of the Contract (or in the event that the original Owner or Annuitant has changed since issue, after being named Owner or Annuitant) and before attaining age 65. The Company may require proof of such disability and continuing disability and reserves the right to obtain an examination by a licensed physician of its choice and at its expense. In addition, the Company will waive the surrender charge in the event that an Owner (or the Annuitant, if the Owner is not an individual) is: (1) admitted to a medical care facility after becoming the Owner or Annuitant under the Contract and remains confined there until the later of one year after the Issue Date or 90 consecutive days; or (2) first diagnosed by a licensed physician as having a fatal illness after the Issue Date of the Contract and after being named Owner or Annuitant. 50 For purposes of the above provision, "medical care facility" means any state-licensed facility or, in a state that does not require licensing, a facility that is operating pursuant to state law, providing medically necessary inpatient care which is prescribed by a licensed "physician" in writing and based on physical limitations which prohibit daily living in a non-institutional setting. "Fatal illness" means a condition diagnosed by a licensed "physician" which is expected to result in death within two years of the diagnosis. "Physician" means a person (other than the Owner, Annuitant or a member of one of their families) who is state licensed to give medical care or treatment and is acting within the scope of that license. "Physically disabled" means that the Owner or Annuitant, as applicable, has been unable to engage in an occupation or to conduct daily activities for a period of at least 12 consecutive months as a result of disease or bodily injury. Where surrender charges have been waived under any of the situations discussed above, no additional payments under this Contract will be accepted unless required by state law. OTHER REDUCTIONS OR ELIMINATIONS OF SURRENDER CHARGES. From time to time the Company may allow a reduction in or elimination of the surrender charges, the period during which the charges apply, or both, and/or credit additional amounts on Contracts, when Contracts are sold to individuals or groups of individuals in a manner that reduces sales expenses. The Company will consider factors such as the following: - the size and type of group or class, and the persistency expected from that group or class; - the total amount of payments to be received, and the manner in which payments are remitted; - the purpose for which the Contracts are being purchased, and whether that purpose makes it likely that costs and expenses will be reduced; - other transactions where sales expenses are likely to be reduced; or - the level of commissions paid to selling broker-dealers or certain financial institutions with respect to Contracts within the same group or class (for example, broker-dealers who offer this Contract in connection with financial planning services offered on a fee-for-service basis). The Company also may reduce or waive the surrender charge, and/or credit additional amounts on Contracts, where either the Owner or the Annuitant on the Issue Date is within the following class of individuals (eligible persons): - employees and registered representatives of any broker-dealer which has entered into a sales agreement with the Company to sell the Contract; - employees of the Company, its affiliates and subsidiaries; officers, directors, trustees and employees of any of the Underlying Portfolios; - investment managers or sub-advisers of the Underlying Portfolios; and - the spouses of and immediate family members residing in the same household with such eligible persons. "Immediate family members" means children, siblings, parents, and grandparents. In addition, if permitted under state law, surrender charge will be waived under 403(b) Contracts where the amount withdrawn is being contributed to a life policy issued by the Company as part of the individual's 403(b) plan. Where an Owner who is trustee under a pension plan surrenders, in whole or in part, a Contract on a terminating employee, the trustee will be permitted to reallocate all or a part of the Accumulated Value under the Contract to other Contracts issued by the Company and owned by the trustee, with no deduction for any otherwise applicable surrender charge. Any such reallocation will be at the unit values for the Sub-Accounts as of the Valuation Date on which a written, signed request is received at the Service Office. 51 Any reduction or elimination in the amount or duration of the surrender charge will not discriminate unfairly among purchasers of this Contract. The Company will not make any changes to this charge where prohibited by law. TRANSFER CHARGE The Company currently does not assess a charge for processing transfers. The Company guarantees that the first 12 transfers in a Contract year will be free of a transfer charge, but reserves the right to assess a charge, guaranteed never to exceed $25, for each subsequent transfer in a Contract year to reimburse it for the expense of processing transfers. For more information, see "TRANSFER PRIVILEGE" under DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE and "TRANSFERS OF ANNUITY UNITS" under ANNUITIZATION--THE PAYOUT PHASE. WITHDRAWAL ADJUSTMENT CHARGE After the Annuity Date, each calendar year the Owner may withdraw a portion of the present value of either all future annuity benefit payments or future guaranteed annuity benefit payments. If a withdrawal is made within 5 years of the Issue Date, the AIR or interest rate used to determine the annuity benefit payments is increased by one of the following adjustments: 15 or more years of annuity benefit payments being valued: 1.00% 10-14 years of annuity benefit payments being valued: 1.50% Less than 10 years of annuity benefit payments being valued: 2.00%
The adjustment to the AIR or interest rate used to determine the present value results in lower future annuity benefit payments, and may be viewed as a charge under the Contract. The Withdrawal Adjustment Charge does not apply if a withdrawal is made in connection with the death of an Annuitant or if a withdrawal is made 5 or more years after the Issue Date. For more information see "WITHDRAWALS AFTER THE ANNUITY DATE," under ANNUITIZATION--THE PAYOUT PHASE. 52 GUARANTEE PERIOD ACCOUNTS Due to certain exemptive and exclusionary provisions in the securities laws, interests in the Guarantee Period Accounts and the Company's Fixed Account are not registered as an investment company under the provisions of the 1933 Act or the 1940 Act. Accordingly, the staff of the SEC has not reviewed the disclosures in this Prospectus relating to the Guarantee Period Accounts or the Fixed Account. Nevertheless, disclosures regarding the Guarantee Period Accounts and the Fixed Account of this Contract or any fixed benefits offered under these accounts may be subject to the provisions of the 1933 Act relating to the accuracy and completeness of statements made in the Prospectus. INVESTMENT OPTIONS. In most jurisdictions, Guarantee Periods ranging from two through ten years may be available. Each Guarantee Period established for the Owner is accounted for separately in a non-unitized segregated account except in California where it is accounted for in the Company's General Account. Each Guarantee Period Account provides for the accumulation of interest at a Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or transferred to a Guarantee Period Account is determined from time to time by the Company in accordance with market conditions. Once an interest rate is in effect for a Guarantee Period Account, however, the Company may not change it during the duration of its Guarantee Period. In no event will the Guaranteed Interest Rate be less than 3%. The Guarantee Period Accounts are not available in Oregon, Maryland and Pennsylvania. To the extent permitted by law, the Company reserves the right at any time to offer Guarantee Periods with durations that differ from those which were available when a Contract initially was issued and to stop accepting new allocations, transfers or renewals to a particular Guarantee Period. Owners may allocate net payments or make transfers from any of the Sub-Accounts, the Fixed Account or an existing Guarantee Period Account to establish a new Guarantee Period Account at any time prior to the Annuity Date. Transfers from a Guarantee Period Account on any date other than on the day following the expiration of that Guarantee Period will be subject to a Market Value Adjustment. The Company establishes a separate investment account each time the Owner allocates or transfers amounts to a Guarantee Period except that amounts allocated to the same Guarantee Period on the same day will be treated as one Guarantee Period Account. The minimum that may be allocated to establish a Guarantee Period Account is $1,000. If less than $1,000 is allocated, the Company reserves the right to apply that amount to the DWS Money Market Sub-Account. The Owner may allocate amounts to any of the Guarantee Periods available. At least 45 days, but not more than 75 days, prior to the end of a Guarantee Period, the Company will notify the Owner in writing of the expiration of that Guarantee Period. At the end of a Guarantee Period the Owner may transfer amounts to the Sub-Accounts, the Fixed Account or establish a new Guarantee Period Account of any duration then offered by the Company, without a Market Value Adjustment. If reallocation instructions are not received at the Service Office before the end of a Guarantee Period, the account value automatically will be applied to a new Guarantee Period Account with the same duration at the then current rate unless (1) less than $1,000 would remain in the Guarantee Period Account on the expiration date, or (2) unless the Guarantee Period would extend beyond the Annuity Date or is no longer available. In such cases, the Guarantee Period Account value will be transferred to the Sub-Account investing in the DWS Money Market VIP. Where amounts have been renewed automatically in a new Guarantee Period, the Company currently gives the Owner an additional 30 days to transfer out of the Guarantee Period Account without application of a Market Value Adjustment. This practice may be discontinued or changed with notice at the Company's discretion. MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to transfers, withdrawals, or surrender from a Guarantee Period Account on the expiration of its Guarantee Period. No Market Value Adjustment applies for the deduction of Contract fees or Rider charges. In addition, no negative Market Value Adjustment will be applied to a death benefit although a positive Market Value Adjustment, if any, will be applied to increase the value of the death benefit when based on the Contract's Accumulated Value. 53 See "DEATH BENEFIT" under DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE. All other transfers, withdrawals, or a surrender prior to the end of a Guarantee Period will be subject to a Market Value Adjustment, which may increase or decrease the value. Amounts applied under an annuity option are treated as withdrawals when calculating the Market Value Adjustment. The Market Value Adjustment will be determined by multiplying the amount taken from each Guarantee Period Account before deduction of any Surrender Charge by the market value factor. The market value factor for each Guarantee Period Account is equal to: [(1+i)/(1+j)]^n/365 - 1 where: i is the Guaranteed Interest Rate expressed as a decimal (for example: 3% = 0.03) being credited to the current Guarantee Period; j is the new Guaranteed Interest Rate, expressed as a decimal, for a Guarantee Period with a duration equal to the number of years remaining in the current Guarantee Period, rounded to the next higher number of whole years. If that rate is not available, the Company will use a suitable rate or index allowed by the Department of Insurance; and n is the number of days remaining from the effective Valuation Date to the end of the current Guarantee Period. Based on the application of this formula, if the then current market rates are lower than the rate being credited to the Guarantee Period Account, the value of a Guarantee Period Account will INCREASE after the Market Value Adjustment is applied. If the then current market rates are higher than the rate being credited to the Guarantee Period Account, the value of a Guarantee Period Account will DECREASE after the Market Value Adjustment is applied. The Market Value Adjustment is limited, however, so that even if the account value is decreased after application of a Market Value Adjustment, it will equal or exceed the Owner's principal plus 3% earnings per year less applicable Contract fees. Conversely, if the then current market rates are lower and the account value is increased after the Market Value Adjustment is applied, the increase in value is also affected by the minimum guaranteed rate of 3%. The amount that will be added to the Guarantee Period Account is limited to the difference between the amount earned and the 3% minimum guaranteed earnings. For examples of how the Market Value Adjustment works, See APPENDIX D--SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT. PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL. Under this feature, the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company will then compute the proportion of the initial payment that must be allocated to the Guarantee Period selected, assuming no transfers or withdrawals, in order to ensure that the value in the Guarantee Period Account on the last day of the Guarantee Period will equal the amount of the entire initial payment, LESS ANY CONTRACT FEES OR CHARGES THAT ARE APPLICABLE TO THE GUARANTEE PERIOD ACCOUNTS. The required amount then will be allocated to the pre-selected Guarantee Period Account and the remaining balance to the other investment options selected by the Owner in accordance with the procedures described in "PAYMENTS" under DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE. Unless the Company is notified otherwise, if a subsequent payment is made after the Program to Protect Principal and Provide Growth Potential has been selected, and during the Guarantee Period, such payment will be allocated among the selected Sub-Accounts only. If you want the subsequent payment to be allocated to a new Guarantee Period Account while enrolled in this program, you much provide payment allocation instructions to the Company that include (1) the Guarantee Period and (2) the dollar or percentage amount you want allocated to that Guarantee Period Account. WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of amounts held in the Guarantee Period Accounts. Withdrawals from these accounts will be made in the same manner and be subject to the same rules as set forth under "SURRENDER AND WITHDRAWALS" under 54 DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE. In addition, the following provisions also apply to withdrawals from a Guarantee Period Account: (1) a Market Value Adjustment will apply to all withdrawals, including Withdrawals Without Surrender Charge, unless made at the end of the Guarantee Period; and (2) the Company reserves the right to defer payments of amounts withdrawn from a Guarantee Period Account for up to six months from the date it receives the withdrawal request. If deferred for 30 days or more, the Company will pay interest on the amount deferred at a rate of at least 3%. In the event that a Market Value Adjustment applies to a withdrawal of a portion of the value of a Guarantee Period Account, it will be calculated on the amount requested and deducted from or added to the amount withdrawn. If a surrender charge applies to the withdrawal, it will be calculated as set forth in "SURRENDER CHARGE" under CHARGES AND DEDUCTIONS after application of the Market Value Adjustment. 55 FEDERAL TAX CONSIDERATIONS A. INTRODUCTION This discussion is not exhaustive and is not intended as tax advice. A qualified tax adviser should always be consulted with regard to the application of the law to individual circumstances. This discussion is based on the Code, Treasury Department regulations, and interpretations existing on the date of this Prospectus. These authorities, however, are subject to change by Congress, the Treasury Department, and the courts. This discussion does not address state or local tax consequences, nor federal estate or gift tax consequences, associated with buying a Contract. IN ADDITION, WE MAKE NO GUARANTEE REGARDING ANY TAX TREATMENT--FEDERAL, STATE, OR LOCAL--OF ANY CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT. B. OUR TAX STATUS The Company is taxed as a life insurance company and the operations of the Separate Account are treated as a part of our total operations. The Separate Account is not separately taxed as a "regulated investment company." Investment income and capital gains of the Separate Account are not taxed to the extent they are applied under a contract. We do not anticipate that we will incur federal income tax liability attributable to the income and gains of the Separate Account, and therefore we do not intend to provide for these taxes. If we are taxed on investment income or capital gains of the Separate Account, then we may charge the Separate Account to pay these taxes. C. TAXATION OF ANNUITIES IN GENERAL 1. TAX DEFERRAL DURING ACCUMULATION PERIOD Under the Code, except as described below, increases in the Contract Value of a Non-Qualified Contract are generally not taxable to the Owner or Annuitant until received as annuity payments or otherwise distributed. However, certain requirements must be satisfied for this general rule to apply, including: - the Contract must be owned by an individual, - Separate Account investments must be "adequately diversified", - we, rather than you, must be considered the Owner of Separate Account assets for federal tax purposes, and - annuity payments must appropriately amortize Purchase Payments and Contract earnings. NON-NATURAL OWNER. As a general rule, deferred annuity contracts held by "non-natural persons", such as corporations, trusts or similar entities, are not annuity contracts for federal income tax purposes. The investment income on these contracts is taxed each year as ordinary income received or accrued by the non-natural Owner. There are exceptions to this general rule for non-natural Owners. Contracts are generally treated as held by a natural person if the nominal Owner is a trust or other entity holding the contract as an agent for a natural person. However, this special exception does not apply to an employer who is the nominal Owner of a contract under a non-qualified deferred compensation plan for its employees. Additional exceptions to this rule include: - certain Contracts acquired by a decedent's estate due to the death of the decedent, - certain Qualified Contracts, - certain Contracts used with structured settlement agreements, and - certain Contracts purchased with a single premium when the Annuity Date is no later than one year from Contract purchase and substantially equal periodic payments are made at least annually. 56 DIVERSIFICATION REQUIREMENTS. For a Contract to be treated as an annuity for federal income tax purposes, separate account investments must be "adequately diversified". The Treasury Secretary issued regulations prescribing standards for adequately diversifying separate account investments. If the Separate Account failed to comply with these diversification standards, the contract would not be treated as an annuity contract for federal income tax purposes and the Owner would generally be taxed on the difference between the contract value and the Purchase Payments. Although we do not control Fund investments, we expect that each Fund will comply with these regulations so that each Subaccount of the Separate Account will be considered "adequately diversified." OWNERSHIP TREATMENT. In some circumstances, owners of variable contracts who retain excessive control over the investment of the underlying separate account assets may be treated as the owners of those assets and may be subject to tax on income produced by those assets. Although published guidance in this area does not address certain aspects of the Contracts, we believe that the Owner of a Contract should generally not be treated as the owner of any assets in the Separate Account, see, however, the discussion below on Publicly Available Funds. We reserve the right to modify the Contracts to bring them into conformity with applicable standards should such modification be necessary to prevent Owners of the Contracts from being treated as the owners of the underlying Separate Account assets. REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract for federal income tax purposes, Section 72(s) of the Code requires any Non-Qualified Contract to contain certain provisions specifying how your interest in the Contract will be distributed in the event of the death of an Owner. Specifically, Section 72(s) requires that (a) if any Owner dies on or after the Annuity Date, but prior to the time the entire interest in the Contract has been distributed, the entire interest in the Contract will be distributed at least as rapidly as under the method of distribution being used as of the date of such Owner's death; and (b) if any Owner dies prior to the Annuity Date, the entire interest in the Contract will be distributed within five years after the date of such Owner's death. These requirements will be considered satisfied as to any portion of an Owner's interest which is payable to or for the benefit of a designated Beneficiary and which is distributed over the life of such designated Beneficiary or over a period not extending beyond the life expectancy of that Beneficiary, provided that such distributions begin within one year of the Owner's death. The designated Beneficiary refers to a natural person designated by the Owner as a Beneficiary and to whom ownership of the Contract passes by reason of death. However, if the designated Beneficiary is the surviving spouse of the deceased Owner, the Contract may be continued with the surviving spouse as the new Owner. The Non-Qualified Contracts contain provisions that are intended to comply with these Code requirements, although no regulations interpreting these requirements have yet been issued. We intend to review such provisions and modify them if necessary to assure that they comply with the applicable requirements when such requirements are clarified by regulation or otherwise. Other rules may apply to Qualified Contracts. FEDERAL DEFENSE OF MARRIAGE ACT. The right of a spouse to continue the Contract, and all Contract provisions relating to spousal continuation are available only to a person who meets the definition of "spouse" under Federal law. The U.S. Supreme Court has held Section 3 of the Federal Defense of Marriage Act (which purportedly did not recognize same-sex marriages, even those which are permitted under individual state laws) to be unconstitutional. Therefore, same-sex marriages recognized under state law will be recognized for federal law purposes. The Department of Treasury and the Internal Revenue Service have recently determined that for federal tax purposes, same-sex spouses will be determined based on the law of the state in which the marriage was celebrated irrespective of the law of the state in which the person resides. However, as some uncertainty remains regarding the treatment of same-sex spouses, you should consult a tax advisor for more information on this subject. 57 TRANSFERS, ASSIGNMENTS, OR EXCHANGES OF A CONTRACT. A transfer or assignment of ownership of a Contract, the designation of an Annuitant, the selection of certain Annuity Dates, or the exchange of a Contract may result in certain tax consequences to you that are not discussed herein. An Owner contemplating any such transfer, assignment, or exchange, should consult a tax advisor as to the tax consequences. DELAYED ANNUITY DATES. If the Annuity Date occurs (or is scheduled to occur) when the Annuitant has reached an advanced age, the Contract might not be treated as an annuity for federal income tax purposes. In that event, the income and gains under the Contract would be currently includible in your income. The following discussion assumes that the Contract is treated as an annuity contract for tax purposes and that we are treated as the Owner of Separate Account assets. 2. TAXATION OF PARTIAL AND FULL WITHDRAWALS Partial withdrawals from a Non-Qualified Contract are includible in income to the extent the Contract Value exceeds the "investment in the contract". This amount is referred to as the "income on the contract". Full withdrawals are also includible in income to the extent they exceed the "investment in the contract." Investment in the contract equals the total of Purchase Payments minus any amounts previously received from the Contract that were not includible in your income. All amounts includible in income with respect to the Contract are taxed as ordinary income. Any assignment or pledge (or agreement to assign or pledge) of Contract Value is treated as a withdrawal. Investment in the contract is increased by the amount includible in income with respect to such assignment or pledge. If you transfer a contract interest, without adequate consideration, to someone other than your spouse (or to a former spouse incident to divorce), you will be taxed on the income on the contract. In this case, the transferee's investment in the contract is increased to reflect the increase in your income. There may be special income tax issues present in situations where the Owner and the Annuitant are not the same person and are not married to one another. A tax adviser should be consulted in those situations. Other rules may apply to Qualified Contracts. PARTIAL WITHDRAWALS AFTER ANNUITIZATION. A lump-sum partial withdrawal from a qualified annuity contract is treated partly as return of a proportionate amount of the investment in the Contract with the excess taxable in full as ordinary income. However, with respect to a non-qualified contract, the IRS issued a private letter ruling in 2000 taking the position that no portion of such a partial withdrawal would be treated as a return of the investment in the contract until after the full amount of the accumulated income under the contract had been distributed. IN LIGHT OF THE UNCERTAINTY AS TO THE TAXATION OF SUCH WITHDRAWALS, OWNERS OF NON-QUALIFIED CONTRACTS SHOULD CONSULT THEIR TAX ADVISERS PRIOR TO MAKING PARTIAL WITHDRAWALS AFTER ANNUITIZATION. OWNERS OF QUALIFIED CONTRACTS SHOULD ALSO CONSULT THEIR TAX ADVISERS WITH RESPECT TO THE POSSIBLE EFFECT OF PARTIAL WITHDRAWALS FROM A QUALIFIED CONTRACT AFTER ANNUITIZATION ON THE COMPLIANCE OF THE CONTRACT WITH THE MINIMUM DISTRIBUTION REQUIREMENTS OF SECTION 401(A)(9). 3. TAXATION OF ANNUITY PAYMENTS Normally, the portion of each annuity payment taxable as ordinary income equals the payment minus the exclusion amount. The exclusion amount for annuity payments is the payment times the ratio of the investment in the contract allocated to the Annuity Option and adjusted for any period certain or refund feature, to the expected value of the annuity payments. Once the total amount of the investment in the contract has been recovered, annuity payments will be fully taxable. If annuity payments stop because the Annuitant dies before the total amount of the investment in the contract is recovered, the unrecovered amount generally is allowed as a deduction to the Annuitant in the last taxable year. 58 4. TAXATION OF DEATH BENEFIT Amounts may be distributed upon your or the Annuitant's death. A death benefit is includible in income and: - if distributed in a lump sum is taxed like a full withdrawal, or - if distributed under an Annuity Option is taxed like annuity payments. 5. PENALTY TAX ON PREMATURE DISTRIBUTIONS A 10% penalty tax applies to a taxable payment from a Non-Qualified Contract unless: - received on or after you reach age 59 1/2, - received due to your disability, - made to a Beneficiary after your death or, for non-natural Owners, after the primary Annuitant's death, - made as a series of substantially equal periodic payments (at least annually) for your life (or life expectancy) or for the joint lives (or joint life expectancies) of you and a designated Beneficiary (within the meaning of the tax law), - made under a Contract purchased with a single premium when the Annuity Date is no later than one year from Contract purchase and substantially equal periodic payments are made at least annually, - made with annuities used with certain structured settlement agreements. Other exceptions may apply. 6. AGGREGATION OF CONTRACTS The taxable amount of an annuity payment or withdrawal from a Non-Qualified Contract may be determined by combining some or all of the Non-Qualified Contracts you own. For example, if you purchase a Contract and also purchase an immediate annuity at approximately the same time, the IRS may treat the two contracts as one contract. Similarly, if a person transfers part of his interest in one annuity contract to purchase another annuity contract, the IRS might treat the two contracts as one contract. In addition, if you purchase two or more Non-Qualified deferred annuity contracts from the same company (or its affiliates) during any calendar year, these contracts are treated as one contract. The effects of this aggregation are not always clear. However, it could affect the taxable amount of an annuity payment or withdrawal and the amount which might be subject to the 10% penalty tax. 7. EXCHANGE OF ANNUITY CONTRACTS We may issue the Contract in exchange for all or part of another annuity contract that you own. Such an exchange will be tax free if certain requirements are satisfied. If the exchange is tax free, your investment in the contract immediately after the exchange will generally be the same as that of the annuity contract exchanged, increased by any additional Purchase Payment made as part of the exchange. Your Contract Value immediately after the exchange may exceed your investment in the contract. That excess may be includible in income should amounts subsequently be withdrawn or distributed from the Contract (e.g., as a partial surrender, full surrender, annuity income payment, or death benefit). If you exchange part of an existing annuity contract for the Contract, the IRS might treat the two contracts as one annuity contract in certain circumstances. (See "Aggregation of Contracts") You should consult your tax adviser in connection with an exchange of all or part of an annuity contract for the Contract. 59 8. PARTIAL ANNUITIZATION Under a new tax provision enacted in 2010, if part of an annuity contract's value is applied to an annuity option that provides payments for one or more lives or for a period of at least ten years, those payments may be taxed as annuity payments instead of withdrawals. None of the payment options under the Contract is intended to qualify for this "partial annuitization" treatment and, if you apply only part of the value of the Contract to a payment option, we will treat those payments as withdrawals for tax purposes. D. QUALIFIED PLANS Currently, the Contracts are also available for use in connection with retirement plans which receive favorable treatment under Sections 401, 403, 408, 408A or 457 of the Code. Contracts offered for use in connection with retirement plans that receive favorable treatment under Sections 401, 403, 408, 408A or 457 of the Code ("Qualified Plans") are referred to as "Qualified Contracts." Numerous special tax rules apply to the participants in Qualified Plans and to Qualified Contracts. We make no attempt in this Prospectus to provide more than general information about use of the Contract with the various types of Qualified Plans. PERSONS INTENDING TO USE THE CONTRACT IN CONNECTION WITH QUALIFIED PLANS SHOULD CONSULT A TAX ADVISER. Under the Code, qualified plans generally enjoy tax-deferred accumulation amounts invested in the plan. Therefore, in considering whether or not to purchase a Contract in a qualified plan, you should consider the Contract's features other than tax deferral, including the availability of lifetime annuity payments. The tax rules applicable to Qualified Plans vary according to the type of plan and the terms and conditions of the plan. For example, for both withdrawals and annuity payments under certain Qualified Contracts, there may be no "investment in the contract" and the total amount received may be taxable. Both the amount of the contribution that may be made, and the tax deduction or exclusion that you may claim for such contribution, are limited under Qualified Plans. If the Contract is used with a Qualified Plan, you and the Annuitant must be the same individual. If a joint Annuitant is named, all distributions made while the Annuitant is alive must be made to the Annuitant. Also, if a joint Annuitant is named who is not the Annuitant's spouse, the Annuity Options which are available may be limited, depending on the difference in their ages. Furthermore, the length of any guarantee period may be limited in some circumstances to satisfy certain minimum distribution requirements under the Code. Qualified Contracts are subject to special rules specifying the time at which distributions must begin and the amount that must be distributed each year. In the case of Individual Retirement Annuities, distributions of minimum amounts must generally begin by April 1 of the calendar year following the calendar year in which the Owner attains age 70 1/2. The required beginning date for 401, 403 and 457 plans is the April 1 of the calendar year following the later of the year in which the Owner attains age 70 1/2 or retires. There are no required minimum distributions during the Owner's lifetime under Roth IRAs. An excise tax is imposed for the failure to comply with the minimum distribution requirements. This excise tax generally equals 50% of the amount by which a minimum required distribution exceeds the actual distribution. The death benefit or other optional benefits under your Contract may affect the amount of the minimum required distribution that must be taken from your Contract. A 10% penalty tax may apply to the taxable amount of payments from Qualified Contracts. For Individual Retirement Annuities, the penalty tax does not apply, for example, to a payment: - received after you reach age 59 1/2, - received after your death or because of your disability, or - made as a series of substantially equal periodic payments (at least annually) for your life (or life expectancy) or for the joint lives (or joint life expectancies) of you and your designated Beneficiary. In addition, the penalty tax does not apply to certain distributions used for qualified first time home purchases, higher education expenses or qualified military reservist distributions. Special conditions must be 60 met to qualify for these exceptions. If you wish to take a distribution for these purposes you should consult your tax adviser. Other exceptions may also be available. Qualified Contracts are amended to conform to tax qualification requirements. However, you are cautioned that the rights of any person to any benefits under Qualified Plans may be subject to the terms and conditions of the plans themselves, regardless of the terms and conditions of the Contract. In addition, we are not bound by terms and conditions of Qualified Plans if they are inconsistent with the Contract. 1. QUALIFIED PLAN TYPES INDIVIDUAL RETIREMENT ANNUITIES. The Code permits eligible individuals to contribute to an individual retirement annuity known as an "IRA." IRAs limit the amounts contributed, the persons eligible and the time when distributions start. Also, subject to direct rollover and mandatory withholding requirements, distributions from other types of qualified plans generally may be "rolled over" on a tax-deferred basis into an IRA. The Contract may not fund a "Coverdell Education Savings Account" (formerly known as an "Education IRA"). SIMPLIFIED EMPLOYEE PENSIONS (SEP IRAS). The Code allows employers to establish simplified employee pension plans, using the employees' IRAs. Under these plans the employer may make limited deductible contributions on behalf of the employees to IRAs. Employers and employees intending to use the Contract in connection with these plans should consult a tax adviser. SIMPLE IRAS. The Code permits certain small employers to establish "SIMPLE retirement accounts," including SIMPLE IRAs, for their employees. Under SIMPLE IRAs, certain deductible contributions are made by both employees and employers. SIMPLE IRAs are subject to various requirements, including limits on the amounts that may be contributed, the persons who may be eligible, and the time when distributions may commence. Employers and employees intending to use the Contract in connection with these plans should consult a tax adviser. ROTH IRAS. The Code permits contributions to an IRA known as a "Roth IRA." Roth IRAs differ from other IRAs in certain respects, including: - Roth IRA contributions are never deductible, - "qualified distributions" from a Roth IRA are excludable from income, - mandatory distribution rules do not apply before death, - a rollover to a Roth IRA must be a "qualified rollover contribution," under the Code, - special eligibility requirements apply, and - contributions to a Roth IRA can be made after the Owner has reached age 70 1/2. All or part of an IRA may be converted into a Roth IRA without taking an actual distribution. You may convert by notifying the IRA issuer or trustee. A conversion typically results in the inclusion of some or all of the IRA value in gross income, except that the 10% penalty tax does not apply on the conversion. Any "qualified distribution", as defined in Code Section 408A, from a Roth IRA is excludible from gross income. A qualified distribution includes a distribution made after you reach age 59 1/2, after your death, because of your disability, or made to a first-time homebuyer. A qualified distribution can only be made after the first five tax years after the year for which you (or your spouse) made a contribution to any Roth IRA established for your benefit. CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT-SHARING PLANS. The Code permits corporate employers to establish types of tax-favored retirement plans for employees. The Self-Employed Individuals Tax Retirement Act of 1962, as amended, commonly referred to as "H.R. 10" or "Keogh" permits self-employed individuals also to establish such tax-favored retirement plans for 61 themselves and their employees. Such retirement plans may permit the purchase of the Contracts in order to provide benefits under the plans. Employers intending to use the Contract in connection with such plans should seek competent advice. TAX-SHELTERED ANNUITIES. Code Section 403(b) permits public school employees and employees of certain types of charitable, educational and scientific organizations to have their employers purchase annuity contracts for them and, subject to certain limitations, to exclude the amount of Purchase Payments from taxable gross income. These annuity contracts are commonly referred to as "tax-sheltered annuities". If you purchase a Contract for such purposes, you should seek competent advice as to eligibility, limitations on permissible amounts of Purchase Payments and other tax consequences associated with the Contracts. Tax-sheltered annuity contracts must contain restrictions on withdrawals of: - contributions made pursuant to a salary reduction agreement in years beginning after December 31, 1988, - earnings on those contributions, and - earnings after December 31, 1988 on amounts attributable to salary reduction contributions held as of December 31, 1988. These amounts can be paid only if you have reached age 59 1/2, severed employment, died, or becomes disabled (within the meaning of the tax law), or in the case of hardship (within the meaning of the tax law). Amounts permitted to be distributed in the event of hardship are limited to actual contributions; earnings thereon cannot be distributed on account of hardship. Amounts subject to the withdrawal restrictions applicable to Section 403(b)(7) custodial accounts may be subject to more stringent restrictions. (These limitations on withdrawals generally do not apply to the extent you direct us to transfer some or all of the Contract Value to the issuer of another tax-sheltered annuity or into a Section 403(b)(7) custodial account.) For Contracts issued after December 31, 2008, amounts attributable to contributions other than salary reduction contributions generally may not be distributed before severance of employment or occurrence of an event specified in the employer's Section 403(b) plan. Pursuant to new tax regulations, we generally are required to confirm, with your 403(b) plan sponsor or otherwise, that withdrawals, transfers, or surrenders you request from a 403(b) Contract comply with applicable tax requirements and to decline requests that are not. DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS. The Code permits employees of state and local governments and tax-exempt organizations to defer a portion of their compensation without paying current taxes. The employees must be participants in an eligible deferred compensation plan. Generally, a Contract purchased by a state or local government or a tax-exempt organization will not be treated as an annuity contract for federal income tax purposes. Those who intend to use the Contracts in connection with such plans should seek competent advice. 2. DIRECT ROLLOVERS If the Contract is used with a retirement plan that is qualified under Sections 401(a), 403(a), or 403(b) of the Code or with an eligible government deferred compensation plan that is qualified under Section 457(b), any "eligible rollover distribution" from the Contract will be subject to "direct rollover" and mandatory withholding requirements. An eligible rollover distribution generally is any distribution from such a qualified retirement plan, excluding certain amounts such as: - minimum distributions required under Section 401(a)(9) of the Code, - certain distributions for life, life expectancy, or for ten years or more which are part of a "series of substantially equal periodic payments," and - hardship distributions. 62 Under these requirements, federal income tax equal to 20% of the taxable portion of the eligible rollover distribution will be withheld from the amount of the distribution. Unlike withholding on certain other amounts distributed from the Contract, discussed below, you cannot elect out of withholding with respect to an eligible rollover distribution. However, this 20% withholding will not apply if, instead of receiving the eligible rollover distribution, you (or your beneficiary) elect to have it directly transferred to certain types of qualified retirement plans. Prior to receiving an eligible rollover distribution, a notice will be provided explaining generally the direct rollover and mandatory withholding requirements and how to avoid the 20% withholding by electing a direct rollover. E. FEDERAL INCOME TAX WITHHOLDING We withhold and send to the U.S. Government a part of the taxable portion of each distribution unless you notify us before distribution of an available election not to have any amounts withheld. In certain circumstances, we may be required to withhold tax. The withholding rates for the taxable portion of periodic annuity payments are the same as the withholding rates for wage payments. In addition, the withholding rate for the taxable portion of non-periodic payments (including withdrawals prior to the maturity date and conversions of, or rollovers from, non-Roth IRAs to Roth IRAs) is 10%. The withholding rate for eligible rollover distributions is 20%. F. OTHER TAX ISSUES 1. FEDERAL ESTATE, GIFT AND GENERATION-SKIPPING TRANSFER TAXES While no attempt is being made to discuss the federal estate tax implications of the Contract in detail, a purchaser should keep in mind that the value of an annuity contract owned by a decedent and payable to a beneficiary by virtue of surviving the decedent is included in the decedent's gross estate. Depending on the terms of the annuity contract, the value of the annuity included in the gross estate may be the value of the lump sum payment payable to the designated beneficiary or the actuarial value of the payments to be received by the beneficiary. Consult an estate planning advisor for more information. Under certain circumstances, the Code may impose a "generation skipping transfer tax" ("GST") when all or part of an annuity contract is transferred to, or a death benefit is paid to, an individual two or more generations younger than the Owner. Regulations issued under the Code may require us to deduct the tax from your Contract, or from any applicable payment, and pay it directly to the IRS. For 2014, the federal estate tax, gift tax and GST tax exemptions and maximum rates are $5,340,000 and 40%, respectively. The potential application of these taxes underscores the importance of seeking guidance from a qualified adviser to help ensure that your estate plan adequately addresses your needs and that of your beneficiaries under all possible scenarios. 2. MEDICARE TAX. Beginning in 2013, distributions from non-qualified annuity contracts will be considered "investment income" for purposes of the newly enacted Medicare tax on investment income. Thus, in certain circumstances, a 3.8% tax may be applied to some or all of the taxable portion of distributions (e.g. earnings) to individuals whose income exceeds certain threshold amounts. Please consult a tax advisor for more information. 3. ANNUITY PURCHASES BY RESIDENTS OF PUERTO RICO The Internal Revenue Service has ruled that income received by residents of Puerto Rico under life insurance or annuity contracts issued by a Puerto Rico branch of a United States life insurance company is U.S.-source income that is generally subject to United States federal income tax. 63 4. ANNUITY PURCHASES BY NONRESIDENT ALIENS AND FOREIGN CORPORATIONS The discussion above provides general information regarding U.S. federal income tax consequences to annuity purchasers that are U.S. citizens or residents. Purchasers that are not U.S. citizens or residents will generally be subject to U.S. federal withholding tax on taxable distributions from annuity contracts at a 30% rate, unless a lower treaty rate applies. In addition, such purchasers may be subject to state and/or municipal taxes and taxes that may be imposed by the purchaser's country of citizenship or residence. Additional withholding may occur with respect to entity purchasers (including foreign corporations, partnerships, and trusts) that are not U.S. residents. Prospective purchasers are advised to consult with a qualified tax adviser regarding U.S., state, and foreign taxation with respect to an annuity contract purchase. 5. FOREIGN TAX CREDITS We may benefit from any foreign tax credits attributable to taxes paid by certain Funds to foreign jurisdictions to the extent permitted under federal tax law. 6. POSSIBLE TAX LAW CHANGES Although the likelihood of legislative changes is uncertain, there is always the possibility that the tax treatment of the Contract could change by legislation or otherwise. Consult a tax adviser with respect to legislative developments and their effect on the Contract. We have the right to modify the contract in response to legislative changes that could otherwise diminish the favorable tax treatment that annuity contract Owners currently receive. We make no guarantee regarding the tax status of any contact and do not intend the above discussion as tax advice. 64 STATEMENTS AND REPORTS An Owner is sent a report semi-annually which provides certain financial information about the Underlying Portfolios. At least annually, the Company will furnish a statement to the Owner containing information about his or her Contract, including Accumulation Unit Values and other information as required by applicable law, rules and regulations. The Company will also send a confirmation statement to Owners each time a transaction is made affecting the Contract's Accumulated Value. (Certain transactions made under recurring payment plans may in the future be confirmed quarterly rather than by immediate confirmations.) The Owner should review the information in all statements carefully. All errors or corrections must be reported to the Company immediately to assure proper crediting to the Contract. The Company will assume that all transactions are accurately reported on confirmation statements and other statements unless the Owner notifies the Principal Office in writing within 30 days after receipt of the statement. While a loan is outstanding, you may continue to make purchase payments to the Contract through your 403(b) or qualified plan. 65 ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS The Company reserves the right, subject to applicable law, to make additions to, deletions from, or substitutions for the shares of a fund that are held in the Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any Underlying Portfolio no longer are available for investment or if, in the Company's judgment, further investment in any Underlying Portfolio should become inappropriate in view of the purposes of the Variable Account or the affected Sub-Account, the Company may withdraw the shares of that Underlying Portfolio and substitute shares of another registered open-end management company. The Company will not substitute any shares attributable to a Contract interest in a Sub-Account without notice to the Owner and prior approval of the SEC and state insurance authorities, to the extent required by the 1940 Act or other applicable law. The Variable Account may, to the extent permitted by law, purchase other securities for other contracts or permit a conversion between contracts upon request by an Owner. The Company also reserves the right to establish additional Sub-Accounts of the Variable Account, each of which would invest in shares corresponding to a new Underlying Portfolio or in shares of another investment company having a specified investment objective. Subject to applicable law and any required SEC approval, the Company may, in its sole discretion, establish new Sub-Accounts or eliminate one or more Sub-Accounts if marketing needs, tax considerations or investment conditions warrant. Any new Sub-Accounts may be made available to existing Owners on a basis to be determined by the Company. Shares of the Underlying Portfolios also are issued to variable accounts of the Company and its affiliates which issue variable life contracts ("mixed funding"). Shares of the Underlying Portfolios also are issued to other unaffiliated insurance companies ("shared funding"). It is conceivable that in the future such mixed funding or shared funding may be disadvantageous for variable life owners or variable annuity owners. Although the Company and the underlying investment companies do not currently foresee any such disadvantages to either variable life insurance owners or variable annuity owners, the Company and the trustees of and the Underlying Portfolios intend to monitor events in order to identify any material conflicts between such owners, and to determine what action, if any, should be taken in response thereto. If the trustees were to conclude that separate funds should be established for variable life and variable annuity separate accounts, the Company will bear the attendant expenses. The Company reserves the right, subject to compliance with applicable law to: (1) transfer assets from the Variable Account or Sub-Account to another of the Company's variable accounts or Sub-Accounts having assets of the same class, (2) to operate the Variable Account or any Sub-Account as a management investment company under the 1940 Act or in any other form permitted by law, (3) to deregister the Variable Account under the 1940 Act in accordance with the requirements of the 1940 Act, (4) to substitute the shares of any other registered investment company for the Portfolio shares held by a Sub-Account, in the event that Portfolio shares are unavailable for investment, or if the Company determines that further investment in such Portfolio shares is inappropriate in view of the purpose of the Sub-Account, (5) to change the methodology for determining the net investment factor, (6) to change the names of the Variable Account or of the Sub-Accounts and. (7) To combine with other Sub-Accounts or other Separate Accounts of the Company. If any of these changes is made, the Company may endorse the Contract to reflect the substitution or change, and will notify Owners of all such changes. In no event will the changes described be made without notice to Owners in accordance with the 1940 Act. 66 CHANGES TO COMPLY WITH LAW AND AMENDMENTS The Company reserves the right, without the consent of Owners, to suspend sales of the Contract as presently offered, and to make any change to provisions of the Contract to comply with, or give Owners the benefit of, any federal or state statute, rule or regulation (or any laws, regulations or rules of any jurisdiction in which the Company is doing business), including but not limited to requirements for annuity contracts and retirement plans under the Code and pertinent regulations or any state statute or regulation. Any such changes will apply uniformly to all Contracts that are affected. Owners will be given written notice of such changes. VOTING RIGHTS The Company will vote Underlying Portfolio shares held by each Sub-Account in accordance with instructions received from Owners. Each person having a voting interest in a Sub-Account will be provided with proxy materials of the Underlying Portfolio, together with a form with which to give voting instructions to the Company. Shares for which no timely instructions are received will be voted in proportion to the instructions that are received. The Company also will vote shares in a Sub-Account that it owns and which are not attributable to Contracts in the same proportion. If the 1940 Act or any rules thereunder should be amended, or if the present interpretation of the 1940 Act or such rules should change, and as a result the Company determines that it is permitted to vote shares in its own right, whether or not such shares are attributable to the Contract, the Company reserves the right to do so. The number of votes which an Owner may cast will be determined by the Company as of the record date established by the Underlying Portfolio. During the accumulation period, the number of Underlying Portfolio shares attributable to each Owner will be determined by dividing the dollar value of the Accumulation Units of the Sub-Account credited to the Contract by the net asset value of one Underlying Portfolio share. During the annuity payout phase, the number of Underlying Portfolio shares attributable to each Owner will be determined by dividing the reserve held in each Sub-Account for the Owner's variable annuity by the net asset value of one Underlying Portfolio share. Ordinarily, the Owner's voting interest in the Underlying Portfolio will decrease as the reserve for the variable annuity is depleted. DISTRIBUTION Effective May 1, 2008, Epoch Securities, Inc. ("Epoch" or "Principal Underwriter"), a Delaware company located at 132 Turnpike Road, Southborough, Massachusetts 01772, became principal underwriter for the Contracts. Epoch is a wholly-owned subsidiary of Global Atlantic (Fin) Company. The Company paid commissions not to exceed 7.0% of payments to broker-dealers that sold the Contract. The Company currently does not pay direct commissions on additional payments to the Contracts. However, alternative commission schedules may be in effect with lower initial commission amounts plus ongoing annual compensation of up to 1% of the Contract's Accumulated Value. To the extent permitted by FINRA rules, overrides and promotional incentives or payments also may be provided to independent marketing organizations and broker-dealers based on the Contract's Accumulated Value, sales volumes, the performance of wholesaling functions, or other sales-related criteria. Additional payments may be made for other services not directly related to the sale of the Contract. The Company intends to recoup commissions and other sales expenses through a combination of anticipated surrender charges and profits from the Company's General Account, which may include amounts derived from mortality and risk charges. Commissions paid on the Contract, including additional incentives or payments, do not result in any additional charge to Owners or to the Variable Account. The Company will retain any surrender charges assessed on a Contract. 67 LEGAL MATTERS There are no legal proceedings to which we, the Separate Account or the Principal Underwriter is a party, or to which the assets of the Separate Account are subject, that are likely to have a material adverse effect on: - the Separate Account; or - the ability of the principal underwriter to perform its contract with the Separate Account; or - on our ability to meet our obligations under the variable annuity contracts funded through the Separate Account. FURTHER INFORMATION A Registration Statement under the 1933 Act relating to this offering has been filed with the SEC. Certain portions of the Registration Statement and amendments have been omitted in this Prospectus pursuant to the rules and regulations of the SEC. The omitted information may be obtained from the SEC's principal office in Washington, D.C., upon payment of the SEC's prescribed fees. 68 APPENDIX A MORE INFORMATION ABOUT THE FIXED ACCOUNT Because of exemption and exclusionary provisions in the securities laws, interests in the Fixed Account generally are not subject to regulation under the provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed portion of the annuity Contract and the Fixed Account may be subject to the provisions of the 1933 Act concerning the accuracy and completeness of statements made in this Prospectus. The disclosures in this APPENDIX A have not been reviewed by the SEC. The Fixed Account is part of the Company's General Account which is made up of all of the general assets of the Company other than those allocated to separate accounts. Allocations to the Fixed Account become part of the assets of the Company and are used to support insurance and annuity obligations. The General Account is not segregated or insulated from the claims of the insurance company's creditors. Any amounts allocated to the Fixed Account or amounts that we guarantee in excess of your Contract Value are subject to our financial strength and claim's paying ability, and are subject to the risk that the insurance company may not be able to cover, or may default on, its obligations under those guarantees. A portion or all of net payments may be allocated to accumulate at a fixed rate of interest in the Fixed Account. Such net amounts are guaranteed by the Company as to principal and a minimum rate of interest. Currently, the Company will credit amounts allocated to the Fixed Account with interest at an effective annual rate of at least 3%, compounded daily. Additional "Excess Interest" may or may not be credited at the sole discretion of the Company. TRANSFERS TO OR FROM THE FIXED ACCOUNT. Transfers to or from the Fixed Account are subject to the Company's then-current rules on Disruptive Trading, as may be amended from time to time. In addition, the Company reserves the right to impose reasonable rules on transfers, including but not limited to the frequency, timing, and amount of transfers to or from the Fixed Account. The Company reserves the right to amend its Disruptive Trading and/or other transfer rules in its sole discretion. Certain states may also impose restrictions on payments and transfers to the Fixed Account. A-1 APPENDIX B OPTIONAL ENHANCED DEATH BENEFIT RIDERS The Company offered a number of optional Enhanced Death Benefit (EDB) Riders that could be elected at issue depending on the age of the oldest Owner (or the oldest Annuitant if the Owner is not a natural person). If you elected an Enhanced Death Benefit Rider, it will remain in effect until the earliest of (a) the Annuity Date; (b) the date the Company determines that a death benefit is payable and the Contract is not continued by the spouse as provided in "THE SPOUSE OF THE OWNER AS BENEFICIARY" under DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE; or (c) surrender of the Contract. The Company reserves the right to discontinue offering any of the described EDB Riders at any time. Such discontinuance would not affect previously issued EDB Riders. The following is a list of the various Enhanced Death Benefit Riders that you may have had available to you at issue. Not all Riders were available at the same time or in all states. To determine which Rider you have, you should check the form number in the lower left-hand corner. 1. Annual Step-Up EDB Rider (Form 3309) 2. Annual Step-Up With 5% Roll-Up EDB Rider (ONLY AVAILABLE IN TEXAS Form 3311-02) 3. 10% Breakthrough With 5% Roll-Up EDB Rider (Form 3317-02) 4. Annual Step-Up With 7% Roll-Up EDB Rider (Form 3313-02) 5. Annual Step-Up Enhanced Death Benefit EDB Rider (Form 3265-99): 6. Annual Step-Up With 5% Roll-Up EDB Rider (TEXAS ONLY--Form 3305-01.1) 7. 7% Roll-Up EDB Rider (Either (a) Form 3266-99 or (b) Form 3303-01 depending on state approval) 8. Annual Step-Up With 7% Roll-Up EDB Rider (Either (a) Form 3264-99 or (b) Form 3304-01 depending on state approval) B-1 1. ANNUAL STEP-UP ENHANCED DEATH BENEFIT RIDER (FORM 3309-02) This Annual Step-Up Enhanced Death Benefit Rider provides a death benefit guarantee if death of an Owner (or an Annuitant if the Owner is not a natural person) occurs before the Annuity Date. The death benefit provides for annual step-ups through the Contract anniversary prior to the deceased's 90th birthday. Withdrawals reduce the applicable values on a proportionate basis. The amount of the death benefit paid by the Company depends upon whether the death of an Owner (or an Annuitant if the Owner is a non-natural person) occurs (1) before or (2) on or after his/her 90th birthday. I. Death BEFORE 90th Birthday. If an Owner (or an Annuitant if the Owner is a non-natural person), dies before the Annuity Date and before his/her 90th birthday, the death benefit will be the GREATER of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork, as determined by the Company, have been received at the Company's Service Office, increased for any positive Market Value Adjustment, if applicable; or (b) the highest Accumulated Value on any Contract anniversary prior to the date of death, as determined after being increased for any positive MVA, if applicable, and subsequent payments, and proportionately reduced for subsequent withdrawals. II. Death ON or AFTER 90th Birthday. If an Owner (or an Annuitant if the Owner is a non-natural person) dies before the Annuity Date and on or after his/her 90th birthday, the death benefit will be the GREATEST of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork, as determined by the Company, have been received at the Company's Service Office, increased for any positive Market Value Adjustment, if applicable; (b) the highest Accumulated Value on any Contract anniversary prior to the deceased's 90th birthday, as determined after being increased for any positive MVA, if applicable, and subsequent payments, and proportionately reduced for subsequent withdrawals; and (c) the Accumulated Value, increased for any positive MVA, if applicable, on the deceased's 90th birthday, increased for subsequent payments and proportionately reduced for subsequent withdrawals. PROPORTIONATE REDUCTION: For each withdrawal, the proportionate reduction is calculated by multiplying the Section I(b), II(b) or II(c) value, whichever is applicable, immediately prior to the withdrawal by the following fraction: Amount of the Withdrawal -------------------------------------------------------- Accumulated Value determined immediately prior to the Withdrawal B-2 2. ANNUAL STEP-UP WITH 5% ROLL-UP ENHANCED DEATH BENEFIT RIDER (FORM 3311-02--TEXAS ONLY) This Annual Step-Up with 5% Roll-Up Enhanced Death Benefit Rider provides a death benefit guarantee if death of an Owner (or an Annuitant if the Owner is not a natural person) occurs before the Annuity Date. The death benefit guarantees 5% growth until the date of death or the deceased's 80th birthday, whichever occurs first, and provides for annual step-ups through the Contract anniversary prior to the deceased's 90th birthday. Withdrawals reduce applicable values on a direct basis (i.e. dollar for dollar), and/or on a proportionate basis as outlined below. The calculation of the death benefit depends upon whether death occurs (1) before or on the deceased's Owner's 80th birthday, (2) after his/her 80th birthday but before his/her 90th birthday or (3) on or after his/her 90th birthday. I. Death BEFORE or ON 80th Birthday. If an Owner (or an Annuitant if the Owner is not a natural person) dies before the Annuity Date and before or on his/her 80th birthday, the death benefit will be the GREATEST of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork, as determined by the Company, have been received at the Company's Service Office, increased for any positive Market Value Adjustment, if applicable; (b) gross payments accumulated daily at an effective annual yield of 5%, starting on the date each payment is applied and ending on the date of death, adjusted for withdrawals as they occur; and (c) the highest Accumulated Value on any Contract anniversary prior to the date of death, as determined after being increased for any positive Market Value Adjustment, if applicable, and subsequent payments, and adjusted for subsequent withdrawals. II. Death AFTER 80th Birthday but BEFORE 90th Birthday. If an Owner (or the Annuitant if the Owner is not a natural person) dies before the Annuity Date but after his/her 80th birthday and before his/her 90th birthday, the death benefit will be the GREATEST of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork, as determined by the Company, have been received at the Company's Service Office, increased for any positive Market Value Adjustment, if applicable; (b) the value as determined by Section I(b) above on the deceased's 80th birthday, increased for subsequent payments, and adjusted for subsequent withdrawals; and (c) the highest Accumulated Value on any Contract anniversary prior to the date of death, as determined after being increased for any positive Market Value Adjustment if applicable, and subsequent payments, and adjusted for subsequent withdrawals. III. Death ON or AFTER 90th Birthday. If an Owner (or the Annuitant if the Owner is not a natural person) dies before the Annuity Date but on or after his/her 90th birthday, the death benefit will be the GREATEST of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork, as determined by the Company, have been received at the Company's Service Office, increased for any positive Market Value Adjustment, if applicable; (b) the value as determined by Section I(b) above on the deceased's 80th birthday, increased for subsequent payments, and adjusted for subsequent withdrawals; (c) the highest Accumulated Value on any Contract anniversary date prior to the deceased's 90th birthday, as determined after being increased for any positive Market Value Adjustment, if applicable, and subsequent payments, and adjusted for subsequent withdrawals; and (d) the Accumulated Value, increased for any positive MVA, if applicable, on the deceased's 90th birthday, increased for subsequent payments, and adjusted for subsequent withdrawals. B-3 EFFECT OF PARTIAL WITHDRAWALS: For purposes of determining the effect of partial withdrawals under this Rider, withdrawals are classified as either (a) Proportionate Withdrawals or (b) Direct (Dollar-for-Dollar) Withdrawals. (a) PROPORTIONATE WITHDRAWALS. Proportionate Withdrawals are withdrawals that proportionately reduce the applicable death benefit values. The proportionate reduction is calculated by multiplying the applicable death benefit value, as described below and as determined immediately prior to the withdrawal, by the following: Amount of the Proportionate Reduction Withdrawal ------------------------------------------------------------ Accumulated Value determined immediately prior to the Withdrawal ALL WITHDRAWALS REFERRED TO IN SECTIONS I(C), II(B), II(C), III(B), III(C) AND III(D) ARE PROPORTIONATE WITHDRAWALS. (b) DIRECT (DOLLAR-FOR-DOLLAR) WITHDRAWALS. Direct (Dollar-for-Dollar) Withdrawals are withdrawals that directly reduce the value referenced in Section I(b) by an amount equal to the amount of the withdrawal. To the extent that no allocation has ever been made to the Fixed Account or to a Guarantee Period Account, all withdrawals referenced in Section I(b) taken in a Contract year that total an amount less than or equal to 5% of gross payments (determined as of the Valuation Date of the withdrawal) less all prior withdrawals in that Contract Year will be classified as a Direct (Dollar-for-Dollar) Withdrawal. That part of a withdrawal that exceeds this amount is classified as a Proportionate Withdrawal. PLEASE NOTE THAT ONCE AN ALLOCATION HAS BEEN MADE TO THE FIXED ACCOUNT OR THE GUARANTEE PERIOD ACCOUNT, ALL FUTURE WITHDRAWALS AS REFERRED TO IN SECTION I(B), REGARDLESS OF THE AMOUNT, ARE CLASSIFIED AS PROPORTIONATE WITHDRAWALS. ONCE A PROPORTIONATE WITHDRAWAL HAS BEEN TAKEN, ALL FUTURE WITHDRAWALS IN ANY CONTRACT YEAR FOR PURPOSES OF SECTION I(B) ARE CLASSIFIED AS PROPORTIONATE WITHDRAWALS. IN OTHER WORDS, NO FUTURE WITHDRAWALS WILL BE CLASSIFIED AS DIRECT(DOLLAR-FOR-DOLLAR) WITHDRAWALS. Subject to certain restrictions and conditions, the Owner may establish a systematic withdrawal program that is designed to allow withdrawals of up to 5% of the initial payment and preserve a death benefit under this Rider equal to payments. For more information on this program, please contact the Company or your registered representative. B-4 3. 10% BREAKTHROUGH WITH 5% ROLL-UP ENHANCED DEATH BENEFIT RIDER (FORM 3317-02) This 10% Breakthrough with 5% Roll-Up Enhanced Death Benefit Rider provides a death benefit guarantee if death of an Owner (or an Annuitant if the Owner is not a natural person) occurs before the Annuity Date. Withdrawals reduce the applicable values on a proportionate basis. The death benefit under I(b) guarantees 5% growth until the date of death or the deceased's 80th birthday, whichever occurs first. The "Current Breakthrough Value" on the date of death or the deceased's 90th birthday, whichever occurs first, is the (c) value guaranteed as the death benefit. On the issue date of the Contract, the Current Breakthrough Value is equal to the initial payment. The "Target Breakthrough Value" is equal to 110% of the Current Breakthrough Value. Each time the Accumulated Value of the Contract reaches the Target Breakthrough Value, that Target Breakthrough Value becomes the new Current Breakthrough Value. A new Target Breakthrough Value, which is 110% of the new Current Breakthrough Value, is then set. The Current Breakthrough Value is increased by subsequent Payments and proportionately reduced by withdrawals; see below. The amount of the death benefit paid by the Company depends upon whether the death of an Owner (or an Annuitant if the Owner is a non-natural person) occurs (1) before or on the deceased's Owner's 80th birthday, (2) after his/her 80th birthday but before his/her 90th birthday, or (3) on or after his/her 90th birthday. I. Death BEFORE or ON Deceased's 80th Birthday. If an Owner, (or an Annuitant if the Owner is a non-natural person), dies before the Annuity Date and before or on his/her 80th birthday, the Death Benefit will be the GREATEST of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork, as determined by the Company, have been received at the Service Office, increased for any positive Market Value Adjustment ("MVA"), if applicable; or (b) gross payments accumulated daily at an effective annual yield of 5%, starting on the date each gross payment is applied and ending on the date of death, proportionately reduced for withdrawals as they occur; and (c) the Current Breakthrough Value on the date of death, increased for subsequent payments and proportionately reduced for subsequent withdrawals. II. Death AFTER Deceased's 80th Birthday but BEFORE 90th Birthday. If an Owner, or an Annuitant if the Owner is a non-natural person, dies before the Annuity Date and after his/her 80th birthday but before his/her 90th birthday, the Death Benefit will be the greatest of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork, as determined by the Company, have been received at the Service Office, increased for any positive MVA, if applicable; (b) the value as determined by Section I(b) above on the deceased's 80th birthday, increased for subsequent payments and proportionately reduced for subsequent withdrawals; and (c) the Current Breakthough Value on the date of death, increased for subsequent payments, and proportionately reduced for subsequent withdrawals. III. Death ON OR AFTER Deceased's 90th Birthday. If an Owner, or an Annuitant if the Owner is a non-natural person, dies on or after his/her 90th birthday, the Death Benefit will be the greatest of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork, as determined by the Company, have been received at the Service Office, increased for any positive MVA, if applicable; (b) the value as determined by Section I(b) above on the deceased's 80th birthday, increased for subsequent payments and proportionately reduced for subsequent withdrawals; B-5 (c) the Current Breakthrough Value on the deceased's 90th birthday, increased for subsequent payments, and proportionately reduced for subsequent withdrawals; and (d) the Accumulated Value, increased for any positive MVA, if applicable, on the deceased's 90th birthday, increased for subsequent payments, and proportionately reduced for subsequent withdrawals. EFFECT OF PAYMENTS ON THE BREAKTHROUGH EDB RIDER Subsequent payments increase the Current Breakthrough Value by the amount of the payment. Following a payment, the Target Breakthrough Value will be 110% of the new Current Breakthrough Value. When a Payment is made: (a) the Current Breakthrough Value increases by the amount of the payment; and (b) the Target Breakthrough Value increases to 110% of the Current Breakthrough Value immediately after the payment. For example, assume that immediately prior to a payment, the Current Breakthrough Value is $100,000, the Accumulated Value is $105,000, and the Target Breakthrough Value is $110,000. The Owner then makes a payment of $10,000. The new Current Breakthrough Value is $110,000, the Accumulated Value is $115,000, and the new Target Breakthrough Value is $121,000 (110% of $110,000). EFFECT OF WITHDRAWALS ON THE BREAKTHROUGH EDB RIDER Subsequent withdrawals proportionately reduce the Current Breakthrough Value, as described below. Following a withdrawal, the Target Breakthrough Value will be 110% of the Current Breakthrough Value. When a withdrawal is taken: (a) the Current Breakthrough Value decreases proportionately, as described below; and (b) the Target Breakthrough Value decreases to 110% of the Current Breakthrough Value immediately after the withdrawal. CALCULATION OF PROPORTIONATE REDUCTION DUE TO WITHDRAWALS The proportionate reduction in a death benefit or in the Current Breakthrough Value is calculated by multiplying the amount of the death benefit or the Current Breakthrough Value immediately prior to the withdrawal by the following fraction: Amount of the Withdrawal -------------------------------------------------------- Accumulated Value determined immediately prior to the Withdrawal For example, assume that immediately prior to a withdrawal, the Current Breakthrough Value is $100,000, the Accumulated Value is $105,000, and the Target Breakthrough Value is $110,000. The Owner then makes a withdrawal of $5,000. The proportionate reduction in the Current Breakthrough Value is calculated as follows: Proportionate reduction = Current Breakthrough Value times (Amount of the Withdrawal divided by the Accumulated Value immediately prior to the withdrawal) = $100,000 times ($5,000 divided by $105,000) = $4,761.90 New Current Breakthrough Value = $100,000 - $4,761.90 = $95,238.10 New Target Breakthrough Value = 110% of $95,238.10 = $104,761.91
The new Current Breakthrough Value is $95,238.10 and the new Target Breakthrough Value is $104,761.91. B-6 4. ANNUAL STEP-UP WITH 7% ROLL-UP ENHANCED DEATH BENEFIT RIDER (FORM 3313-02) This Annual Step-Up with 7% Roll-Up Enhanced Death Benefit Rider provides a death benefit guarantee if death of an Owner (or an Annuitant if the Owner is not a natural person) occurs before the Annuity Date. The death benefit guarantees 7% growth until the date of death or the deceased Owner's 80th birthday, subject to a 200% cap, and provides for annual step-ups through the Contract anniversary prior to the deceased's 90th birthday. Withdrawals reduce the applicable values on a direct basis (i.e. dollar-for-dollar) and/or on a proportionate basis. The amount of the death benefit paid by the Company depends upon whether the death of an Owner (or an Annuitant if the Owner is a non-natural person) occurs (1) before or on the deceased's Owner's 80th birthday, (2) after his/her 80th birthday but before his/her 90th birthday, or (3) on or after his/her 90th birthday. I. Death BEFORE or ON Deceased's 80th Birthday. If an Owner, (or an Annuitant if the Owner is a non-natural person), dies before the Annuity Date and before or on his/her 80th birthday, the Death Benefit will be the GREATEST of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork, as determined by the Company, have been received at the Service Office, increased for any positive Market Value Adjustment ("MVA"), if applicable; (b) gross payments accumulated daily at 7%, starting on the date each gross payment is applied and ending on the date of death, adjusted for withdrawals as they occur. This value cannot exceed 200% of the total of gross payments and Payment Credits, adjusted for withdrawals as they occur; and (c) the highest Accumulated Value on any Contract anniversary prior to the date of death, as determined after being increased for any positive MVA, if applicable, and subsequent payments, and adjusted for subsequent withdrawals. II. Death AFTER Deceased's 80th Birthday but BEFORE 90th Birthday. If an Owner, or an Annuitant if the Owner is a non-natural person, dies before the Annuity Date and after his/her 80th birthday but before his/her 90th birthday, the death benefit will be the greatest of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork, as determined by the Company, have been received at the Service Office, increased for any positive MVA, if applicable; (b) the value as determined by Section I(b) above on the deceased's 80th birthday, increased for subsequent payments and adjusted for subsequent withdrawals; and (c) the highest Accumulated Value on any Contract anniversary prior to the date of death, as determined after being increased for any positive MVA, if applicable, and subsequent payments, and adjusted for subsequent withdrawals. III. Death ON or AFTER Deceased's 90th Birthday. If an Owner, or an Annuitant if the Owner is a non-natural person, dies before the Annuity Date but on or after his/her 90th birthday, the death benefit will be the greatest of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork, as determined by the Company, have been received at the Service Office, increased for any positive MVA, if applicable; (b) the value as determined by Section I(b) above on the deceased's 80th birthday, increased for subsequent payments and adjusted for subsequent withdrawals; B-7 (c) the highest Accumulated Value on any Contract anniversary prior to the deceased's 90th birthday, as determined after being increased for any positive MVA, if applicable, and subsequent payments, and adjusted for subsequent withdrawals; and (d) the Accumulated Value, increased for any positive MVA, if applicable, on the deceased's 90th birthday, increased for subsequent payments, and adjusted for subsequent withdrawals. EFFECT OF PARTIAL WITHDRAWALS: For purposes of determining the effect of partial withdrawals under this Rider, withdrawals are classified as either (a) Proportionate Withdrawals or (b) Direct (Dollar-for Dollar) Withdrawals. (a) PROPORTIONATE WITHDRAWALS. Proportionate Withdrawals are withdrawals that proportionately reduce the appropriate death benefit values. The proportionate reduction is calculated by multiplying the applicable death benefit value, as described below and as determined immediately prior to the withdrawal, by the following: Amount of the Proportionate Reduction Withdrawal ------------------------------------------------------------ Accumulated Value determined immediately prior to the Withdrawal ALL WITHDRAWALS REFERRED TO IN SECTIONS I(C), II(B), II(C), III(B), III(C) AND III(D) ARE PROPORTIONATE WITHDRAWALS. (b) DIRECT (DOLLAR-FOR-DOLLAR) WITHDRAWALS. Direct (Dollar-for-Dollar) Withdrawals are withdrawals that directly reduce the value referenced in Section I(b) by an amount equal to the amount of the withdrawal. To the extent that no allocation has ever been made to the Fixed Account or to a Guarantee Period Account, all withdrawals referenced in Section I(b) taken in a Contract year that total an amount less than or equal to 7% of gross payments (determined as of the Valuation Date of the withdrawal) less all prior withdrawals in that Contract year will be classified as a Direct (Dollar-for-Dollar) Withdrawal. That part of a withdrawal that exceeds this amount is classified as a Proportionate Withdrawal. PLEASE NOTE THAT ONCE AN ALLOCATION HAS BEEN MADE TO THE FIXED ACCOUNT OR THE GUARANTEE PERIOD ACCOUNT, ALL FUTURE WITHDRAWALS AS REFERRED TO IN SECTION I(B), REGARDLESS OF THE AMOUNT, ARE CLASSIFIED AS PROPORTIONATE WITHDRAWALS. ONCE A PROPORTIONATE WITHDRAWAL HAS BEEN TAKEN, ALL FUTURE WITHDRAWALS IN ANY CONTRACT YEAR FOR PURPOSES OF SECTION I(B) ARE CLASSIFIED AS PROPORTIONATE WITHDRAWALS. IN OTHER WORDS, NO FUTURE WITHDRAWALS WILL BE CLASSIFIED AS DIRECT (DOLLAR-FOR-DOLLAR) WITHDRAWALS. Subject to certain restrictions and conditions, the Owner may establish a systematic withdrawal program that is designed to allow withdrawals of up to 7% of the initial payment and preserve a death benefit under this Rider equal to payments. For more information on this program, please contact the Company or your registered representative. B-8 5. ANNUAL STEP-UP ENHANCED DEATH BENEFIT RIDER (FORM 3265-99) This Annual Step-Up Enhanced Death Benefit Rider provides a death benefit guarantee if death of an Owner (or an Annuitant if the Owner is not a natural person) occurs before the Annuity Date. The death benefit provides for annual step-ups through the Contract anniversary prior to the deceased's 90th birthday. Withdrawals reduce the applicable values on a proportionate basis. The calculation of the death benefit depends upon whether death occurs (1) before or (2) on or after the deceased's 90th birthday. I. Death BEFORE 90th Birthday. If an Owner (or an Annuitant if the Owner is not a natural person) dies before the Annuity Date and before his/her 90th birthday, the death benefit is equal to the GREATEST of: (a) the Accumulated Value on the Valuation Date that the Company receives proof of death and all necessary claim paperwork, increased by any positive Market Value Adjustment; (b) gross payments made to the Contract until the date of death, proportionately reduced to reflect withdrawals; or (c) the highest Accumulated Value on any Contract anniversary date prior to the date of death, as determined after being increased for any positive Market Value Adjustment and subsequent payments and proportionately reduced for subsequent withdrawals. II. Death ON or AFTER 90th Birthday. If an Owner (or an Annuitant if the Owner is not a natural person) dies before the Annuity Date but on or after his/her 90th birthday, the death benefit is equal to the GREATER of: (a) the Accumulated Value on the Valuation Date that the Company receives proof of death and all necessary claim paperwork, increased by any positive Market Value Adjustment; or (b) the death benefit, as calculated under Section I, that would have been payable on the Contract anniversary prior to the deceased's 90th birthday, increased for subsequent payments and proportionately reduced for subsequent withdrawals. PROPORTIONATE REDUCTION: For each withdrawal, the proportionate reduction is calculated by multiplying the Section I(b), I(c) or II(b) value, whichever is applicable, immediately prior to the withdrawal by the following fraction: Amount of the Withdrawal -------------------------------------------------------- Accumulated Value determined immediately prior to the Withdrawal B-9 6. ANNUAL STEP-UP WITH 5% ROLL-UP ENHANCED DEATH BENEFIT RIDER (FORM 3305-01.1 ONLY AVAILABLE IN TEXAS This Annual Step-Up with 5% Roll-Up Enhanced Death Benefit Rider provides a death benefit guarantee if death of an Owner (or an Annuitant if the Owner is not a natural person) occurs before the Annuity Date. The death benefit guarantees 5% growth until the date of death or the deceased's 90th birthday, whichever occurs first, and provides for annual step-ups through the Contract anniversary prior to the deceased's 90th birthday. Withdrawals reduce applicable values on a direct basis (i.e. dollar for dollar), and/or on a proportionate basis as outlined below. For purposes of the Blended Withdrawal Methodology discussed below, the Fixed Account and the Guarantee Period Accounts are considered Restricted Funds. ONCE AN ALLOCATION HAS BEEN MADE TO A RESTRICTED FUND, ALL FUTURE WITHDRAWALS IN ANY CONTRACT YEAR ARE PROPORTIONATE REDUCTION WITHDRAWALS. PROPORTIONATE REDUCTION WITHDRAWALS. Proportionate Reduction Withdrawals are withdrawals that proportionately reduce the appropriate death benefit values. The proportionate reduction is calculated by multiplying the applicable death benefit value, as described below and as determined immediately prior to the withdrawal, by the following: Amount of the Proportionate Reduction Withdrawal -------------------------------------------------------- Accumulated Value determined immediately prior to the withdrawal ALL REDUCTIONS UNDER SECTION I(C) AND II(B) BELOW ARE PROPORTIONATE REDUCTION WITHDRAWALS. DIRECT REDUCTION WITHDRAWALS (DOLLAR-FOR-DOLLAR). Direct Reduction Withdrawals are withdrawals that directly reduce (i.e. dollar-for-dollar) the appropriate death benefit value by an amount equal to the amount of the withdrawal. BLENDED WITHDRAWAL METHODOLOGY. Under the Blended Withdrawal Methodology, if no allocation has ever been made to a Restricted Fund, all withdrawals that total an amount less than or equal to 5% of gross payments (determined as of the Valuation Date of the withdrawal) in a Contract Year are Direct Reduction Withdrawals (i.e. Dollar-for-Dollar). That part of a withdrawal that exceeds 5% of gross payments (determined as of the Valuation Date of the withdrawal) in a Contract Year is classified as a Proportionate Reduction Withdrawal. ONCE A PROPORTIONATE REDUCTION WITHDRAWAL HAS BEEN TAKEN, ALL FUTURE WITHDRAWALS IN ANY CONTRACT YEAR ARE CLASSIFIED AS PROPORTIONATE REDUCTION WITHDRAWALS. SIMILARLY, AS NOTED ABOVE, ONCE AN ALLOCATION IS MADE TO A RESTRICTED FUND (CURRENTLY THE FIXED ACCOUNT AND ANY GUARANTEE PERIOD ACCOUNT), ALL FUTURE WITHDRAWALS IN ANY CONTRACT YEAR ARE CLASSIFIED AS PROPORTIONATE REDUCTION WITHDRAWALS. IN OTHER WORDS, NO FUTURE WITHDRAWALS WILL BE CLASSIFIED AS DIRECT REDUCTION WITHDRAWALS. The calculation of the death benefit depends upon whether death occurs (1) before or on or (2) after the deceased's Owner 90th birthday. I. Death BEFORE or ON 90th Birthday. If an Owner (or an Annuitant if the Owner is not a natural person) dies before the Annuity Date and before or on his/her 90th birthday, the death benefit will be the greatest of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork, have been received at the Company's Service Office, increased for any positive Market Value Adjustment, if applicable; (b) gross payments accumulated daily at an effective annual yield of 5%, starting on the date each payment is applied and ending on the date of death, adjusted for withdrawals as they occur; and (c) the highest Accumulated Value on any Contract anniversary prior to the date of death, as determined after being increased for any positive Market Value Adjustment, if applicable, and subsequent payments, and adjusted for subsequent withdrawals. B-10 II. Death AFTER 90th Birthday. If an Owner (or the Annuitant if the Owner is not a natural person) dies before the Annuity Date but after his/her 80th birthday and before his/her 90th birthday, the death benefit will be the GREATEST of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork, have been received at the Company's Service Office, increased for any positive Market Value Adjustment, if applicable; (b) the death benefit, as calculated under Section I. Above, that would have been payable on the deceased's 90th birthday, increased for subsequent payments and adjusted for subsequent withdrawals. For the (b) value, subsequent withdrawals are calculated as Proportionate Reduction Withdrawals. Subject to certain restrictions and conditions, the Owner may establish a systematic withdrawal program that is designed to allow withdrawals of up to 5% of the initial payment and preserve a death benefit under this Rider equal to payments. For more information on this program, please contact the Company or your registered representative. B-11 7(A). 7% ROLL-UP ENHANCED DEATH BENEFIT RIDER (FORM 3266-99) This 7% Roll-Up Enhanced Death Benefit Rider provides a death benefit guarantee if death of an Owner (or an Annuitant if the Owner is not a natural person) occurs before the Annuity Date. The death benefit guarantees 7% growth until the date of death or the Contract anniversary prior to the deceased Owner's 90th birthday, whichever occurs first, subject to a 200% cap. Withdrawals reduce the applicable values on a proportionate basis. The amount of the death benefit paid by the Company depends upon whether the death of an Owner (or an Annuitant if the Owner is a non-natural person) occurs (1) before or (2) on or after his/her 90th birthday I. Death BEFORE 90th Birthday. If an Owner (or an Annuitant if the Owner is not a natural person) dies before the Annuity Date and before his/her 90th birthday, the death benefit will be the GREATER of: (a) the Accumulated Value on the Valuation Date that the Company receives proof of death and all necessary claim paperwork, increased by any positive Market Value Adjustment; or (b) gross payments, accumulated daily at an effective annual yield of 7% from the date each payment is applied until the date of death, proportionately reduced to reflect withdrawals. The value determined in section (b) above cannot exceed 200% of gross payments and Payment Credits, proportionately reduced for subsequent withdrawals. II. Death ON or AFTER 90th Birthday. If an Owner (or an Annuitant if the Owner is not a natural person) dies before the Annuity Date but on or after his/her 90th birthday, the death benefit is equal to the GREATER of: (a) the Accumulated Value on the Valuation Date that the Company receives proof of death and all necessary claim paperwork, increased by any positive Market Value Adjustment; or (b) the death benefit, as calculated under Section I above, that would have been payable on the Contract anniversary prior to the deceased's 90th birthday, increased for subsequent payments and proportionately reduced for subsequent withdrawals. PROPORTIONATE REDUCTION: For each withdrawal, the proportionate reduction is calculated by multiplying the Section I(b) or II(b) value, whichever is applicable, immediately prior to the withdrawal by the following fraction: Amount of the Withdrawal -------------------------------------------------------- Accumulated Value determined immediately prior to the Withdrawal 7(B). 7% ROLL-UP ENHANCED DEATH BENEFIT RIDER (FORM 3303-01) This 7% Roll-Up Enhanced Death Benefit Rider provides a death benefit guarantee if death of an Owner (or an Annuitant if the Owner is not a natural person) occurs before the Annuity Date. The death benefit guarantees 7% growth until the date of death or the deceased Owner's 90th birthday, whichever occurs first, subject to a 200% cap. For purposes of determining the effect of withdrawals under this EDB Rider, withdrawals are classified as Proportionate Reduction Withdrawals and/or Direct Reduction Withdrawals (i.e. Dollar-for-Dollar). For purposes of the Blended Withdrawal Methodology discussed below, the Fixed Account and the Guarantee Period Accounts are considered Restricted Funds. ONCE AN ALLOCATION HAS BEEN MADE TO A RESTRICTED FUND, ALL FUTURE WITHDRAWALS IN ANY CONTRACT YEAR ARE PROPORTIONATE REDUCTION WITHDRAWALS. PROPORTIONATE REDUCTION WITHDRAWALS. Proportionate Reduction Withdrawals are withdrawals that proportionately reduce the appropriate death benefit values. The proportionate reduction is calculated by B-12 multiplying the applicable death benefit value, as described below and as determined immediately prior to the withdrawal, by the following: Amount of the Proportionate Reduction Withdrawal -------------------------------------------------------- Accumulated Value determined immediately prior to the withdrawal ALL REDUCTIONS UNDER SECTION II(B) BELOW ARE PROPORTIONATE REDUCTION WITHDRAWALS. DIRECT REDUCTION WITHDRAWALS (DOLLAR-FOR-DOLLAR). Direct Reduction Withdrawals are withdrawals that directly reduce (i.e. dollar-for-dollar) the appropriate death benefit value by an amount equal to the amount of the withdrawal. BLENDED WITHDRAWAL METHODOLOGY. Under the Blended Withdrawal Methodology, if no allocation has ever been made to a Restricted Fund, all withdrawals that total an amount less than or equal to 7% of gross payments (determined as of the Valuation Date of the withdrawal) in a Contract Year are Direct Reduction Withdrawals (i.e. Dollar-for-Dollar). That part of a withdrawal that exceeds 7% of gross payments (determined as of the Valuation Date of the withdrawal) in a Contract Year is classified as a Proportionate Reduction Withdrawal. ONCE A PROPORTIONATE REDUCTION WITHDRAWAL HAS BEEN TAKEN, ALL FUTURE WITHDRAWALS IN ANY CONTRACT YEAR ARE CLASSIFIED AS PROPORTIONATE REDUCTION WITHDRAWALS. SIMILARLY, AS NOTED ABOVE, ONCE AN ALLOCATION IS MADE TO A RESTRICTED FUND (CURRENTLY THE FIXED ACCOUNT AND ANY GUARANTEE PERIOD ACCOUNT), ALL FUTURE WITHDRAWALS IN ANY CONTRACT YEAR ARE CLASSIFIED AS PROPORTIONATE REDUCTION WITHDRAWALS. IN OTHER WORDS, NO FUTURE WITHDRAWALS WILL BE CLASSIFIED AS DIRECT REDUCTION WITHDRAWALS. The calculation of the death benefit depends upon whether death occurs (1) before or on or (2) after the deceased's Owner 90th birthday. I. Death BEFORE or ON 90th Birthday. If an Owner (or an Annuitant if the Owner is not a natural person) dies before the Annuity Date and before or on his/her 90th birthday, the death benefit will be the GREATER of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork have been received at the Service Office, increased for any positive Market Value Adjustment; or (b) gross payments, accumulated daily at an effective annual yield of 7% from the date each payment is applied until the date of death, reduced to reflect withdrawals using the Blended Withdrawal Methodology. The value determined in section (b) above cannot exceed a cap of 200% of gross payments and Payment Credits, with both the value and the cap reduced by subsequent withdrawals using the Blended Withdrawal Methodology. II. Death AFTER 90th Birthday. If an Owner (or an Annuitant if the Owner is not a natural person) dies before the Annuity Date but after his/her 90th birthday, the death benefit is equal to the GREATER of: (a) the Accumulated Value on the date on which both the death certificate and all necessary claim paperwork have been received at the Service Office, increased by any positive Market Value Adjustment; or (b) the death benefit, as calculated under Section I above, that would have been payable on the deceased's 90th birthday, increased for subsequent payments and proportionately reduced for subsequent withdrawals. Subsequent withdrawals are calculated as Proportionate Reduction Withdrawals as described above. B-13 Subject to certain restrictions and conditions, the Owner may establish a systematic withdrawal program that is designed to allow withdrawals of up to 7% of the initial payment and preserve a death benefit under this Rider equal to payments. For more information on this program, please contact the Company or your registered representative. B-14 8(A). ANNUAL STEP-UP WITH 7% R0LL-UP ENHANCED DEATH BENEFIT RIDER (FORM 3264-99) This Annual Step-Up with 7% Roll-Up Enhanced Death Benefit Rider provides a death benefit guarantee if death of an Owner (or an Annuitant if the Owner is not a natural person) occurs before the Annuity Date. The death benefit guarantees 7% growth until the date of death or the Contract anniversary prior to the deceased Owner's 90th birthday, whichever occurs first, subject to a 200% cap and provides for annual step-ups through the Contract anniversary prior to the deceased's Owner's 90th birthday. Withdrawals reduce the applicable values on a proportionate basis. The amount of the death benefit paid by the Company depends upon whether the death of an Owner (or an Annuitant if the Owner is a non-natural person) occurs (1) before or (2) on or after his/her 90th birthday I. Death BEFORE 90th Birthday. If an Owner (or an Annuitant if the Owner is not a natural person) dies before the Annuity Date and before his/her 90th birthday, the death benefit will be the GREATEST of: (a) the Accumulated Value on the Valuation Date that the Company receives proof of death, increased by any positive Market Value Adjustment; (b) gross payments, accumulated daily at an effective annual yield of 7% from the date each payment is applied until the date of death, proportionately reduced to reflect withdrawals; and (c) the highest Accumulated Value on any Contract anniversary date prior to the date of death, as determined after being increased for any positive Market Value Adjustment and subsequent payments and proportionately reduced for subsequent withdrawals. The value determined in section (b) above cannot exceed 200% of gross payments and Payment Credits, proportionately reduced for subsequent withdrawals. II. Death ON or AFTER 90th Birthday. If an Owner (or the Annuitant if the Owner is not a natural person) dies before the Annuity Date but on or after his/her 90th birthday, the death benefit is equal to the GREATER of: (a) the Accumulated Value on the Valuation Date that the Company receives proof of death, increased by any positive Market Value Adjustment; or (b) the death benefit, as calculated under Section I above, that would have been payable on the Contract anniversary prior to the deceased's 90th birthday, increased for subsequent payments and proportionately reduced for subsequent withdrawals. PROPORTIONATE REDUCTION: For each withdrawal, the proportionate reduction is calculated by multiplying the Section I(b), I(c)or II(b) value, whichever is applicable, immediately prior to the withdrawal by the following fraction: Amount of the Withdrawal -------------------------------------------------------- Accumulated Value determined immediately prior to the Withdrawal 8(B). ANNUAL STEP-UP WITH 7% ROLL-UP ENHANCED DEATH BENEFIT RIDER (FORM 3304-01) This Annual Step-Up with 7% Roll-up Enhanced Death Benefit Rider provides a death benefit guarantee if death of an Owner (or an Annuitant if the Owner is not a natural person) occurs before the Annuity Date. The death benefit guarantees 7% growth until the date of death or the deceased Owner's 90th birthday, whichever occurs first, subject to a 200% cap, and also provides for annual step-ups through the Contract anniversary prior to the deceased's Owner's 90th birthday. For purposes of determining the effect of withdrawals under this EDB Rider, withdrawals are classified as Proportionate Reduction Withdrawals and/or Direct Reduction Withdrawals (i.e. Dollar-for Dollar). For purposes of the Blended Withdrawal Methodology discussed below, the Fixed Account and the Guarantee Period Accounts are considered Restricted Funds. ONCE AN ALLOCATION HAS BEEN MADE TO A RESTRICTED FUND, ALL FUTURE WITHDRAWALS IN ANY CONTRACT YEAR ARE PROPORTIONATE REDUCTION WITHDRAWALS. B-15 PROPORTIONATE REDUCTION WITHDRAWALS. Proportionate Reduction Withdrawals are withdrawals that proportionately reduce the appropriate death benefit values. The proportionate reduction is calculated by multiplying the applicable death benefit value, as described below and as determined immediately prior to the withdrawal, by the following: Amount of the Withdrawal -------------------------------------------------------- Accumulated Value determined immediately prior to the Withdrawal ALL REDUCTIONS UNDER SECTION II(B) BELOW ARE PROPORTIONATE REDUCTION WITHDRAWALS. DIRECT REDUCTION WITHDRAWALS (DOLLAR-FOR-DOLLAR). Direct Reduction Withdrawals are withdrawals that directly reduce (i.e. dollar-for-dollar) the appropriate death benefit value by an amount equal to the amount of the withdrawal. BLENDED WITHDRAWAL METHODOLOGY. Under the Blended Withdrawal Methodology, if no allocation has ever been made to a Restricted Fund, all withdrawals that total an amount less than or equal to 7% of gross payments (determined as of the Valuation Date of the withdrawal) in a Contract Year are Direct Reduction Withdrawals (Dollar-For-Dollar). That part of a withdrawal that exceeds 7% of gross payments (determined as of the Valuation Date of the withdrawal) in a Contract Year is classified as a Proportionate Reduction Withdrawal. ONCE A PROPORTIONATE REDUCTION WITHDRAWAL HAS BEEN TAKEN, ALL FUTURE WITHDRAWALS IN ANY CONTRACT YEAR ARE CLASSIFIED AS PROPORTIONATE REDUCTION WITHDRAWALS. SIMILARLY, AS NOTED ABOVE, ONCE AN ALLOCATION IS MADE TO A RESTRICTED FUND (CURRENTLY THE FIXED ACCOUNT AND ANY GUARANTEE PERIOD ACCOUNT), ALL FUTURE WITHDRAWALS IN ANY CONTRACT YEAR ARE CLASSIFIED AS PROPORTIONATE REDUCTION WITHDRAWALS. IN OTHER WORDS, NO FUTURE WITHDRAWALS WILL BE CLASSIFIED AS DIRECT REDUCTION WITHDRAWALS. The calculation of the death benefit depends upon whether death occurs (1) before or on or (2) after the deceased's Owner 90th birthday. I. Death BEFORE or ON 90th Birthday. If an Owner (or an Annuitant if the Owner is not a natural person) dies before the Annuity Date and before or on his/her 90th birthday, the death benefit will be the GREATEST of: (a) the Accumulated Value on the date that both the death certificate and all necessary claim paperwork have been received at the Service Office, increased for any positive Market Value Adjustment; (b) gross payments, accumulated daily at an effective annual yield of 7% from the date each payment is applied until the date of death, adjusted to reflect withdrawals using the Blended Withdrawal Methodology; or (c) the highest Accumulated Value on any Contract anniversary date prior to the date of death, as determined after being increased for any positive Market Value Adjustment and subsequent payments and proportionately reduced for subsequent withdrawals. The value determined in section (b) above cannot exceed a cap of 200% of gross payments and Payment Credits, with both the value and the cap reduced by subsequent withdrawals using the Blended Withdrawal Methodology. Under section (c) above, subsequent withdrawals are calculated as Proportionate Reduction Withdrawals. II. Death AFTER 90th Birthday. If an Owner (or the Annuitant if the Owner is not a natural person) dies before the Annuity Date but after his/her 90th birthday, the death benefit is equal to the GREATER of: (a) the Accumulated Value on the date that both the death certificate and all necessary claim paperwork have been received at the Service Office, increased for any positive Market Value Adjustment; or B-16 (b) the death benefit, as calculated under Section I above, that would have been payable on the deceased's 90th birthday, increased for subsequent payments and proportionately reduced for subsequent withdrawals. For the (b) value, subsequent withdrawals are calculated as Proportionate Reduction Withdrawals. Subject to certain restrictions and conditions, the Owner may establish a systematic withdrawal program that is designed to allow withdrawals of up to 7% of the initial payment and preserve a death benefit under this Rider equal to payments. For more information on this program, please contact the Company or your registered representative. B-17 APPENDIX C OPTIONAL ENHANCED EARNINGS RIDER You may have elected the Enhanced Earnings Rider (EER) at issue if the oldest Owner had not yet attained age 76. The Rider provides for additional amounts to be paid to the beneficiary under certain circumstances in the event that an Owner (or an Annuitant if the Owner is a nonnatural person) dies prior to the Annuity Date. The Company reserves the right to terminate the availability of the EER at any time; however, such a termination would not effect Riders issued prior to the termination date. CONDITIONS FOR PAYMENT OF THE EER BENEFIT For any benefit to be payable under the EER, certain conditions must be met, as follows: 1. The death must occur prior to the Annuity Date. 2. The difference between (a) and (b) must be greater than zero, where: (a) is the Accumulated Value, and (b) is gross payments not previously withdrawn.
IF (A) MINUS (B) IS ZERO OR LESS, NO BENEFIT WILL BE PAYABLE. Under the EER, Accumulated Value is determined on the Valuation Date on which due proof of death and all necessary documentation have been received at the Service Office. For purposes of the EER, withdrawals will be considered withdrawn from earnings first and then withdrawn from gross payments on a last-in, first-out basis. Therefore, the value of the EER largely depends on the amount of earnings that accumulate under the Contract. If you expect to withdraw the earnings from your Accumulated Value, electing the EER may not be appropriate. Your financial representative can help you determine if the EER is appropriate in your circumstances. AMOUNT OF EER BENEFIT ISSUE AGE 0 TO 65--If a benefit is payable under the EER and the Contract was issued prior to the oldest Owner's 66th birthday, the benefit will be equal to the LESSER of: (a) 200% of gross payments not previously withdrawn. (For purposes of this calculation only, except for the Initial Payment, gross payments shall not include payments made under the Contract during the 12-month period immediately prior to the date of death.); or (b) 40% of the difference between the Accumulated Value and gross payments not previously withdrawn. ISSUE AGE 66 TO 70--If a benefit is payable under the EER and the Contract was issued on or after the oldest Owner's 66th birthday and before his/her 71st birthday, the benefit will be equal to the LESSER of: (a) 80% of gross payments not previously withdrawn. (For purposes of this calculation only, except for the Initial Payment, gross payments shall not include payments made under the Contract during the 12-month period immediately prior to the date of death.); or (b) 40% of the difference between the Accumulated Value and gross payments not previously withdrawn. ISSUE AGE 71 TO 75--If a benefit is payable under the EER and the Contract was issued on or after the oldest Owner's 71st birthday and before his/her 76th birthday, the benefit will be equal to the LESSER of: (a) 50% of gross payments not previously withdrawn. (For purposes of this calculation only, except for the Initial Payment, gross payments shall not include payments made under the Contract during the 12-month period immediately prior to the date of death.); or (b) 25% of the difference between the Accumulated Value and gross payments not previously withdrawn. C-1 EXAMPLES: EXAMPLE 1. Assume that the oldest Owner is 67 years old at the time the Contract is issued and selects the Enhanced Earnings Rider. The Owner makes an initial payment of $100,000 and does not make any subsequent payments or take any withdrawals. Further assume that the Owner dies five years later and on the date that due proof of death and all necessary documentation are received by the Company the Accumulated Value is equal to $150,000. The EER benefit on that date is equal to the LESSER of: (a) 80% of the gross payments (not previously withdrawn) made to the Contract (excluding payments made in the 12 months prior to the date of death) = (80% x 100,000) = $80,000; or (b) 40% of the difference between the Accumulated Value and the gross payments (not previously withdrawn) made to the contract = (40% x (150,000 - 100,000)) = $20,000. The EER benefit is equal to $20,000 under (b), which is the lesser of $80,000 (80% x 100,000) and $20,000 (40% x (150,000 - 100,000)). EXAMPLE 2. Assume that the oldest Owner is 67 years old at the time the Contract is issued and selects the Enhanced Earnings Rider. The Owner makes an initial payment of $100,000 and does not make any subsequent payments or take any withdrawals. Further assume that the Owner dies ten years later and on the date that due proof of death and all necessary documentation are received by the Company the Accumulated Value is equal to $250,000. The EER benefit on that date is equal to the LESSER of: (a) 80% of the gross payments (not previously withdrawn) made to the Contract (excluding payments made in the 12 months prior to the date of death) = (80% x $100,000) = $80,000; or (b) 40% of the difference between the Accumulated Value and the gross payments (not previously withdrawn) made to the Contract = (40% x ($250,000 - $100,000)) = $60,000. The EER benefit is equal to $60,000 under (b), which is the lesser of $80,000 (80% x $100,000) and $60,000 (40% x ($250,000 - $100,000)). EXAMPLE 3. Assume that the oldest Owner is 67 years old at the time the Contract is issued and selects the Enhanced Earnings Rider. The Owner makes an initial payment of $100,000 and does not make any subsequent payments. Further assume that the Owner takes a $15,000 withdrawal and that the Accumulated Value was equal to $150,000 before the withdrawal was taken. Since there was $50,000 of earnings in the Contract at the time of withdrawal, for purposes of the Enhanced Earnings Rider the withdrawal is considered to be a withdrawal of $15,000 of earnings. Immediately after the withdrawal, the Accumulated Value is $135,000 and the gross payments (not previously withdrawn) is $100,000. Immediately after the withdrawal, the EER benefit is equal to the LESSER of: (a) 80% of the gross payments (not previously withdrawn) made to the Contract (excluding payments made in the 12 months prior to the date of death) = (80% x $100,000) = $80,000; or (b) 40% of the difference between the Accumulated Value and the gross payments (not previously withdrawn) made to the contract = (40% x ($135,000 - $100,000)) = $14,000. The EER benefit is equal to $14,000 under (b), which is the lesser of $80,000 (80% x 100,000) and $14,000 (40% x ($135,000 - $100,000)). EXAMPLE 4. Assume that the oldest Owner is 67 years old at the time the Contract is issued and selects the Enhanced Earnings Rider. The Owner makes an initial payment of $100,000 and does not make any subsequent payments. Further assume that the Owner takes a $65,000 withdrawal and that the Accumulated Value was equal to $150,000 before the withdrawal was taken. Since there was $50,000 of C-2 earnings in the Contract at the time of the withdrawal, for purposes of the Enhanced Earnings Rider the withdrawal of $65,000 is considered to be a withdrawal of $50,000 earnings and $15,000 of gross payments. Immediately after the withdrawal, the Accumulated Value is $85,000 and the gross payments (not previously withdrawn) is $85,000. Immediately after the withdrawal, the EER benefit is equal to the LESSER of: (a) 80% of the gross payments (not previously withdrawn) made to the Contract (excluding payments made in the 12 months prior to the date of death) = (80% x $85,000) = $68,000; or (b) 40% of the difference between the Accumulated Value and the gross payments (not previously withdrawn) made to the contract = (40% x ($85,000 - $85,000)) = $0. The EER benefit is equal to $0 under (b), which is the lesser of $68,000 (80% x $85,000) and $0 (40% x ($85,000 - $85,000)). TERMINATING THE EER Once the EER is chosen, it cannot be discontinued unless the underlying contract is surrendered, annuitized, or a death benefit is payable. The EER will terminate on the earliest of the following: 1. the Annuity Date; 2. the date the Contract is surrendered; 3. the date the Company determines a death benefit is payable; or 4. if the deceased Owner's spouse, who is the sole beneficiary, continues the contract. If the payment of the death benefit is deferred under the Contract or if the Contract is continued by the deceased Owner's spouse, the amount of the EER benefit will be applied to the Contract through an allocation to the Sub-Account investing in the DWS Money Market Portfolio and the EER will terminate. C-3 APPENDIX D SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT PART 1: SURRENDER CHARGES FULL SURRENDER--Assume a payment of $50,000 is made on the Issue Date and no additional payments are made. Assume there are no partial withdrawals. The Withdrawal Without Surrender Charge Amount is equal to the greater of 100% of cumulative earnings (excluding Payment Credits) or 15% of the total of all payments invested in the Contract. The table below presents examples of the surrender charge resulting from a full surrender, based on Hypothetical Accumulated Values.
WITHDRAWAL HYPOTHETICAL WITHOUT SURRENDER ACCUMULATED SURRENDER CHARGE SURRENDER CONTRACT YEAR VALUE CHARGE AMOUNT PERCENTAGE CHARGE ------------------------------------------ ------------ -------------- ---------- --------- 1......................................... $ 56,160 $ 7,500 8.5% $4,136 2......................................... 60,653 8,653 8.5% 4,250 3......................................... 65,505 13,505 8.5% 4,250 4......................................... 70,745 18,745 8.5% 4,250 5......................................... 76,405 24,405 7.5% 3,750 6......................................... 82,517 30,517 6.5% 3,250 7......................................... 89,119 37,119 5.5% 2,750 8......................................... 96,248 44,248 3.5% 1,750 9......................................... 103,948 51,948 1.5% 750 10........................................ 112,264 60,264 0.0% 0
WITHDRAWALS--Assume a payment of $50,000 is made on the Issue Date and no additional payments are made. Assume that there are withdrawals as detailed below. The Withdrawal Without Surrender Charge Amount is equal to the greater of 100% of cumulative earnings (excluding Payment Credits) or 15% of the total of all payments invested in the Contract less that portion of any prior withdrawal(s) of payments that are subject to the surrender charge table. The table below presents examples of the surrender charge resulting from withdrawals, based on Hypothetical Accumulated Values:
WITHDRAWAL HYPOTHETICAL WITHOUT SURRENDER ACCUMULATED SURRENDER CHARGE SURRENDER CONTRACT YEAR VALUE WITHDRAWALS CHARGE AMOUNT PERCENTAGE CHARGE ------------------------------ ------------- ----------- -------------- ---------- ---------- 1............................. $ 56,160 $ 0 $ 7,500 8.5% $ 0 2............................. 60,653 0 8,653 8.5% 0 3............................. 65,505 0 13,505 8.5% 0 4............................. 70,745 30,000 18,745 8.5% 957 5............................. 44,005 10,000 5,812 7.5% 314 6............................. 36,725 5,000 5,184 6.5% 0 7............................. 34,264 10,000 5,184 5.5% 265 8............................. 26,205 15,000 4,461 3.5% 369 9............................. 12,101 5,000 2,880 1.5% 32 10............................ 7,669 5,000 2,562 0.0% 0
D-1 PART 2: MARKET VALUE ADJUSTMENT The market value factor is: [(1+i)/(1+j)]^n/365 - 1 For purposes of the examples below: i = the guaranteed interest rate being credited to the guarantee period. j = the guaranteed interest rate on the date of surrender for the guarantee period with a duration equal to the number of years remaining in the current guarantee period, rounded to the next higher number of whole years. n = the number of days from the date of surrender to the expiration date of the guarantee period. The following examples assume: 1. The payment was allocated to a ten-year Guarantee Period Account with a Guaranteed Interest Rate of 8%. 2. The date of surrender is seven years (2,555 days) from the expiration date. 3. The value of the Guarantee Period Account is equal to $62,985.60 at the end of three years. 4. No transfers or withdrawals affecting this Guarantee Period Account have been made. 5. Surrender charges, if any, are calculated in the same manner as shown in the examples in Part 1. NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)* Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11 The market value factor = [(1+i)/(1+j)]^n/365 - 1 = [(1+.08)/(1+.11)]^2555/365 - 1 = (.97297)^7 - 1 = -.17454
The Market Value Adjustment = Maximum of the market value factor multiplied by the withdrawal or the negative of the excess interest earned over 3% = Maximum (-.17454 x $62,985.60 or -$8,349.25) = Maximum (-$10,992.38 or -$8,349.25) = -$8,349.25
-------------------------------- * Capped takes into account the excess interest part of the Market Value Adjustment formula when the value produced is greater than the cap. D-2 NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)** Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10 The market value factor = [(1+i)/(1+j)]^n/365 - 1 = [(1+.08)/(1+.10)]^2555/365 - 1 = (.98182)^7 - 1 = -.12054 The Market Value Adjustment = the market value factor multiplied by the withdrawal = -.12054 x $62,985.60 = -$7,592.11
-------------------------------- ** Uncapped is a straight application of the Market Value Adjustment formula when the value produced is less than the cap. POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)* Assume that on the date of surrender, the current rate (j) is 5.00% or 0.05 The market value factor = [(1+i)/(1+j)]^n/365 - 1 = [(1+.08)/(1+.05)]^2555/365 - 1 = (1.02857)^7 - 1 = .21798
The Market Value Adjustment = Minimum of the market value factor multiplied by the withdrawal or the excess interest earned over 3% = Minimum of (.21798 x $62,985.60 or $8,349.25) = Minimum of ($13,729.78 or $8,349.25) = $8,349.25
-------------------------------- * Capped takes into account the excess interest part of the Market Value Adjustment formula when the value produced is greater than the cap. D-3 POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)** Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07 The market value factor = [(1+i)/(1+j)]^n/365 - 1 = [(1+.08)/(1+.07)]^2555/365 - 1 = (1.00935)^7 - 1 = .06728 The Market Value Adjustment = the market value factor multiplied by the withdrawal = .06728 x $62,985.60 = $4,237.90
-------------------------------- ** Uncapped is a straight application of the Market Value Adjustment formula when the value produced is less than the cap. D-4 APPENDIX E CONDENSED FINANCIAL INFORMATION COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY SEPARATE ACCOUNT KG THE FOLLOWING TABLES PROVIDE CONDENSED FINANCIAL INFORMATION FOR THE SUB-ACCOUNTS OF THE COMPANY FOR THE 10-YEAR PERIOD ENDING DECEMBER 31, 2013.
YEAR ENDED DECEMBER 31ST ----------------------------------------------------------------------------------------- SUB-ACCOUNT 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 ----------------------------------------- ------ ------- ------- ------- ------- ------ -------- ------- -------- -------- ALGER BALANCED PORTFOLIO (CLASS I-2) Unit Value: Beginning of Period.................... 1.210 1.155 1.171 1.076 0.845 1.255 1.133 1.097 1.026 0.996 End of Period.......................... 1.375 1.210 1.155 1.171 1.076 0.845 1.255 1.133 1.097 1.026 Number of Units Outstanding at End of Period (in thousands)................... 19,046 21,076 25,180 30,068 34,756 41,848 51,587 60,624 71,489 81,165 ALGER CAPITAL APPRECIATION PORTFOLIO (CLASS I-2) Unit Value: Beginning of Period.................... 1.233 1.057 1.075 0.956 0.642 1.186 0.901 0.766 0.679 0.637 End of Period.......................... 1.643 1.233 1.057 1.075 0.956 0.642 1.186 0.901 0.766 0.679 Number of Units Outstanding at End of Period (in thousands)................... 12,536 14,502 16,054 23,804 27,888 29,882 36,269 33,430 37,385 42,604 CREDIT SUISSE TRUST INTERNATIONAL EQUITY FLEX II PORTFOLIO (CLASS I) (MERGED INTO THE CREDIT SUISSE TRUST INTERNATIONAL EQUITY FLEX III ON DECEMBER 11, 2009 WHICH LIQUIDATED ON OCTOBER 21, 2011) Unit Value: Beginning of Period.................... N/A N/A N/A N/A 0.371 0.706 0.746 0.668 0.583 0.502 End of Period.......................... N/A N/A N/A N/A N/A 0.371 0.706 0.746 0.668 0.583 Number of Units Outstanding at End of Period (in thousands)................... N/A N/A N/A N/A N/A 6,023 6,245 9,451 12,903 10,618 CREDIT SUISSE TRUST INTERNATIONAL EQUITY FLEX III PORTFOLIO (CLASS I) (LIQUIDATED ON OCTOBER 21, 2011) Unit Value: Beginning of Period.................... N/A N/A 1.564 1.413 0.945 2.122 1.662 1.272 1.009 0.819 End of Period.......................... N/A N/A N/A 1.564 1.413 0.945 2.122 1.662 1.272 1.009 Number of Units Outstanding at End of Period (in thousands)................... N/A N/A N/A 8,846 10,587 9,119 12,144 13,197 13,871 12,866 DREYFUS IP MIDCAP STOCK PORTFOLIO (INITIAL SHARES) (CLOSED TO NEW PAYMENT ALLOCATIONS OR TRANSFERS ON NOVEMBER 15, 2010) Unit Value: Beginning of Period.................... 1.830 1.551 1.567 1.250 0.936 1.593 1.592 1.498 1.392 1.233 End of Period.......................... 2.436 1.830 1.551 1.567 1.250 0.936 1.593 1.592 1.498 1.392 Number of Units Outstanding at End of Period (in thousands)................... 10,143 12,169 14,617 19,299 23,633 27,735 33,552 43,196 48,787 53,998
E-1
YEAR ENDED DECEMBER 31ST --------------------------------------------------------------------------------------- SUB-ACCOUNT 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 ------------------------------------------- ------ ------- ------ ------ ------ ------ -------- -------- -------- -------- DWS ALL CAP GROWTH VIP (CLASS A) (MERGED INTO THE DWS CAPITAL GROWTH VIP (CLASS A) ON DECEMBER 8, 2006) Unit Value: Beginning of Period...................... N/A N/A N/A N/A N/A N/A N/A 0.996 0.927 0.871 End of Period............................ N/A N/A N/A N/A N/A N/A N/A N/A 0.996 0.927 Number of Units Outstanding at End of Period (in thousands)..................... N/A N/A N/A N/A N/A N/A N/A N/A 94,664 33,347 DWS BLUE CHIP VIP (CLASS A) (MERGED INTO THE DWS GROWTH & INCOME VIP (CLASS A) ON APRIL 30, 2012) Unit Value: Beginning of Period...................... N/A 1.418 1.446 1.289 0.976 1.609 1.577 1.383 1.274 1.114 End of Period............................ N/A N/A 1.418 1.446 1.289 0.976 1.609 1.577 1.383 1.274 Number of Units Outstanding at End of Period (in thousands)..................... N/A N/A 23,378 27,757 31,670 36,810 46,268 56,486 64,342 78,148 DWS BOND VIP (CLASS A) (DWS CORE FIXED INCOME VIP (CLASS A) MERGED INTO THIS FUND ON APRIL 30, 2012) Unit Value: Beginning of Period...................... 1.504 N/A N/A N/A N/A N/A N/A N/A N/A N/A End of Period............................ 1.439 1.504 N/A N/A N/A N/A N/A N/A N/A N/A Number of Units Outstanding at End of Period (in thousands)..................... 17,301 20,646 N/A N/A N/A N/A N/A N/A N/A N/A DWS CAPITAL GROWTH VIP (CLASS A) Unit Value: Beginning of Period...................... 1.213 1.060 1.126 0.978 0.782 1.183 1.066 0.996 0.927 0.871 End of Period............................ 1.611 1.213 1.060 1.126 0.978 0.782 1.183 1.066 0.996 0.927 Number of Units Outstanding at End of Period (in thousands)..................... 58,519 68,739 82,187 73,873 89,478 78,792 97,862 118,500 94,664 33,347 DWS CORE EQUITY VIP (CLASS A) (DWS BLUE CHIP VIP (CLASS A) MERGED INTO THIS FUND ON APRIL 30, 2012; NAME CHANGED FROM THE DWS GROWTH & INCOME VIP (CLASS A) ON MAY 1, 2012) Unit Value: Beginning of Period...................... 1.018 0.892 0.906 0.803 0.607 0.998 0.999 0.891 0.852 0.785 End of Period............................ 1.379 1.018 0.892 0.906 0.803 0.607 0.998 0.999 0.891 0.852 Number of Units Outstanding at End of Period (in thousands)..................... 50,439 58,864 31,349 36,277 41,328 46,468 57,141 70,662 85,395 40,306 DWS CORE FIXED INCOME VIP (CLASS A) (MERGED INTO THE DWS BOND VIP (CLASS A) ON APRIL 30, 2012) Unit Value: Beginning of Period...................... N/A 1.412 1.346 1.281 1.206 1.517 1.477 1.436 1.425 1.383 End of Period............................ N/A N/A 1.412 1.346 1.281 1.206 1.517 1.477 1.436 1.425 Number of Units Outstanding at End of Period (in thousands)..................... N/A N/A 24,094 27,919 30,761 33,832 38,367 42,582 49,296 57,078
E-2
YEAR ENDED DECEMBER 31ST ------------------------------------------------------------------------------------ SUB-ACCOUNT 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 ---------------------------------------------- ------ ------ ------ ------- ------- ------ ------- ------- ------- ------- DWS DAVIS VENTURE VALUE VIP (CLASS A) (MERGED INTO THE DWS LARGE CAP VALUE VIP (CLASS A) ON APRIL 27, 2009) Unit Value: Beginning of Period......................... N/A N/A N/A N/A 0.820 1.391 1.350 1.192 1.103 1.000 End of Period............................... N/A N/A N/A N/A N/A 0.820 1.391 1.350 1.192 1.103 Number of Units Outstanding at End of Period (in thousands)............................... N/A N/A N/A N/A N/A 35,633 42,251 46,715 50,725 54,625 DWS GLOBAL EQUITY VIP (CLASS A) (NAME CHANGED FROM DWS DIVERSIFIED INTERNATIONAL EQUITY VIP (CLASS A) ON JULY 15, 2013) Unit Value: Beginning of Period......................... 1.449 1.253 1.445 1.321 1.036 2.052 1.783 1.440 1.276 1.094 End of Period............................... 1.705 1.449 1.253 1.445 1.321 1.036 2.052 1.783 1.440 1.276 Number of Units Outstanding at End of Period (in thousands)............................... 9,521 10,677 12,130 14,704 17,389 20,487 25,700 30,472 34,719 38,352 DWS DREMAN FINANCIAL SERVICES VIP (CLASS A) (MERGED INTO THE DWS DREMAN HIGH RETURN EQUITY VIP (CLASS A) ON SEPTEMBER 15, 2006; NAME CHANGED TO THE DWS STRATEGIC VALUE VIP (CLASS A) ON JUNE 1, 2009; NAME CHANGED TO THE DWS LARGE CAP VALUE VIP (CLASS A) ON APRIL 29, 2011) Unit Value: Beginning of Period......................... N/A N/A N/A N/A N/A N/A N/A 1.322 1.342 1.215 End of Period............................... N/A N/A N/A N/A N/A N/A N/A N/A 1.322 1.342 Number of Units Outstanding at End of Period (in thousands)............................... N/A N/A N/A N/A N/A N/A N/A N/A 22,892 28,813 DWS SMALL MID CAP VALUE VIP (CLASS A) (NAME CHANGED FROM DWS DREMAN SMALL MID CAP VALUE (CLASS A) ON MAY 1, 2013) Unit Value: Beginning of Period......................... 2.841 2.533 2.735 2.254 1.762 2.685 2.642 2.143 1.971 1.586 End of Period............................... 3.789 2.841 2.533 2.735 2.254 1.762 2.685 2.642 2.143 1.971 Number of Units Outstanding at End of Period (in thousands)............................... 12,226 16,767 18,965 22,245 25,654 29,570 36,991 43,399 54,103 66,158 DWS EQUITY 500 INDEX VIP (CLASS A) Unit Value: Beginning of Period......................... 1.077 0.944 0.940 0.831 0.667 1.077 1.037 0.911 0.883 0.811 End of Period............................... 1.401 1.077 0.944 0.940 0.831 0.667 1.077 1.037 0.911 0.883 Number of Units Outstanding at End of Period (in thousands)............................... 28,210 31,143 35,423 41,778 49,591 56,523 67,369 82,444 96,115 112,590 DWS GLOBAL INCOME BUILDER VIP (CLASS A) (NAME CHANGED FROM THE DWS BALANCED VIP (CLASS A) ON MAY 1, 2012) Unit Value: Beginning of Period......................... 1.630 1.463 1.505 1.372 1.128 1.574 1.522 1.401 1.362 1.293 End of Period............................... 1.874 1.630 1.463 1.505 1.372 1.128 1.574 1.522 1.401 1.362 Number of Units Outstanding at End of Period (in thousands)............................... 28,113 32,178 36,965 42,897 50,688 60,267 76,991 91,858 112,219 136,894
E-3
YEAR ENDED DECEMBER 31ST ------------------------------------------------------------------------------------ SUB-ACCOUNT 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 ---------------------------------------------- ------- ------ ------ ------ ------ ------- ------- ------- ------- ------- DWS GLOBAL SMALL CAP VIP (CLASS A) (NAME CHANGED FROM THE DWS GLOBAL OPPORTUNITIES VIP (CLASS A) ON MAY 2, 2011; NAME CHANGED FROM THE DWS GLOBAL SMALL CAP GROWTH VIP (CLASS A) ON MAY 1, 2014) Unit Value: Beginning of Period......................... 2.108 1.853 2.086 1.670 1.143 2.317 2.149 1.785 1.532 1.260 End of Period............................... 2.826 2.108 1.853 2.086 1.670 1.143 2.317 2.149 1.785 1.532 Number of Units Outstanding at End of Period (in thousands)............................... 7,835 9,450 11,283 13,797 16,008 17,680 21,475 26,819 29,183 31,147 DWS GLOBAL GROWTH VIP (CLASS A) (NAME CHANGED FROM THE DWS GLOBAL THEMATIC VIP (CLASS A) ON MAY 1, 2013) Unit Value: Beginning of Period......................... 1.546 1.322 1.566 1.398 0.986 1.913 1.826 1.423 1.174 1.037 End of Period............................... 1.862 1.546 1.322 1.566 1.398 0.986 1.913 1.826 1.423 1.174 Number of Units Outstanding at End of Period (in thousands)............................... 6,482 9,536 11,120 14,001 15,273 17,181 20,835 24,886 20,131 20,878 DWS GOVERNMENT & AGENCY SECURITIES VIP (CLASS A) Unit Value: Beginning of Period......................... 1.926 1.898 1.791 1.704 1.599 1.545 1.479 1.440 1.424 1.392 End of Period............................... 1.842 1.926 1.898 1.791 1.704 1.599 1.545 1.479 1.440 1.424 Number of Units Outstanding at End of Period (in thousands)............................... 16,876 20,688 25,403 31,755 38,625 46,509 49,953 55,362 65,750 79,487 DWS HEALTH CARE VIP (CLASS A) (MERGED INTO THE DWS CAPITAL GROWTH VIP (CLASS A) ON APRIL 29, 2011) Unit Value: Beginning of Period......................... N/A N/A 1.386 1.299 1.079 1.424 1.276 1.219 1.139 1.055 End of Period............................... N/A N/A N/A 1.386 1.299 1.079 1.424 1.276 1.219 1.139 Number of Units Outstanding at End of Period (in thousands)............................... N/A N/A N/A 6,881 8,112 10,687 12,122 14,794 17,848 20,688 DWS HIGH INCOME VIP (CLASS A) Unit Value: Beginning of Period......................... 2.070 1.827 1.784 1.587 1.150 1.533 1.540 1.414 1.381 1.245 End of Period............................... 2.203 2.070 1.827 1.784 1.587 1.150 1.533 1.540 1.414 1.381 Number of Units Outstanding at End of Period (in thousands)............................... 19,353 22,678 26,256 31,555 38,234 42,139 49,101 67,251 79,756 97,566 DWS INTERNATIONAL VIP (CLASS A) Unit Value: Beginning of Period......................... 0.974 0.818 0.996 0.994 0.755 1.479 1.309 1.054 0.921 0.801 End of Period............................... 1.154 0.974 0.818 0.996 0.994 0.755 1.479 1.309 1.054 0.921 Number of Units Outstanding at End of Period (in thousands)............................... 10,729 12,382 14,431 16,993 19,050 22,039 27,239 31,793 34,104 36,810 DWS JANUS GROWTH & INCOME VIP (CLASS A) (MERGED INTO THE DWS CAPITAL GROWTH VIP (CLASS A) ON APRIL 27, 2009) Unit Value: Beginning of Period......................... N/A N/A N/A N/A 0.677 1.170 1.113 1.041 0.942 0.857 End of Period............................... N/A N/A N/A N/A N/A 0.677 1.170 1.113 1.041 0.942 Number of Units Outstanding at End of Period (in thousands)............................... N/A N/A N/A N/A N/A 29,908 36,464 43,738 53,123 57,039
E-4
YEAR ENDED DECEMBER 31ST ------------------------------------------------------------------------------------ SUB-ACCOUNT 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 ---------------------------------------------- ------- ------- ------ ------ ------ ------ ------- ------- ------- ------- DWS JANUS GROWTH OPPORTUNITIES VIP (CLASS A) (MERGED INTO THE DWS CAPITAL GROWTH VIP (CLASS A) ON DECEMBER 8, 2006) Unit Value: Beginning of Period......................... N/A N/A N/A N/A N/A N/A N/A 0.769 0.724 0.652 End of Period............................... N/A N/A N/A N/A N/A N/A N/A N/A 0.769 0.724 Number of Units Outstanding at End of Period (in thousands)............................... N/A N/A N/A N/A N/A N/A N/A N/A 46,197 53,672 DWS LARGE CAP VALUE VIP (CLASS A) Unit Value: Beginning of Period......................... 2.187 2.020 2.050 1.877 1.518 2.421 2.170 1.907 1.897 1.748 End of Period............................... 2.823 2.187 2.020 2.050 1.877 1.518 2.421 2.170 1.907 1.897 Number of Units Outstanding at End of Period (in thousands)............................... 36,651 44,022 52,236 28,548 33,115 21,030 27,166 33,240 40,803 49,127 DWS MFS STRATEGIC VALUE VIP (CLASS A) (MERGED INTO THE DWS DREMAN HIGH RETURN EQUITY SERVICES VIP (CLASS A) ON SEPTEMBER 15, 2006; NAME CHANGED TO THE DWS STRATEGIC VALUE VIP (CLASS A) ON JUNE 1, 2009; NAME CHANGED TO THE DWS LARGE CAP VALUE VIP (CLASS A) ON APRIL 29, 2011) Unit Value: Beginning of Period......................... N/A N/A N/A N/A N/A N/A N/A 0.769 0.724 0.652 End of Period............................... N/A N/A N/A N/A N/A N/A N/A N/A 0.769 0.724 Number of Units Outstanding at End of Period (in thousands)............................... N/A N/A N/A N/A N/A N/A N/A N/A 46,197 53,672 DWS MID CAP GROWTH VIP (CLASS A) (MERGED INTO THE DWS SMALL CAP GROWTH VIP (CLASS A) ON APRIL 29, 2011) Unit Value: Beginning of Period......................... N/A N/A 1.079 0.855 0.606 1.230 1.152 1.053 0.928 0.906 End of Period............................... N/A N/A N/A 1.079 0.855 0.606 1.230 1.152 1.053 0.928 Number of Units Outstanding at End of Period (in thousands)............................... N/A N/A N/A 7,919 8,487 9,812 11,300 13,386 14,814 17,086 DWS MONEY MARKET VIP (CLASS A) Unit Value: Beginning of Period......................... 1.226 1.244 1.261 1.279 1.293 1.278 1.235 1.196 1.180 1.186 End of Period............................... 1.209 1.226 1.244 1.261 1.279 1.293 1.278 1.235 1.196 1.180 Number of Units Outstanding at End of Period (in thousands)............................... 27,093 30,310 34,013 34,513 42,153 59,626 58,844 54,082 61,161 68,139 DWS OAK STRATEGIC EQUITY VIP (CLASS A) (MERGED INTO THE DWS CAPITAL GROWTH VIP (CLASS A) ON DECEMBER 8, 2006) Unit Value: Beginning of Period......................... N/A N/A N/A N/A N/A N/A N/A 0.625 0.660 0.661 End of Period............................... N/A N/A N/A N/A N/A N/A N/A N/A 0.625 0.660 Number of Units Outstanding at End of Period (in thousands)............................... N/A N/A N/A N/A N/A N/A N/A N/A 16,253 20,441 DWS SMALL CAP GROWTH VIP (CLASS A) Unit Value: Beginning of Period......................... 1.273 1.129 1.192 0.934 0.674 1.353 1.292 1.245 1.179 1.077 End of Period............................... 1.793 1.273 1.129 1.192 0.934 0.674 1.353 1.292 1.245 1.179 Number of Units Outstanding at End of Period (in thousands)............................... 21,380 24,295 28,374 17,035 19,899 23,235 27,285 34,660 40,451 42,214
E-5
YEAR ENDED DECEMBER 31ST ---------------------------------------------------------------------------------------- SUB-ACCOUNT 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 ------------------------------------------ ------- ------ ------ ------- ------- ------ -------- -------- ------- -------- DWS STRATEGIC VALUE VIP (CLASS A) (MERGED INTO THE DWS LARGE CAP VALUE VIP (CLASS A) ON APRIL 29, 2011) Unit Value: Beginning of Period..................... N/A N/A 1.199 1.080 0.874 1.642 1.697 1.449 1.362 1.211 End of Period........................... N/A N/A N/A 1.199 1.080 0.874 1.642 1.697 1.449 1.362 Number of Units Outstanding at End of Period (in thousands).................... N/A N/A N/A 58,791 71,042 84,954 105,329 132,090 132,600 146,873 DWS TECHNOLOGY VIP (CLASS A) (MERGED INTO THE DWS CAPITAL GROWTH VIP (CLASS A) ON APRIL 29, 2011) Unit Value: Beginning of Period..................... N/A N/A 0.942 0.805 0.509 0.960 0.852 0.857 0.838 0.834 End of Period........................... N/A N/A N/A 0.942 0.805 0.509 0.960 0.852 0.857 0.838 Number of Units Outstanding at End of Period (in thousands).................... N/A N/A N/A 21,689 26,337 29,728 37,450 44,278 55,324 64,797 DWS TURNER MID CAP GROWTH VIP (CLASS A) (MERGED INTO THE DWS SMALL CAP GROWTH VIP (CLASS A) ON APRIL 29, 2011) Unit Value: Beginning of Period..................... N/A N/A 1.259 0.990 0.669 1.344 1.084 1.032 0.936 0.855 End of Period........................... N/A N/A N/A 1.259 0.990 0.669 1.344 1.084 1.032 0.936 Number of Units Outstanding at End of Period (in thousands).................... N/A N/A N/A 11,200 12,114 13,046 15,311 19,321 22,040 22,412 DWS UNCONSTRAINED INCOME VIP (CLASS A) (NAME CHANGED FROM THE DWS STRATEGIC INCOME VIP (CLASS A) ON SEPTEMBER 22, 2011) Unit Value: Beginning of Period..................... 2.117 1.899 1.829 1.685 1.393 1.531 1.473 1.371 1.358 1.268 End of Period........................... 2.066 2.117 1.899 1.829 1.685 1.393 1.531 1.473 1.371 1.358 Number of Units Outstanding at End of Period (in thousands).................... 9,407 11,506 13,313 15,512 16,099 17,120 21,043 19,739 19,539 20,890 GOLDMAN SACHS VIT GLOBAL MARKETS NAVIGATOR FUND (SERVICE SHARES) (INVESTMENT OPTION ADDED ON MAY 22, 2012) Unit Value: Beginning of Period..................... 1.047 N/A N/A N/A N/A N/A N/A N/A N/A N/A End of Period........................... 1.173 1.047 N/A N/A N/A N/A N/A N/A N/A N/A Number of Units Outstanding at End of Period (in thousands).................... 33 3 N/A N/A N/A N/A N/A N/A N/A N/A INVESCO V.I. MANAGED VOLATILITY FUND (SERIES I SHARES) (NAME CHANED FROM THE AIM V.I. UTILITIES FUND (SERIES I SHARES) ON APRIL 30, 2010; NAME CHANED FROM THE INVESCO V.I. UTILITIES FUND (SERIES I SHARES) ON APRIL 30, 2014) Unit Value: Beginning of Period..................... 1.182 1.157 1.008 0.961 0.848 1.272 1.069 0.864 0.750 0.616 End of Period........................... 1.291 1.182 1.157 1.008 0.961 0.848 1.272 1.069 0.864 0.750 Number of Units Outstanding at End of Period (in thousands).................... 5,761 6,692 8,095 8,341 9,404 11,320 12,976 14,422 14,983 11,875
E-6
YEAR ENDED DECEMBER 31ST -------------------------------------------------------------------------------------- SUB-ACCOUNT 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 -------------------------------------------- ------- ------ ------ ------ ------ ------- -------- ------- ------- -------- SVS DREMAN FINANCIAL SERVICES PORTFOLIO (CLASS A) (MERGED INTO THE DWS DREMAN FINANCIAL SERVICES VIP (CLASS A) ON FEBRUARY 3, 2006; MERGED INTO THE DWS DREMAN HIGH RETURN EQUITY VIP (CLASS A) ON SEPTEMBER 15, 2006; NAME CHANGED TO THE DWS STRATEGIC VALUE VIP (CLASS A) ON JUNE 1, 2009; NAME CHANGED TO THE DWS LARGE CAP VALUE VIP (CLASS A) ON APRIL 29, 2011) Unit Value: Beginning of Period....................... N/A N/A N/A N/A N/A N/A N/A 1.322 1.342 1.215 End of Period............................. N/A N/A N/A N/A N/A N/A N/A N/A 1.322 1.342 Number of Units Outstanding at End of Period (in thousands)............................. N/A N/A N/A N/A N/A N/A N/A N/A 22,892 28,813 SVS EAGLE FOCUSED LARGE CAP GROWTH PORTFOLIO (CLASS A) (MERGED INTO THE SCUDDER CAPITAL GROWTH PORTFOLIO (CLASS A) ON APRIL 29, 2005) Unit Value: Beginning of Period....................... N/A N/A N/A N/A N/A N/A N/A N/A 0.837 0.834 End of Period............................. N/A N/A N/A N/A N/A N/A N/A N/A N/A 0.837 Number of Units Outstanding at End of Period (in thousands)............................. N/A N/A N/A N/A N/A N/A N/A N/A N/A 26,100 SVS FOCUS VALUE AND GROWTH PORTFOLIO (CLASS A) (MERGED INTO THE SCUDDER GROWTH AND INCOME PORTFOLIO (CLASS A) ON APRIL 29, 2005) Unit Value: Beginning of Period....................... N/A N/A N/A N/A N/A N/A N/A N/A N/A 1.264 End of Period............................. N/A N/A N/A N/A N/A N/A N/A N/A N/A 1.387 Number of Units Outstanding at End of Period (in thousands)............................. N/A N/A N/A N/A N/A N/A N/A N/A N/A 38,331 SVS INDEX 500 PORTFOLIO (CLASS A) (MERGED INTO THE SCUDDER VIT EQUITY 500 INDEX PORTFOLIO (CLASS A) ON SEPTEMBER 15, 2005; NAME CHANGED TO THE DWS VIT EQUITY 500 INDEX VIP (CLASS A)) Unit Value: Beginning of Period....................... N/A N/A N/A N/A N/A N/A N/A N/A 0.883 0.811 End of Period............................. N/A N/A N/A N/A N/A N/A N/A N/A N/A 0.883 Number of Units Outstanding at End of Period (in thousands)............................. N/A N/A N/A N/A N/A N/A N/A N/A N/A 112,590 THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. (INITIAL SHARES) (CLOSED TO NEW PAYMENT ALLOCATIONS OR TRANSFERS ON NOVEMBER 15, 2010) Unit Value: Beginning of Period....................... 0.890 0.806 0.811 0.716 0.543 0.840 0.790 0.734 0.718 0.686 End of Period............................. 1.180 0.890 0.806 0.811 0.716 0.543 0.840 0.790 0.734 0.718 Number of Units Outstanding at End of Period (in thousands)............................. 1,979 2,246 2,743 3,349 3,962 4,323 5,792 7,248 9,175 10,121
E-7 APPENDIX F EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS COMMONWEALTH ANNUITY CONTRACTS ONLY Assume in the examples below that a 65-year-old male annuitizes his contract exactly two years after the Issue Date. The annuitization amount is $250,000. Further assume that he selects a variable Life with Period Certain annuity payout option of Single Life with Payments Guaranteed for 10 Years, an Assumed Investment Return ("AIR") of 3%, and an annual Change Frequency. Assume that the Annuity Value purchases 1,370 Annuity Units and the first monthly annuity benefit payment is equal to $1,370. The following examples assume a net return of 8% (gross return of 9.4%). PRESENT VALUE WITHDRAWALS EXAMPLE 1. Assume that the Owner has taken no previous withdrawals and would like to take the maximum Present Value Withdrawal available at the beginning of the fifth contract year (the third year of the Annuity Payout phase). Annuity Units prior to withdrawal = 1,370 Annuity Unit Value on the date of withdrawal = 1.09944 Monthly Annuity Benefit Payment prior to withdrawal = $1,506.24 Rate used in Present Value Determination = 5% (3% AIR plus 2% Withdrawal Adjustment Charge) Present Value of Future Guaranteed Annuity Benefit Payments = $119,961.92 Maximum Present Value Withdrawal Amount = $89,971.44 ($119,961.92 x 75%) Annuity Units after withdrawal = 342.50 (1,370 x (1 - (89,971.44/119,961.92))) Annuity Unit Value on the date of withdrawal = 1.09944 Monthly Annuity Benefit Payment after withdrawal = $376.56 Because the withdrawal is being made within 5 years of the Issue Date, the rate used in the Present Value Determination is increased by a Withdrawal Adjustment Charge. Since less than 10 years of guaranteed annuity payments are being valued, the Withdrawal Adjustment Charge is 2%. Because this is a Present Value Withdrawal, the number of Annuity Units will increase to 1,370 after the end of the 10-year period during which the Company guaranteed to make payments. EXAMPLE 2. Assume that the Owner has taken no previous withdrawals and would like to take the maximum Present Value Withdrawal available at the beginning of the tenth contract year (eighth year of the Annuity Payout phase). Annuity Units prior to withdrawal = 1,370 Annuity Unit Value on the date of withdrawal = 1.39350 Monthly Annuity Benefit Payment prior to withdrawal = $1,909.09 Rate used in Present Value Determination = 3% (3% AIR) Present Value of Future Guaranteed Annuity Benefit Payments = $65,849.08 Maximum Present Value Withdrawal Amount = $49,386.81 ($65,849.08 x 75%) Annuity Units after withdrawal = 342.50 (1,370 x (1 - (49,386.81/65,849.08))) Annuity Unit Value on the date of withdrawal = 1.39350 Monthly Annuity Benefit Payment after withdrawal = $477.27 Because the withdrawal is being made more than 5 years after the Issue Date, the rate used in the Present Value Determination is not increased by a Withdrawal Adjustment Charge. Because this is a Present Value Withdrawal, the number of Annuity Units will increase to 1,370 after the end of the 10-year period during which the Company guaranteed to make payments. F-1 PAYMENT WITHDRAWALS EXAMPLE 3. Assume that the Owner has taken no previous withdrawals and would like to take the maximum Payment Withdrawal of 10 monthly annuity benefit payments at the beginning of the fifth contract year (the third year of the Annuity Payout phase). At that time, the Annuitant's life expectancy is greater than 15 years. Last Monthly Annuity Benefit Payment = $1,436.50 Withdrawal Amount = $14,365.00 (10 x 1,436.50) Annuity Units prior to withdrawal = 1,370 Annuity Unit Value on the date of withdrawal = 1.09944 Monthly Annuity Benefit Payment prior to withdrawal = $1,506.24 Rate used in Present Value Determination = 4% (3% AIR plus 1% Withdrawal Adjustment Charge) Present Value of Future Annuity Benefit Payments = $234,482.77 Annuity Units after withdrawal = 1,286.07 (1,370 x (1 - (14,365.00/234,482.77))) Annuity Unit Value on the date of withdrawal = 1.09944 Monthly Annuity Benefit Payment after withdrawal = $1,413.96 Because the withdrawal is being made within 5 years of the Issue Date, the rate used in the Present Value Determination is increased by a Withdrawal Adjustment Charge. Since there are more than 15 years of annuity payments being valued (the Annuitant's life expectancy is more than 15 years), the Withdrawal Adjustment Charge is 1%. Because this is a Payment Withdrawal, the number of Annuity Units will not increase after the end of the 10-year period during which the Company guaranteed to make payments. EXAMPLE 4. Assume that the Owner has taken no previous withdrawals and would like to take the maximum Payment Withdrawal of 10 monthly annuity benefit payments at the beginning of the tenth contract year (eighth year of the Annuity Payout phase). Last Monthly Annuity Benefit Payment = $1,820.71 Withdrawal Amount = $18,207.10 (10 x 1,820.71) Annuity Units prior to withdrawal = 1,370 Annuity Unit Value on the date of withdrawal = 1.39350 Monthly Annuity Benefit Payment prior to withdrawal = $1,909.09 Rate used in Present Value Determination = 3% (3% AIR) Present Value of Future Annuity Benefit Payments = $268,826.18 Annuity Units after withdrawal = 1,272.71 (1,370 x (1 - (18,207.10/268,826.18))) Annuity Unit Value on the date of withdrawal = 1.39350 Monthly Annuity Benefit Payment after withdrawal = $1,779.80 Because the withdrawal is being made more than 5 years after the Issue Date, the rate used in the Present Value Determination is not increased by a Withdrawal Adjustment Charge. Because this is a Payment Withdrawal, the number of Annuity Units will not increase after the end of the 10-year period during which the Company guaranteed to make payments. PRESENT VALUE WITHDRAWAL VERSUS PAYMENT WITHDRAWAL EXAMPLE 5. Assume that the Owner has taken no previous withdrawals and would like to take a $10,000 withdrawal at the beginning of the fifth contract year (the third year of the Annuity Payout phase). At that time, the Annuitant's life expectancy is greater than 15 years. The following examples show the impact of taking the withdrawal under the Present Value Withdrawal Option and the Payment Withdrawal Option. F-2 PRESENT VALUE WITHDRAWAL Annuity Units prior to withdrawal = 1,370 Annuity Unit Value on the date of withdrawal = 1.09944 Monthly Annuity Benefit Payment prior to withdrawal = $1,506.24 Rate used in Present Value Determination = 5% (3% AIR plus 2% Withdrawal Adjustment Charge) Present Value of future Guaranteed Annuity Benefit Payments = $119,961.92 Withdrawal = $10,000 Annuity Units after withdrawal = 1,255.80 (1,370 x (1 - (10,000/119,961.92))) Annuity Unit Value on the date of withdrawal = 1.09944 Monthly Annuity Benefit Payment after withdrawal = $1,380.67 Because the withdrawal is being made within 5 years of the Issue Date, the rate used in the Present Value Determination is increased by a Withdrawal Adjustment Charge. Since less than 10 years of guaranteed annuity payments are being valued, the Withdrawal Adjustment Charge is 2%. Because this is a Present Value Withdrawal, the number of Annuity Units will increase to 1,370 at the end of the 10-year period during which the Company guaranteed to make payments. PAYMENT WITHDRAWAL Annuity Units prior to withdrawal = 1,370 Annuity Unit Value on the date of withdrawal = 1.09944 Monthly Annuity Benefit Payment prior to withdrawal = $1,506.24 Rate used in Present Value Determination = 4% (3% AIR plus 1% Withdrawal Adjustment Charge) Present Value of future Annuity Benefit Payments = $234,482.77 Withdrawal = $10,000 Annuity Units after withdrawal = 1,311.57 (1,370 x (1 - (10,000/$234,482.77))) Annuity Unit Value on the date of withdrawal = 1.09944 Monthly Annuity Benefit Payment after withdrawal = $1,442.00 Because the withdrawal is being made within 5 years of the Issue Date, the rate used in the Present Value Determination is increased by a Withdrawal Adjustment Charge. Since there are more than 15 years of annuity payments being valued (the Annuitant's life expectancy is more than 15 years), the Withdrawal Adjustment Charge is 1%. Because this is a Payment Withdrawal, the number of Annuity Units will not increase at the end of the 10-year period during which the Company guaranteed to make payments. F-3 APPENDIX G DISCONTINUATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER Effective January 31, 2002, the Company terminated the availability of the optional Minimum Guaranteed Annuity Payout (M-GAP) Rider. This termination does not affect M-GAP Riders issued prior to January 31, 2002 except that Owners who have previously elected the M-GAP Rider will not be able to purchase a new M-GAP Rider under the repurchase feature. The M-GAP Rider provides a guaranteed minimum amount of fixed annuity lifetime income during the annuity payout phase, after a ten year or fifteen year waiting period, subject to the conditions described below. On each Contract anniversary a Minimum Guaranteed Annuity Payout Benefit Base (less any applicable premium taxes) is determined. The Minimum Guaranteed Annuity Payout Benefit Base is the value that will be annuitized should you exercise the Rider. In order to exercise the Rider, a fixed annuitization option involving a life contingency must be selected. Annuitization under this Rider will occur at the Company's guaranteed annuity option rates listed under the Annuity Option Tables in the Contract. The Minimum Guaranteed Annuity Payout Benefit Base is equal to the greatest of: (a) The Accumulated Value increased by any positive Market Value Adjustment, if applicable, on the Contract Anniversary that the M-GAP Benefit Base is being determined; (b) the Accumulated Value on the effective date of the Rider accumulated daily at an effective annual yield of 5% plus gross payments made thereafter compounded daily at an effective annual yield of 5%, starting on the date each payment is applied, proportionately reduced to reflect withdrawals; or (c) the highest Accumulated Value on any Contract anniversary since the Rider effective date, as determined after being increased for subsequent payments and any positive Market Value Adjustment, if applicable, and proportionately reduced for subsequent withdrawals. For each withdrawal described in (b) and (c) above, the proportionate reduction is calculated by multiplying the (b) or (c) value, whichever is applicable, determined immediately prior to the withdrawal by the following fraction: amount of the withdrawal -------------------------------------------------------- Accumulated Value determined immediately prior to the withdrawal EXERCISING THE M-GAP RIDER. - The Owner may only exercise the M-GAP Rider within thirty days after any Contract anniversary following the expiration of a ten or fifteen-year waiting period from the effective date of the Rider. - The Owner may only annuitize under a fixed annuity payout option involving a life contingency as provided under "DESCRIPTION OF ANNUITY PAYOUT OPTIONS" in the Prospectus. - The Owner may only annuitize at the Company's guaranteed fixed annuity option rates listed under the Annuity Option Tables in the Contract. TERMINATING THE M-GAP RIDER. The Owner may not terminate the M-GAP Rider prior to the seventh Contract anniversary after the effective date of the Rider. The Owner may terminate the Rider at any time after the seventh Contract anniversary following the effective date of the Rider. The Rider will terminate automatically upon surrender of the Contract or the date that a death benefit is payable if the Contract is not continued under "THE SPOUSE OF THE OWNER AS BENEFICIARY" under DESCRIPTION OF THE CONTRACT--THE ACCUMULATION PHASE. G-1 From time to time the Company may illustrate minimum guaranteed income amounts under the M-GAP Rider for individuals based on a variety of assumptions, including varying rates of return on the value of the Contract during the accumulation phase, annuity payout periods, annuity payout options and M-GAP Rider waiting periods. Any assumed rates of return are for purposes of illustration only and are not intended as a representation of past or future investment rates of return. For example, the illustration below assumes an initial payment of $100,000 for an Annuitant age 60 (at issue) and exercise of an M-GAP Rider with a ten-year waiting period. The illustration assumes that no subsequent payments or withdrawals are made and that the annuity payout option is a Life Annuity with 120 Monthly Payments Guaranteed. The values below have been computed based on a 5% net rate of return and are the guaranteed minimums that would be received under the M-GAP Rider. The minimum guaranteed benefit base amounts are the values that will be annuitized. Minimum guaranteed annual income values are based on a fixed annuity payout.
CONTRACT MINIMUM MINIMUM ANNIVERSARY GUARANTEED GUARANTEED AT EXERCISE BENEFIT BASE ANNUAL INCOME(1) ---------------- --------------- ---------------------- 10 $162,889 $12,153 15 $207,892 $17,695
------------------ (1) Other fixed annuity options involving a life contingency other than Life Annuity With Payments Guaranteed for 10 years are available. See "DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS" in the Prospectus. The M-GAP Rider does not create Accumulated Value or guarantee performance of any investment option. Because this Rider is based on guaranteed actuarial factors, the level of lifetime income that it guarantees may often be less than the level that would be provided by applying the then current annuity factors. Therefore, the Rider should be regarded as providing a guarantee of a minimum amount of annuity income. As described above, withdrawals will reduce the benefit base. G-2 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY STATEMENT OF ADDITIONAL INFORMATION OF FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS FUNDED THROUGH SUB-ACCOUNTS OF SEPARATE ACCOUNT KG INVESTING IN SHARES OF THE UNDERLYING PORTFOLIOS THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH THE SCUDDER GATEWAY PLUS PROSPECTUS OF SEPARATE ACCOUNT KG, DATED MAY 1, 2014 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM ANNUITY CLIENT SERVICES, COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY, PO BOX 758554, TOPEKA, KS 66675, TELEPHONE 1-800-782-8380. DATED MAY 1, 2014 Commonwealth Annuity Scudder Gateway Plus TABLE OF CONTENTS GENERAL INFORMATION AND HISTORY 3 TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY 4 SERVICES 4 UNDERWRITERS 6 ANNUITY BENEFIT PAYMENTS AND ACCUMULATION UNIT CALCULATION 7 ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM 8 PERFORMANCE INFORMATION 8 TAX-DEFERRED ACCUMULATION 15 STATE PREMIUM TAX CHART 16 FINANCIAL STATEMENTS 16 FINANCIAL STATEMENTS OF COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY AND SEPARATE ACCOUNT KG F-1
2 GENERAL INFORMATION AND HISTORY The Company's principal office (the "Principal Office") is located at 132 Turnpike Road, Suite 210, Southborough, MA 01772, Telephone 508-460-2400. Effective September 1, 2006, Allmerica Financial Life Insurance and Annuity Company was renamed Commonwealth Annuity and Life Insurance Company (the "Company"). The Company is a life insurance company organized under the laws of Delaware in July 1974. Prior to December 31, 2002, the Company was a wholly owned subsidiary of First Allmerica Financial Life Insurance Company ("First Allmerica)", which in turn was a direct subsidiary of Allmerica Financial Corporation ("AFC"). Effective December 31, 2002, the Company became a Massachusetts domiciled insurance company and a direct wholly-owned subsidiary of The Hanover Insurance Group ("THG," formerly Allmerica Financial Corporation). On December 30, 2005, THG completed the closing of the sale of the Company to The Goldman Sachs Group, Inc. ("Goldman Sachs"), 200 West Street, New York, NY 10282. Effective April 30, 2013, Goldman Sachs completed the transfer of the common stock of the Company to Global Atlantic (Fin) Company, which is a wholly-owned indirect subsidiary of Global Atlantic Financial Group Limited ("Global Atlantic"). Currently, Goldman Sachs owns approximately 22% of the outstanding ordinary shares of Global Atlantic, Goldman Sachs and Global Atlantic employees own approximately 4.5% of the outstanding ordinary shares, and unaffiliated investors, none of whom own more than 9.9%, own the remaining 73.5% of the outstanding ordinary shares. The registered office of Global Atlantic Financial Group Limited is located at Appleby Services (Bermuda) Ltd., Canon's Court, 22 Victoria Street, Hamilton HM 12 Bermuda. The Company is subject to the laws of the Commonwealth of Massachusetts governing insurance companies and to regulation by the Commissioner of Insurance of Massachusetts. In addition, the Company is subject to the insurance laws and regulations of other states and jurisdictions in which it is licensed to operate. In connection with the acquisition of the Company, Global Atlantic has provided certain written assurances to the Commissioner of the Massachusetts Division of Insurance (the "Commissioner"). More specifically, Global Atlantic agreed to make capital contributions to the Company, subject to a maximum of $250 million, if necessary to ensure that the Company maintains a risk-based capital ratio of at least 100%, pursuant to Massachusetts Insurance Law. Such assurances have been provided solely to the Commissioner by Global Atlantic, and terminate the sooner of 2018 or at such time as Goldman Sachs owns less than 10% of the outstanding voting securities of Global Atlantic. These assurances are not evidence of indebtedness or an obligation or liability of Global Atlantic, and do not provide Contract Owners with any specific rights or recourse against Global Atlantic. These assurances replaced substantially similar assurances that had been provided by Goldman Sachs. Separate Account KG (the "Variable Account") is a separate investment account of Commonwealth Annuity and Life Insurance Company (the "Company") authorized by vote of its Board of Directors on June 13, 1996. Several Sub-Accounts of the Variable Account are available under the Scudder Gateway Plus (the "Contract"). Each Sub-Account invests exclusively in shares of one of the following funds: 3 ------------------------------------------------------------------------------------------------------------------ AIM VARIABLE INSURANCE FUNDS DWS VARIABLE SERIES II (INVESCO VARIABLE INSURANCE FUNDS)(SERIES I SHARES) (CLASS A) Invesco V.I. Managed Volatility Fund DWS Global Equity VIP DWS Small Mid Cap Value VIP THE ALGER PORTFOLIOS DWS Global Income Builder VIP (CLASS I-2) DWS Global Growth VIP Alger Balanced Portfolio DWS Government & Agency Securities VIP Alger Capital Appreciation Portfolio DWS High Income VIP DWS Large Cap Value VIP DWS INVESTMENT VIT FUNDS DWS Money Market VIP DWS Equity 500 Index VIP DWS Small Mid Cap Growth VIP DWS Unconstrained Income VIP DWS VARIABLE SERIES I (CLASS A) DWS Bond VIP GOLDMAN SACHS VARIABLE INSURANCE TRUST DWS Capital Growth VIP (SERVICE SHARES) DWS Global Small Cap Growth VIP Goldman Sachs VIT Global Markets Navigator Fund DWS Core Equity VIP DWS International VIP ------------------------------------------------------------------------------------------------------------------
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY The Company currently imposes no charge for taxes payable in connection with the Contract, other than for state and local premium taxes and similar assessments when applicable. The Company reserves the right to impose a charge for any other taxes that may become payable in the future in connection with the Contract or the Variable Account. The Variable Account is considered to be a part of and taxed with the operations of the Company. The Company is taxed as a life insurance company under subchapter L of the Internal Revenue Code (the "Code"), and files a consolidated tax return with its parent and affiliated companies. The Company reserves the right to make a charge for any effect which the income, assets or existence of the Contract or the Variable Account may have upon its tax. Such charge for taxes, if any, will be assessed on a fair and equitable basis in order to preserve equity among classes of Contract Owners ("Owners"). The Variable Account presently is not subject to tax. SERVICES SERVICE PROVIDERS CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the Variable Account. Underlying Portfolio shares owned by the Sub-Accounts are held on an open account basis. A Sub-Account's ownership of Underlying Portfolio shares is reflected on the records of the Underlying Portfolio and is not represented by any transferable stock certificates. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PricewaterhouseCoopers LLP is the Company's Independent Registered Public Accounting Firm. PricewaterhouseCoopers LLP is located at 125 High Street, Boston, MA 02110. MAIL ROOM AND ADMINISTRATIVE SERVICES. The Company has retained se2, Inc. an affiliate of Security Distributors, Inc.,, to provide systems, administrative, accounting, mailroom and lockbox services and other 4 services to the Company. The principal administrative offices of se2, Inc. are located at One Security Benefit Place, Topeka, Kansas, 66636. EXPERTS. The financial statements of the Company as of December 31, 2013 and 2012 and for each of the three years in the period ended December 31, 2013, and the financial statements of Separate Account KG of the Company as of December 31, 2013 and for the periods indicated, included in this Statement of Additional Information constituting part of this Registration Statement, have been so included in reliance on the reports of PricewaterhouseCoopers LLP, the Company's independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. The financial statements of the Company included herein should be considered only as bearing on the ability of the Company to meet its obligations under the Contract. OTHER SERVICE ARRANGEMENTS CERTAIN PAYMENTS WE RECEIVE WITH REGARD TO THE FUNDS. We and our principal underwriter, Epoch Securities, Inc., ("Epoch") may receive payments from the Funds or their service providers (e.g., the investment adviser, administrator, distributor, and/or their affiliates). These payments may be used for a variety of purposes, including payment of expenses that we (and our affiliates) incur in promoting, marketing, and administering the Contract and, in our role as an intermediary, the Funds. We (and our affiliates) may profit from these payments. The amount of payments we receive from the Funds' service providers is based on a percentage of the assets of the particular Fund attributable to the Contract as well as certain other variable insurance products that we and/or our affiliates may issue or administer. These percentages are negotiated and vary with each Fund. These payments may be derived, in whole or in part, from the investment advisory fee deducted from Fund assets. Contract Owners, through their indirect investment in the Funds, bear the costs of these investment advisory fees (see the Funds' prospectuses for more information). Some service providers may pay us significantly more than others and the amount we receive may be substantial. These percentages currently range from 0.05% to 0.25%, and as of the date of this prospectus, we are receiving payments from each Fund's service providers. Additionally, certain of the Funds make payments to us or Epoch under their distribution plans (12b-1 plans). The payment rates currently range from 0.16% to 0.25% based on the amount of assets invested in those Funds. Payments made out of the assets of the Funds will reduce the amount of assets that otherwise would be available for investment, and will reduce the return on your investment. The dollar amount of future asset based fees is not predictable because these fees are a percentage of the Fund's average net assets, which can fluctuate over time. If, however, the value of the Funds goes up, then so would the payment to us or to Epoch. Conversely, if the value of the Fund goes down, payments to us or to Epoch would decrease. A Fund's service provider may provide us (or our affiliates) and/or broker dealers that sell the Contracts ("selling firms") with marketing support, may pay us (or our affiliates) and/or selling firms amounts to participate in national and regional sales conferences and meetings with the sales desks, and may occasionally provide us (or our affiliates) and/or selling firms with items of relatively small value, such as promotional gifts, meals, tickets, or other similar items in the normal course of business. We and/or Epoch also may directly or indirectly receive additional amounts or different percentages of assets under management from some of the Funds' service providers with regard to other variable insurance products we or our affiliates may issue or administer. 5 UNDERWRITERS Effective May 1, 2008, Epoch Securities, Inc., a Delaware company located at 132 Turnpike Road, Southborough, MA 01772 ("Epoch" or "Underwriter"), became principal underwriter for the Contracts. Epoch is a corporation organized and existing under the laws of the state of Delaware, and is a wholly-owned subsidiary of Global Atlantic (Fin) Company . Epoch is a registered broker-dealer with the SEC and a member of the Financial Industry Regulatory Authority ("FINRA"). The Company has effectively ceased issuing new contracts except in connection with certain pre-existing contractual plans and programs. The Company has effectively ceased issuing new Contracts except in connection with certain pre-existing contractual plans and programs. The Company paid commissions not to exceed 7.0% of payments to broker-dealers that sold the Contract. The Company currently does not pay direct commissions on additional payments to the Contracts. However, alternative commission schedules may be in effect with lower initial commission amounts plus ongoing annual compensation of up to 1% of the Contract's Accumulated Value. To the extent permitted by FINRA rules, overrides and promotional incentives or payments also may be provided to independent marketing organizations and broker-dealers based on the Contract's Accumulated Value, sales volumes, the performance of wholesaling functions, or other sales-related criteria. Additional payments may be made for other services not directly related to the sale of the Contract. Commissions paid by the Company do not result in any charge to Owners or to the Variable Account in addition to the charges described under CHARGES AND DEDUCTIONS in the Prospectus. The Company intends to recoup the commission and other sales expense through a combination of anticipated surrender, withdrawal and/or annuitization charges, profits from the Company's general account, including the investment earnings on amounts allocated to accumulate on a fixed basis in excess of the interest credited on fixed accumulations by the Company, and the profit, if any, from the mortality and expense risk charge. The aggregate amounts of commissions paid to Epoch for the years 2011, 2012 and 2013 were $2,051,266.24, $1,707,119.08 and $1,548,567.45, respectively. No commissions were retained by Epoch for sales of all contracts funded by the Separate Account KG (including contracts not described in the Prospectus) for the years 2011, 2012 and 2013. 6 ANNUITY BENEFIT PAYMENTS AND ACCUMULATION UNIT CALCULATION The method by which the Accumulated Value under the Contract is determined is described in detail under "Computation of Values" in the Prospectus. ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The Accumulation Unit calculation for a daily Valuation Period may be illustrated by the following hypothetical example: Assume that the assets of a Sub-Account at the beginning of a one-day Valuation Period were $5,000,000; that the value of an Accumulation Unit on the previous date was $1.135000; and that during the Valuation Period, the investment income and net realized and unrealized capital gains exceed net realized and unrealized capital losses by $1,675. The Accumulation Unit Value at the end of the current Valuation Period would be calculated as follows: (1) Accumulation Unit Value -- Previous Valuation Period $ 1.135000 (2) Value of Assets -- Beginning of Valuation Period $5,000,000 (3) Excess of Investment Income and Net Gains Over Capital Losses $1,675 (4) Adjusted Gross Investment Rate for the Valuation Period (3) divided by (2) 0.000335 (5) Annual Charge (one-day equivalent of 1.40% per annum) 0.000039 (6) Net Investment Rate (4) - (5) 0.000296 (7) Net Investment Factor 1.000000 + (6) 1.000296 (8) Accumulation Unit Value -- Current Period (1) x (7) $ 1.135336
Conversely, if unrealized capital losses and charges for expenses and taxes exceeded investment income and net realized capital gains by $1,675, the Accumulation Unit Value at the end of the Valuation Period would have been $1.134576. The method for determining the amount of annuity benefit payments is described in detail under "Variable Annuity Benefit Payments" in the Prospectus. ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING HYPOTHETICAL EXAMPLE. The determination of the Annuity Unit Value and the variable annuity benefit payment may be illustrated by the following hypothetical example: Assume an Owner has 40,000 Accumulation Units in a Variable Account, and that the value of an Accumulation Unit on the Valuation Date used to determine the amount of the first variable annuity benefit payment is $1.120000. Therefore, the Accumulated Value of the Contract is $44,800 (40,000 x $1.120000). Assume also that the Owner elects an option for which the first monthly payment is $6.57 per $1,000 of Accumulated Value applied. Assuming no premium tax or surrender charge, the first monthly payment would be $44.80 ($44,800 divided by $1,000) multiplied by $6.57, or $294.34. Next, assume that the Annuity Unit Value for the assumed investment return of 3.0% per annum for the Valuation Date as of which the first payment was calculated was $1.100000. Annuity Unit Values will not be the same as Accumulation Unit Values because the former reflect the 3.0% assumed investment return used in the annuity rate calculations. When the Annuity Unit Value of $1.100000 is divided into the first monthly payment, the number of Annuity Units represented by that payment is determined to be 267.5818. The value of this same number of Annuity Units will be paid in each subsequent month under most options. Assume further that the net investment factor for the Valuation Period applicable to the next annuity benefit payment is 1.000190. Multiplying this factor by .999919 (the one-day adjustment factor for the assumed investment return of 3.0% per annum) produces a factor of 1.000109. This then is multiplied by the Annuity Unit Value on the immediately preceding Valuation Date (assumed here to be $1.105000). The result is an Annuity Unit Value of $1.105121 for the current monthly payment. The current monthly payment then is determined by multiplying the number of Annuity Units by the current Annuity Unit Value, or 267.5818 times $1.105121, which produces a current monthly payment of $295.71. 7 ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAMS. To the extent permitted by law, the Company reserves the right to offer Enhanced Automatic Transfer Program(s) from time to time. If you elect to participate, the Company will credit an enhanced interest rate to payments made to the Enhanced Automatic Transfer Program. Eligible payments: - must be new payments to the Contract, including the initial payment, - must be allocated to the Fixed Account, which will be the source account, - must be automatically transferred out of the Fixed Account to one or more Sub-Accounts over a specified time period and - will receive the enhanced rate while they remain in the Fixed Account. You may be able to establish more than one Enhanced Automatic Transfer Program. Payments made to the Contract during the same month will be part of the same Enhanced Automatic Transfer Program if the length of the time period is the same and the enhanced rate is the same. The allocation for all of the amounts in the same program will be in accordance with the instructions for the most recent payment to this program. The monthly transfer will be made on the date designated for the initial payment to this program. The amount allocated will be determined by dividing the amount in the program by the number of remaining months. For example, for a six-month program, the first automatic transfer will be 1/6th of the balance; the second automatic transfer will be 1/5th of the balance, and so on. Payments to different Enhanced Automatic Transfer Programs will be handled in accordance with the instructions for each particular program. PERFORMANCE INFORMATION Performance information for a Sub-Account may be compared, in reports and promotional literature, to certain indices described in the Prospectus under PERFORMANCE INFORMATION. In addition, the Company may provide advertising, sales literature, periodic publications or other material information on various topics of interest to Owners and prospective Owners. These topics may include the relationship between sectors of the economy and the economy as a whole and its effect on various securities markets, investment strategies and techniques (such as value investing, market timing, dollar cost averaging, asset allocation, constant ratio transfer and account rebalancing), the advantages and disadvantages of investing in tax-deferred and taxable investments, customer profiles and hypothetical purchase and investment scenarios, financial management and tax and retirement planning, and investment alternatives to certificates of deposit and other financial instruments, including comparisons between the Contract and the characteristics of and market for such financial instruments. Total return data and supplemental total return information may be advertised based on the period of time that an Underlying Portfolio and/or an underlying Sub-Account have been in existence, even if longer than the period of time that the Contract has been offered. The results for any period prior to a Contract being offered will be calculated as if the Contract had been offered during that period of time, with all charges assumed to be those applicable to the Contract. TOTAL RETURN "Total Return" refers to the total of the income generated by an investment in a Sub-Account and of the changes of value of the principal invested (due to realized and unrealized capital gains or losses) for a specified period, reduced by the Sub-Account's asset charge and any applicable surrender charge which would be assessed upon complete withdrawal of the investment. Total Return figures are calculated by standardized methods prescribed by rules of the Securities and Exchange Commission (the "SEC"). The quotations are computed by finding the average annual compounded rates of return over the specified periods that would equate the initial amount invested to the ending redeemable values, according to the following formula: 8 P(1 + T)(^n) = ERV Where: P = a hypothetical initial payment to the Variable Account of $1,000 T = average annual total return n = number of years ERV = the ending redeemable value of the $1,000 payment at the end of the specified period
The calculation of Total Return includes the annual charges against the asset of the Sub-Account. This charge is 1.40% on an annual basis. The calculation of ending redeemable value assumes (1) the Contract was issued at the beginning of the period, and (2) a complete surrender of the Contract at the end of the period. The deduction of the surrender charge, if any, applicable at the end of the period is included in the calculation, according to the following schedule:
COMPLETE YEARS FROM DATE OF PAYMENT CHARGE ------------------- ------ Less than 4 8.5% Less than 5 7.5% Less than 6 6.5% Less than 7 5.5% Less than 8 3.5% Less than 9 1.5% Thereafter 0%
No surrender charge is deducted upon expiration of the periods specified above. In each calendar year, a certain amount (withdrawal without surrender charge amount, as described in the Prospectus) is not subject to the surrender charge. The calculations of Total Return reflect the deduction of the $35 annual Contract fee. SUPPLEMENTAL TOTAL RETURN INFORMATION The Supplemental Total Return Information in this section refers to the total of the income generated by an investment in a Sub-Account and of the changes of value of the principal invested (due to realized and unrealized capital gains or losses) for a specified period reduced by the Sub-Account's asset charges. It is assumed, however, that the investment is NOT withdrawn at the end of each period. The quotations of Supplemental Total Return are computed by finding the average annual compounded rates of return over the specified periods that would equate the initial amount invested to the ending values, according to the following formula: P(1 + T)(n) = EV Where: P = a hypothetical initial payment to the Variable Account of $1,000 T = average annual total return n = number of years EV = the ending value of the $1,000 payment at the end of the specified period
The calculation of Supplemental Total Return reflects the 1.40% annual charge against the assets of the Sub-Accounts. The ending value assumes that the Contract is NOT surrendered at the end of the specified period, and therefore there is no adjustment for the surrender charge that would be applicable if the Contract was surrendered at the end of the 9 period. The calculation of supplemental total return does not include the deduction of the $35 annual Contract fee. PERFORMANCE TABLES. Quotations of average annual total return as shown in Table 1A are calculated in the standardized manner prescribed by the SEC and show the percentage rate of return of a hypothetical initial investment of $1,000 for the most recent one, five and ten year period or for a period covering the time the Sub-Account has been in existence, if less than the prescribed periods. The calculation is adjusted to reflect the deduction of the annual Sub-Account asset charge of 1.40%, the effect of the $35 annual Contract fee, the Underlying Fund charges and the surrender charge which would be assessed if the investment were completely withdrawn at the end of the specified period. The calculation is not adjusted to reflect the deduction of any optional Rider charges. Quotations of supplemental average total returns, as shown in Table 1B, are calculated in exactly the same manner and for the same periods of time, except that they do not reflect the Contract fee and assume that the Contract is not surrendered at the end of the periods shown. Performance results in Tables 1A and 2A reflect the applicable deductions for the Contract fee, Sub-Account charges and Underlying Fund charges under this Contract and also assume that the Contract is surrendered at the end of the applicable period. Performance results in Tables 1B and 2B do not include the Contract fee and assume that the Contract is not surrendered at the end of the applicable period. Neither set of tables include optional Rider charges and neither sets reflects the 4% Payment Credit. The performance shown in Tables 2A and 2B is calculated in exactly the same manner as that in Tables 1A and 1B; however, the period of time is based on the Underlying Fund's lifetime, which may predate the Sub-Account's inception date. These performance calculations are based on the assumption that the Sub-Account corresponding to the applicable Underlying Fund was actually in existence throughout the stated period and that the contractual charges and expenses during that period were equal to those currently assessed under this Contract. PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE UNDERLYING FUND IN WHICH THE SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT MAY BE ACHIEVED IN THE FUTURE. 10 PERFORMANCE TABLES COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY TABLE 1A AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING DECEMBER 31, 2013 SINCE INCEPTION OF SUB-ACCOUNT (ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
10 YEARS (OR SUB-ACCOUNT FOR YEAR SINCE INCEPTION ENDED INCEPTION DATE 12/31/13 5 YEARS IF LESS) ----------- -------- ------- ------------ Alger Balanced Portfolio 11/15/99 -2.96 -2.21 3.49 Alger Capital Appreciation Portfolio 11/15/99 8.13 -0.67 9.85 DWS Equity 500 Index VIP 9/1/99 5.70 -1.49 5.18 DWS Bond VIP 12/12/96 -1.26 -1.59 1.11 DWS Capital Growth VIP 5/11/98 6.10 -0.89 5.67 DWS Core Equity VIP 5/1/98 5.89 -0.98 4.91 DWS Global Small Cap Growth VIP 5/6/98 5.45 -3.29 9.36 DWS International VIP 5/6/98 10.38 -9.34 4.30 DWS Diversified International Equity VIP 11/13/96 7.30 -8.01 5.39 DWS Small Mid Cap Value VIP 11/13/96 3.90 -0.40 9.53 DWS Global Income Builder VIP 11/29/96 3.23 -0.77 3.79 DWS Global Growth VIP 5/12/98 8.45 -5.48 6.59 DWS Government & Agency Securities VIP 12/4/96 -5.98 3.07 3.25 DWS High Income VIP 11/13/96 5.02 4.86 7.32 DWS Large Cap Value VIP 11/13/96 0.34 -3.41 4.98 DWS Money Market VIP 11/20/96 -8.61 -2.21 0.17 DWS Small Mid Cap Growth VIP 12/4/96 4.49 -2.66 4.38 DWS Unconstrained Income VIP 5/1/97 3.40 5.47 5.87 INVESCO V.I. Managed Volatility Fund 5/1/01 -5.24 -2.77 8.30 Goldman Sachs VIT Global Markets Navigator Fund 5/22/12 N/A N/A -6.07
11 TABLE 1B SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 2013 SINCE INCEPTION OF SUB-ACCOUNT (ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
SUB-ACCOUNT FOR YEAR SINCE INCEPTION ENDED INCEPTION OF DATE 12/31/13 5 YEARS SUB-ACCOUNT ----------- -------- ------- ------------ Alger Balanced Portfolio 11/15/99 4.74 -0.74 3.61 Alger Capital Appreciation Portfolio 11/15/99 16.65 0.77 9.91 DWS Equity 500 Index VIP 9/1/99 14.08 0.00 5.29 DWS Bond VIP 12/12/96 6.54 -0.17 1.21 DWS Capital Growth VIP 5/11/98 14.43 0.50 5.71 DWS Core Equity VIP 5/1/98 14.19 0.40 4.95 DWS Global Small Cap Growth VIP 5/6/98 13.76 -1.88 9.42 DWS International VIP 5/6/98 18.96 -8.02 4.35 DWS Diversified International Equity VIP 11/13/96 15.70 -6.72 5.42 DWS Small Mid Cap Value VIP 11/13/96 12.17 1.14 9.63 DWS Global Income Builder VIP 11/29/96 11.40 0.70 3.89 DWS Global Growth VIP 5/12/98 16.94 -4.17 6.62 DWS Government & Agency Securities VIP 12/4/96 1.48 4.50 3.39 DWS High Income VIP 11/13/96 13.31 6.18 7.40 DWS Large Cap Value VIP 11/13/96 8.25 -2.02 5.04 DWS Money Market VIP 11/20/96 -1.39 -0.82 0.27 DWS Small Mid Cap Growth VIP 12/4/96 12.75 -1.21 4.48 DWS Unconstrained Income VIP 5/1/97 11.49 6.70 5.91 INVESCO V.I. Managed Volatility Fund 5/1/01 2.15 -1.46 8.31 Goldman Sachs VIT Global Markets Navigator Fund 5/22/12 N/A N/A 4.74
12 TABLE 2A AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 2013 SINCE INCEPTION OF UNDERLYING PORTFOLIO(1) (ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
10 YEARS PORTFOLIO FOR YEAR (OR SINCE INCEPTION ENDED INCEPTION DATE 12/31/13 5 YEARS IF LESS) ----------- -------- ------- --------- Alger Balanced Portfolio 9/5/89 -2.96 -2.21 3.49 Alger Capital Appreciation Portfolio 1/25/95 8.13 -0.67 9.85 DWS Equity 500 Index VIP 9/1/99 5.70 -1.49 5.18 DWS Bond VIP 5/1/96 -1.26 -1.59 1.11 DWS Capital Growth VIP 7/16/85 6.10 -0.89 5.67 DWS Core Equity VIP 5/2/94 5.89 -0.98 4.91 DWS Global Small Cap Growth VIP 5/1/96 5.45 -3.29 9.36 DWS International VIP 5/1/87 10.38 -9.34 4.30 DWS Diversified International Equity VIP 1/6/92 7.30 -8.01 5.39 DWS Small Mid Cap Value VIP 5/1/96 3.90 -0.40 9.53 DWS Global Income Builder VIP 4/6/82 3.23 -0.77 3.79 DWS Global Growth VIP 5/5/98 8.45 -5.48 6.59 DWS Government & Agency Securities VIP 9/3/87 -5.98 3.07 3.25 DWS High Income VIP 4/6/82 5.02 4.86 7.32 DWS Large Cap Value VIP 5/1/96 0.34 -3.41 4.98 DWS Money Market VIP 4/6/82 -8.61 -2.21 0.17 DWS Small Mid Cap Growth VIP 5/2/94 4.49 -2.66 4.38 DWS Unconstrained Income VIP 5/1/97 3.40 5.47 5.87 INVESCO V.I. Managed Volatility Fund 1/3/95 -5.24 -2.77 8.30 Goldman Sachs VIT Global Markets Navigator Fund 5/22/12 N/A N/A -4.78
(1) Some of the Underlying Portfolios in which the Sub-Accounts invest existed prior to the date the Sub-Accounts commenced operations. In this table, the specified period is based on the inception date of each Underlying Portfolio rather than the inception date of the Sub-Account. As such, the table represents what the performance of a Sub-Account would have been if the Sub-Account had been both in existence and invested in the corresponding Underlying Portfolio since the date indicated. In that respect, these numbers are hypothetical and are not the actual performance numbers for the Sub-Accounts or the Contract. 13 TABLE 2B SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 2013 SINCE INCEPTION OF UNDERLYING PORTFOLIO(1) (ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
10 YEARS PORTFOLIO FOR YEAR (OR SINCE INCEPTION ENDED INCEPTION DATE 12/31/13 5 YEARS IF LESS) --------- -------- ------- --------- Alger Balanced Portfolio 9/5/89 4.74 -0.74 3.61 Alger Capital Appreciation Portfolio 1/25/95 16.65 0.77 9.91 DWS Equity 500 Index VIP 9/1/99 14.08 0.00 5.29 DWS Bond VIP 5/1/96 6.54 -0.17 1.21 DWS Capital Growth VIP 7/16/85 14.43 0.50 5.71 DWS Core Equity VIP 5/2/94 14.19 0.40 4.95 DWS Global Small Cap Growth VIP 5/1/96 13.76 -1.88 9.42 DWS International VIP 5/1/87 18.96 -8.02 4.35 DWS Diversified International Equity VIP 1/6/92 15.70 -6.72 5.42 DWS Small Mid Cap Value VIP 5/1/96 12.17 1.14 9.63 DWS Global Income Builder VIP 4/6/82 11.40 0.70 3.89 DWS Global Growth VIP 5/5/98 16.94 -4.17 6.62 DWS Government & Agency Securities VIP 9/3/87 1.48 4.50 3.39 DWS High Income VIP 4/6/82 13.31 6.18 7.40 DWS Large Cap Value VIP 5/1/96 8.25 -2.02 5.04 DWS Money Market VIP 4/6/82 -1.39 -0.82 0.27 DWS Small Mid Cap Growth VIP 5/2/94 12.75 -1.21 4.48 DWS Unconstrained Income VIP 5/1/97 11.49 6.70 5.91 INVESCO V.I. Managed Volatility Fund 1/3/95 2.15 -1.46 8.31 Goldman Sachs VIT Global Markets Navigator Fund 5/22/12 N/A N/A 4.74
(1) Some of the Underlying Portfolios in which the Sub-Accounts invest existed prior to the date the Sub-Accounts commenced operations. In this table, the specified period is based on the inception date of each Underlying Portfolio rather than the inception date of the Sub-Account. As such, the table represents what the performance of a Sub-Account would have been if the Sub-Account had been both in existence and invested in the corresponding Underlying Portfolio since the date indicated. In that respect, these numbers are hypothetical and are not the actual performance numbers for the Sub-Accounts or the Contract. YIELD AND EFFECTIVE YIELD - THE DWS MONEY MARKET SUB-ACCOUNT Set forth below is yield and effective yield information for the DWS Money Market Sub-Account for the seven-day period ended December 31, 2013: Yield -1.39% Effective Yield -1.38%
The yield and effective yield figures are calculated by standardized methods prescribed by rules of the SEC. Under those methods, the yield quotation is computed by determining the net change (exclusive of capital changes) in the value of a hypothetical pre-existing account having a balance of one accumulation unit of the Sub-Account at the beginning of the period, dividing the difference by the value of the account at the beginning of the same period to obtain the base period return, and then multiplying the return for a seven-day base period by (365/7), with the resulting yield carried to the nearest hundredth of one percent. 14 The DWS Money Market Sub-Account computes effective yield by compounding the unannualized base period return by using the formula: Effective Yield = [(base period return + 1)(365/7) ] - 1 The calculations of yield and effective yield reflect the $35 Contract fee.
TAX-DEFERRED ACCUMULATION NON-QUALIFIED CONVENTIONAL ANNUITY CONTRACT SAVINGS PLAN (AFTER-TAX CONTRIBUTIONS AND TAX-DEFERRED EARNINGS) --------------------------------------- ----------------------- NO TAXABLE LUMP SUM AFTER-TAX CONTRIBUTIONS WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS ----------- ---------------- ----------------------- Years 10 $107,946 $86,448 $81,693 Years 20 233,048 165,137 133,476 Years 30 503,133 335,021 218,082
This chart compares the accumulation of a $50,000 initial investment into a non-qualified annuity contract with a conventional savings plan. Contributions to the non-qualified annuity contract and the conventional savings plan are made after tax. Only the gain in the non-qualified annuity contract will be subject to income tax in a taxable lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an 8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate of 36%, representative of the target market, adjusted to reflect a decrease of $3 of itemized deductions for each $100 of income over $117,950. Tax rates are subject to change as is the tax-deferred treatment of the Contract. Income on non-qualified annuity contracts is taxed as ordinary income upon withdrawal. A 10% tax penalty may apply to early withdrawals. See FEDERAL TAX CONSIDERATIONS in the Prospectus. The chart does not reflect the following charges and expenses under the Contract: 1.25% for mortality and expense risk; 0.15% administration charges; 8.5% maximum surrender charge; and $35 annual Contract fee. The tax-deferred accumulation would be reduced if these charges were reflected. No implication is intended by the use of these assumptions that the return shown is guaranteed in any way or that the return shown represents an average or expected rate of return over the period of the Contract. (IMPORTANT -- THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN.) Unlike savings plans, contributions to non-qualified annuity contracts provide tax-deferred treatment on earnings. In addition, contributions to tax-deferred retirement annuities are not subject to current tax in the year of contribution. When monies are received from a non-qualified annuity contract (and you have many different options on how you receive your funds), they are subject to income tax. At the time of receipt, if the person receiving the monies is retired, not working or has additional tax exemptions, these monies may be taxed at a lesser rate. 15 STATE PREMIUM TAX CHART
QUALIFIED NON-QUALIFIED STATE PLANS PLANS ----- --------- ------------- California 0.50%* 2.35%* Maine 0.00% 2.00% Nevada 0.00% 3.50%* South Dakota 0.00% 1.25%** West Virginia 1.00%* 1.00%* Wyoming 0.00% 1.00%
--------- * Taxes will be assessed when annuity benefits commence. We reserve the right to deduct taxes earlier if such taxes are assessed by the state. ** The Tax Rate is 0.08% on annuity considerations in excess of $500,000 FINANCIAL STATEMENTS Financial Statements are included for Commonwealth Annuity and Life Insurance Company and for its Separate Account KG. 16 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholder of Commonwealth Annuity and Life Insurance Company: We have audited the accompanying consolidated financial statements of Commonwealth Annuity and Life Insurance Company and its subsidiaries, an indirect wholly-owned subsidiary of Global Atlantic Financial Group Limited, which comprise the consolidated balance sheets as of December 31, 2013 and December 31, 2012, and the related consolidated statements of operations, comprehensive income, shareholder's equity, and cash flows for the three years in the period ended December 31, 2013. MANAGEMENT'S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. AUDITOR'S RESPONSIBILITY Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commonwealth Annuity and Life Insurance Company and its subsidiaries at December 31, 2013 and December 31, 2012, and the results of their operations and their cash flows for the three years ended December 31, 2013 in accordance with accounting principles generally accepted in the United States of America. /s/ PricewaterhouseCoopers LLP April 29, 2014 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) CONSOLIDATED BALANCE SHEETS
As of December 31, 2013 2012 ----------------------------------------------------------------------------------------------------------------------------- (In millions, except share and per share amounts) ASSETS Investments: NOTES Available-for-sale fixed maturities at fair value (amortized cost of $11,067 ----- and $6,564 in 2013 and 2012 respectively) 6,8 $ 11,419 $ 7,140 Trading fixed maturities at fair value (amortized cost of $1,255 and $454 in 2013 and 2012, respectively) 8,9 1,273 520 Commercial mortgage loans (includes mortgage loans carried at fair value of $32 and $0 in 2013 and 2012, respectively) 6,8 819 386 Policy loans 8 738 316 Other invested assets (includes $391 and $0, respectively, related to variable interest entities) 6,8 391 - ------------ ------------ Total investments 14,640 8,362 ------------ ------------ Cash and cash equivalents (includes $4 and $0, respectively, related to variable interest entities) 984 618 Accrued investment income 125 62 Premiums, accounts and notes receivable, net 5 2 Reinsurance receivable on paid and unpaid losses, benefits, unearned premiums, modified coinsurance and funds withheld coinsurance (includes assets at fair value of $1,266 and $0, respectively) 13 9,024 6,625 Value of business acquired 12 425 63 Deferred policy acquisition costs 12 276 144 Deferred federal income taxes 10 248 - Derivative instruments receivable 6,8 176 168 Other assets (includes $78 and $0, respectively, related to variable interest 15 entities) 141 56 Separate account assets 8 3,403 3,180 ------------ ------------ Total assets $ 29,447 $ 19,280 ============ ============ LIABILITIES Policy liabilities and accruals: Future policy benefits (includes liabilities carried at fair value of $3,110 and $592 in 2013 and 2012 respectively) 8,13 $ 13,704 $ 5,202 Outstanding claims and losses (includes liabilities carried at fair value of $24 and $8 in 2013 and 2012, respectively) 8,13 164 116 Contractholder deposit funds and other policy liabilities (includes liabilities carried at fair value of $121 and $92 in 2013 and 2012, respectively) 8,13 4,106 4,566 ------------ ------------ Total policy liabilities and accruals 17,974 9,884 ------------ ------------ Derivative instruments payable 6,8,13 333 283 Collateral on derivative instruments 6,8 44 47 Securities sold under agreements to repurchase 8 621 115 Deferred federal income taxes 10 - 73 Dividend payable to shareholder 11 - 150 Accrued expenses and other liabilities (includes $4 and $0, respectively, related to variable interest entities) 15 213 86 Reinsurance payable 13 5,806 4,537 Separate account liabilities 8 3,403 3,180 ------------ ------------ Total liabilities $ 28,394 $ 18,355 ------------ ------------ Commitments and contingencies (Notes 16 and 17) SHAREHOLDER'S EQUITY Commonwealth Annuity and Life Insurance Company's shareholder's equity: Common stock, $1,000 par value, 10,000 shares authorized, 2,526 shares issued and outstanding $ 3 $ 3 Additional paid-in capital 815 602 Accumulated other comprehensive income 20 199 318 Retained earnings 36 2 -------------------------- Total Commonwealth Annuity and Life Insurance Company's shareholder's equity 1,053 925 ------------ ------------ Total liabilities and shareholder's equity $ 29,447 $ 19,280 ============ ============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 2 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2013 2012 2011 ----------------------------------------------------------------------------------------------------------------------------- (In millions) REVENUES NOTES ----- Premiums 13 $ 62 $ 44 $ 47 Universal life and investment product policy fees 13 349 205 195 Net investment income 7 294 235 197 Net realized investment gains Total other-than-temporary impairment ("OTTI") losses 7 - - - -------------------------------------------------- Net OTTI losses recognized in earnings - - - Net realized capital gains, excluding net OTTI losses recognized in earnings 7 147 85 102 -------------------------------------------------- Total net realized investment gains 147 85 102 Other income 15 29 20 20 -------------------------------------------------- Total revenues 881 589 561 -------------------------------------------------- BENEFITS, LOSSES AND EXPENSES Policy benefits, claims, losses and loss adjustment expenses 13 716 339 295 Amortization of policy acquisition costs 12 91 27 48 (Gains)/losses on derivative instruments 6 (40) 247 (133) Other operating expenses 15 69 70 67 -------------------------------------------------- Total benefits, losses and expenses 836 683 277 -------------------------------------------------- Income/(Loss) before federal income taxes 45 (94) 284 -------------------------------------------------- FEDERAL INCOME TAX EXPENSE Current tax expense/(benefit) 10 268 74 (53) Deferred tax (benefit)/expense 10 (257) (112) 145 -------------------------------------------------- Total federal income tax expense/(benefit) 11 (38) 92 -------------------------------------------------- Net income/(loss) attributable to Commonwealth Annuity and Life Insurance Company $ 34 (56) 192 ==================================================
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 3 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2013 2012 2011 ----------------------------------------------------------------------------------------------------------------------------- (In millions) ---------------------------------------------------- Net income/(loss) attributable to Commonwealth Annuity and Life Insurance Company $ 34 (56) 192 ---------------------------------------------------- Other comprehensive income, before tax: Unrealized (losses)/gains on securities for the period (104) 541 36 Less: reclassification adjustment for gains included in net income (120) (96) (101) ---------------------------------------------------- Unrealized (losses)/gains on available-for-sale securities (224) 445 (65) Net effect on value of business acquired and deferred acquisition costs 42 (37) 2 ---------------------------------------------------- Other comprehensive (loss)/income, before tax (182) 408 (63) Income tax benefit/(expense) related to: Net unrealized investment gains/(losses) 78 (156) 23 Net effect on value of business acquired and deferred acquisition costs (15) 13 (1) ---------------------------------------------------- Total income tax benefit/(expense) 63 (143) 22 ---------------------------------------------------- Other comprehensive (loss)/income, net of tax (119) 265 (41) ---------------------------------------------------- Comprehensive (loss)/income attributable to Commonwealth Annuity and Life Insurance Company $ (85) $ 209 $ 151 ====================================================
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 4 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Accumulated Total Additional Other Company Common Paid-in Comprehensive Retained Shareholder's (In millions) Stock Capital Income Earnings Equity --------------------------------------------------------------------------------------------------- -------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2010 $ 3 $ 717 $ 94 $ 61 $ 875 ==================================================================== Net income Other comprehensive income - 192 192 Net unrealized lossses (41) (41) Dividend to shareholder (160) (160) -------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2011 $ 3 $ 717 $ 53 $ 93 $ 866 ==================================================================== Net loss (56) (56) Other comprehensive income - Net unrealized gains 265 265 Dividend to shareholder (115) (35) (150) -------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2012 $ 3 $ 602 $ 318 $ 2 $ 925 ==================================================================== Net income 34 34 Other comprehensive income - Net unrealized losses (119) (119) Dividend to shareholder Contributions 213 213 -------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2013 $ 3 $ 815 $ 199 $ 36 $ 1,053 ====================================================================
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 5 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2013 2012 2011 ----------------------------------------------------------------------------------------------------------------------------------- (In millions) CASH FLOWS FROM OPERATING ACTIVITIES Net income/(loss) $ 34 $ (56) $ 192 Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Changes in fair value of trading fixed maturities 47 (22) (8) Net realized investment gains (148) (85) (102) Non cash derivative activity 480 366 (117) Non cash reinsurance recapture gain (122) - - Net accretion and amortization on investments (181) (93) (73) Net amortization and depreciation 94 27 48 Interest credited to contractholder deposit funds and trust instruments supported by funding obligations 113 89 20 Deferred federal income taxes (299) (58) 144 Change in premiums and notes receivable, net of reinsurance premiums payable (643) (93) 113 Change in deferred acquisition costs (26) - - Change in accrued investment income 17 (3) 12 Change in policy liabilities and accruals, net 315 (109) (185) Change in reinsurance receivable and modified coinsurance 559 195 85 Change in accrued expenses and other liabilities 312 (22) (1) Other, net - 13 (3) ----------------- --------------- ----------------- Net cash provided by operating activities 552 149 125 ----------------- --------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals of available-for-sale fixed maturities 6,220 3,523 2,637 Proceeds from maturities of available-for-sale fixed maturities 76 41 27 Proceeds from disposals of trading fixed maturities 329 93 128 Proceeds from maturities of trading fixed maturities 13 5 0 Proceeds from mortgages sold, matured or collected 135 43 39 Proceeds from disposals of other investments 507 536 627 Reinsurance transactions, net of cash acquired 169 698 27 Purchase of available-for-sale fixed maturities (5,545) (3,696) (2,260) Purchase of trading fixed maturities (330) (70) (117) Purchase of mortgages (115) - - Purchase of other investments (481) - - Other investing activities, net (726) (627) (630) ----------------- --------------- ----------------- Net cash provided by investing activities 252 546 478 ----------------- --------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES Settlement of repurchase agreements (1,957) (694) (139) Proceeds from issuance of repurchase agreements 2,463 709 149 Withdrawals from contractholder deposit funds (794) (410) (120) Withdrawals from trust instruments supported by funding obligations - - (16) Dividend to shareholder (150) (160) (250) ----------------- --------------- ----------------- Net cash used in financing activities (438) (555) (376) ----------------- --------------- ----------------- Net change in cash and cash equivalents 366 140 227 Cash and cash equivalents, beginning of period 618 478 251 ----------------- --------------- ----------------- Cash and cash equivalents, end of period $ 984 $ 618 $ 478 ================= =============== ================= Income taxes (paid)/received $ (71) $ (74) $ 43
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 6 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Commonwealth Annuity and Life Insurance Company (collectively with its subsidiaries, "the Company") is a stock life insurance company organized under the laws of the Commonwealth of Massachusetts, and is a wholly-owned direct subsidiary of Global Atlantic (Fin) Company, a Delaware company ("Finco"). Finco is a wholly-owned indirect subsidiary of Global Atlantic Financial Group Limited, a Bermuda company ("Global Atlantic" or "GAFG"). The Company insures and reinsures blocks of fixed and variable annuities, universal and variable universal life insurance, traditional life insurance and group retirement products. On April 30, 2013, The Goldman Sachs Group Inc. (collectively with its subsidiaries, "Goldman Sachs") contributed several of its insurance subsidiaries, including the Company, to GAFG, and sold approximately 78% of the ordinary shares of GAFG to third-party investors, none of which owns more than 9.9% of the GAFG ordinary shares. See Note 4 for more information. 2. BASIS OF PRESENTATION The accompanying audited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The most significant estimates are those used in determining the fair value of financial instruments, deferred policy acquisition costs ("DAC"), value of business acquired ("VOBA"), liabilities for future contract and policyholder benefits, other-than-temporary impairments of investments, and valuation allowance on deferred tax assets. Although these and other estimates and assumptions are based on the best available information, actual results could differ from those estimates. The consolidated financial statements include the results of operations and financial position of the Company and its subsidiaries. As of December 31, 2013, the Company directly owned all of the outstanding shares of First Allmerica Financial Life Insurance Company ("FAFLIC") and Accordia Life and Annuity Company ("Accordia"). FAFLIC is a Massachusetts domiciled company that insures and reinsures run-off blocks of fixed annuities, traditional life insurance, universal and variable universal life insurance, group retirement products, variable annuities and an exited accident and health business. Accordia is an Iowa domiciled company that underwrites, markets and distributes indexed universal life, universal life and term life products. See Notes 4 and 21 for information on the acquisition of Accordia. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. FINANCIAL INSTRUMENTS In the normal course of business, the Company enters into transactions involving various types of financial instruments. The Company separates its financial instruments into two categories: cash instruments and derivative contracts. The Company accounts for its financial instruments at fair value, except commercial mortgage loans as discussed below, in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 820, "Fair Value Measurements and Disclosure." The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Notes 6-8 for further information about investments, investment income and gains and losses and fair value measurements respectively. Cash instruments include U.S. government and federal agency obligations, asset backed, commercial and residential mortgage backed securities ("structured securities"), investment-grade corporate bonds, state, municipal and provincial obligations, mutual funds held in separate accounts, commercial mortgage loans, and other non-derivative financial instruments. Derivatives are instruments that derive their value from underlying asset prices, indices, reference rates and other inputs or a combination of these factors. Derivatives may be privately negotiated contracts, which are usually referred to as over-the-counter ("OTC") derivatives, or they may be listed and traded on an exchange ("exchange-traded"). The Company has entered into certain OTC derivatives, primarily equity put options, swaps and interest rate swaptions, to manage certain equity market, credit and interest rate risk. These instruments do not qualify for hedge accounting and are carried at fair value with changes reported as a component of net income. The Company trades equity futures contracts pursuant to an investment management agreement with a subsidiary of its former parent company, Goldman Sachs Asset Management, L.P. ("GSAM"). These exchange-traded futures are traded through a regulated exchange and positions are carried at fair value with changes reported as components of net income. The clearinghouse guarantees the performance of both counterparties, which mitigates credit risk to the Company. 7 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Depending on the nature of the derivative transaction, the Company maintains Credit Support Agreements ("CSA") with each counterparty, including affiliates. In general, the CSA sets a minimum threshold of exposure that must be collateralized. B. VALUATION OF INVESTMENTS The Company accounts for its fixed maturity and equity security investments at fair value. Fixed maturities and equity securities may be classified as either available-for-sale or trading. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a separate component of shareholder's equity. Trading securities are carried at fair value, with unrealized gains and losses reported in net investment income. The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in net investment income. Commercial mortgage loans ("CML's") acquired at a premium or discount are carried at amortized cost using the effective interest rate method. CML's held by the Company are diversified by property type and geographic area throughout the United States. CML's are considered impaired when it is probable that the Company will not collect amounts due according to the terms of the original loan agreement. The Company assesses the impairment of loans individually for all loans in the portfolio. The Company estimates the fair value of the underlying collateral using internal valuations generally based on discounted cash flow analyses. The Company estimates an allowance for loan and lease losses ("ALLL") representing potential credit losses embedded in the CML portfolio. The estimate is based on a consistently applied analysis of the loan portfolio and takes into consideration all available information, including industry, geographical, economic and political factors. See Note 6 for further information on CML's. Policy loans represent loans the Company issues to contractholders which are fully collateralized by the cash surrender value of associated life insurance policies. Policy loans are carried principally at unpaid principal balances. Interest income on such loans is recognized as earned using the contractually agreed upon interest rate. Generally, interest is capitalized on the associated policy's anniversary date. Realized investment gains and losses, other than those related to separate accounts for which the Company does not bear the investment risk and that meet the conditions for separate account reporting under FASB ASC 944-80, "Accounting and Reporting by Insurance Enterprises for Certain Non Traditional Long Duration Contracts and for Separate Accounts," are reported as a component of revenues based upon specific identification of the investment assets sold. Realized investment gains and losses related to separate accounts that meet the conditions for separate account reporting under FASB ASC 944-80 accrue to and are borne by the contract holder. The Company recognizes OTTI for securities classified as available-for-sale in accordance with FASB ASC Topic 320, "Investments-Debt and Equity Securities." At least quarterly, management reviews impaired securities for OTTI. The Company considers several factors when determining if a security is other-than-temporarily impaired, including but not limited to: its intent and ability to hold the impaired security until an anticipated recovery in value, the issuer's ability to meet current and future principal and interest obligations for fixed maturity securities, the length and severity of the impairment, the financial condition and near term and long term prospects for the issuer. In making these evaluations, the Company exercises considerable judgment. If the Company intends to sell or if it is more likely than not that it will be required to sell an impaired security prior to recovery of its cost basis, then the Company recognizes a charge to earnings for the full amount of the impairment (the difference between the amortized cost and fair value of the security). For fixed maturity securities that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell, the Company separates the impairment into two components: credit loss and non-credit loss. Credit losses are charged to net realized investment losses and non-credit losses are charged to other comprehensive income. The credit loss component is the difference between the security's amortized cost and the present value of its expected future cash flows discounted at the current effective rate. The remaining difference between the security's fair value and the present value of its expected future cash flows is the non-credit loss. For corporate bonds both historical default (by rating) data is used as a proxy for the probability of default, and loss given default (by issuer) projections are applied to the par amount of the bond. Potential losses incurred on structured securities are based on expected loss models rather than incurred loss models. Expected cash flows include assumptions about key systematic risks (e.g. unemployment rates, housing prices) and loan-specific information (e.g. delinquency rates, loan-to-volume ratios). Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third parties, along with assumptions and judgments about the future performance of the underlying collateral. 8 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, amounts due from banks, money market securities, highly liquid overnight deposits, discount notes and commercial paper held in the ordinary course of business. The Company also invests cash in overnight tri-party reverse repurchase agreements, in which the Company receives investment grade, highly liquid securities as collateral from counterparties. None of these assets are restricted or segregated for specific business reasons. D. DAC AND DEFERRED SALES INDUCEMENTS ("DSI") DAC consists of commissions, ceding commissions and other costs that are directly related to the successful acquisition of new or renewal insurance contracts. The Company defers sales inducements generated by variable annuities that offer enhanced crediting rates or bonus payments. Acquisition costs related to traditional life products are amortized in proportion to premium revenue recognized. Acquisition costs and sales inducements related to variable annuity products and universal and variable universal life insurance products are amortized in proportion to total estimated gross profits ("EGPs") from investment yields, mortality, surrender charges and expense margins over the deemed economic life of the contracts. DAC and DSI amortization on non-traditional products is reviewed periodically and adjusted retrospectively when the Company revises its estimate of current or future gross profits to be recognized from these products. Acquisition costs related to the reinsurance of fixed annuities are amortized in proportion to the reduction in contractholder deposit funds. The carrying amount of DAC is adjusted for the effects of realized and unrealized gains and losses on debt securities classified as available-for-sale and certain derivatives. See Note 12 for further information about DAC. E. REINSURANCE Reinsurance accounting is applied for ceded and assumed transactions when the risk transfer provisions of FASB ASC 944-40, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," have been met. To meet risk transfer requirements, a long-duration reinsurance contract must transfer mortality or morbidity risks, and subject the reinsurer to a reasonable possibility of a significant loss. Those contracts that do not meet risk transfer requirements are accounted for using deposit accounting. With respect to ceded reinsurance, the Company values reinsurance recoverables on reported claims at the time the underlying claim is recognized in accordance with contract terms. For future policy benefits, the Company estimates the amount of reinsurance recoverables based on the terms of the reinsurance contracts and historical reinsurance recovery information. The reinsurance recoverables are based on what the Company believes are reasonable estimates and the balance is reported as an asset in the Consolidated Balance Sheets. However, the ultimate amount of the reinsurance recoverable is not known until all claims are settled. Reinsurance contracts do not relieve the Company from its obligations to policyholders, and failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. There were no amounts deemed uncollectible at December 31, 2013 and 2012, respectively. See Note 13 for further information about reinsurance. F. PROPERTY, EQUIPMENT AND CAPITALIZED SOFTWARE Property, equipment, leasehold improvements and capitalized software are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets. Certain costs of software developed or obtained for internal use are capitalized and amortized on a straight-line basis over the useful life of the software. Amortization of leasehold improvements is calculated using the straight-line method over the lesser of the term of the leases or the estimated useful life of the improvements. The Company tests for the potential impairment of long-lived assets whenever events or changes in circumstances suggest that the carrying amounts may not be recoverable in accordance with FASB ASC 360, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company recognizes impairment losses only when the carrying amounts of long-lived assets exceed the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. In such cases, the Company reduces the carrying value of the asset to fair value. Fair values are estimated using discounted cash flow analysis. 9 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. VOBA VOBA represents the difference between estimated fair value of insurance and reinsurance contracts acquired in a business combination and the carrying value of the purchased in-force insurance contract liabilities. VOBA is amortized over the life of the policies in relation to the emergence of EGP's from surrender charges, investment income, mortality net of reinsurance ceded and expense margins and actual realized gain/(loss) on investments. The economic life of the universal life and variable universal life block of policies is estimated at between 30 and 60 years, depending on product and is amortized accordingly. VOBA is reviewed periodically to ensure that the unamortized portion does not exceed the expected recoverable amount. As a result of the FAFLIC business acquisition, negative VOBA was recognized, reducing the carrying value of the acquired in-force insurance liabilities, except for the Closed Block participating policies ("Closed Block"), to fair value. Since the acquired contracts do not have any future premiums, negative VOBA is amortized in proportion to the change in the underlying reserves. The carrying amount of VOBA is adjusted for the effects of realized and unrealized gains and losses on debt securities classified as available-for-sale and certain derivatives. See Note 12 for further information about VOBA. H. SEPARATE ACCOUNTS Separate account assets and liabilities represent segregated funds administered and invested by the Company for the benefit of variable annuity and variable universal life insurance contractholders and certain pension funds. Assets consist principally of mutual funds at fair value. The investment income and gains and losses of these accounts generally accrue to the contractholders and therefore, are not included in the Company's net income. However, the Company's net income reflects fees assessed and earned on fund values of these contracts which are presented as a component of Universal life and investment product policy fees in the Consolidated Statements of Operations. See Note 5 for further information about liabilities for minimum guarantees under ASC 944-80, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and Separate Accounts." Separate account assets representing contractholder funds are measured at fair value and reported as a summary total in the Consolidated Balance Sheets, with an equivalent summary total reported for related liabilities. I. POLICY LIABILITIES AND ACCRUALS Future policy benefits are liabilities for annuity, life, and health insurance policies. Such liabilities are established in amounts adequate to meet the estimated future obligations of policies in-force. The liabilities associated with the FAFLIC Closed Block traditional life insurance policies are determined using a fair value approach. The fair value is computed using a number of assumptions including asset fair values and market participant assumptions for such items as the Company's credit risk, discount rates, expenses, and capital requirements. The liabilities associated with assumed life insurance products are computed using the net level premium method for individual life and annuity policies, and are based upon estimates as to future investment yield, mortality and withdrawals that include provisions for adverse deviation. Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from 3.25 % to 11.25 % for annuities and 2.5 % to 6.5 % for life insurance. Mortality, morbidity and withdrawal assumptions for all policies are based on the Company's own experience and industry standards. Liabilities for universal life, variable universal life, fixed annuities and variable annuities include deposits received from customers and investment earnings on their fund balances, less administrative and surrender charges. Universal life and variable universal life fund balances are also assessed mortality charges. Liabilities for variable annuities include a reserve for guaranteed minimum death benefits ("GMDB") in excess of contract values. See Note 5 for further information about liabilities for minimum guarantees. Liabilities for outstanding claims and claims adjustment expenses are estimates of payments to be made on life and health insurance contracts for reported losses and claims adjustment expenses and estimates of losses and claims adjustment expenses incurred but not reported as of the balance sheet date. These liabilities are determined using case basis evaluations and statistical analyses and represent estimates of the ultimate cost of all claims incurred but not paid. These estimates are continually reviewed and adjusted as necessary; such adjustments are reflected in current operations. See Note 14 for further information about outstanding claims, losses and loss adjustment expenses. 10 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Contractholder deposit funds and other policy liabilities include deposit administration funds and immediate participation guarantee funds and consist of deposits received from customers and earnings on their fund balances as of the balance sheet date. Policy liabilities and accruals are based on the various estimates discussed above. Although the adequacy of these amounts cannot be assured, the Company believes that policy liabilities and accruals will be sufficient to meet future obligations of policies in-force. The amount of liabilities and accruals, however, could be revised in the near-term if the estimates discussed above are revised. The Company established liabilities for amounts payable under insurance policies, including traditional life insurance and term life insurance policies. Generally, amounts are payable over an extended period of time and related liabilities are calculated as the present value of future expected benefits to be paid reduced by the present value of future expected premiums. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, policy lapse, renewal, investment returns, inflation, expenses and other contingent events as appropriate for the respective product. These assumptions include provisions for adverse deviations, are established at the time the policy is issued and are intended to estimate the experience for the period the policy benefits are payable. Utilizing these assumptions, liabilities are established on a block-of-business basis. For traditional long duration insurance contracts, assumptions such as morality, morbidity and interest rates are 'locked in' upon the issuance of new business. However, significant adverse changes in experience on such contracts may require the Company to establish premium deficiency reserves. Premium deficiency reserves occur when the gross premiums are lower than the required U.S. GAAP premium to fund the future policyowner benefits. Such reserves are determined based on assumptions at the time the premium deficiency reserve is established and do not include a provision for adverse deviation. Future policy benefit liabilities for participating traditional life insurance policies are equal to the aggregate of (i) net level premium reserves for death and endowment policy benefits (calculated based upon the nonforfeiture interest rate, ranging from 2.0% to 7.5% and mortality rated guarantee in calculating the cash surrender values described in such contracts); and (ii) the liability for terminal dividends. Future policy benefit liabilities for nonparticipating traditional life insurance policies are equal to the aggregate of the present value of expected future benefit payments and related expenses less the present value of expected future net premiums. Assumptions as to the mortality and persistency are based upon the Company's experience when the basis of the liability is established. Interest rate assumptions for the aggregate future policy benefit liabilities range from 2.0% to 7.5%. Future policy benefit reserves for fixed indexed universal life with returns linked to the performance of a specified market index are equal to the sum of the fair value of the embedded derivatives and the host (or guaranteed) component of the contracts. The change in the fair value of the embedded derivative is linked to the performance of the equity option. The host value is established at inception of the contract and is equal to the total account value less embedded derivative and accreted over the policy's life at a constant rate of interest. Future policy benefits reserves for fixed indexed annuities earning a fixed rate of interest and other deferred annuity products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. For the year ended December 31, 2013, interest credit rates for those products ranges from 2.0% to 5.0% for indexed universal life. The Company holds additional liabilities for its no lapse guarantees (associated with universal life type products) which are accounted for in accordance with FASB ASC 944-20, Financial Services - Insurance - Insurance Activities (formerly SOP03-1). Policy and contract claims include amounts payable relating to in course of settlement (ICOS) and incurred but not reported (IBNR) claim liabilities. ICOS claim liabilities are established for policies when the Company is notified of the death of the policyholder but the claim has not been paid as of the reporting date. IBNR claim liabilities are determined using studies of past experience and are estimated using actuarial estimates of historical claims expense, adjusted for current trends and conditions. These estimates are continually reviewed and the ultimate liability may vary significantly from the amount recognized, which are reflected in net income in the period in which they are determined. Changes in policy and contract claims are recorded in Policy benefits, claims, losses and loss adjustment expenses in the Consolidated Statements of Operations. 11 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) J. PREMIUMS, FEE REVENUES AND RELATED EXPENSES Premiums for individual life insurance and individual and group annuity products, excluding universal life and investment-related products, are considered revenue when due. Benefits, losses and related expenses are matched with premiums, resulting in their recognition over the lives of the contracts. This matching is accomplished through the provision for future benefits, estimated and unpaid claims, amortization of the value of business acquired and amortization of deferred policy acquisition costs. Revenues for investment-related products consist of net investment income and contract charges assessed against the fund values. Related benefit expenses include annuity benefit claims for guaranteed minimum death benefits in excess of contract values, and net investment income credited to the fund values after deduction for investment and risk charges. Revenues for universal life and investment products consist of net investment income, with mortality, administration and surrender charges assessed against the fund values. Related benefit expenses include universal life benefit claims in excess of fund values and net investment income credited to universal life and fixed annuity fund values. Certain policy charges such as enhanced crediting rates or bonus payments that represent compensation for services to be provided in future periods are classified as deferred sales inducements and amortized over the period benefited using the same assumptions used to amortize deferred acquisition costs. See Note 12 for further information on DAC and Note 5 for further information on deferred sales inducements. K. CLOSED BLOCK The Company's wholly-owned subsidiary, FAFLIC, established and began operating a FAFLIC Closed Block for the benefit of participating policies, consisting of certain individual life insurance participating policies, individual deferred annuity contracts and supplementary contracts not involving life contingencies which were in-force as of FAFLIC's demutualization on October 16, 1995. The purpose of the FAFLIC Closed Block is to benefit certain classes of policies and contracts for which the Company has a dividend scale payable. Unless the Commonwealth of Massachusetts Commissioner of Insurance (the "Commissioner") consents to an earlier termination, the Closed Block will continue to be in effect until the expiration of in-force Closed Block policies. FAFLIC allocated to the FAFLIC Closed Block assets in an amount that is expected to produce cash flows which, together with future revenues from the Closed Block, are reasonably sufficient to support the FAFLIC Closed Block, including provision for payment of policy benefits, certain future expenses and taxes, and for continuation of policyholder dividend scales payable in 1994 so long as the experience underlying such dividend scales continues. FAFLIC expects that the factors underlying such experience will fluctuate in the future and policyholder dividend scales for the FAFLIC Closed Block will be set accordingly. Although the assets and cash flow generated by the FAFLIC Closed Block inure solely to the benefit of the holders of policies included in the FAFLIC Closed Block, the excess of FAFLIC Closed Block liabilities over FAFLIC Closed Block assets as measured on a GAAP basis represent the expected future after-tax income from the FAFLIC Closed Block which may be recognized in income over the period the policies and contracts in the FAFLIC Closed Block remain in-force. In the event that the FAFLIC Closed Block's assets are insufficient to meet the benefits of the FAFLIC Closed Block's benefits, general assets would be utilized to meet the contractual benefits of the FAFLIC Closed Block's policyowners. The Company elected the fair value option to measure its FAFLIC Closed Block obligations. Profitability attributable to the FAFLIC Closed Block is ultimately paid to the policyholders via policy dividends. As approved by the Massachusetts Division of Insurance on August 1, 2013, the Company's dividend payable formulas are set by the Company's Board of Directors in the first quarter of the calendar year and payable on or about August 1 in that year. A trading fixed maturity portfolio was established to back the FAFLIC Closed Block policy liabilities to match fair value asset and liability movements. The Company acquired a Closed Block of policies as part of the transaction with Athene Holding Ltd. (See Note 4 for further information). The Indianapolis Life Insurance Company ("ILICO") Closed Block is made up of participating policies, consisting of certain individual life insurance participating policies. The ILICO Closed Block was established September 18, 2000 pursuant to the Indy Life Plan of Conversion and operates in accordance with the Indy Life Closed Block Memorandum. Insurance policies which had a dividend scale in effect as of the establishment date are included in the ILICO Closed Block. The ILICO Closed Block was designed to give reasonable assurance to owners of insurance policies included therein that assets would be available to maintain the dividend scales and interest credits in effect prior to the reorganization, if the experience underlying such scales and crediting continued. The assets, including related revenue, allocated to the ILICO Closed Block will accrue solely to the benefit of the policyowners included in the ILICO Closed Block until the ILICO Closed Block no longer exists. 12 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company will continue to pay guaranteed benefits under all policies, including policies included in the ILICO Closed Block, in accordance with their terms. In the event that the ILICO Closed Block's assets were insufficient to meet the benefits of the ILICO Closed Block's guaranteed benefits, general assets would be utilized to meet the contractual benefits of the ILICO Closed Block's policyowners. All assets in the ILICO Closed Block will ultimately be paid out in policyholder benefits. In addition to the value of the policyholder liabilities, a provision is made in the fair value liability to reflect commissions and expenses incurred by the Company to support the ILICO Closed Block liabilities. The full fair value liability of the ILICO Closed Block is the fair value of assets plus the present value of future commissions and expenses determined in the actuarial appraisal model. Although the assets and cash flow generated by the ILICO Closed Block inure solely to the benefit of the holders of policies included in the ILICO Closed Block, the excess of ILICO Closed Block liabilities over ILICO Closed Block assets as measured on a GAAP basis represent the expected future after-tax income from the ILICO Closed Block which may be recognized in income over the period the policies and contracts in the ILICO Closed Block remain in-force. The Company elected the fair value option on policies making up the ILICO Closed Block. Profitability attributable to the ILICO Closed Block is ultimately paid to the policyholders via policy dividends. Dividend payable formulas are set before the outset of the calendar year, and adverse investment performance does not change the dividend liability to the policyholders. A trading fixed maturity portfolio was established to back the ILICO Closed Block policy liabilities to match fair value asset and liability movements. The Company also took on certain obligations relating to a Closed Block of business originating from the former Amerus Life Insurance Company ("Amerus"). The Amerus Closed Block has been ceded to the Company on an excess of existing reinsurance basis. The only risk transferred to the Company as of the acquisition date is a tail risk that the assets in the Closed Block are insufficient to pay policyholder liabilities. These obligations include the responsibility to pay for the expenses related to that Closed Block. A liability for this obligation is determined equal to the present value of the expenses discounted at current risk free rates with a provision for the Company's own credit. The liability also includes a provision for any cost of capital related to the obligation. See Notes 8 and 9 for further information about the Company's Closed Blocks. L. RECENT ACCOUNTING DEVELOPMENTS INCLUSION OF THE FED FUNDS EFFECTIVE SWAP RATE (OR OVERNIGHT INDEX SWAP RATE) AS A BENCHMARK INTEREST RATE FOR HEDGE ACCOUNTING PURPOSES (ASC 815): In July 2013, the FASB issued ASU No. 2013-10, "Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes". ASU No. 2013-10 provides new guidance regarding derivatives that permits the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the United States Treasury and London Interbank Offered Rate ("LIBOR"). Additionally, this new guidance removes the restriction on using different benchmark rates for similar hedges. ASU No. 2013-10 is effective prospectively for qualifying new or redesignated hedging relationship entered into on or after July 17, 2013. The adoption did not have a material impact on the Company's financial condition, results of operations or cash flows. DISCLOSURES ABOUT OFFSETTING ASSETS AND LIABILITIES (ASC 210): In December 2011, the FASB issued ASU No. 2011-11, "Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities." In February 2013, the FASB issued ASU 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities", which amended ASU No. 2011-1. ASU No. 2013-01 clarifies that ordinary trade receivables and receivables are not in the scope of ASU No. 2011-11. ASU No. 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements. ASU No. 2011-11 requires disclosure of the effect or potential effect of offsetting arrangements on the Company's financial position as well as enhanced disclosure of the rights of setoff associated with the Company's recognized assets and recognized liabilities. ASU No. 2011-11 and ASU No. 2013-01 were effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Since these amended principles require only additional disclosures concerning offsetting and related arrangements, adoption did not affect the Company's financial condition, results of operations or cash flows. 13 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PRESENTATION OF AN UNRECOGNIZED TAX BENEFIT WHEN A NET OPERATING LOSS CARRYFORWARD, A SIMILAR TAX LOSS, OR A TAX CREDIT CARRYFORWARD EXISTS (ASC 740): The FASB issued ASU No.2013-11, "Income taxes (Topic 740): Presentation of Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a similar Tax loss or a Tax Credit exists". The amendments requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carried forward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date. The unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments are effective for fiscal years and interim periods beginning after December 15, 2013. Adoption of ASU No. 2013-11 is not expected to have a material effect on the Company's financial condition, results of operations or cash flows. REPORTING OF AMOUNTS RECLASSIFIED OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (ASC 220): The FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." The amendments require an entity to report amounts reclassified out of accumulated other comprehensive income, by component, that are reclassified directly to net income in the same reporting period. Adoption of ASU No. 2013-02 did not have an effect on the Company's financial condition, results of operations or cash flows. See Note 20 for the impacts of adoption of ASU No. 2013-02. TESTING INDEFINITE-LIVED INTANGIBLE ASSETS FOR IMPAIRMENT (ASC 350): The FASB issued ASU No. 2012-02, "Intangibles-Goodwill and Others (Topic 350): Testing indefinite Lived Assets for Impairment", effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that, the indefinite-lived intangible asset is impaired. In this ASU, an entity also has the option to bypass the qualitative assessment and proceed directly to performing the quantitative impairment test. Adoption of ASU No. 2012-02 did not have an effect on the Company's financial condition, results of operations or cash flows. ACCOUNTING FOR CERTAIN RECEIVE-VARIABLE, PAY-FIXED INTEREST RATE SWAPS - SIMPLIFIED HEDGE ACCOUNTING APPROACH (ASC 815): In January 2014, the FASB issued ASU No. 2014-03, "Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps - Simplified Hedge Accounting Approach." ASU No. 2014-03 addresses concerns of private company stakeholders by providing an additional hedge accounting alternative within Topic 815 for certain types of swaps that are entered into by a private company for the purpose of economically converting a variable-rate borrowing into a fixed-rate borrowing. This additional hedge accounting alternative acts as a practical expedient to qualify for cash flow hedge accounting under Topic 815 if certain conditions are met. ASU No. 2014-03 is effective for annual periods beginning after December 2014, and interim periods within annual periods beginning after December 15, 2015, with early adoption permitted. The Company does not expect the adoption of this new guidance to have a material impact on its financial position, results of operations or cash flows. OBLIGATIONS RESULTING FROM JOINT AND SEVERAL LIABILITY ARRANGEMENTS FOR WHICH THE TOTAL AMOUNT OF THE OBLIGATION IS FIXED AT THE REPORTING DATE (ASC 405): In February 2013, the FASB issued ASU No. 2013-04, "Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the total Amount of the Obligation is Fixed at the Reporting Date." ASU No. 2013-04 requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. Additionally, ASU No. 2013-04 requires an entity to disclose the nature and amount of the obligation, as well as other information about the obligation. ASU No. 2013-04 is effective retrospectively for fiscal years beginning after December 15, 2013 and interim periods within those years. The Company does not expect the adoption of this new guidance to have a material impact on its financial position, results of operations or cash flows. M. RECLASSIFICATIONS Certain reclassifications have been made to previously reported amounts to conform to the current presentation. 14 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) N. GOODWILL AND OTHER INTANGIBLE ASSETS As a result of the acquisition of Accordia, the Company recognizes an asset for goodwill which represents the excess of cost over the fair value of net assets. Goodwill is pushed down to the appropriate reporting unit and is tested for impairment at the reporting unit level. The Company recognizes an intangible asset for state licenses acquired as a result of business combinations. The state license intangibles are not amortized. As of December 31, 2013 and December 31, 2012, the Company state license intangibles were $7 million and $5 million, respectively. The Company has a gross intangible asset of $4 million related to distribution relationships in the form of agents and channels through which the Company sells products. This intangible asset is being amortized over 5 years. Accumulated amortization of the intangible asset was $0.2 million as of December 31, 2013. The Company recorded amortization expense of $0.2 million for the period ended December 31, 2013. Estimated future amortization of the distribution intangible is $1 million for 2014, 2015, 2016 and 2017. See Notes 15 and 21 for more information. O. UNEARNED REVENUE RESERVE (URR) The Company receives certain revenues from universal life insurance products which are deferred to future periods. The amount deferred is equal to the excess of the revenue collected over the ultimate future level of these revenues. A liability for this unearned revenue is established and amortized consistently with the amortization of DAC on similar products. See Note 12 for further information about URR. P. VARIABLE INTEREST ENTITY (VIE) In the ordinary course of business, the Company invests in certain property limited liability companies and other entities subject to VIE analysis under the VIE subsections of ASC 810, Consolidations. The Company analyzes each investment to determine whether it is a VIE, and if so, whether the Company is the primary beneficiary or a significant interest holder based on the qualitative and quantitative assessment. The Company evaluates the design of the entity, the risks to which the entity was designed to expose the variable interest holder and the extent of the Company's control of and variable interest in the VIE. See Notes 4, 6 and 8 for more information. 4. SIGNIFICANT TRANSACTIONS On October 1, 2013 the Company closed the transaction to assume what was previously the life insurance business of Aviva USA from Athene Holding Ltd. The transaction was consummated through the purchase of a shell company from Athene Holding Ltd. and multiple reinsurance agreements with Aviva Life and Annuity Company ("ALAC") and Aviva Life and Annuity Company of New York ("ALACNY"), both wholly owned subsidiaries of Athene Holding Ltd., and multiple service agreements (together, with the purchase of the shell company and multiple reinsurance agreements, the "Accordia acquisition"). Two wholly owned subsidiaries, Accordia and FAFLIC, assumed the life business from ALAC and ALACNY respectively. The Company accounted for this transaction as a business combination under ASC 805 Business Combinations. See Note 21 for more information. Effective April 30, 2013, Goldman Sachs restructured its insurance business and contributed several of its insurance subsidiaries, including the Company, to GAFG. The Company became a wholly owned subsidiary of Finco, which is a wholly owned indirect subsidiary of GAFG. As part of the restructuring and contribution, the Company recaptured certain blocks of business it had previously ceded to Goldman Sachs affiliates. Effective April 1, 2013, the Company recaptured approximately $5.0 billion in reserves and received a ceding commission of $39 million from these affiliates. See note 13 for more information. Effective April 1, 2013, the Company entered into new reinsurance agreements with Commonwealth Annuity and Life Reinsurance Company ("CwA Re") a Bermuda domiciled affiliate. In connection with these new reinsurance agreements, the Company ceded approximately $5.7 billion of reserves and paid a ceding commission of $108 million. The Massachusetts Division of Insurance approved these transactions. See note 13 for more information. 15 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 4. SIGNIFICANT TRANSACTIONS (CONTINUED) On August 12, 2013, the Company, through a consolidated affiliate, ARC Rail 2013-1, LLC ("ARC Rail") a Delaware limited liability company, purchased a portfolio of 3,641 railcars with existing leases for $79 million from a group of companies under common ownership by Perrella Weineberg Partners. Additionally, on August 12, 2013, the Company entered into management servicing agreement with Infinity Asset Management, LLC, a Georgia limited liability company ("Infinity Asset Management") in which Infinity Asset Management will provide management, operating, maintenance and other railcar services for the Company. Infinity Asset Management is an affiliate of Perrella Weineberg Partners. On April 26, 2013, the Company, through a consolidated affiliate, ARC Finance 2013-1, LLC ("ARC Finance") a Delaware limited liability company, purchased a portfolio of 145 life settlement policies ("LS") and 206 single premium annuities ("SPIA") for $164 million and $198 million, respectively. The Company is required to make scheduled premium payments into the LS in order to receive the death benefit payment associated with the LS upon death of the referenced life. The SPIAs were purchased in conjunction with the LS and are tied to the same referenced lives, whereby the SPIA payments received effectively fund the required LS premium payments discussed previously. Additionally, at separation from GS, the Company purchased 24 LS with an aggregated purchase price of $41 million. This block ("unhedged LS") was not purchased through a consolidated affiliate and does not have SPIAs tied to the referenced lives as a source of funding for the LS. See Notes 6 and 8 for further information. Effective July 1, 2012, the Company ceded via funds withheld coinsurance, 90% of a block of its fixed annuity business to a Goldman Sachs affiliate, Arrow Reinsurance Company, Limited, a Bermuda domiciled Reinsurance Company ("Arrow Re"). In connection with this transaction, the Company incurred a negative ceding commission of $67 million. The transaction was approved by the Massachusetts Division of Insurance. See Note 13 for further information on reinsurance. Effective July 1, 2012, the Company entered into an agreement with a third party whereby the Company recaptured a ceded block of universal life business with reserves of approximately $385 million. In connection with this transaction, the Company incurred recapture fees of $44 million. The Company also received approximately $301 million in cash as part of this transaction. See Note 13 for further information on reinsurance. Effective July 1, 2012, the Company entered into a coinsurance agreement with a third party whereby the Company assumed approximately $1.6 billion of fixed annuity deposit liabilities and received a ceding commission of approximately $161 million. The Company received approximately $1.5 billion of available-for-sale fixed maturities and $272 million of cash. See Note 13 for further information on reinsurance. Effective June 30, 2012, the Company entered into a coinsurance agreement with a third party whereby the Company assumed approximately $1.5 billion of fixed annuity deposit liabilities and received a ceding commission of approximately $41 million. The Company received approximately $1.2 billion of available-for-sale fixed maturities, $240 million of commercial mortgage loan assets and $125 million in cash. See Note 13 for further information on reinsurance. Effective July 1, 2011, the Company entered into a coinsurance agreement with a third party whereby the Company assumed approximately $1.5 billion of fixed annuity deposit liabilities and received a ceding commission of approximately $21 million. The Company received approximately $1.2 billion of available-for-sale fixed maturities, $239 million of commercial mortgage loan assets and $27 million in cash. See Note 13 for further information on reinsurance. 16 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. LIABILITIES UNDER ASC 944-80, ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS GUARANTEED MINIMUM DEATH BENEFITS The Company has issued variable annuity contracts with a GMDB feature. The GMDB feature provides annuity contractholders with a guarantee that the benefit received at death will be no less than a prescribed minimum amount. This amount is based on either the net deposits paid into the contract, the net deposits accumulated at a specified rate, the highest historical account value on a contract anniversary, or more typically, the greatest of these values. If the GMDB is higher than the current account value at the time of death, the Company incurs a cost equal to the difference. The following table summarizes the liability for GMDB contracts reflected in the general account. The GMDB exposure includes reinsurance assumed, however, modified coinsurance is excluded as it provides negligible GMDB reserves and significant account values:
For the Years Ended December 31, 2013 2012 ---------------------------------------------------------------------------------------- (IN MILLIONS) Beginning balance $ 245 $ 254 Provision for GMDB: GMDB expense incurred 38 39 Volatility (1) (31) 17 ------------------------------- 7 56 Claims, net of reinsurance: Claims from policyholders (52) (65) Claims ceded to reinsurers 37 54 ------------------------------- (15) (11) GMDB reinsurance premium (41) (54) ------------------------------- Ending balance $ 196 $ 245 ===============================
(1) Volatility reflects the difference between actual and expected investment performance, persistency, age distribution, mortality and other factors that are assumptions within the GMDB reserving model. The reserve represents estimates, over a range of stochastic scenarios, of the present value of future GMDB net benefits expected to be paid less the present value of future GMDB net fees charged to the contract holders. The following information relates to the reserving methodology and assumptions for GMDB at December 31, 2013 and 2012. - The projection model uses 500 stochastically scenarios with mean total return ranging from 2% per annum for money market funds to 5% per annum for bond fund to 8% for equities. - For equities, one factor local volatility lognormal model was used to generate index returns, whereas on the rates front one factor normal was used. - Equity implied volatilities by duration graded from OTC quotes on the front to historical volatilities on the back. For the year ended December 31, 2013, equity volatilities ranged from 11% to 27%, depending on index and term. For rates volatility, risk-neutrals volatilities were used. - The mortality assumptions are factors of an industry standard mortality table based on company experience varying by age and gender. Mortality improvement of 1% per year for 10 years is assumed. - The full surrender assumption was changed in 2012 to incorporate anti-selective policyholder behavior. Specifically, a dynamic lapse function was incorporated that assumes policyholders are more/less likely to lapse when their guaranteed benefit is more out/in the money. The base (pre dynamic adjustment) lapse assumption is 12%. This dynamic lapse function was developed using the Company's historical behavior. - The partial withdrawal rate assumption varies by tax-qualified status and attained age. Total projected partial withdrawals are from 6% - 7% for all years. 17 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. LIABILITIES UNDER ASC 944-80, ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS (CONTINUED) The following table presents the account value, net amount at risk and average attained age of underlying contractholders for guarantees in the event of death as of December 31, 2013 and 2012. The net amount at risk is the death benefit coverage in-force or the amount that the Company would have to pay if all contractholders had died as of the specified date, and represents the excess of the guaranteed benefit over the account value.
December 31, (in millions, except for contractholder information) 2013 2012 --------------------------------------------------------------------------------------------- Net deposits paid Account value $ 3,086 $ 2,577 Net amount at risk $ 8 $ 13 Average attained age of contractholders 65 64 Ratchet (highest historical account value at specified anniversary dates) Account value $ 618 $ 593 Net amount at risk $ 35 $ 53 Average attained age of contractholders 69 69 Roll-up (net deposits accumulated at a specified rate) Account value $ 31 $ 30 Net amount at risk $ 15 $ 20 Average attained age of contractholders 81 80 Higher of ratchet or roll-up Account value $ 2,239 $ 2,145 Net amount at risk $ 810 $ 1,140 Average attained age of contractholders 76 76 Total of guaranteed benefits categorized above Account value $ 5,975 $ 5,345 Net amount at risk $ 868 $ 1,226 Average attained age of contractholders 70 69 (weighted by account value) 118,531 121,968 Number of contractholders
UNIVERSAL LIFE (UL) AND INDEXED UNIVERSAL LIFE (IUL) The majority of the business assumed from Aviva Life and Annuity Company is Universal Life ("UL") and Indexed Universal Life ("IUL"). That business is governed by ASC 944 FINANCIAL SERVICES - INSURANCE. A portion of the UL business has a no lapse guarantee ("NLG") feature and exhibits a pattern of earnings of profits followed by losses. An additional reserve per ASC 944-20, FINANCIAL SERVICES - INSURANCE - INSURANCE ACTIVITIES is held for the NLG business. Also, a portion of the IUL business is indexed to equity indices. The embedded derivative related to the index is bifurcated and valued per ASC 815-15 DERIVATIVES AND HEDGING-EMBEDDED DERIVATIVES. ASC 815 requires that all derivative instruments be measured at fair value. Thus, any premiums allocated to indexed strategies are bifurcated into a Host Contract and an Embedded Derivative component, where the Value of the Embedded Derivative ("VED") is fair valued. Policies are re-bifurcated at the end of each index period. The indexed business has index periods of either 5 or 6 years. One year strategies use a series of 5 one year periods and two years strategies have a series of 3 two year periods. As of each index period, the account value is projected to the end of the next index period assuming the future index credits return the amount spent. The account value is also projected to the end of the index period assuming policy interest guarantees. No policy deductions are used. The difference between the indexed accumulation and the guaranteed interest accumulation is determined at each policy anniversary until the end of the index period. These differences are discounted back to the current anniversary date to determine the VED. The discount rate equals the forward treasury curve plus an "own credit spread" reflecting the company's credit rating. The Host Contract is set equal to the policy's accumulated value less the VED. On each valuation date, the current market value of the index is projected forward to the end of the index period assuming future index credits return the amount that is spent. The Host Contract is accumulated to the valuation date using an accrual rate sufficient to bring the Host Contract value to the guaranteed account value by the end of the index period. The ASC 815 reserve on the valuation date is equal to the VED plus the Host Contract value. 18 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. LIABILITIES UNDER ASC 944-80, ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS (CONTINUED) The reserve determined under ASC 944 is determined such that the reserve is built up with profits in the early years and released when earnings become negative. A stochastic Asset/Liability Model is used which incorporates the full inventory of assets and the NLG liabilities. 500 interest rate and equity return scenarios are generated using the Goldman Sachs rate generator. These interest rates are used to drive the yield on new investments, as well as dynamic lapse rates which vary based on the relationship between new money rates and current credited rates on the liabilities. All sources of policy holder revenue are used to develop the ASC 944 liability (full assessment approach). For each scenario, a benefit ratio is determined equal to the present value of future benefits due to the NLG feature divided the present value of future assessment. The discount rate used is the same as that used in the DAC calculation which is equal to the credited rate at the time the business was acquired by Accordia. The reserve is determined for any point in time equal to the accumulated value of the assessments times the benefit ratio less the accumulated value of the benefits paid due to the NLG feature. An average of the reserves over all scenarios is determined and used for the ASC 944 reserve. The specific sources of revenue used in the determination of full assessments are COI's, expense loads, surrender charges collected and investment margin (investment income less amounts credited to the account value). The benefits taken into account in determining the benefit ratio are the death benefits paid after the account value becomes negative. The following table shows the balances of the ASC 815 and 944 reserves reported in future policy benefits on the balance sheet: December 31, 2013 -------------------------------------------------------------- (IN MILLIONS) ASC 815 reserves - host contract $ 3,164 ASC 815 reserves - embedded derivative $ 587 ASC 944 reserves $ 507 GUARANTEED MINIMUM INCOME BENEFIT The Company previously issued variable annuity contracts with a guaranteed minimum income benefit ("GMIB") feature. The GMIB liability as of December 31, 2013 was $3 million with a benefit paid of approximately $1 million for the year ended December 31, 2013. The GMIB liability as of December 31, 2012 was $6 million with a benefit paid of approximately $2 million for the year ended December 31, 2012. Similar to the approach employed to value the GMDB reserve, the fair value reserve for the GMIB feature was computed using a risk neutral approach. The reserve was determined by estimating the present value of future GMIB benefits expected to be paid less the present value of future GMIB fees charged to the policyholders, over a range of stochastic scenarios. SALES INDUCEMENTS The Company's variable annuity product offerings included contracts that offered enhanced crediting rates or bonus payments. The following reflects the changes to the deferred sales inducement asset: For the years ended December 31, 2013 2012 ---------------------------------------------------------------------------- (IN MILLIONS) Balance at beginning of year $ - $ - Acquisition expenses deferred 1 1 Reinsurance ceded (1) (1) ----------------------------- Balance at end of year $ - $ - ============================= 19 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. LIABILITIES UNDER ASC 944-80, ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS (CONTINUED) SEPARATE ACCOUNTS WITH CREDITED INTEREST GUARANTEES The Company issued variable annuity and life contracts through its separate accounts for which net investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholder. The Company also issued variable annuity and life contracts through separate accounts where the Company contractually guarantees to the contractholder the total deposits made to the contract less any partial withdrawals plus a minimum return. The market value adjusted ("MVA") product attributable to a third party was assumed on a modified coinsurance basis. Therefore, the assets related to these liabilities are recorded as a modified coinsurance receivable, which is included within recoverable from reinsurers. See Note 13 for further information on reinsurance. The Company had the following variable annuities with guaranteed minimum returns: December 31, 2013 2012 ------------------------------------------------------------------------ (IN MILLIONS) Account value $ 13 $ 15 Range of guaranteed minimum return rates 2.8 - 3.5% 2.8 - 3.5% Account balances of these contracts with guaranteed minimum returns were invested as follows: December 31, 2013 2012 -------------------------------------------------------------------- (IN MILLIONS) Asset Type: Fixed maturities $ 22 $ 24 Cash and cash equivalents 1 2 --------------------------------- Total $ 23 $ 26 ================================= 20 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. INVESTMENTS A. FIXED MATURITIES The amortized cost and fair value for fixed maturities were as follows:
AVAILABLE-FOR-SALE FIXED MATURITIES -------------------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 2013 COST GAINS LOSSES VALUE -------------------------------------------------------------------------------------------------------- (IN MILLIONS) U.S. Treasury securities and U.S. government and agency securities $ 303 $ 8 $ (39) $ 272 States and political subdivision securities 1,084 38 (31) 1,091 Foreign government securities 7 - (1) 6 Emerging markets securities 16 - - 16 Corporate fixed maturities 4,589 83 (65) 4,607 Structured securities 5,068 398 (39) 5,427 ------------------------------------------------------ Total available-for-sale fixed maturities $ 11,067 $ 527 $ (175) $ 11,419 ======================================================
AVAILABLE-FOR-SALE FIXED MATURITIES -------------------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 2012 COST GAINS LOSSES VALUE -------------------------------------------------------------------------------------------------------- (IN MILLIONS) U.S. Treasury securities and U.S. government and agency securities $ 441 $ 35 $ (4) $ 472 States and political subdivision securitites 454 73 (1) 526 Foreign government securities 2 0 - 2 Corporate fixed maturities 2,086 146 (3) 2,229 Structured securities 3,581 340 (10) 3,911 ------------------------------------------------------ Total available-for-sale fixed maturities $ 6,564 $ 594 $ (18) $ 7,140 ======================================================
At December 31, 2013 and 2012, the amortized cost and fair value of the assets on deposit with various state and governmental authorities were $132 million and $142 million, and $140 million and $169 million, respectively. The Company entered into various derivative and other arrangements that required assets, such as cash and fixed maturities, to be pledged or received as collateral. At December 31, 2013 and 2012, cash and fixed maturities held as collateral were $44 million and $47 million, respectively. The amortized cost and fair value by maturity periods for fixed maturities are shown below. Actual maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, or the Company may have the right to put or sell the obligations back to the issuers. Structured securities are included in the category representing their contractual maturity. The maturity distribution for available-for-sale fixed maturity securities is as follows: AS OF DECEMBER 31, 2013 AMORTIZED COST FAIR VALUE ------------------------------------------------------------------------------- (IN MILLIONS) Due in one year or less $ 86 $ 86 Due after one year through five years 447 459 Due after five years through ten years 1,093 1,120 Due after ten years 9,441 9,754 ------------------- ------------------- Total $ 11,067 $ 11,419 =================== =================== 21 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. INVESTMENTS (CONTINUED) B. COMMERCIAL MORTGAGE LOANS The maturity distribution for commercial mortgage loans is as follows: AS OF DECEMBER 31, 2013 AMORTIZED COST ----------------------------------------------------- (IN MILLIONS) 2014 $ 48 2015 65 2016 18 2017 26 2018 36 2019 and thereafter 626 ------------------- Total $ 819 =================== Actual maturities could differ from contractual maturities, because borrowers may have the right to prepay with or without prepayment, penalties and loans may be refinanced. The Company individually and collectively evaluates all its mortgage loans for impairment. The credit quality indicator for the Company's CML's is an internal measure based on the borrower's ability to pay and the value of the underlying collateral. The internal risk rating is related to an increasing likelihood of loss, with a low quality rating representing the category in which a loss is first expected. There were no loans in arrears as of December 31, 2013. The Company's ALLL allowance was $4 million as of December 31, 2013. There were no loans in arrears and the Company's ALLL allowance was $7 million as of December 31, 2012. The Company diversifies its commercial mortgage loan portfolio by both geographic region and property type to reduce the risk of concentration. The following tables present the Company's CML's by geographic region and property type. AMORTIZED COST AS OF DECEMBER 31, 2013 2012 ----------------------------------------------------------------------- (IN MILLIONS) Pacific $ 185 $ 106 South Atlantic 177 116 Middle Atlantic 118 81 East North Central 105 25 Mountain 101 30 West South Central 43 - West North Central 41 11 Multi-Region 25 2 East South Central 13 11 New England 11 4 ---------------- ----------------- Total by Region $ 819 $ 386 ================ ================= AMORTIZED COST AS OF DECEMBER 31, 2013 2012 ----------------------------------------------------------------------- (IN MILLIONS) Retail $ 214 $ 111 Office Building 202 141 Apartment 176 45 Industrial 90 - Mixed use 52 - Warehouse 49 69 Hotel/Motel 33 - Other Commercial 3 20 ---------------- ----------------- Total by Property Type $ 819 $ 386 ================ ================= 22 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. INVESTMENTS (CONTINUED) C. DERIVATIVE INSTRUMENTS The Company manages its risk through the purchase of equity derivative put options, swaps and equity futures used to protect against increases in GMDB liability in the event that the market declines; trading in interest rate derivatives to manage certain guaranteed crediting rate risks; and trading in credit derivatives to manage counterparty risk on reinsurance transactions. In addition, the Company invests in exchange traded futures and options as part of its overall diversification and total return objectives. The Company has embedded derivatives related to reinsurance contracts that are accounted for on a modified coinsurance basis. Under such arrangements, the ceding company owns the assets backing the liabilities and transfers the investment returns on the pool of assets to the reinsurer; the reinsurer records a "modco" loan receivable for the assets held by the ceding company. An embedded derivative exists because the arrangement exposes the reinsurer to third-party credit risk. The Company shares in the economic performance of Standard and Poor's call options used to hedge equity indexed life insurance contracts assumed via funds withheld reinsurance. The Company does not employ hedge accounting. Management monitors the Company's derivative activities by reviewing portfolio activities and risk levels. Management also oversees all derivative transactions to ensure that the types of transactions entered into and the results obtained from those transactions are consistent with both the Company's risk management strategy and the Company's policies and procedures. The fair value of the derivative assets and liabilities were as follows:
AS OF DECEMBER 2013 --------------------------------------------------------------------------------------------------------------------- (In millions, except number of contracts) Derivative Derivative Number Of Assets Liabilities Contracts ----------------------------------------------- DERIVATIVE CONTRACTS Interest rate contracts $ 22 $ - 6 Equity market contracts 23 - 276,358 Futures contracts 34 5 14,494 Embedded derivatives- modco loans 97 $ 328 4 ----------------------------------------------- Gross fair value of derivative contracts $ 176 $ 333 290,862 =============================================== Funds withheld reinsurance receivable 1,266 3 Fair value included within total assets $ 1,442 290,865 ================ =============== Embedded derivative- IUL product 587 1 Fair value included within total liabilities $ 920 9 ==============================
As of December 2012 --------------------------------------------------------------------------------------------------------------------- (In millions, except number of contracts) Derivative Derivative Number of Assets Liabilities Contracts ----------------------------------------------- DERIVATIVE CONTRACTS Equity market contracts $ 22 $ - 571,720 Interest rate contracts 48 - 13,239 Foreign currency contracts 0 - 1 Embedded derivatives- modco loans 98 283 4 ----------------------------------------------- Gross fair value of derivative contracts $ 168 $ 283 584,964 =============================================== Fair value included within total assets $ 168 584,964 ================ =============== Fair value included within total liabilities $ 283 4 ==============================
23 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. INVESTMENTS (CONTINUED) C. DERIVATIVE INSTRUMENTS (CONTINUED) The derivative gains and losses for the year ended December 31, 2013 are reported as follows:
Amount of (loss)/gain Location of gain/(loss) recognized in recognized in income on Derivative contracts income on derivatives derivatives -------------------------------------------------------------------------------------------------------------------------------- General account derivatives Net realized investment gains/(losses) $ 15 Foreign Currency Forwards Net realized investment (losses)/gains (2) ----------------- 13 ----------------- GMDB product derivatives (Losses)/gains on derivative instruments (249) Credit Default Swaps (Losses)/gains on derivative instruments (6) Embedded derivatives- modco loans Gains/(losses) on derivative instruments 295 ----------------- 40 ----------------- $ 53 =================
The derivative gains and losses for the year ended December 31, 2012 are reported as follows:
Amount of gain/(loss) Location of gain/(loss) recognized in recognized in income on Derivative contracts income on derivatives derivatives -------------------------------------------------------------------------------------------------------------------------------- General account derivatives Net realized investment gains/(losses) $ (2) ----------------- GMDB product derivatives Gains/(losses) on derivative instruments (119) Embedded derivatives - modco loans Gains/(losses) on derivative instruments (128) ----------------- (247) ----------------- Total Losses $ (249) =================
The derivative gains and losses for the year ended December 31, 2011 are reported as follows:
Amount of gain/(loss) Location of gain/(loss) recognized in recognized in income on Derivative contracts income on derivatives derivatives -------------------------------------------------------------------------------------------------------------------------------- General account derivatives Net realized investment gains/(losses) $ 3 ----------------- Foreign currency swap Gains/(losses) on derivative instruments 1 GMDB product derivatives Gains/(losses) on derivative instruments 20 Credit default swaps Gains/(losses) on derivative instruments (1) Embedded derivatives - modco loans Gains/(losses) on derivative instruments 113 ----------------- 133 ----------------- Total Gains $ 136 =================
24 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. INVESTMENTS (CONTINUED) D. OTHER-THAN-TEMPORARY IMPAIRMENT The table below presents a rollforward of the cumulative credit loss component of OTTI impairment losses recognized in earnings on fixed maturity securities still held by the Company at December 31, 2013 and 2012, respectively, for which a portion of the OTTI losses were recognized in other comprehensive income:
2013 2012 ------------- ------------- (IN MILLIONS) BALANCE AT BEGINNING OF YEAR $ 4 $ 4 Additions: Initial impairments - credit loss OTTI recognized on securities not previously impaired - - Reductions: Due to sales (or maturities, pay downs or prepayments) during the period of securities previously credit loss OTTI impaired - - ------------- ------------- Balance at end of year $ 4 $ 4 ============= =============
E. SECURITIES IN A CONTINUOUS UNREALIZED LOSS POSITION The following table provides information about the Company's available-for-sale fixed maturities that have been continuously in an unrealized loss position.
----------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2013 GROSS NUMBER OF (In millions, except number of securities) UNREALIZED FAIR SECURITIES WITH GROSS LOSSES VALUE UNREALIZED LOSSES ----------------------------------------------------------------------------------------------------------------- Investment grade fixed maturities (1): 0-12 months $ 100 $ 2,030 380 Greater than 12 months 32 134 16 ----------------------------------------------------------------- Total investment grade fixed maturities $ 132 $ 2,164 396 ----------------------------------------------------------------- Below investment grade fixed maturities: 0-12 months $ 43 $ 1,071 155 Greater than 12 months - - - ----------------------------------------------------------------- Total below investment grade fixed maturities 43 1,071 155 ----------------------------------------------------------------- Total fixed maturities $ 175 $ 3,235 551 =================================================================
(1) Includes gross unrealized losses for investment grade fixed maturity obligations of the U.S. Treasury, U.S. government and agency securities, states, and political subdivisions of $69 million at December 31, 2013. The Company's intent is to hold the securities until anticipated recovery above book values.
----------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2012 GROSS NUMBER OF (In millions, except number of securities) UNREALIZED FAIR SECURITIES WITH GROSS LOSSES VALUE UNREALIZED LOSSES ----------------------------------------------------------------------------------------------------------------- Investment grade fixed maturities (1): 0-12 months $ 13 $ 611 82 Greater than 12 months 1 17 14 ----------------------------------------------------------------- Total investment grade fixed maturities $ 14 $ 628 96 ----------------------------------------------------------------- Below investment grade fixed maturities: 0-12 months $ 3 $ 201 30 Greater than 12 months 1 16 7 ----------------------------------------------------------------- Total below investment grade fixed maturities 4 217 37 ----------------------------------------------------------------- Total fixed maturities $ 18 $ 845 133 =================================================================
(1) Includes gross unrealized losses for investment grade fixed maturity obligations of the U.S. Treasury, U.S. government and agency securities, states, and political subdivisions of $5 million at December 31, 2012. 25 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. INVESTMENTS (CONTINUED) F. VARIABLE INTEREST ENTITY In August 2013, the company formed a VIE, ARC Rail, which purchased $79 million of railroad assets. The entity was created solely for the purpose of acquiring and leasing the railroad assets. As the primary beneficiary of the Railcar VIE, the Company consolidates the results of the Railcar VIE. In April 2013, the Company formed a VIE, ARC Finance, which purchased $164 million of LS assets and $198mm of SPIA assets. The entity was created solely for the purpose of issuing notes backed by the cash flows of the underlying LS and SPIA assets. As the primary beneficiary of the ARC Finance VIE, the Company consolidates the results of the ARC Finance VIE. Through April 2011, the Company, through its subsidiary FAFLIC, held a Guaranteed Investment Contract through Allmerica Global Funding ("AGF"), a Cayman Islands based entity. AGF was formed as a special purpose vehicle solely for the purposes of issuing debt instruments to third party investors and used the proceeds to purchase investment contracts from the Company. AGF had one medium term note outstanding as of December 31, 2010 for $16 million with a 6.0% fixed rate, which was issued in June 1999 and matured on April 12, 2011. AGF was a VIE and was consolidated within the Company as the Company was the primary beneficiary.
CONSOLIDATED VIES FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------------------- 2013 2012 TOTAL TOTAL TOTAL ASSETS LIABILITIES TOTAL ASSETS LIABILITIES --------------------------------------------------------- ARC Rail $ 82 $ 4 $ - $ - ARC Finance 391 - - - --------------------------------------------------------- Total $ 473 $ 4 $ - $ - ==========================================================
G. INVESTMENTS IN LIFE SETTLEMENTS (LS) The Company's investments in LS are accounted for under the investment method. The following table presents additional information regarding the LS investments. DECEMBER 31, 2013 NUMBER OF CARRYING DEATH BENEFIT CONTRACTS VALUE PAYOUT $ MILLIONS $ MILLIONS ------------------------------------------------ 2014 to 2017 - $ - $ - 2018 7 17 21 Thereafter 156 389 521 ------------------------------------------------ Total 163 $ 406 $ 542 ================================================ At December 31, 2013, the anticipated life insurance premiums required to keep the LS contracts in force are $14 million in 2014 through 2016, $15 million in 2017, and $14 million in 2018. A majority of the anticipated LS premium payments are expected to be funded by incoming SPIA payments tied to the same reference lives. H. OTHER The Company had the following concentration of investments at fair value that exceeded 10% of shareholder's equity. The table below excludes residential mortgage-backed securities issued by individual sponsors: As of December 31, 2013 2012 Issuer Name ----------------------------------------------------------------------- (IN MILLIONS) U.S. Treasury and Strips $ 221 $ 406 FREMF Mortgage 131 - California State Revenue Bonds 119 - Bank of America Large Loan - 124 26 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7. INVESTMENT INCOME AND GAINS AND LOSSES A. NET INVESTMENT INCOME The components of net investment income were as follows:
For the Years Ended December 31, 2013 2012 2011 -------------------------------------------------------------------------------------------------------------- (IN MILLIONS) Fixed maturities - interest and other income $ 485 $ 301 $ 226 Fixed maturities - change in fair value on trading securities (47) 22 8 Commercial mortgage loans 22 9 6 Policy loans 27 21 21 Modified coinsurance interest income 79 66 65 Short-term investments and miscellaneous income/(loss) 2 18 - ----------------------------------------- Gross investment income 568 437 326 Less: Modified coinsurance interest expense (138) (138) (122) Less: Funds withheld interest expense (115) (54) - Less: Funds withheld policy loan interest (4) - - Less: Investment expenses (17) (10) (7) ----------------------------------------- Net investment income $ 294 $ 235 $ 197 =========================================
The Company had no fixed maturities on non-accrual status at December 31, 2013, 2012 or 2011. The Company had no fixed maturities which were non-income producing at December 31, 2013, 2012 or 2011 B. NET REALIZED INVESTMENT GAINS AND LOSSES Net realized gains and (losses) on investments were as follows:
For the Years Ended December 31, 2013 2012 2011 ------------------------------------------------------------------------------------------------------ (IN MILLIONS) Available-for-sale fixed maturities (1) $ 120 $ 95 $ 101 Trading fixed maturities 15 (5) 1 Commercial mortgage loans - - (1) Affiliate secured note - 1 - Other investments 13 (2) 1 ------------------------------------ Gross realized investment gains 148 89 102 Less: Amortization of modco (1) (4) - ==================================== Net realized investment gains 147 85 102 ====================================
(1) The Company had no other-than-temporary impairments in 2013 and 2012. The Company recognized other-than-temporary impairments of $0.2 million in 2011. The proceeds from voluntary sales of available-for-sale fixed maturities and the gross realized gains and gross realized losses on those sales were as follows: PROCEEDS FROM VOLUNTARY GROSS GROSS For the Years Ended December 31, SALES GAINS LOSSES ------------------------------------------------------------------------- (IN MILLIONS) 2013 Fixed maturities $ 4,563 $ 127 $ 29 2012 Fixed maturities $ 3,523 $ 28 $ 5 2011 Fixed maturities $ 2,415 $ 115 $ 14 27 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). The best evidence of fair value is a quoted price in an active market. If listed prices or quotations are not available, fair value is determined by reference to prices of similar instruments and quoted prices or recent prices in less active markets. U.S. GAAP has a three-level fair value hierarchy for disclosure of fair value measurements. The fair value hierarchy prioritizes inputs to the valuation techniques used to measure fair value, giving the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. A financial instrument's level in the fair value hierarchy is based on the lowest level of any input that is significant to fair value measurement. The three levels of the fair value hierarchy are described below: BASIS OF FAIR VALUE MEASUREMENT Level 1 Inputs are unadjusted quoted prices in active markets to which the Company had access at the measurement date for identical, unrestricted assets and liabilities. Level 2 Inputs to valuation techniques are observable either directly or indirectly. Level 3 One or more inputs to valuation techniques are significant and unobservable. The following tables set forth by level within the fair value hierarchy financial assets and liabilities accounted for at fair value under FASB ASC 820 as of December 31, 2013 and 2012. As required by FASB ASC 820, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
DECEMBER 31, 2013 (IN MILLIONS) LEVEL 1 LEVEL 2 LEVEL 3 TOTAL --------------------------------------------------------------------------------------------------------------------- Financial Assets Available-for-sale fixed maturities U.S. treasury,government and agency securities $ 221 $ 51 $ - $ 272 States and political subdivision securities - 1,091 - 1,091 Foreign government securities - 6 - 6 Emerging market securities - 16 - 16 Corporate fixed maturities - 4,607 - 4,607 Structured securities - 5,427 - 5,427 --------------------------------------------------------- Total available-for-sale fixed maturities 221 11,198 - 11,419 --------------------------------------------------------- Trading fixed maturities U.S. treasury,government and agency securities $ 6 $ - $ - $ 6 States and political subdivision securities - 88 - 88 Corporate fixed maturities - 945 - 945 Structured securities - 234 - 234 --------------------------------------------------------- Total trading fixed maturities 6 1,267 - 1,273 --------------------------------------------------------- Derivative instruments receivable Interest rate contracts - 22 - 22 Equity market contracts - 23 - 23 Futures contracts 34 - - 34 Embedded derivatives - modco loans - - 97 97 --------------------------------------------------------- Total derivative instruments receivable 34 45 97 176 --------------------------------------------------------- Separate account assets 3,403 - - 3,403 Funds withheld reinsurance receivable - 1,266 - 1,266 Commercial mortgage loans - 32 - 32 ========================================================= Total assets at fair value $ 3,664 $ 13,808 $ 97 $ 17,569 =========================================================
28 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED)
DECEMBER 31, 2013 (IN MILLIONS) LEVEL 1 LEVEL 2 LEVEL 3 TOTAL -------------------------------------------------------------------------------------------------------------------- Financial Liabilities Foreign currency contracts $ 5 $ - $ - $ 5 Embedded derivatives - 231 97 328 FAFLIC Closed Block policy liabilities - - 638 638 ILICO Closed Block policy liabilities - - 862 862 Amerus Closed Block policy liabilities - - 58 58 Embedded derivative- IUL product - - 587 587 Policyholder liabilities - - 1,110 1,110 -------------------------------------------------------- Total liabilities at fair value $ 5 $ 231 $ 3,352 $ 3,588 ========================================================
DECEMBER 31, 2012 (IN MILLIONS) LEVEL 1 LEVEL 2 LEVEL 3 TOTAL -------------------------------------------------------------------------------------------------------------------- Financial Assets Available-for-sale fixed maturities U.S. treasury, government and agency securities $ 406 $ 66 $ - $ 472 States and political subdivision securities - 526 - 526 Emerging market securities - 2 - 2 Corporate fixed maturities - 2,229 0 2,229 Structured securities - 3,911 - 3,911 -------------------------------------------------------- Total available-for-sale fixed maturities 406 6,734 0 7,140 -------------------------------------------------------- Trading fixed maturities U.S. treasury, government and agency securities 7 - - 7 States and political subdivision securities - 32 - 32 Corporate fixed maturities - 335 - 335 Structured securities - 146 - 146 -------------------------------------------------------- Total trading fixed maturities 7 513 - 520 -------------------------------------------------------- Derivative instruments receivable Interest rate contracts - 48 - 48 Equity market contracts - 21 1 22 Foreign Currency Contracts - - - 0 Embedded derivatives - modco loan - - 98 98 -------------------------------------------------------- Total derivative instruments receivable - 69 99 168 -------------------------------------------------------- Separate account assets 3,180 - - 3,180 -------------------------------------------------------- Total assets at fair value $ 3,593 $ 7,316 $ 99 $ 11,008 ======================================================== Financial Liabilities Embedded derivatives $ - $ 185 $ 98 $ 283 FAFLIC Closed Block policy liabilities - - 692 692 -------------------------------------------------------- Total liabilities at fair value $ - $ 185 $ 790 $ 975 ========================================================
CASH INSTRUMENTS The Company's cash instruments are generally classified within Level 1 or Level 2, except for insurance liabilities which are classified within Level 3. LEVEL 1 CASH INSTRUMENTS: Level 1 cash instruments include U.S. Treasury, agency and government guaranteed fixed maturity securities, foreign government securities, short term money market securities and mutual funds held in separate accounts. Level 1 instruments are valued using quoted market prices for identical unrestricted instruments in active markets. 29 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED) LEVEL 2 CASH INSTRUMENTS: Level 2 cash instruments include fixed maturity securities for which quoted market prices from active markets are not available. Level 2 cash instruments are priced using observable inputs, which can be verified to quoted prices, recent trading activity for identical or similar instruments, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations and the relationship of recent market activity to the prices provided from alternative pricing sources. The Company does not make valuation adjustments to level 2 instruments. At December 31, 2013 and December 31, 2012, structured securities were valued using observable inputs and, accordingly, are included in Level 2. LEVEL 3 CASH INSTRUMENTS: Level 3 cash instruments have one or more significant valuation inputs that are not observable. Absent evidence to the contrary, Level 3 investments are initially valued at transaction price, which is considered to be the best initial estimate of fair value. Subsequently, the Company uses other methodologies to determine fair value, which vary based on the type of instrument. Valuation inputs and assumptions are changed when corroborated by substantive observable evidence, including values realized on sales of Level 3 assets. DERIVATIVE CONTRACTS LEVEL 1 DERIVATIVE CONTRACTS: Level 1 derivatives include exchange traded futures as they are actively traded and are valued at their quoted market price. LEVEL 2 DERIVATIVE CONTRACTS: Level 2 derivatives include most types of derivative instruments utilized by the Company and include derivatives for which all significant valuation inputs are corroborated by market evidence. These derivative contracts are principally valued using an income approach. The Company calculates the fair value of derivative assets by discounting future cash flows at a rate that incorporates counterparty credit spreads and the fair value of derivative liabilities by discounting future cash flows at a rate that incorporates the Company's own credit spreads. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. INTEREST RATE DERIVATIVES. Valuations for non-option based derivatives are based on present value techniques, which utilize significant inputs that may include the swap yield curve, LIBOR basis curves, and repurchase rates. Valuations for option based derivatives are based on option pricing models, which utilize significant inputs that may include the swap yield curve, LIBOR basis curves, and interest rate volatility. FOREIGN CURRENCY DERIVATIVES. Prices for currency derivatives based on the exchange rates of leading industrialized nations, including those with longer tenors, are generally transparent. EQUITY MARKET DERIVATIVES. Exchange traded and OTC equity derivatives generally have observable market prices, except for contracts with long tenors or reference prices that differ significantly from current market prices. CREDIT DERIVATIVES. Credit derivatives are valued using inputs that may include credit correlation, repurchase rates and the extrapolation beyond observable limits of the swap yield curve and credit curves. LEVEL 3 DERIVATIVE CONTRACTS: Level 3 derivatives include credit derivatives and equity market derivatives, which are valued as described in Level 2 but have significant unobservable inputs and also includes embedded derivatives which are principally valued using an income approach as explained in detail below. For Level 3 equity derivatives, significant Level 3 inputs generally include equity volatility inputs for options that are very long-dated. Valuations are based on present value techniques, which may utilize the swap yield curve and the spot equity and bond index level with significant unobservable inputs. 30 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED) FAIR VALUE OF OTHER ASSETS AND LIABILITIES SIGNIFICANT UNOBSERVABLE INPUTS The tables below present the ranges of significant unobservable inputs used to value the Company's Level 3 financial assets and liabilities. These ranges represent the significant unobservable inputs that were used in the valuation of each type of financial asset and liability. Weighted averages in the tables below are calculated by weighting each input by the relative fair value of the respective financial instruments. The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one financial asset or liability. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Company's Level 3 financial assets and liabilities.
--------------------------------------------------------------------------------------------------------------------------- LEVEL 3 ASSETS AS RANGE OF SIGNIFICANT UNOBSERVABLE OF DECEMBER 2013 VALUATION TECHNIQUES AND INPUTS (WEIGHTED AVERAGE) AS OF LEVEL 3 FINANCIAL ASSETS (IN MILLIONS) SIGNIFICANT UNOBSERVABLE INPUTS DECEMBER 2013 --------------------------------------------------------------------------------------------------------------------------- Embedded derivatives - modco $97 Discounted cash flows Discounted cash flows loans - Duration/WAL - 0.1 to 26.1 (weighted - Contract-holder average is 8.1) persistency - 7.2% to 12.5% (weighted average is 10.1%) ---------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------- LEVEL 3 LIABILITIES AS OF RANGE OF SIGNIFICANT UNOBSERVABLE DECEMBER 2013 VALUATION TECHNIQUES AND INPUTS (WEIGHTED AVERAGE) AS OF LEVEL 3 FINANCIAL LIABILITIES (IN MILLIONS) SIGNIFICANT UNOBSERVABLE INPUTS DECEMBER 2013 --------------------------------------------------------------------------------------------------------------------------- Embedded derivatives - funds $97 Discounted cash flows Discounted cash flows withheld - Duration/WAL - 0.1 to 26.1 (weighted - Contract-holder average is 8.1) persistency - 7.2% to 12.5% (weighted average is 10.1%) --------------------------------------------------------------------------------------------------------------------------- Embedded derivative - IUL $587 FAS 133. Policy persistency is the 0.5%-10% (Weighted average is 2.5%) product significant unobservable input. --------------------------------------------------------------------------------------------------------------------------- FAFLIC Closed Block policy $638 Discounted Cash Flows Discounted Cash Flows liabilities - Mortality rate - 3% to 5% - Surrender rate - 3% to 4% --------------------------------------------------------------------------------------------------------------------------- ILICO Closed Block policy $862 Fair value of closed block assets The range of expenses is $60-$100 liabilities plus present value of expenses paid per policy. The weighted average from the open block plus the cost is $78 per policy increased by of capital held in support of the inflation plus an additional liabilities. Unobservable inputs $72/policy to cover conversion are a market participant's view of costs in the two years following the expenses, a risk margin on the acquisition. The range of the risk uncertainty of the level of margin is 10%-200%. The weighted expenses, and a cost on the capital average is 142%. The range of the held in support of the liabilities. cost of capital is 10%-20% over the risk free rate. The weighted average is 15.1% over the risk free rate. ---------------------------------------------------------------------------------------------------------------------------
31 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED)
--------------------------------------------------------------------------------------------------------------------------- LEVEL 3 LIABILITIES AS OF RANGE OF SIGNIFICANT UNOBSERVABLE DECEMBER 2013 VALUATION TECHNIQUES AND INPUTS (WEIGHTED AVERAGE) AS OF LEVEL 3 FINANCIAL LIABILITIES (IN MILLIONS) SIGNIFICANT UNOBSERVABLE INPUTS DECEMBER 2013 --------------------------------------------------------------------------------------------------------------------------- Amerus Closed Block policy $58 Present value of expenses paid from The range of expenses is $60-$100 liabilities the open block plus the cost of per policy. The weighted average capital held in support of the is $80 per policy increased by liabilities. Unobservable inputs inflation plus an additional are a market participant's view of $72/policy to cover conversion the expenses, a risk margin on the costs in the two years following uncertainty of the level of acquisition. The range of the risk expenses, and a cost of capital on margin is 10%-200%. The weighted the capital held in support of the average is 102%. The range of the liabilities cost of capital is 10%-20%. The weighted average is 15.1% --------------------------------------------------------------------------------------------------------------------------- Policyholder liabilities $1,110 Present value of risk loaded The persistency, mortality and assumed liability cash flows. Unobservable expense assumptions are based on inputs include a market company experience. The range of participant's view of policy risk loadings is from .5% to 1000% persistency, mortality, the percent of the company's expenses incurred to administer the experience. The weighted average business, and the risk loadings varies by product type and which reflect the riskiness of the assumption and reflects the cash flows. riskiness of the cash flows ---------------------------------------------------------------------------------------------------------------------------
INDEXED UNIVERSAL LIFE (IUL) DERIVATIVES The Company has an embedded derivative liability related to fixed indexed universal life policies where the returns are linked to the performance of a specified market index, subject to participation rates and caps. The Company participates in the economics of call options as discussed in Note 6. The change in the fair value of the embedded derivative is linked to the performance of the equity option. EMBEDDED DERIVATIVES RELATED TO GUARANTEED MINIMUM BENEFITS These embedded derivatives are principally valued using an income approach. Valuations are based on option pricing techniques, which utilize significant inputs that may include swap yield curve and implied volatilities. These embedded derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant unobservable inputs generally include the extrapolation beyond observable limits of the swap yield curve and implied volatilities, actuarial assumptions for policyholder behavior and mortality and the potential variability in policyholder behavior and mortality, nonperformance risk, counterparty credit spreads and cost of capital for purposes of calculating the risk margin. 32 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED) FAFLIC CLOSED BLOCK POLICY LIABILITIES The fair value of the FAFLIC Closed Block policy liabilities is calculated as the sum of the fair value of FAFLIC Closed Block assets, an adjustment to the fair value of FAFLIC Closed Block assets for non-performance risk, fair value of the FAFLIC Closed Block maintenance expenses, and a risk margin based on the cost of holding capital to back the FAFLIC Closed Block. The estimated fair value for the provision for maintenance expense is determined by calculating the annual cost associated with administering the applicable policies, including servicing costs as well as provisions for overhead, both adjusted for inflation. The annual cost is discounted at a fair value rate, approximating risk free, with a provision for non-performance risk. The estimated fair value of the provision for cost of capital is determined by calculating an annual cost inherent in having to hold risk capital to back the business. This amount is generally determined by using standard regulatory metrics to determine how much capital should be held. The amount of capital held is reduced by the net investment income that would be earned from the assets backing the capital. The annual cost is discounted at a rate determined to approximate a market participant's hurdle rate. As the liability cash flows in total are based on the asset cash flows, the basic value of the liabilities are equal to the fair value of the FAFLIC Closed Block assets. By utilizing market participant assumptions, the FAFLIC Closed Block policy liabilities contain unobservable inputs resulting in a fair value measurement of Level 3. ILICO AND AMERUS CLOSED BLOCK POLICY LIABILITIES The Company elected the fair value option on policies making up the ILICO Closed Block. All assets in the Closed Block will ultimately be paid out in policyholder benefits via adjustments to policyholder dividends. Therefore, it is deemed that the fair value of the policyholder liabilities is equal to the fair value of the asset at any given point. In addition to the value of the policyholder liabilities, a provision is made in the fair value liability to reflect commissions and expenses incurred by the Company to support the Closed Block liabilities. The full fair value liability of the ILICO Closed Block is the fair value of assets plus the present value of future commissions and expenses determined in the actuarial appraisal model. The Company also took on certain obligations relating to a Closed Block of business originating from the former Amerus Life Insurance Company. These obligations include the responsibility to pay for the expenses related to that Closed Block. A liability for this obligation is determined equal to the present value of the expenses discounted at current risk free rates with a provision for the Company's own credit. The liability also includes a provision for any cost of capital related to the obligation. By utilizing market participant assumptions, the Closed Block policy liabilities contain unobservable inputs resulting in a fair value measurement of Level 3. FUNDS WITHHELD LIABILITIES The Company has chosen the fair value option for determining the value of certain liabilities reinsured on a funds withheld basis. The fair value of the funds withheld liabilities is equal to the present value of the risk adjusted cash flows. At the time the liabilities were acquired, the fair value was determined by a full actuarial appraisal with market participant assumptions. Risk adjustments were made to the mortality, persistency, and expense assumptions so that the present value of the risk adjusted cash flows equaled the actuarial appraisal value on the acquisition date. The present value uses a fair value rate, approximating a risk free rate, with a provision for non-performance risk. By utilizing market participant assumptions, the funds withheld liabilities contain unobservable inputs resulting in a fair value measurement of Level 3. 33 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED) TRANSFERS INTO OR OUT OF LEVEL 3: Overall, transfers into and/or out of Level 3 are attributable to a change in the observability of inputs. Assets and liabilities are transferred into Level 3 when a significant input cannot be corroborated with market observable data. This occurs when market activity decreases significantly and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets and liabilities are transferred out of Level 3 when circumstances change such that a significant input can be corroborated with market observable data. This may be due to a significant increase in market activity, a specific event, or one or more significant input(s) becoming observable. Transfers into and/or out of any level are assumed to occur at the beginning of the period. The tables below set forth a summary of changes in the fair value of the Company's Level 3 financial assets and liabilities for the years ended December 31, 2013 and 2012. The tables reflect gains and losses for the full year for all financial assets and liabilities categorized as Level 3 as at December 31, 2013 and December 31, 2012.
Net unrealized Net gains/(losses) relating Balance, realized to instruments still Net transfers beginning gains/ held at the reporting Net in and/or out Balance, end Year Ended December 2013 of year (losses) date settlements of Level 3 of year -------------------------------------------------------------------------------------------------------------------------------- (IN MILLIONS) Financial Assets Derivative contracts Equity market contracts 1 - (1) - - - Embedded derivative- modco loans 98 - (1) - - 97 ---------------------------------------------------------------------------------------------- Total derivative contracts 99 - (2) - - 97 ---------------------------------------------------------------------------------------------- Total assets $ 99 $ - $ (2) $ - $ - $ 97 ============================================================================================== Financial Liabilities Embedded derivative $ 98 $ - $ (1) $ - $ - $ 97 FAFLIC Closed Block policy liabilities 692 (8)(1) (46) - - 638 ILICO Closed Block policy liabilities - - (1) (2) 865 862 Amerus Closed Block liabilities - - 2 (3) 59 58 Embedded derivative- IUL - 98 - 489 587 Policyholder liabilities - 6 - - 1,104 1,110 ---------------------------------------------------------------------------------------------- Total liabilities $ 790 $ (2) $ 52 $ (5) $ 2,517 $ 3,352 ==============================================================================================
(1) Included in the net realized gains/(losses) is $15 million of realized gains from the Company's trading portfolio and a release of policyholder benefits ($16) million offset by a decrease in maintenance expenses of ($6) million and cost of capital charges of ($1) million for the year ended December 31, 2013 34 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED)
Net unrealized Net gains/(losses) relating Balance, realized to instruments still Net transfers beginning gains/ held at the reporting Net in and/or out Balance, end Year Ended December 2012 of year (losses) date settlements of Level 3 of year -------------------------------------------------------------------------------------------------------------------------------- (IN MILLIONS) Financial Assets Derivative contracts Equity market 1 - (0) - - 1 Embedded derivative 59 - 39 - - 98 ---------------------------------------------------------------------------------------------- Total derivative contracts 60 - 39 - - 99 ---------------------------------------------------------------------------------------------- Total assets $ 60 $ - $ 39 $ - $ - $ 99 ============================================================================================= Financial Liabilities Embedded derivative $ - $ - $ - $ - $ 98 $ 98 FAFLIC Closed Block policy liabilities 686 (16)(1) 22 - - 692 ---------------------------------------------------------------------------------------------- Total liabilities $ 686 $ (16) $ 22 $ - $ 98 $ 790 ==============================================================================================
(1) Included in the net realized gains/(losses) is ($5) million of realized losses from the Company's trading portfolio and a release of policyholder benefits ($15) million offset by an increase in maintenance expenses of $2 million and cost of capital charges of $2 million for the year ended December 31, 2012. The following methods and assumptions are used to estimate the fair value of each class of financial instruments that are not held at fair value as required by FASB ASC 825-10-15, "Financial Instrument Disclosures." COMMERCIAL MORTGAGE LOANS The fair values of mortgages and other loans are estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. POLICY LOANS For policy loans with fixed interest rates, estimated fair values are determined by using discounted cash flow models applied to groups of similar policy loans determined by the nature of the underlying insurance liabilities. Cash flow estimates are developed by applying a weighted-average interest rate to the outstanding principal balance of the respective group of policy loans and an estimated average maturity determined through experience studies of the past performance of policyholder repayment behavior for similar loans. These cash flows are discounted using current risk-free interest rates with no adjustment for borrower credit risk as these loans are fully collateralized by the cash surrender value of the underlying insurance policy. The estimated fair value for policy loans with variable interest rates approximates carrying value due to the absence of borrower credit risk and the short time period between interest rate resets, which presents minimal risk of a material change in estimated fair value due to changes in market interest rates. LS AND SPIA ASSETS The fair value of LS and SPIA assets is obtained by discounting the expected cash flows related to the LS and SPIA assets by swap rate plus a spread. The spread is calculated and fixed by matching the initial cash flow projections at purchase date with the LS and SPIA purchase price. Expected cash flows include: annuity payments received from SPIAs, premiums paid into LS and death benefit payments received on LS. 35 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE During March of 2010, the Company entered into a series of third party repurchase agreements. The notional value as of December 31, 2013 and 2012 was approximately $621 and $115 million, respectively. The Company posted $696 and $115 million in fixed maturity securities as collateral for these transactions as of December 31, 2013 and 2012, respectively. Fair value is estimated based on expected future cash flows and interest rates. INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES) Fair value of liabilities under supplementary contracts without life contingencies is estimated based on current fund balances and fair value of other individual contractholder funds represents the present value of future policy benefits. The following presents carrying amounts and fair values of the Company's financial instruments not carried at fair value as of December 31, 2013 and 2012:
2013 2012 ------------------------------ ---------------------------- CARRYING FAIR CARRYING FAIR DECEMBER 31, VALUE VALUE VALUE VALUE ---------------------------- ---------------------------------- ------------ ----------------- -------------- ------------- (IN MILLIONS) Financial Assets Commercial mortgage loans $ 787 $ 762 $ 386 $ 392 Policy loans 738 846 316 417 LS and SPIA assets 391 375 - - ------------ ----------------- -------------- ------------- $ 1,916 $ 1,983 $ 702 $ 809 ============ ================= ============== ============= Financial Liabilities Securities sold under agreements to repurchase $ 621 $ 621 $ 115 $ 115 Supplementary contracts without life contingencies 5 5 6 6 Other individual contract deposit funds 3,594 3,623 4,262 4,215 ------------ ----------------- -------------- ------------- $ 4,220 $ 4,249 $ 4,383 $ 4,336 ============ ================= ============== =============
36 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 9. CLOSED BLOCK Summarized financial information of the FAFLIC Closed Block is as follows:
BALANCE SHEETS December 31, 2013 2012 ------------------------------------------------------------------------------------------------------------- (IN MILLIONS) ASSETS Investments: Trading fixed maturities at fair value (amortized cost of $439 and $454 in 2013 and 2012, respectively) $ 459 $ 520 Policy loans 78 86 Cash and cash equivalents 49 29 Accrued investment income 8 9 Deferred federal income taxes 23 21 Other assets 1 1 -------------------------------- Total assets $ 618 $ 666 -------------------------------- LIABILITIES Policy liabilities and accruals at fair value $ 546 $ 605 Policyholder dividend obligation at fair value (1) 74 75 Policyholder dividends payable at fair value (1) 18 12 Other liabilities 6 5 -------------------------------- Total liabilities $ 644 $ 697 -------------------------------- Excess of Closed Block liabilities over assets designated to the Closed Block and maximum future earnings to be recognized from Closed Block assets and liabilities $ 26 $ 31 ================================
(1) Included within contractholder deposit funds and other policy liabilities in the accompanying Consolidated Balance Sheets.
STATEMENTS OF OPERATIONS For the Years Ended December 31, 2013 2012 2011 ------------------------------------------------------------------------------------------------------------- (IN MILLIONS) REVENUES Premiums and other income $ 16 $ 18 $ 18 Net investment income (20) 56 47 Net realized investment (losses)/gains 15 (5) 1 ------------------------------------------ Total revenues 11 69 66 ------------------------------------------ BENEFITS AND EXPENSES Policy benefits 4 71 55 Other expenses 1 0 0 ------------------------------------------ Total benefits and expenses 5 71 55 ------------------------------------------ Net contribution (to)/from the Closed Block $ 6 $ (2) $ 11 ------------------------------------------
Many expenses related to FAFLIC Closed Block operations are charged to operations outside the FAFLIC Closed Block; accordingly, the contribution from the FAFLIC Closed Block does not represent the actual profitability of the FAFLIC Closed Block operations. 37 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 9. CLOSED BLOCK (CONTINUED) Summarized financial information of the ILICO Closed Block is as follows:
BALANCE SHEETS December 31, 2013 ------------------------------------------------------------------------------------------------------------- (IN MILLIONS) ASSETS Investments: Trading fixed maturities at fair value (amortized cost of $684 $ in 2013) 683 Mortgage loans 32 Policy loans 98 Cash and cash equivalents 53 Accrued investment income 10 Other assets 1 -------------------------------- Total assets $ 877 -------------------------------- LIABILITIES Policy liabilities and accruals at fair value $ 842 Policyholder dividend obligation at fair value (1) 16 Policyholder dividends payable at fair value (1) 4 Deferred federal income taxes 3 Other liabilities 150 -------------------------------- Total liabilities $ 1,015 -------------------------------- Excess of Closed Block liabilities over assets designated to the Closed Block and maximum future earnings to be recognized from Closed Block assets and liabilities $ 138 ================================
(2) Included within contractholder deposit funds and other policy liabilities in the accompanying Consolidated Balance Sheets. STATEMENTS OF OPERATIONS For the Years Ended December 31, 2013 ----------------------------------------------------------------------- (IN MILLIONS) REVENUES Premiums and other income $ 8 Net investment income 10 Net realized investment (losses)/gains (0) ---------- Total revenues 18 ---------- BENEFITS AND EXPENSES Policy benefits 9 Other expenses 0 ---------- Total benefits and expenses 9 ---------- ---------- Net contribution (to)/from the Closed Block $ 9 ---------- Many expenses related to ILICO Closed Block operations are charged to operations outside the ILICO Closed Block; accordingly, the contribution from the ILICO Closed Block does not represent the actual profitability of the ILICO Closed Block operations. 38 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. FEDERAL INCOME TAXES PROVISION FOR INCOME TAXES Income taxes are provided for using the asset and liability method under which deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and tax bases of assets and liabilities. The Company reports interest expense related to income tax matters in Federal income tax (benefit)/expense, and income tax penalties in other operating expenses in the Consolidated Statements of Operations. The Company is expected to file a consolidated tax return with Goldman Sachs for the period January 1, 2013 through April 30, 2013. Any net operating loss carryforwards or foreign tax credits from prior to the acquisition date of December 30, 2005 can only be used against the income of the Company. A written agreement sets out the method of allocating tax between the companies and, in general, it is based upon the separately calculated liability of each consolidated member of Goldman Sachs with credit provided for losses used by other group members. Effective May 1, 2013, there was an ownership change. The ownership change makes the Company no longer eligible to be part of Goldman Sachs' consolidated return. The Company will file a consolidated tax return with Accordia, Cape Verity I, Inc., Cape Verity II, Inc., Cape Verity III, Inc. and Gotham Re, Inc. which will consolidate with the Company's return as of October 1, 2013. The Company has a written agreement, approved by the Company's Board of Directors, which sets forth the manner in which the total combined Federal income tax is allocated to each entity within the new consolidated group. In general, it is based upon the separately calculated liability of each consolidated member of the group with credit provided for losses used by other group members. FAFLIC is expected to file a stand alone tax return for the period January 1, 2013 through December 31, 2013. The Company filed a consolidated tax return with Goldman Sachs for the period January 1, 2012 through December 31, 2012 and January 1, 2011 through December 31, 2011. The Company received payments for tax benefits in the amount of $57 million in 2011. The tables below present the components of the provision/(benefit) for taxes and a reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate.
For the Years Ended December 31, 2013 2012 2011 ------------------------------------------------------------------------------------------------- (IN MILLIONS) Federal income tax (benefit)/expense Current tax expense/(benefit) $ 268 $ 74 $ (53) Deferred tax (benefit)/expense (257) (112) 145 ------------------------------------------- Total $ 11 $ (38) $ 92 ===========================================
For the Years Ended December 31, 2013 2012 2011 ------------------------------------------------------------------------------------------------- (IN MILLIONS) Expected federal income tax (benefit)/expense $ 16 $ (33) $ 99 Dividend received deduction (4) (4) (4) Prior years' federal income tax adjustment (1) (1) (3) ------------------------------------------- Federal income tax (benefit)/expense $ 11 $ (38) $ 92 ===========================================
DEFERRED INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilites. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse. Valuation allowances are established to reduce deferred tax assets to the amount that more likely than not will be realized. 39 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. FEDERAL INCOME TAXES (CONTINUED) The table below presents the significant components of deferred tax assets and liabilities. December 31, 2013 2012 --------------------------------------------------------------------------- (IN MILLIONS) Deferred tax asset Insurance reserves $ 102 $ 123 Sec. 848 capitalization 262 67 Investments, net 50 - Tax credit carryforwards 4 6 Loss carryforwards 30 29 Ceding commission 2 4 Goodwill 99 - Accrued policyholder dividends 6 4 Deferred compensation - 2 ------------ ------------ Subtotal deferred tax asset 555 235 Valuation allowance (4) (6) ------------ ------------ Total deferred tax asset, net $ 551 $ 229 ------------ ------------ Deferred tax liability VOBA/DAC $ (289) $ (104) Investments, net (0) (170) Fair value adjustment - Closed Block (7) (23) Other, net (7) (5) ------------ ------------ Total deferred tax liability (303) (302) ------------ ------------ Total deferred tax asset/(liability), net $ 248 $ (73) ============ ============ The Company has recorded a valuation allowance against tax benefits from foreign tax credit carryforwards of $4 million and $6 million for the tax year ended December 31, 2013 and 2012, as it is the Company's opinion that it is more likely than not that these deferred tax assets will not be fully realized. In management's judgment, the remaining gross deferred tax asset will more likely than not be realized through reductions of future taxes, except as otherwise noted. This conclusion is based primarily on a review of expected taxable income and considers all available evidence, both positive and negative. At December 31, 2013 the Company has foreign tax credit carryforwards of $4 million that will expire beginning in 2014, net operating loss carryforwards of $27 million that begin to expire in 2017 and no capital loss carryforwards. All tax credits and net operating loss carryforwards for the Company were generated prior to 2006 are subject to annual limitations on utilization. In 2013, FAFLIC utilized its capital loss carryforward of $79 thousand and does not have any net operating loss carryforwards or foreign tax credits. As of December 31, 2013, Accordia, Cape Verity I, Inc., Cape Verity II, Inc., Cape Verity III, Inc. and Gotham Re, Inc. do not have any net operating loss carryforwards, capital loss carryforwards or foreign tax credits. UNRECOGNIZED TAX BENEFITS The Company recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between position taken in a tax return and amounts recognized in the financial statements. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will impact the Company's financial condition, results of income or cash flows. As of December 31, 2013 and December 31, 2012, the Company did not record a liability related to accounting for uncertainty in income taxes. REGULATORY TAX EXAMINATIONS The Company's and FAFLIC's federal income tax returns are routinely audited by the IRS, and when appropriate, provisions are made in the financial statements in anticipation of the results of these audits. The Company's exam period is open in 2007 and forward. FAFLIC's exam period is open in 2009 and forward. 40 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 11. DIVIDEND RESTRICTIONS Massachusetts has enacted laws governing the payment of dividends to shareholders by insurers, which affect the dividend paying ability of the Company. The Company must obtain written approval from the Commissioner prior to the declaration of any dividend whilst it maintains a negative unassigned surplus. The Company must meet minimum capital and surplus requirements under a risk-based capital ("RBC") formula. RBC is the standard measurement of an insurance company's required capital on a statutory basis. It is based on a formula calculated by applying factors to various assets, premium and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. Regulatory action is tied to the amount of a company's surplus deficit under the RBC formula. GAFG has an agreement with the Massachusetts Division of Insurance to maintain total adjusted capital levels at a minimum of 100% of the Company's Company Action Level, which was $177 and $72 million at December 31, 2013 and 2012, respectively. Total adjusted capital for life insurance companies is defined as statutory capital and surplus, plus asset valuation reserve, plus 50% of dividends apportioned for payment and was $791 and $371 million at December 31, 2013 and 2012, respectively, for the Company. FAFLIC, a Massachusetts domiciled insurance company, is subject to and in compliance with similar minimum capital and surplus requirements. The payment of dividends by Accordia to the Company is regulated under Iowa law. Under Iowa law, Accordia may pay dividends only from the earned surplus arising from its business and must receive prior approval (or non-disapproval) of the Iowa Insurance Commissioner to pay any dividend that would exceed certain statutory limitations. In 2012, the Company declared a dividend payable of $150 million to Goldman Sachs which was paid in January 2013. In 2011, the Company declared and paid a dividend of $160 million to Goldman Sachs. The Company received permission from the Commissioner prior to payment of each of the aforementioned dividends. 12. VALUE OF BUSINESS ACQUIRED, DEFERRED POLICY ACQUISITION COSTS AND UNEARNED REVENUE RESERVE The changes in VOBA for the years ended December 31 were as follows:
(IN MILLIONS) 2013 2012 ------------- -------------- Balance, at beginning of year $ 63 $ 23 Business acquired 365 48 Amortized to expense during the year(1) (12) (3) Adjustment for unrealized investment (gains)/losses during the year 9 (5) ------------- -------------- Balance, at end of year $ 425 $ 63 ============= ==============
(1) These amounts are shown within other operating expenses in the accompanying Consolidated Statements of Operations. The Accordia acquisition resulted in an initial VOBA balance of $365 million. Effective July 1, 2012, the Company recaptured a ceded block of Universal Life business resulting in an initial VOBA balance of $48 million. In 2011, the amount of VOBA amortized to expense was $4 million. Estimated future amortization of VOBA as of December 31, 2013 is as follows: (IN MILLIONS) 2014 $ 35 2015 31 2016 27 2017 21 2018 18 2019 and thereafter 293 ---------- Total $ 425 ========== 41 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. VALUE OF BUSINESS ACQUIRED, DEFERRED POLICY ACQUISITION COSTS AND UNEARNED REVENUE RESERVE (CONTINUED) The following reflects the changes to the deferred policy acquisition asset:
For the years ended December 31, 2013 2012 ---------------------------------------------------------------------------------------- (IN MILLIONS) Balance, at beginning of year $ 144 $ 169 Block acquisition/Reinsurance 152 34 Additions 26 Amortized to expense during the year(1) (79) (24) Adjustment for unrealized investment (gains)/losses during the year 33 (32) Reinsurance reductions - (3) ------------------------------ Balance, at end of year $ 276 $ 144 ==============================
(1) These amounts are shown within other operating expenses in the accompanying Consolidated Statements of Operations. In 2011, the amount amortized to expense was $43 million. Effective April 1, 2013 the Company recaptured a block of business via a fund withheld agreement with s previous affiliate, Arrow Re, resulting in a policy acquisition expense of $28 million. Also, effective April 1, 2013, the Company ceded several blocks of business to CwA Re resulting in an initial DAC balance of $152 million. Effective July 1, 2011, the Company entered into a coinsurance agreement with an unrelated party resulting in an initial DAC balance of $3 million. The following reflects the changes to the unearned revenue reserve: (IN MILLIONS) 2013 ------------- Balance, at beginning of year $ - Deferrals during the year 11 Amortized to income during the year (7) ------------- Balance, at end of year $ 4 ============= 13. REINSURANCE The Company seeks to diversify risk and limit its overall financial exposure via reinsurance. In addition, consistent with the overall business strategy, the Company assumes certain policy risks written by other insurance companies on a coinsurance, modified coinsurance, and funds withheld coinsurance basis. Under a coinsurance arrangement, depending upon the terms of the contract, the reinsurer may share in the risk of loss due to mortality or morbidity, lapses, and the investment risk, if any, inherent in the underlying policy. Modified coinsurance and funds withheld coinsurance differ from coinsurance in that the assets supporting the reserves are retained by the ceding company while the risk is transferred to the reinsurer. As discussed in Note 4 - Significant Transactions, effective October 1, 2013, the Company assumed, through a coinsurance reinsurance arrangement the life insurance business of Aviva Life and Annuity Company, a subsidiary of Athene Holding Ltd. Reserves of approximately $7.5 billion were assumed and this was treated as a business combination in accordance with ASC 805. As discussed in Note 4 - Significant Transactions, effective October 1, 2013, the Company entered into a fundswithheld coinsurance agreement with Aviva Life and Annuity Company of New York, a subsidiary of Athene Holding, Ltd. As discussed in Note 4 - Significant Transactions, effective April 1, 2013, the Company recaptured from Goldman Sachs affiliate reinsurance agreements approximately $5.0 billion in reserves and received a ceding commission of $39 million. Also effective April 1, 2013, the Company entered into new reinsurance agreements with CwA Re and ceded approximately $5.7 billion of reserves and paid a ceding commission of $108 million. As discussed in Note 4 - Significant Transactions, effective July 1, 2012, the Company ceded via funds withheld coinsurance, 90% of a block of fixed annuity business to an affiliate, Arrow Re. As of December 2012, the ceded reserves under this contract were $2.4 billion. 42 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. REINSURANCE (CONTINUED) As discussed in Note 4 - Significant Transactions, effective July 1, 2012, the Company terminated a coinsurance agreement with a third party whereby the Company recaptured a ceded block of Universal Life business with reserves of approximately $385 million. As discussed in Note 4 - Significant Transactions, effective July 1, 2012, the Company entered into a coinsurance agreement with a third party whereby the Company assumed approximately $1.6 billion of fixed annuity deposit liabilities. As discussed in Note 4 - Significant Transactions, in 2012 and 2011 the Company entered into a coinsurance agreement with a third party whereby the Company assumed a total of approximately $3.0 billion ($1.5 billion in 2012 and $1.5 billion in 2011) of fixed annuity deposit liabilities. The Company entered into a coinsurance agreement to cede the entire Fidelity Mutual Life Insurance Company ("FML") block of business to its affiliate, Columbia Capital Life Reinsurance Company ("Columbia"). As of December 31, 2012, the Company ceded reserves of $496 million. The Company also ceded 100% of its direct fixed annuity insurance business to Columbia. As of December 31, 2012, the Company ceded reserves of $32 million. The Company maintains a number of reinsurance treaties whereby the Company assumes on a coinsurance basis and modified coinsurance basis life, fixed and variable annuities, universal life and variable universal life insurance policies. The Company also maintains other reinsurance treaties including the cession of non core universal life business, certain individual disability income policies, and discontinued accident and health insurance. The effects of reinsurance were as follows:
For the Years Ended December 31, 2013 2012 ------------------------------------------------------------------------------------ (IN MILLIONS) Policy liabilities and accruals: Direct $ 3,233 $ 3,066 Assumed - non-affiliated 14,741 6,818 ----------------------------------- Total policy liabilities and accruals: 17,974 9,884 ----------------------------------- Ceded - affiliated (1) (7,179) (6,378) Ceded - non-affiliated (1) (1,845) (247) ----------------------------------- Total ceded policy liabilities and accruals: (9,024) (6,625) ----------------------------------- Net policy liabilities and accruals $ 8,950 $ 3,259 ===================================
(1) Included within reinsurance receivable on paid and unpaid losses, benefits, unearned premiums, modified coinsurance and funds withheld coinsurance within the Consolidated Balance Sheets. The Company determines the appropriate amount of reinsurance based on evaluation of the risks accepted and on market conditions (including the availability and pricing of reinsurance). The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk. Based on its review of its reinsurers' financial statements and reputations in the reinsurance marketplace, the Company believes that it does not have any uncollectible reinsurance recoverables and, accordingly, the Company has not established any reserves for uncollectible reinsurance at December 31, 2013 or 2012, respectively. As of December 31, 2013, the Company's only concentrations of credit risk greater than 10% of the Company's shareholder's equity were with its affiliate, CwA Re. Reinsurance recoverable related to the blocks of business reinsured with CwA Re at December 31, 2013 were $5.9 billion. As of December 31, 2012, the Company's only concentrations of credit risk greater than 10% of the Company's shareholder's equity were with its affiliates, Columbia, Ariel Capital Re and Arrow Re. The Company had reinsurance recoverables at December 31, 2012 of approximately $528 million, respectively, related to the blocks of business reinsured with Columbia, and approximately $2.2 billion, respectively, related to the block of business reinsured with Ariel Capital Re. As of December 31, 2012, reinsurance recoverable related to the block of business reinsured with Arrow Re was $2.4 billion. 43 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. REINSURANCE (CONTINUED) The effects of reinsurance were as follows:
For the Years Ended December 31, 2013 2012 2011 ----------------------------------------------------------------------------------------------------- (IN MILLIONS) Life and accident and health insurance premiums: Direct $ 20 $ 20 $ 27 Assumed - non-affiliated 43 26 29 Ceded - non-affiliated (1) (2) (9) ---------------------------------------------------- Net premiums $ 62 $ 44 $ 47 ====================================================
For the Years Ended December 31, 2013 2012 2011 ----------------------------------------------------------------------------------------------------- (IN MILLIONS) Universal life and investment product policy fees: Direct $ 135 $ 120 $ 113 Assumed - non-affiliated 300 150 156 Ceded - affiliated (86) (65) (74) ---------------------------------------------------- Net universal life and investment product policy fees $ 349 $ 205 $ 195 ====================================================
For the Years Ended December 31, 2013 2012 2011 ----------------------------------------------------------------------------------------------------- Policy benefits, claims, losses and loss adjustment expenses: Direct $ 130 $ 245 $ 163 Assumed - non-affiliated 581 283 223 Ceded - affiliated (6) (182) (210) Ceded - non-affiliated 11 (7) 119 ---------------------------------------------------- Net policy benefits, claims, losses and loss adjustment expenses $ 716 $ 339 $ 295 ====================================================
14. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES The Company regularly updates its reserve estimates on accident and health business as new information becomes available and events occur which may impact the resolution of unsettled claims. Changes in these estimates are reflected in current year income. Such development can be either favorable or unfavorable to the Company s financial results. The liability for future policy benefits and outstanding claims and claims adjustment expenses, excluding the effect of reinsurance, related to the Company's accident and health business, consisting of the Company's exited individual health and group accident and health business, was $149 and $172 million at December 31, 2013 and 2012, respectively. Reinsurance recoverables related to this business were $149 and $172 million at December 31, 2013 and 2012 respectively. 44 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15. COMPOSITION OF OTHER ASSETS, LIABILITIES, INCOME AND EXPENSES Other assets consist of the following:
December 31, 2013 2012 ------------------------------------------------------------ ------------- ---------------- (IN MILLIONS) State licenses (intangible asset) $ 7 $ 5 Accounts receivable 16 5 Railcars 76 - Deferred modco interest expense - 31 Taxes receivable 26 10 Miscellaneous assets 16 5 ------------- ---------------- Total other assets $ 141 $ 56 ============= ================
Accrued expenses and other liabilities consist of the following:
December 31, 2013 2012 ------------------------------------------------------------ ------------- ---------------- (IN MILLIONS) Payables in process $ 118 $ 72 Policyholder liabilities 12 1 Taxes payable 4 1 Accrued expenses 31 8 Miscellaneous liabilities 48 4 ------------- ---------------- Total accrued expenses and other liabilities $ 213 $ 86 ============= ================
Other income consists of the following:
For the Years Ended December 31, 2013 2012 2011 ------------------------------------------------------------ ------------- ------------- ---------- (IN MILLIONS) Asset management fees $ 2 $ 2 $ 2 Reinsurance administration fee 20 17 17 Miscellaneous income 7 1 1 ------------- ------------- ---------- Total other income $ 29 $ 20 $ 20 ============= ============= ==========
Other operating expenses consist of the following:
For the Years Ended December 31, 2013 2012 2011 ------------------------------------------------------------ ------------- ------------- ---------- (IN MILLIONS) Taxes, licenses and fees $ 13 $ 5 $ 6 Commission expense (77) 7 7 Fees and operational services 52 38 37 Salaries and benefits 4 12 10 Legal and auditing 12 3 2 InterCompany charges 41 - - Miscellaneous operating expenses 24 5 5 ------------- ------------- ---------- Total other operating expenses $ 69 $ 70 $ 67 ============= ============= ==========
45 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16. COMMITMENTS The Company has agreed to pay Athene Holdings Ltd. Cash on May 1, 2014 for the value of the Company's insurance agents' loan balance asset as of that date. The Company has committed to assume the Company's insurance agents' defined contribution and defined benefit pension plans from Athene on May 1, 2014. As the Company will be fully reimbursed for the plans being acquired on that date, they have not recognized any assets or liabilities related to the future transaction. Once the Company becomes the plans' sponsor in May 2014, it will recognize the pension plan liabilities in accordance with ASC 715 on its books as well as related assets received as compensation for the unfunded status of the plans. The Company has operational servicing agreements with third party administrators for contract/policy administration over certain of the Company's fixed annuity, traditional life, universal life, variable annuity and variable universal life business. Additionally, there is a professional services agreement to manage certain aspects of the Company's reinsurance portfolio. As of December 31, 2013, purchase commitments under agreements with third party administrators and other service providers were as follows: (IN MILLIONS) 2014 $ 63 2015 49 2016 11 2017 11 2018 8 2019 and thereafter 36 --------------- Total $ 178 =============== 17. CONTINGENCIES REGULATORY AND INDUSTRY DEVELOPMENTS Unfavorable economic conditions may contribute to an increase in the number of insurance companies that are under regulatory supervision. This may result in an increase in mandatory assessments by state guaranty funds, or voluntary payments by solvent insurance companies to cover losses to policyholders of insolvent or rehabilitated companies. Mandatory assessments, which are subject to statutory limits, can be partially recovered through a reduction in future premium taxes in some states. In connection with the separation of the Company from Goldman Sachs, GAFG provided certain written assurances (the "2013 Keepwell Agreement") to the Commissioner of the Massachusetts Division of Insurance (the "Commissioner"). GAFG agreed to make capital contributions to the Company, subject to a maximum of $250 million, if necessary to ensure that the Company maintains a risk-based capital ratio of at least 100% of the Company Action Level. Such assurances have been provided solely to the Commissioner by Global Atlantic and terminate in 2018 or at such time as Goldman Sachs owns less than 10% of the voting securities of GAFG. LITIGATION The Company is involved from time to time in judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its business. The Hanover Insurance Group ("THG") has agreed to indemnify the Company and Goldman Sachs with respect to certain of these matters as provided in the Stock Purchase Agreement, although several of the representatives and warranties have expired. THG has also agreed to indemnify Goldman Sachs for certain litigation, regulatory matters and other liabilities related to the pre-closing activities of the transferred business. Management believes, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on the Company's financial condition. Given the inherent difficulty of predicting the outcome of the Company's litigation and regulatory matters, particularly in cases or proceedings in which substantial or indeterminate damages or fines are sought, the Company cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred. However, the Company believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the its consolidated financial position or results of income. 46 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 17. CONTINGENCIES (CONTINUED) Pursuant to an agreement with Athene Holding, Ltd, the Company has agreed to indemnify Athene Holding, Ltd. for certain third party claims and the Company is maintaining a litigation accrual for the claims. The litigation accrual related to these claims was $10 million as of December 31, 2013. The Company has financing arrangements with unaffiliated third parties to support the reserves of its affiliated captive reinsurers. Total fees expensed associated with these credit facilities were $4 million for the year ended December 31, 2013 and are included in other operating expenses. As of December 31, 2013, the total capacity of the financing arrangements with third parties was $1.4 billion. There were no outstanding balances from the financing arrangements with unaffiliated third parties as of December 31, 2013. 18. RELATED PARTY TRANSACTIONS During the year ended December 31, 2013, the Company had administration, shared services, management services, and investment management services agreements with related parties under Goldman Sachs. These affiliates provide legal, compliance, technology, operations, financial reporting, human resources, risk management and distribution services. The Company recorded expenses for these agreements of $15 million, $15 million, and $14 million for the years ended December 31, 2013, 2012, and 2011, respectively, and had $6 million and $1 million payable at December 31, 2013 and 2012, respectively. Effective April 30, 2013, the Company entered into agreements with certain affiliates under GAFG. These affiliates agreed to provide personnel, management services, administrative support, the use of facilities, and such other services as the parties may agree to from time to time. The Company recorded expenses of $41 million for the year ended December 31, 2013 and had $24 million payable at December 31, 2013. On April 30, 2013, Goldman Sachs waived $213 million of current taxes payable due from the Company under a tax sharing agreement. The transaction was recorded as a capital contribution. On May 1, 2013, the Company purchased LS and SPIA assets from Goldman Sachs for $403 million. See Note 4, 6 and 8 for additional information. The Company has a service agreement with Global Atlantic Financial Life Limited ("GAFLL"), a Bermuda domiciled entity, which can be terminated by either party upon applicable notice. Under the agreement, the Company recorded expenses of $1 million related to certain employee compensation plans, including incentive interests and stock appreciation rights. Effective April 1, 2013, the Company recaptured blocks of variable annuity, fixed annuity, universal life and individual life business previously ceded to Ariel Capital Re, Arrow Re and Columbia Capital Life Reinsurance Company. Subsequent to the recapture, the Company ceded the recaptured blocks of business plus additional blocks of universal life and individual life business to CwA Re. Under the April 1, 2013 agreements, CwA Re agreed to pay the Company certain fees for the continued administration of the ceded business. The Company received fee income from CwA Re of $16 million and had $4 million receivable at December 31, 2013. On December 31, 2009, the Company ceded via coinsurance and modified coinsurance, 100% of its variable annuity business to an affiliate, Ariel Capital Re acting on behalf of, and for the benefit of a segregated account established by Ariel Capital Re. Under this agreement, Ariel Capital Re agreed to pay the Company certain fees for continued administration of the variable annuity business. The Company received fee income from Ariel Capital Re of $3 million, $14 million and $15 million for the years ended December 31, 2013, 2012 and 2011, respectively. The Company had no receivable related to the fee income at December 31, 2013 and a receivable of $1 million at December 31, 2012. 47 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 18. RELATED PARTY TRANSACTIONS (CONTINUED) Effective July 1, 2012, the Company ceded via funds withheld coinsurance, 90% of a block of fixed annuity business to an affiliate, Arrow Re. Under this agreement, Arrow Re agreed to pay the Company certain fees for the continued administration of the business. The Company recorded fee income from Arrow Re of $12 million and $2 million for the year ended December 31, 2013 and had no receivable and $1 million receivable at December 31, 2013 and 2012, respectively. During the year ended December 31, 2013, the Company provided management services, administrative support, and use of Company facilities for affiliates under Goldman Sachs and receives certain distribution and administration fees from affiliates under Goldman Sachs. The Company recorded income from these agreements of $5 million, $7 million, and $8 million for the years ended December 31, 2013, 2012, and 2011, respectively, and had $1 million and $1 million receivable at December 31, 2013 and 2012, respectively. The Company has entered into several derivative transactions with affiliates, which resulted in income of $41 million for the year ended December 31, 2013, income of $37 million for the year ended December 31, 2012, and expenses of $28 million for the year ended December 31, 2011. The Company had affiliated derivatives payables of $327 million for the year ended December 31, 2013 and affiliated derivative payables of $283 million for the year ended December 31, 2012. In December 2011, the Company entered into an agreement with an affiliate to purchase a $25 million secured note. Under the agreement, the secured note maintained an interest rate of 2.77%. In August 2012, the Company sold the note back to the same affiliate and recognized a pre-tax gain of $1 million, which is recorded within net realized capital gains within the Consolidated Statements of Operations. The Company recognized interest income of $0.5 million from the note for the year ended December 31, 2012. This amount is recorded within net investment income within the Consolidated Statements of Operations. At December 31, 2011, the amortized cost and fair value of the secured note were $25 and $25 million, respectively. These amounts are recorded within available-for-sale fixed maturities within the Consolidated Balance Sheets. The Company has entered into purchase and sale transactions with affiliates, which resulted in realized gains of $11 million for the year ended December 31, 2013. These transactions were recorded at fair value. There were no outstanding receivables at December 31, 2013 related to these transactions. Under Goldman Sachs' ownership, the employees of the Company participate in The Goldman Sachs Amended and Restated Stock Incentive Plan (the "SIP"). Pursuant to the SIP, Goldman Sachs issued restricted stock units (RSUs) to certain employees of the Company as part of their overall compensation. For employees not deemed retirement eligible, unvested RSUs require future service as a condition of delivery of the underlying shares of Goldman Sachs' common stock generally over a three year period. Delivery of the underlying shares of common stock is also conditioned on the grantee's satisfying certain other requirements as outlined in the award agreement. The Company incurred expenses of $0 million, $1 million and $0 million relating to RSUs for the years ended December 31, 2013, 2012 and 2011, respectively. 19. STATUTORY FINANCIAL INFORMATION The Company is required to file annual statements with state regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities. Statutory surplus differs from shareholder's equity reported in accordance with generally accepted accounting principles primarily because fixed maturities are required to be carried at amortized cost, policy acquisition costs are expensed when incurred, asset valuation and interest maintenance reserves are required, life insurance reserves are based on different assumptions and the recognition of deferred tax assets is based on different recoverability assumptions.
Statutory capital and surplus was as follows: (Unaudited) December 31, 2013 2012 ------------------------------------------------------------------------------------------- (IN MILLIONS) Commonwealth Annuity $ 724 $ 327 FAFLIC 155 125 Accordia 382 6
Statutory net (loss)/income was as follows: (Unaudited) For the years ended December 31, 2013 2012 2011 ---------------------------------------------------------------------------------------------------------- (IN MILLIONS) Commonwealth Annuity $ (33) $ (7) $ 122 FAFLIC (39) 20 20 Accordia (112) 1 -
48 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 20. ACCUMULATED OTHER COMPREHENSIVE INCOME ("AOCI") Information about amounts reclassified out of each component of AOCI:
AMOUNTS RECLASSIFIED FROM CONSOLIDATED STATEMENTS OF OPERATIONS COMPONENTS OF AOCI AOCI LOCATION ----------------------------------------------------------------------------------------------------------------------------- For the years ended December 31, 2013 2012 --------------------------- Net Unrealized investment gains/(losses) on available-for-sale securities: Net realized capital gains, excluding OTTI Net unrealized investment gains/(losses) $ 120 $ 96 losses --------------------------- Net unrealized investment gains/(losses), before tax 120 96 Income tax (expense)/benefit (42) (34) --------------------------- Net unrealized investment gains/(losses), after tax $ 78 $ 62 ===========================
21. ACQUISITION The Company's acquisition of Accordia is accounted for by applying FASB ASC 805-50-15. The table below summarizes the amounts recognized at fair value for assets acquired and liabilities assumed and the resulting goodwill. See Note 4 for a description of the transaction. ----------------------------------------------------------------- FAIR VALUE OCTOBER 2013 (IN MILLIONS) Assets: Total investments $ 6,196 Cash and cash equivalents 295 VOBA 365 Other intangibles 7 Other assets at fair value 1,575 ----------------- Total assets acquired $ 8,438 ----------------- Liabilities: Policyholder liabilities $ 8,269 Other liabilities at fair value 44 ----------------- Total liabilities assumed $ 8,313 ----------------- ----------------- Goodwill 3 ----------------- Total cash consideration $ 128 ----------------------------------------------------------------- The goodwill of $3 million recognized as a result of the acquisition includes the expected synergies and other benefits that management believes will result from combining the operations of Aviva USA life business with the operations of the Company. See Note 4 - Summary of Significant Accounting Policies, for further discussion of goodwill. Approximately $1 million of goodwill is estimated to be deductible for tax purposes. Included in the assets acquired is VOBA, which reflects the estimated fair value of in-force contracts acquired and represents the portion of the purchase price that is allocated to the future profits embedded in the acquired contracts at the acquisition date. See Note 4 - Summary of Significant Accounting Policies, for further explanation of VOBA. The assessment of fair value in accordance with FASB ASC 805-20-25 included the establishment of intangible assets for VOBA, distribution relationships and various state licenses. 49 COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY (AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF GLOBAL ATLANTIC FINANCIAL GROUP LIMITED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 22. SUBSEQUENT EVENT On January 2, 2014, the direct parent of the Company, Finco, acquired Forethought Financial Group ("FFG"), a privately-held diversified financial services organization that owns life insurance entities. As part of this transaction, effective January 2, 2014, Finco restructured the ownership of certain subsidiaries, which resulted in certain changes and transactions involving the Company. Regulatory approval was received for the transactions from the Massachusetts Division of Insurance, the Indiana Division of Insurance, the Texas Department of Insurance and the Iowa Department of Insurance. The Company issued a $300 million note to its direct parent, Finco and capitalized a newly created affiliate, MARS Acquisition Company with the proceeds. Finco, in turn, contributed 79% of the common stock of the Company to FFG. Subsequently, FFG repaid the 95% of the loan with the transfer of 95% of its investment in common stock of two insurance subsidiaries, Forethought Life Insurance Company, an Indiana domiciled insurer, and Forethought National Life Insurance Company, Texas domiciled insurer. The Company then declared and paid a dividend of approximately $39 million to its shareholders. This dividend was approved by the Massachusetts Division of Insurance. FFG then contributed all of its ownership in the Company to its subsidiary, Forethought Financial Services ("FFSI"). On March 31, 2014, the Company received a $39.5 million capital contribution from FFG and $10.5 million from Finco. The contribution did not change the ownership structure or ownership percentage of the Company's shareholders. 50 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of Commonwealth Annuity and Life Insurance Company and the Contract Owners of Separate Account KG of Commonwealth Annuity and Life Insurance Company: In our opinion, the accompanying statements of assets and liabilities and the related statements of operations and of changes in net assets present fairly, in all material respects, the financial position of each of the sub-accounts (as listed in the statements of assets and liabilities and the statements of operations) constituting Separate Account KG of Commonwealth Annuity and Life Insurance Company at December 31, 2013, the results of each of their operations for the year then ended and the changes in each of their net assets for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Commonwealth Annuity and Life Insurance Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2013 by correspondence with the underlying funds' transfer agents, provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts April 17, 2014 SEPARATE ACCOUNT KG STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2013
DREYFUS IP ALGER CAPITAL MIDCAP STOCK ALGER BALANCED APPRECIATION PORTFOLIO PORTFOLIO PORTFOLIO INITIAL CLASS I-2 CLASS I-2 SHARES ----------------- ----------------- ---------------- ASSETS: Investments in shares of the Underlying Funds, at fair value $ 26,967,150 $ 21,348,971 $ 25,164,687 Investment income receivable - - - ----------------- ----------------- ---------------- Total assets 26,967,150 21,348,971 25,164,687 LIABILITIES: - - - ----------------- ----------------- ---------------- Net assets $ 26,967,150 $ 21,348,971 $ 25,164,687 ================= ================= ================ NET ASSETS BY CATEGORY: Accumulation reserves 26,654,535 21,169,804 24,900,167 Payout reserves 312,615 179,167 264,520 ----------------- ----------------- ---------------- $ 26,967,150 $ 21,348,971 $ 25,164,687 ================= ================= ================ Investments in shares of the Underlying Funds, at cost $ 25,114,908 $ 13,889,833 $ 17,183,776 Underlying Fund shares held 1,999,047 290,818 1,205,783 Units outstanding and unit fair values by distribution category: Scudder Gateway Advisor, Scudder Gateway Elite and Scudder Gateway Plus: Units outstanding, December 31, 2013 19,045,649 12,535,793 10,142,832 Unit fair value, December 31, 2013 $ 1.375378 $ 1.643299 $ 2.436264 Scudder Gateway Incentive: Units outstanding, December 31, 2013 18,843 104,716 29,203 Unit fair value, December 31, 2013 $ 1.357452 $ 2.054678 $ 2.220493 Scudder Gateway Incentive with Enhanced Death Benefit Rider: Units outstanding, December 31, 2013 568,232 268,372 181,101 Unit fair value, December 31, 2013 $ 1.313909 $ 1.988867 $ 2.149214
The accompanying notes are an integral part of these financial statements. SA-1 SEPARATE ACCOUNT KG STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) DECEMBER 31, 2013
DWS CAPITAL DWS CORE EQUITY DWS BOND VIP GROWTH VIP VIP CLASS A CLASS A CLASS A ----------------- ----------------- ---------------- ASSETS: Investments in shares of the Underlying Funds, at fair value $ 25,292,020 $ 95,967,538 $ 70,200,449 Investment income receivable - - - ----------------- ----------------- ---------------- Total assets 25,292,020 95,967,538 70,200,449 LIABILITIES: - - - ----------------- ----------------- ---------------- Net assets $ 25,292,020 $ 95,967,538 $ 70,200,449 ================= ================= ================ NET ASSETS BY CATEGORY: Accumulation reserves 22,466,892 94,806,485 63,150,700 Payout reserves 2,825,128 1,161,053 7,049,749 ----------------- ----------------- ---------------- $ 25,292,020 $ 95,967,538 $ 70,200,449 ================= ================= ================ Investments in shares of the Underlying Funds, at cost $ 25,760,582 $ 63,612,267 $ 50,846,975 Underlying Fund shares held 4,590,203 3,377,949 6,083,228 Units outstanding and unit fair values by distribution category: Scudder Gateway Advisor, Scudder Gateway Elite and Scudder Gateway Plus: Units outstanding, December 31, 2013 17,300,736 58,518,756 50,439,464 Unit fair value, December 31, 2013 $ 1.438514 $ 1.611133 $ 1.379159 Scudder Gateway Incentive: Units outstanding, December 31, 2013 72,608 154,590 52,456 Unit fair value, December 31, 2013 $ 1.174235 $ 1.402521 $ 1.547828 Scudder Gateway Incentive with Enhanced Death Benefit Rider: Units outstanding, December 31, 2013 281,020 1,082,425 370,598 Unit fair value, December 31, 2013 $ 1.136610 $ 1.357345 $ 1.498162
The accompanying notes are an integral part of these financial statements. SA-2 SEPARATE ACCOUNT KG STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) DECEMBER 31, 2013
DWS EQUITY 500 DWS GLOBAL DWS GLOBAL INDEX VIP EQUITY VIP GROWTH VIP CLASS A CLASS A (a) CLASS A (a) ----------------- ----------------- ---------------- ASSETS: Investments in shares of the Underlying Funds, at fair value $ 40,361,463 $ 16,497,090 $ 12,290,025 Investment income receivable - - - ----------------- ----------------- ---------------- Total assets 40,361,463 16,497,090 12,290,025 LIABILITIES: - - - ----------------- ----------------- ---------------- Net assets $ 40,361,463 $ 16,497,090 $ 12,290,025 ================= ================= ================ NET ASSETS BY CATEGORY: Accumulation reserves 39,488,045 16,395,823 12,154,380 Payout reserves 873,418 101,267 135,645 ----------------- ----------------- ---------------- $ 40,361,463 $ 16,497,090 $ 12,290,025 ================= ================= ================ Investments in shares of the Underlying Funds, at cost $ 27,419,124 $ 17,354,509 $ 12,309,989 Underlying Fund shares held 2,123,170 1,779,621 1,104,225 Units outstanding and unit fair values by distribution category: Scudder Gateway Advisor, Scudder Gateway Elite and Scudder Gateway Plus: Units outstanding, December 31, 2013 28,210,415 9,520,541 6,481,689 Unit fair value, December 31, 2013 $ 1.401046 $ 1.705412 $ 1.861567 Scudder Gateway Incentive: Units outstanding, December 31, 2013 121,234 55,236 98,541 Unit fair value, December 31, 2013 $ 1.524733 $ 1.399832 $ 1.668808 Scudder Gateway Incentive with Enhanced Death Benefit Rider: Units outstanding, December 31, 2013 442,161 135,310 36,826 Unit fair value, December 31, 2013 $ 1.475764 $ 1.354838 $ 1.615175
(a) Name change. See Note 1. The accompanying notes are an integral part of these financial statements. SA-3 SEPARATE ACCOUNT KG STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) DECEMBER 31, 2013
DWS GLOBAL DWS GOVERNMENT INCOME BUILDER DWS GLOBAL SMALL & AGENCY VIP CAP GROWTH VIP SECURITIES VIP CLASS A CLASS A CLASS A ----------------- ----------------- ---------------- ASSETS: Investments in shares of the Underlying Funds, at fair value $ 53,628,597 $ 22,317,967 $ 31,510,359 Investment income receivable - - - ----------------- ----------------- ---------------- Total assets 53,628,597 22,317,967 31,510,359 LIABILITIES: - - - ----------------- ----------------- ---------------- Net assets $ 53,628,597 $ 22,317,967 $ 31,510,359 ================= ================= ================ NET ASSETS BY CATEGORY: Accumulation reserves 49,938,402 22,236,588 31,209,429 Payout reserves 3,690,195 81,379 300,930 ----------------- ----------------- ---------------- $ 53,628,597 $ 22,317,967 $ 31,510,359 ================= ================= ================ Investments in shares of the Underlying Funds, at cost $ 46,786,665 $ 15,619,925 $ 33,782,707 Underlying Fund shares held 1,964,417 1,289,311 2,747,198 Units outstanding and unit fair values by distribution category: Scudder Gateway Advisor, Scudder Gateway Elite and Scudder Gateway Plus: Units outstanding, December 31, 2013 28,112,752 7,834,891 16,876,382 Unit fair value, December 31, 2013 $ 1.874306 $ 2.825508 $ 1.841783 Scudder Gateway Incentive: Units outstanding, December 31, 2013 51,064 32,805 111,468 Unit fair value, December 31, 2013 $ 1.343376 $ 2.103001 $ 1.477281 Scudder Gateway Incentive with Enhanced Death Benefit Rider: Units outstanding, December 31, 2013 667,598 54,744 183,970 Unit fair value, December 31, 2013 $ 1.300331 $ 2.035477 $ 1.429885
The accompanying notes are an integral part of these financial statements. SA-4 SEPARATE ACCOUNT KG STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) DECEMBER 31, 2013
DWS DWS HIGH INCOME INTERNATIONAL DWS LARGE CAP VIP VIP VALUE VIP CLASS A CLASS A CLASS A ----------------- ----------------- ---------------- ASSETS: Investments in shares of the Underlying Funds, at fair value $ 43,165,074 $ 12,838,722 $ 105,800,994 Investment income receivable - - - ----------------- ----------------- ---------------- Total assets 43,165,074 12,838,722 105,800,994 LIABILITIES: - - - ----------------- ----------------- ---------------- Net assets $ 43,165,074 $ 12,838,722 $ 105,800,994 ================= ================= ================ NET ASSETS BY CATEGORY: Accumulation reserves 42,382,200 12,607,188 104,885,525 Payout reserves 782,874 231,534 915,469 ----------------- ----------------- ---------------- $ 43,165,074 $ 12,838,722 $ 105,800,994 ================= ================= ================ Investments in shares of the Underlying Funds, at cost $ 41,813,099 $ 12,306,650 $ 85,850,968 Underlying Fund shares held 6,201,878 1,417,078 6,624,984 Units outstanding and unit fair values by distribution category: Scudder Gateway Advisor, Scudder Gateway Elite and Scudder Gateway Plus: Units outstanding, December 31, 2013 19,353,401 10,729,261 36,650,711 Unit fair value, December 31, 2013 $ 2.202600 $ 1.154380 $ 2.822712 Scudder Gateway Incentive: Units outstanding, December 31, 2013 45,436 241,658 215,098 Unit fair value, December 31, 2013 $ 2.029323 $ 1.097688 $ 1.803396 Scudder Gateway Incentive with Enhanced Death Benefit Rider: Units outstanding, December 31, 2013 226,593 176,800 1,122,127 Unit fair value, December 31, 2013 $ 1.964179 $ 1.062290 $ 1.745511
The accompanying notes are an integral part of these financial statements. SA-5 SEPARATE ACCOUNT KG STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) DECEMBER 31, 2013
DWS MONEY MARKET DWS SMALL MID DWS SMALL MID VIP CAP GROWTH VIP CAP VALUE VIP CLASS A CLASS A CLASS A (a) ----------------- ----------------- ---------------- ASSETS: Investments in shares of the Underlying Funds, at fair value $ 33,034,202 $ 39,096,283 $ 47,238,358 Investment income receivable 146 - - ----------------- ----------------- ---------------- Total assets 33,034,348 39,096,283 47,238,358 LIABILITIES: - - - ----------------- ----------------- ---------------- Net assets $ 33,034,348 $ 39,096,283 $ 47,238,358 ================= ================= ================ NET ASSETS BY CATEGORY: Accumulation reserves 32,578,691 38,575,133 46,893,757 Payout reserves 455,657 521,150 344,601 ----------------- ----------------- ---------------- $ 33,034,348 $ 39,096,283 $ 47,238,358 ================= ================= ================ Investments in shares of the Underlying Funds, at cost $ 33,034,202 $ 25,356,733 $ 36,944,701 Underlying Fund shares held 33,034,202 1,810,851 2,765,712 Units outstanding and unit fair values by distribution category: Scudder Gateway Advisor, Scudder Gateway Elite and Scudder Gateway Plus: Units outstanding, December 31, 2013 27,092,569 21,379,592 12,226,459 Unit fair value, December 31, 2013 $ 1.209311 $ 1.793085 $ 3.789201 Scudder Gateway Incentive: Units outstanding, December 31, 2013 97,203 79,166 65,540 Unit fair value, December 31, 2013 $ 1.022292 $ 1.134208 $ 3.300973 Scudder Gateway Incentive with Enhanced Death Benefit Rider: Units outstanding, December 31, 2013 173,452 611,302 217,067 Unit fair value, December 31, 2013 $ 0.989531 $ 1.097767 $ 3.194870
(a) Name change. See Note 1. The accompanying notes are an integral part of these financial statements. SA-6 SEPARATE ACCOUNT KG STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) DECEMBER 31, 2013
GOLDMAN SACHS DWS VIT GLOBAL UNCONSTRAINED MARKETS INVESCO V.I. INCOME VIP NAVIGATOR FUND UTILITIES FUND CLASS A SERVICE SHARES SERIES I SHARES ----------------- ----------------- ---------------- ASSETS: Investments in shares of the Underlying Funds, at fair value $ 19,798,830 $ 38,734 $ 7,600,218 Investment income receivable - - - ----------------- ----------------- ---------------- Total assets 19,798,830 38,734 7,600,218 LIABILITIES: - - - ----------------- ----------------- ---------------- Net assets $ 19,798,830 $ 38,734 $ 7,600,218 ================= ================= ================ NET ASSETS BY CATEGORY: Accumulation reserves 19,586,979 38,734 7,521,701 Payout reserves 211,851 - 78,517 ----------------- ----------------- ---------------- $ 19,798,830 $ 38,734 $ 7,600,218 ================= ================= ================ Investments in shares of the Underlying Funds, at cost $ 19,542,388 $ 37,794 $ 7,469,965 Underlying Fund shares held 1,717,158 3,377 446,284 Units outstanding and unit fair values by distribution category: Scudder Gateway Advisor, Scudder Gateway Elite and Scudder Gateway Plus: Units outstanding, December 31, 2013 9,407,349 33,018 5,760,863 Unit fair value, December 31, 2013 $ 2.066079 $ 1.173138 $ 1.291033 Scudder Gateway Incentive: Units outstanding, December 31, 2013 15,759 - 2,935 Unit fair value, December 31, 2013 $ 1.939039 - $ 1.282396 Scudder Gateway Incentive with Enhanced Death Benefit Rider: Units outstanding, December 31, 2013 176,867 - 128,034 Unit fair value, December 31, 2013 $ 1.876817 - $ 1.241779
The accompanying notes are an integral part of these financial statements. SA-7 SEPARATE ACCOUNT KG STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) DECEMBER 31, 2013
THE DREYFUS SOCIALLY JANUS ASPEN RESPONSIBLE JANUS PORTFOLIO GROWTH FUND, INSTITUTIONAL INC. INITIAL SHARES SHARES ----------------- ----------------- ASSETS: Investments in shares of the Underlying Funds, at fair value $ 143,820 $ 2,341,455 Investment income receivable - - ----------------- ----------------- Total assets 143,820 2,341,455 LIABILITIES: - - ----------------- ----------------- Net assets $ 143,820 $ 2,341,455 ================= ================= NET ASSETS BY CATEGORY: Accumulation reserves 143,820 2,323,330 Payout reserves - 18,125 ----------------- ----------------- $ 143,820 $ 2,341,455 ================= ================= Investments in shares of the Underlying Funds, at cost $ 111,401 $ 1,547,602 Underlying Fund shares held 4,205 53,118 Units outstanding and unit fair values by distribution category: Scudder Gateway Advisor, Scudder Gateway Elite and Scudder Gateway Plus: Units outstanding, December 31, 2013 115,564 1,978,558 Unit fair value, December 31, 2013 $ 1.244511 $ 1.179575 Scudder Gateway Incentive: Units outstanding, December 31, 2013 - 2,626 Unit fair value, December 31, 2013 - $ 1.238933 Scudder Gateway Incentive with Enhanced Death Benefit Rider: Units outstanding, December 31, 2013 - 3,622 Unit fair value, December 31, 2013 - $ 1.199167
The accompanying notes are an integral part of these financial statements. SA-8 SEPARATE ACCOUNT KG STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2013
DREYFUS IP ALGER CAPITAL MIDCAP STOCK ALGER BALANCED APPRECIATION PORTFOLIO DWS CAPITAL PORTFOLIO PORTFOLIO INITIAL DWS BOND VIP GROWTH VIP CLASS I-2 CLASS I-2 SHARES CLASS A CLASS A -------------- -------------- -------------- -------------- -------------- INVESTMENT INCOME: Dividends $ 311,354 $ 69,926 $ 345,517 $ 1,062,911 $ 1,147,360 EXPENSES: Mortality and expense risk fees 336,747 246,318 306,093 356,151 1,128,167 Administrative expense fees 40,144 29,406 36,595 42,611 134,915 -------------- -------------- -------------- -------------- -------------- Total expenses 376,891 275,724 342,688 398,762 1,263,082 -------------- -------------- -------------- -------------- -------------- Net investment income (loss) (65,537) (205,798) 2,829 664,149 (115,722) -------------- -------------- -------------- -------------- -------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Capital gain distributions - 2,184,202 - - - Net realized gain (loss) from sales of investments 55,537 1,442,695 1,093,105 (231) 3,653,467 -------------- -------------- -------------- -------------- -------------- Net realized gain (loss) 55,537 3,626,897 1,093,105 (231) 3,653,467 Change in unrealized gain (loss) 3,413,567 2,193,331 5,806,813 (1,974,353) 21,879,996 -------------- -------------- -------------- -------------- -------------- Net realized and unrealized gain (loss) 3,469,104 5,820,228 6,899,918 (1,974,584) 25,533,463 -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from operations $ 3,403,567 $ 5,614,430 $ 6,902,747 $ (1,310,435) $ 25,417,741 ============== ============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements. SA-9 SEPARATE ACCOUNT KG STATEMENTS OF OPERATIONS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 2013
DWS GLOBAL DWS CORE EQUITY DWS EQUITY 500 DWS GLOBAL DWS GLOBAL INCOME BUILDER VIP INDEX VIP EQUITY VIP GROWTH VIP VIP CLASS A CLASS A CLASS A (a) CLASS A (a) CLASS A --------------- --------------- -------------- -------------- -------------- INVESTMENT INCOME: Dividends $ 961,180 $ 683,640 $ 388,797 $ 152,792 $ 1,115,868 EXPENSES: Mortality and expense risk fees 828,723 481,425 202,049 151,547 674,653 Administrative expense fees 99,239 57,515 24,181 18,157 80,657 --------------- --------------- -------------- -------------- -------------- Total expenses 927,962 538,940 226,230 169,704 755,310 --------------- --------------- -------------- -------------- -------------- Net investment income (loss) 33,218 144,700 162,567 (16,912) 360,558 --------------- --------------- -------------- -------------- -------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Capital gain distributions - 812,074 - - - Net realized gain (loss) from sales of investments 2,440,326 1,913,541 (411,351) (810,710) 573,729 --------------- --------------- -------------- -------------- -------------- Net realized gain (loss) 2,440,326 2,725,615 (411,351) (810,710) 573,729 Change in unrealized gain (loss) 17,340,466 7,038,588 2,837,190 3,170,962 6,516,187 --------------- --------------- -------------- -------------- -------------- Net realized and unrealized gain (loss) 19,780,792 9,764,203 2,425,839 2,360,252 7,089,916 --------------- --------------- -------------- -------------- -------------- Net increase (decrease) in net assets from operations $ 19,814,010 $ 9,908,903 $ 2,588,406 $ 2,343,340 $ 7,450,474 =============== =============== ============== ============== ==============
(a) Name change. See Note 1. The accompanying notes are an integral part of these financial statements. SA-10 SEPARATE ACCOUNT KG STATEMENTS OF OPERATIONS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 2013
DWS GLOBAL DWS GOVERNMENT DWS SMALL CAP & AGENCY DWS HIGH INCOME INTERNATIONAL DWS LARGE CAP GROWTH VIP SECURITIES VIP VIP VIP VALUE VIP CLASS A CLASS A CLASS A CLASS A CLASS A -------------- -------------- --------------- -------------- ------------- INVESTMENT INCOME: Dividends $ 139,019 $ 1,111,877 $ 3,344,088 $ 658,636 $ 2,083,498 EXPENSES: Mortality and expense risk fees 266,651 455,421 561,164 155,183 1,310,575 Administrative expense fees 31,952 54,509 67,160 18,552 156,588 -------------- -------------- --------------- -------------- ------------- Total expenses 298,603 509,930 628,324 173,735 1,467,163 -------------- -------------- --------------- -------------- ------------- Net investment income (loss) (159,584) 601,947 2,715,764 484,901 616,335 -------------- -------------- --------------- -------------- ------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Capital gain distributions 1,476,116 1,512,383 - - - Net realized gain (loss) from sales of investments 981,726 (368,585) 90,313 (120,946) 1,923,365 -------------- -------------- --------------- -------------- ------------- Net realized gain (loss) 2,457,842 1,143,798 90,313 (120,946) 1,923,365 Change in unrealized gain (loss) 3,888,872 (3,402,534) (20,015) 1,740,874 23,782,563 -------------- -------------- --------------- -------------- ------------- Net realized and unrealized gain (loss) 6,346,714 (2,258,736) 70,298 1,619,928 25,705,928 -------------- -------------- --------------- -------------- ------------- Net increase (decrease) in net assets from operations $ 6,187,130 $ (1,656,789) $ 2,786,062 $ 2,104,829 $ 26,322,263 ============== ============== =============== ============== =============
The accompanying notes are an integral part of these financial statements. SA-11 SEPARATE ACCOUNT KG STATEMENTS OF OPERATIONS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 2013
GOLDMAN SACHS DWS VIT GLOBAL DWS MONEY DWS SMALL MID DWS SMALL MID UNCONSTRAINED MARKETS MARKET VIP CAP GROWTH VIP CAP VALUE VIP INCOME VIP NAVIGATOR FUND CLASS A CLASS A CLASS A (a) CLASS A SERVICE SHARES -------------- -------------- -------------- -------------- -------------- INVESTMENT INCOME: Dividends $ 3,651 $ 41,910 $ 517,478 $ 1,149,469 $ 8 EXPENSES: Mortality and expense risk fees 461,389 443,461 575,743 276,615 181 Administrative expense fees 55,296 52,985 68,846 33,077 22 -------------- -------------- -------------- -------------- -------------- Total expenses 516,685 496,446 644,589 309,692 203 -------------- -------------- -------------- -------------- -------------- Net investment income (loss) (513,034) (454,536) (127,111) 839,777 (195) -------------- -------------- -------------- -------------- -------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Capital gain distributions - - - 656,018 462 Net realized gain (loss) from sales of investments - 1,456,097 1,227,536 205,818 338 -------------- -------------- -------------- -------------- -------------- Net realized gain (loss) - 1,456,097 1,227,536 861,836 800 Change in unrealized gain (loss) - 11,003,000 12,358,326 (2,291,902) 838 -------------- -------------- -------------- -------------- -------------- Net realized and unrealized gain (loss) - 12,459,097 13,585,862 (1,430,066) 1,638 -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from operations $ (513,034) $ 12,004,561 $ 13,458,751 $ (590,289) $ 1,443 ============== ============== ============== ============== ==============
(a) Name change. See Note 1. The accompanying notes are an integral part of these financial statements. SA-12 SEPARATE ACCOUNT KG STATEMENTS OF OPERATIONS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 2013
THE DREYFUS SOCIALLY JANUS ASPEN RESPONSIBLE INVESCO V.I. JANUS PORTFOLIO GROWTH FUND, UTILITIES FUND INSTITUTIONAL INC. INITIAL SERIES I SHARES SHARES SHARES ---------------- ---------------- ----------------- INVESTMENT INCOME: Dividends $ 242,846 $ 1,004 $ 28,312 EXPENSES: Mortality and expense risk fees 106,348 1,644 28,154 Administrative expense fees 12,705 197 3,378 ---------------- ---------------- ----------------- Total expenses 119,053 1,841 31,532 ---------------- ---------------- ----------------- Net investment income (loss) 123,793 (837) (3,220) ---------------- ---------------- ----------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Capital gain distributions 169,124 - - Net realized gain (loss) from sales of investments 89,611 1,806 104,366 ---------------- ---------------- ----------------- Net realized gain (loss) 258,735 1,806 104,366 Change in unrealized gain (loss) 367,784 32,125 520,600 ---------------- ---------------- ----------------- Net realized and unrealized gain (loss) 626,519 33,931 624,966 ---------------- ---------------- ----------------- Net increase (decrease) in net assets from operations $ 750,312 $ 33,094 $ 621,746 ================ ================ =================
The accompanying notes are an integral part of these financial statements. SA-13 SEPARATE ACCOUNT KG STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31,
ALGER CAPITAL APPRECIATION DREYFUS IP MIDCAP STOCK ALGER BALANCED PORTFOLIO PORTFOLIO PORTFOLIO CLASS I-2 CLASS I-2 INITIAL SHARES ----------------------------- ----------------------------- ----------------------------- 2013 2012 2013 2012 2013 2012 -------------- -------------- -------------- -------------- -------------- -------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment income (loss) $ (65,537) $ (9,817) $ (205,798) $ (74,360) $ 2,829 $ (219,060) Net realized gain (loss) 55,537 (483,346) 3,626,897 1,076,043 1,093,105 134,994 Change in unrealized gain (loss) 3,413,567 1,892,051 2,193,331 1,825,141 5,806,813 3,948,790 -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from operations 3,403,567 1,398,888 5,614,430 2,826,824 6,902,747 3,864,724 -------------- -------------- -------------- -------------- -------------- -------------- FROM CONTRACT TRANSACTIONS: Net purchase payments 21,638 111,570 50,262 9,226 76,266 5,498 Withdrawals (2,138,056) (3,163,940) (1,539,402) (1,572,562) (1,799,088) (2,015,334) Contract benefits (1,906,782) (1,721,772) (1,390,304) (1,194,397) (1,282,350) (1,267,879) Contract charges (79,017) (86,904) (57,741) (57,413) (78,594) (76,176) Transfers 781,634 (380,531) 222,475 787,616 (1,444,538) (1,160,369) Other transfers from (to) the General Account 613,646 208,321 67,919 123,117 119,539 141,525 -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from contract transactions (2,706,937) (5,033,256) (2,646,791) (1,904,413) (4,408,765) (4,372,735) -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets 696,630 (3,634,368) 2,967,639 922,411 2,493,982 (508,011) NET ASSETS: Beginning of year 26,270,520 29,904,888 18,381,332 17,458,921 22,670,705 23,178,716 -------------- -------------- -------------- -------------- -------------- -------------- End of year $ 26,967,150 $ 26,270,520 $ 21,348,971 $ 18,381,332 $ 25,164,687 $ 22,670,705 ============== ============== ============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements. SA-14 SEPARATE ACCOUNT KG STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
DWS BOND VIP DWS CAPITAL GROWTH VIP DWS CORE EQUITY VIP CLASS A CLASS A CLASS A ----------------------------- ----------------------------- ----------------------------- 2013 2012 2013 2012 2013 2012 -------------- -------------- -------------- -------------- -------------- -------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment income (loss) $ 664,149 $ (308,088) $ (115,722) $ (475,737) $ 33,218 $ (335,448) Net realized gain (loss) (231) 144,055 3,653,467 1,907,272 2,440,326 (253,558) Change in unrealized gain (loss) (1,974,353) 1,505,791 21,879,996 11,047,830 17,340,466 5,292,606 -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from operations (1,310,435) 1,341,758 25,417,741 12,479,365 19,814,010 4,703,600 -------------- -------------- -------------- -------------- -------------- -------------- FROM CONTRACT TRANSACTIONS: Net purchase payments 105,686 6,666 209,944 52,212 125,333 47,876 Withdrawals (2,704,095) (2,393,872) (6,244,328) (6,441,014) (4,958,669) (3,345,848) Contract benefits (1,801,985) (2,099,251) (5,369,060) (6,466,790) (5,550,074) (4,743,060) Contract charges (76,164) (61,149) (256,852) (267,385) (128,670) (103,256) Transfers (732,016) 34,463,604 (2,970,557) (4,216,053) (258,932) 35,339,791 Other transfers from (to) the General Account 257,270 296,003 433,658 1,080,719 634,197 328,210 -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from contract transactions (4,951,304) 30,212,001 (14,197,195) (16,258,311) (10,136,815) 27,523,713 -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets (6,261,739) 31,553,759 11,220,546 (3,778,946) 9,677,195 32,227,313 NET ASSETS: Beginning of year 31,553,759 - 84,746,992 88,525,938 60,523,254 28,295,941 -------------- -------------- -------------- -------------- -------------- -------------- End of year $ 25,292,020 $ 31,553,759 $ 95,967,538 $ 84,746,992 $ 70,200,449 $ 60,523,254 ============== ============== ============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements. SA-15 SEPARATE ACCOUNT KG STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
DWS EQUITY 500 INDEX VIP DWS GLOBAL EQUITY VIP DWS GLOBAL GROWTH VIP CLASS A CLASS A (a) CLASS A (a) ----------------------------- ----------------------------- ----------------------------- 2013 2012 2013 2012 2013 2012 -------------- -------------- -------------- -------------- -------------- -------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment income (loss) $ 144,700 $ 114,550 $ 162,567 $ 223,851 $ (16,912) $ 6,027 Net realized gain (loss) 2,725,615 1,109,876 (411,351) (950,403) (810,710) (980,630) Change in unrealized gain (loss) 7,038,588 3,418,301 2,837,190 2,999,371 3,170,962 3,329,041 -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from operations 9,908,903 4,642,727 2,588,406 2,272,819 2,343,340 2,354,438 -------------- -------------- -------------- -------------- -------------- -------------- FROM CONTRACT TRANSACTIONS: Net purchase payments 14,774 48,365 35,139 44,262 3,816 4,330 Withdrawals (2,790,896) (2,832,937) (899,557) (1,293,178) (653,094) (925,976) Contract benefits (2,485,926) (1,883,547) (612,418) (850,770) (4,128,074) (945,721) Contract charges (112,146) (109,747) (39,818) (37,886) (36,189) (48,127) Transfers 993,452 (26,947) (311,843) 23,779 (336,021) (571,373) Other transfers from (to) the General Account 407,088 152,243 42,620 108,267 149,346 158,668 -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from contract transactions (3,973,654) (4,652,570) (1,785,877) (2,005,526) (5,000,216) (2,328,199) -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets 5,935,249 (9,843) 802,529 267,293 (2,656,876) 26,239 NET ASSETS: Beginning of year 34,426,214 34,436,057 15,694,561 15,427,268 14,946,901 14,920,662 -------------- -------------- -------------- -------------- -------------- -------------- End of year $ 40,361,463 $ 34,426,214 $ 16,497,090 $ 15,694,561 $ 12,290,025 $ 14,946,901 ============== ============== ============== ============== ============== ==============
(a) Name change. See Note 1. The accompanying notes are an integral part of these financial statements. SA-16 SEPARATE ACCOUNT KG STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
DWS DWS DWS GOVERNMENT & AGENCY GLOBAL INCOME BUILDER VIP GLOBAL SMALL CAP GROWTH VIP SECURITIES VIP CLASS A CLASS A CLASS A ----------------------------- ----------------------------- ----------------------------- 2013 2012 2013 2012 2013 2012 -------------- -------------- -------------- -------------- -------------- -------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment income (loss) $ 360,558 $ 88,826 $ (159,584) $ (148,879) $ 601,947 $ 1,172,341 Net realized gain (loss) 573,729 (418,910) 2,457,842 1,638,157 1,143,798 1,445,247 Change in unrealized gain (loss) 6,516,187 6,221,004 3,888,872 1,196,801 (3,402,534) (1,930,864) -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from operations 7,450,474 5,890,920 6,187,130 2,686,079 (1,656,789) 686,724 -------------- -------------- -------------- -------------- -------------- -------------- FROM CONTRACT TRANSACTIONS: Net purchase payments 42,906 676,642 9,774 12,870 18,287 66,574 Withdrawals (3,852,303) (4,011,731) (1,366,121) (1,671,813) (3,761,742) (5,611,061) Contract benefits (3,742,432) (4,690,303) (1,355,494) (1,239,435) (2,541,707) (4,175,465) Contract charges (98,385) (103,424) (58,602) (59,446) (100,121) (125,303) Transfers (123,512) 219,020 (1,250,464) (826,189) (1,659,519) (6,416) Other transfers from (to) the General Account 628,295 369,000 45,899 99,485 321,728 545,583 -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from contract transactions (7,145,431) (7,540,796) (3,975,008) (3,684,528) (7,723,074) (9,306,088) -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets 305,043 (1,649,876) 2,212,122 (998,449) (9,379,863) (8,619,364) NET ASSETS: Beginning of year 53,323,554 54,973,430 20,105,845 21,104,294 40,890,222 49,509,586 -------------- -------------- -------------- -------------- -------------- -------------- End of year $ 53,628,597 $ 53,323,554 $ 22,317,967 $ 20,105,845 $ 31,510,359 $ 40,890,222 ============== ============== ============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements. SA-17 SEPARATE ACCOUNT KG STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
DWS HIGH INCOME VIP DWS INTERNATIONAL VIP DWS LARGE CAP VALUE VIP CLASS A CLASS A CLASS A ----------------------------- ----------------------------- ----------------------------- 2013 2012 2013 2012 2013 2012 -------------- -------------- -------------- -------------- -------------- -------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment income (loss) $ 2,715,764 $ 3,234,824 $ 484,901 $ 90,620 $ 616,335 $ 574,413 Net realized gain (loss) 90,313 (373,133) (120,946) (509,077) 1,923,365 (1,283,234) Change in unrealized gain (loss) (20,015) 3,059,036 1,740,874 2,517,882 23,782,563 9,184,278 -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from operations 2,786,062 5,920,727 2,104,829 2,099,425 26,322,263 8,475,457 -------------- -------------- -------------- -------------- -------------- -------------- FROM CONTRACT TRANSACTIONS: Net purchase payments 11,999 80,112 9,000 19,295 122,394 86,374 Withdrawals (3,942,558) (4,462,856) (1,240,911) (789,007) (8,509,919) (8,566,895) Contract benefits (2,182,733) (2,711,173) (895,892) (926,466) (6,829,824) (6,203,957) Contract charges (89,783) (96,373) (35,319) (34,874) (277,879) (289,302) Transfers (1,243,491) (97,902) 550,230 (204,120) (3,904,389) (3,972,571) Other transfers from (to) the General Account 306,939 162,939 49,700 120,148 680,944 947,813 -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from contract transactions (7,139,627) (7,125,253) (1,563,192) (1,815,024) (18,718,673) (17,998,538) -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets (4,353,565) (1,204,526) 541,637 284,401 7,603,590 (9,523,081) NET ASSETS: Beginning of year 47,518,639 48,723,165 12,297,085 12,012,684 98,197,404 107,720,485 -------------- -------------- -------------- -------------- -------------- -------------- End of year $ 43,165,074 $ 47,518,639 $ 12,838,722 $ 12,297,085 $ 105,800,994 $ 98,197,404 ============== ============== ============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements. SA-18 SEPARATE ACCOUNT KG STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
DWS MONEY MARKET VIP DWS SMALL MID CAP GROWTH VIP DWS SMALL MID CAP VALUE VIP CLASS A CLASS A CLASS A (a) ----------------------------- ----------------------------- ----------------------------- 2013 2012 2013 2012 2013 2012 -------------- -------------- -------------- -------------- -------------- -------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment income (loss) $ (513,034) $ (565,470) $ (454,536) $ (467,800) $ (127,111) $ (131,594) Net realized gain (loss) - - 1,456,097 356,953 1,227,536 (639,611) Change in unrealized gain (loss) - - 11,003,000 4,142,719 12,358,326 6,486,466 -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from operations (513,034) (565,470) 12,004,561 4,031,872 13,458,751 5,715,261 -------------- -------------- -------------- -------------- -------------- -------------- FROM CONTRACT TRANSACTIONS: Net purchase payments 241,911 130,620 124,601 47,600 56,406 21,761 Withdrawals (12,453,005) (8,637,803) (2,358,335) (2,446,996) (3,520,975) (3,239,411) Contract benefits (1,630,876) (2,056,612) (1,795,972) (1,837,116) (10,003,074) (2,016,456) Contract charges (109,638) (122,103) (104,250) (100,818) (124,479) (143,926) Transfers 3,354,923 (1,729,625) (467,154) (1,258,022) (1,293,684) (972,869) Other transfers from (to) the General Account 6,653,123 7,722,209 140,716 360,026 216,599 183,849 -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from contract transactions (3,943,561) (4,693,314) (4,460,394) (5,235,326) (14,669,207) (6,167,052) -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets (4,456,595) (5,258,784) 7,544,167 (1,203,454) (1,210,456) (451,791) NET ASSETS: Beginning of year 37,490,944 42,749,728 31,552,116 32,755,570 48,448,814 48,900,605 -------------- -------------- -------------- -------------- -------------- -------------- End of year $ 33,034,348 $ 37,490,944 $ 39,096,283 $ 31,552,116 $ 47,238,358 $ 48,448,814 ============== ============== ============== ============== ============== ==============
(a) Name change. See Note 1. The accompanying notes are an integral part of these financial statements. SA-19 SEPARATE ACCOUNT KG STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
GOLDMAN SACHS VIT GLOBAL MARKETS DWS UNCONSTRAINED INCOME VIP NAVIGATOR FUND INVESCO V.I. UTILITIES FUND CLASS A SERVICE SHARES SERIES I SHARES ----------------------------- ----------------------------- ----------------------------- 2013 2012 2013 2012 2013 2012 -------------- -------------- -------------- -------------- -------------- -------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment income (loss) $ 839,777 $ 1,177,536 $ (195) $ (145) $ 123,793 $ 141,540 Net realized gain (loss) 861,836 513,037 800 161 258,735 321,372 Change in unrealized gain (loss) (2,291,902) 1,029,803 838 102 367,784 (281,200) -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from operations (590,289) 2,720,376 1,443 118 750,312 181,712 -------------- -------------- -------------- -------------- -------------- -------------- FROM CONTRACT TRANSACTIONS: Net purchase payments 106,830 26,219 - - 112,916 39,960 Withdrawals (1,741,707) (2,721,321) (7,836) (275) (671,397) (813,630) Contract benefits (1,090,020) (1,610,953) - - (515,943) (473,004) Contract charges (74,579) (86,973) (58) (36) (26,898) (29,240) Transfers (1,646,978) 510,896 41,770 3,604 (325,956) (460,986) Other transfers from (to) the General Account 164,332 173,957 4 - 209,679 46,532 -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets from contract transactions (4,282,122) (3,708,175) 33,880 3,293 (1,217,599) (1,690,368) -------------- -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets (4,872,411) (987,799) 35,323 3,411 (467,287) (1,508,656) NET ASSETS: Beginning of year 24,671,241 25,659,040 3,411 - 8,067,505 9,576,161 -------------- -------------- -------------- -------------- -------------- -------------- End of year $ 19,798,830 $ 24,671,241 $ 38,734 $ 3,411 $ 7,600,218 $ 8,067,505 ============== ============== ============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements. SA-20 SEPARATE ACCOUNT KG STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31,
THE DREYFUS SOCIALLY RESPONSIBLE JANUS ASPEN JANUS PORTFOLIO GROWTH FUND, INC. INSTITUTIONAL SHARES INITIAL SHARES ---------------------------------- ---------------------------------- 2013 2012 2013 2012 ----------------- ---------------- ---------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment income (loss) $ (837) $ (1,054) $ (3,220) $ (13,132) Net realized gain (loss) 1,806 1,193 104,366 58,733 Change in unrealized gain (loss) 32,125 18,798 520,600 181,252 ----------------- ---------------- ---------------------------------- Net increase (decrease) in net assets from operations 33,094 18,937 621,746 226,853 ----------------- ---------------- ---------------------------------- FROM CONTRACT TRANSACTIONS: Net purchase payments - - 35 809 Withdrawals (6,844) (17,407) (149,061) (211,721) Contract benefits (8,301) (3,056) (102,841) (176,201) Contract charges (265) (302) (8,147) (8,182) Transfers (9,297) 27,526 (99,486) (57,546) Other transfers from (to) the General Account 2,397 - 61,341 15,009 ----------------- ---------------- ---------------------------------- Net increase (decrease) in net assets from contract transactions (22,310) 6,761 (298,159) (437,832) ----------------- ---------------- ---------------------------------- Net increase (decrease) in net assets 10,784 25,698 323,587 (210,979) NET ASSETS: Beginning of year 133,036 107,338 2,017,868 2,228,847 ----------------- ---------------- ---------------------------------- End of year $ 143,820 $ 133,036 $ 2,341,455 $ 2,017,868 ================= ================ ==================================
The accompanying notes are an integral part of these financial statements. SA-21 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION Separate Account KG (the "Separate Account"), which funds the Scudder Gateway Advisor, Scudder Gateway Elite, Scudder Gateway Plus, and Scudder Gateway Incentive variable annuity contracts, is a separate investment account of Commonwealth Annuity and Life Insurance Company ("Commonwealth Annuity"), established on November 1, 1990, for the purpose of separating from the general assets of Commonwealth Annuity those assets used to fund the variable portion of certain variable annuity contracts (the "Contracts") issued by Commonwealth Annuity. Commonwealth Annuity is the Sponsor of the Separate Account. Commonwealth Annuity is a wholly-owned subsidiary of Global Atlantic (Fin) Company, a Delaware company, which is a wholly-owned indirect subsidiary of Global Atlantic Financial Group Limited ("GAFG"), a Bermuda company. Prior to April 30, 2013, Commonwealth Annuity was a wholly-owned subsidiary of The Goldman Sachs Group, Inc. ("Goldman Sachs"). Effective April 30, 2013, Goldman Sachs contributed several of its insurance subsidiaries, including Commonwealth Annuity, to GAFG, a newly formed holding company, and to certain subsidiaries of GAFG. Goldman Sachs owns approximately 20% of the outstanding ordinary shares of GAFG, and other investors, none of whom own more than 9.9%, own the remaining approximately 80% of the outstanding ordinary shares. Commonwealth Annuity is subject to the laws of the Commonwealth of Massachusetts governing insurance companies and to regulation by the Commissioner of Insurance of Massachusetts. In addition, Commonwealth Annuity is subject to the insurance laws and regulations of other states and jurisdictions in which it is licensed to operate. Under applicable insurance law, the assets and liabilities of the Separate Account are clearly identified and distinguished from the other assets and liabilities of Commonwealth Annuity. The Separate Account cannot be charged with liabilities arising out of any other business of Commonwealth Annuity. Commonwealth Annuity's General Account is subject to the claims of creditors. The Separate Account is registered with the Securities and Exchange Commission ("SEC") as a unit investment trust under the Investment Company Act of 1940, as amended (the "1940 Act"). Such registration does not involve the supervision or management of investment practices or policies of the Separate Account or Commonwealth Annuity by the SEC. Epoch Securities, Inc. ("Epoch") is the principal underwriter for the Separate Account. Epoch, an affiliate of Commonwealth Annuity, is a wholly-owned subsidiary of Global Atlantic (Fin) Company, and is a wholly-owned indirect subsidiary of GAFG. Twenty-three Sub-Accounts are currently offered by the Separate Account, all of which had activity during the year. Each Sub-Account invests exclusively in one of the Funds ("Underlying Funds") that are part of the following fund groups: FUND GROUPS Aim Variable Insurance Funds (Invesco Variable Insurance Funds) Dreyfus Investment Portfolio DWS Investment VIT Funds DWS Variable Series I DWS Variable Series II Goldman Sachs Variable Insurance Trust Janus Aspen Series The Alger Portfolios The Dreyfus Socially Responsible Growth Fund, Inc. The fund groups listed above are open-end, diversified management investment companies registered SA-22 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - ORGANIZATION (CONTINUED) under the 1940 Act. The following Underlying Funds were renamed as indicated:
DATE NEW NAME OLD NAME ---- -------- -------- May 1, 2013 DWS Global Growth VIP Class A DWS Global Thematic VIP Class A May 1, 2013 DWS Small Mid Cap Value VIP Class A DWS Dreman Small Mid Cap Value VIP Class A July 15, 2013 DWS Global Equity VIP Class A DWS Diversified International Equity VIP Class A
From time to time Commonwealth Annuity reviews its product offerings, particularly with regard to the utilization of its Sub-Account offerings, and determines if it is necessary to discontinue certain Sub-Accounts. The following Sub-Accounts are closed to new payment allocations and transfers: CLOSED SUB-ACCOUNTS Dreyfus IP MidCap Stock Portfolio Initial Shares The Dreyfus Socially Responsible Growth Fund, Inc. Initial Shares NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). The following is a summary of significant accounting policies followed by the Separate Account in the preparation of its financial statements. ESTIMATES - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates at the date of the financial statements. Actual results could differ from those estimates. SUBSEQUENT EVENTS - For the year ended December 31, 2013, Commonwealth Annuity evaluated subsequent events through April 17, 2014; the issuance date of the financial statements. INVESTMENTS - Investment transactions are recorded as of the trade date. Investments held by the Sub-Accounts are recorded at fair value based on the stated net asset value per share ("NAV") of the Underlying Funds. The change in the difference between cost and fair value is reflected in unrealized gain (loss) in the statements of operations. Realized investment gains and losses are determined using the average cost method. Dividend income and capital gain distributions are recorded on the ex-distribution date and are reinvested in additional shares of the Underlying Funds at NAV. Investment income receivable represents dividends receivable by, but not yet reinvested in, the Underlying Funds. FINANCIAL INSTRUMENTS - The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). The best evidence of fair value is a quoted price in an active market. If listed prices or quotations are not available, fair value is determined by reference to prices of similar instruments and quoted prices or recent prices in less active markets. U.S. GAAP has a three-level fair value hierarchy for disclosure of fair value measurements. The fair value hierarchy prioritizes inputs to the valuation techniques used to measure fair value, giving the highest priority to level 1 inputs and the lowest priority to level 3 inputs. A financial instrument's level in the fair value hierarchy is based on the lowest level of any input that is significant to fair value measurement. The three levels of the fair value hierarchy are described below: SA-23 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of Fair Value Measurement Level 1 Inputs are adjusted quoted prices in active markets to which Commonwealth Annuity had access at the measurement date for identical, unrestricted assets or liabilities. Level 2 Inputs to valuation techniques are observable either directly or indirectly. Level 3 One or more inputs to valuation techniques are both significant and unobservable. The open-end mutual funds in the Separate Account produce a daily NAV that is validated with a sufficient level of observable activity to support classification of the fair value measurement as level 1. RECEIVABLE FROM AND PAYABLE TO COMMONWEALTH ANNUITY - These represent transactions not settled with the general account. ANNUITIZED CONTRACTS - Net assets allocated to contracts in the payout phase ("Payout Reserves") involving life contingencies are computed according to either the 1983A or Annuity 2000 mortality tables. Depending on the product the assumed investment return can be 3.0, 3.5, 5.0, or 7.0 percent. The mortality risk is fully borne by Commonwealth Annuity and may result in greater amounts being transferred into the Separate Account by Commonwealth Annuity to cover greater than expected longevity of annuitants. Conversely, if amounts allocated exceed amounts required, transfers may be made to Commonwealth Annuity. UNITS OUTSTANDING AND UNIT FAIR VALUES BY DISTRIBUTION CATEGORY - The units outstanding represent the total number of units outstanding for the Sub-Account for the noted distribution category. A dash denotes the Sub-Account has no investors. The unit fair value is the measurement used in determining the value of a unit. The unit fair value varies to reflect the investment experience of the Sub-Account and any assessment of charges against the Sub-Account's net assets. A dash denotes the investment option is not available for the noted distribution category. STATEMENTS OF CHANGES IN NET ASSETS - Contract Owners may allocate their Contract Values to variable investment options in the Separate Account, the Fixed Account and the Guaranteed Period Account ("GPA"). The Fixed Account is a part of Commonwealth Annuity's General Account that guarantees principal and a fixed minimum interest rate. The GPA is included in Separate Account GPA, a non-registered Separate Account offered by Commonwealth Annuity, which offers fixed rates of interest for specified periods. Net Purchase Payments represent payments under the Contracts (excluding amounts allocated to the Fixed and GPA) reduced by applicable deductions, charges, and state premium taxes. Withdrawals are payments to Contract Owners and beneficiaries made under the terms of the Contracts and amounts that Contract Owners have requested to be withdrawn and paid to them. Contract Charges are deductions from Contract Values for optional rider benefits and annual contract fees. Contract benefits are payments made to Contract Owners and beneficiaries under the terms of the Contracts. Transfers are amounts that Contract Owners have directed to be moved among variable Sub-Accounts and the GPA. Other transfers from (to) the General Account include certain transfers from and to contracts in the annuitization phase, reserve adjustments, and withdrawal charges. FEDERAL INCOME TAXES - The operations of the Separate Account are included in the federal income tax return of Commonwealth Annuity, which is taxed as a life insurance company under Subchapter L of the Internal Revenue Code ("IRC"). Under the current provisions of the IRC, Commonwealth Annuity does not expect to incur federal income taxes on the earnings or realized capital gains attributable to the Separate Account. Based on SA-24 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) this, no Federal income tax provision is required. Commonwealth Annuity will review periodically the status of this policy in the event of changes in the tax law. A charge may be made in future years for any federal income taxes that would be attributable to the Contracts. The Separate Account did not record any changes in and had no recorded liabilities for uncertain tax benefits or related interest and penalties as of and for the year ended December 31, 2013. DIVERSIFICATION REQUIREMENT - Under the provisions of Section 817(h) of the IRC, a variable annuity contract will not be treated as an annuity contract for federal income tax purposes for any period for which the investments of the segregated asset account on which the contract is based are not adequately diversified. The IRC provides that the "adequately diversified" requirement may be met if the underlying investments satisfy either a statutory safe harbor test or diversification requirements set forth in regulations issued by the Secretary of the Treasury. The Internal Revenue Service has issued regulations under Section 817(h) of the IRC. Commonwealth Annuity believes that the Separate Account satisfies the current requirements of the regulations, and it intends that it will continue to meet such requirements. NOTE 3 - EXPENSES AND RELATED PARTY TRANSACTIONS Commonwealth Annuity assesses a charge to compensate for certain mortality and expense risks it has assumed. The mortality risk assumed by Commonwealth Annuity is that annuitants may live for a longer time than anticipated, and that Commonwealth Annuity therefore will pay an aggregate amount of benefit payments greater than anticipated. The expense risk assumed is that the expenses incurred in issuing and administering the Contracts will exceed the amounts realized from the administrative charges provided in the Contracts. If the charge for mortality and expense risks is not sufficient to cover actual mortality experience and expenses, Commonwealth Annuity will absorb the losses. If costs are less than the amounts charged, the difference will be a profit to Commonwealth Annuity. Commonwealth Annuity also assesses an administrative charge. Both of these charges are imposed during the accumulation phase and the annuity payout phase. A contract fee may be deducted during the accumulation phase and upon full surrender of the Contract, if the accumulated value is below certain levels. Subject to state availability, Commonwealth Annuity offers a number of optional benefit riders. A separate charge is made for each rider. Charges vary depending upon the optional benefits selected and by the underwriting classification of the annuitant. Commonwealth Annuity may also charge other one-time fees for certain Contract transactions, which are not listed in the following table. For more detailed information about fees and charges, refer to the product prospectuses. When contract value has been allocated to more than one investment option, Contract Deductions are made from each on a pro-rata basis. Contract fees may be waived by Commonwealth Annuity in certain cases at its discretion, and where permitted by law. Fees and charges may be deducted daily, monthly, or annually. They may be deducted from the net assets of each Sub-Account ("Unit Fair Value") or deducted from individual contracts ("Individual Contract"). Current fees and charges are summarized in the following table. For more detailed information about fees and charges, refer to the product prospectuses. SA-25 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - EXPENSES AND RELATED PARTY TRANSACTIONS (CONTINUED)
SCUDDER GATEWAY SCUDDER SCUDDER SCUDDER SCUDDER INCENTIVE WITH GATEWAY GATEWAY GATEWAY GATEWAY ENHANCED DEATH ADVISOR ELITE PLUS INCENTIVE BENEFIT RIDER ----------------- ----------------- ----------------- ----------------- ----------------- Mortality and Expense Risk Frequency Daily Daily Daily Daily Daily Deduction Method Unit Fair Value Unit Fair Value Unit Fair Value Unit Fair Value Unit Fair Value Rate (Annual) 1.25% 1.25% 1.25% 1.30% 1.30% Administrative Expense Frequency Daily Daily Daily Daily Daily Deduction Method Unit Fair Value Unit Fair Value Unit Fair Value Unit Fair Value Unit Fair Value Rate (Annual) 0.15% 0.15% 0.15% 0.15% 0.15% Contract Fee Frequency Annually, and Annually, and Annually, and Annually, and Annually, and upon full upon full upon full upon full upon full surrender of the surrender of the surrender of the surrender of the surrender of the contract contract contract contract contract Deduction Method Individual Individual Individual Individual Individual Contract Contract Contract Contract Contract Maximum Annual Fee $35 $35 $35 $35 $35 Optional Rider Fees Frequency NA NA NA NA Monthly Deduction Method NA NA NA NA Unit Fair Value Rate (Annual) NA NA NA NA 0.25% Optional Rider Fees Frequency Monthly Monthly Monthly Monthly Monthly Deduction Method Individual Individual Individual Individual Individual Contract Contract Contract Contract Contract Rate (Annual) 0.15%-0.80% 0.15%-0.55% 0.15%-1.10% 0.30% 0.30%
A surrender charge may be deducted from the accumulated value of the Contract in the case of surrender or partial redemption of the Contract, or at the time annuity payments begin. The amount charged is determined by the product, the length of time the Contract has been in force, the category of accumulated value surrendered or redeemed, the time elapsed since the amount surrendered or redeemed was credited to the Contract, and whether the Contract Owner or annuitant are included in certain classes exempt from these charges. The maximum charge will not exceed 8.5% of the amount surrendered or redeemed. Some states and municipalities impose premium taxes, which currently range up to 3.5%, on variable annuity contracts. The disclosures above include current fees and charges. There are certain other fees and charges that may be assessed in future periods, at the discretion of Commonwealth Annuity, in accordance with Contract terms. Detailed descriptions of these fees and charges are available in the product prospectuses. SA-26 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - EXPENSES AND RELATED PARTY TRANSACTIONS (CONTINUED) Goldman Sachs Asset Management, L.P. ("GSAM"), a subsidiary of Goldman Sachs, is investment advisor to the Goldman Sachs Variable Insurance Trust ("Goldman Sachs VIT"). During the year ended December 31, 2013, management fees of the underlying Goldman Sachs VIT fund were paid directly by the fund to GSAM in its capacity as investment manager and administrator of the Goldman Sachs VIT fund. The Goldman Sachs VIT fund's advisory agreement provides for the fund to pay a fee equal to an annual rate of 0.81% of the fund's average daily net assets. According to the Plan of Distribution and Service pursuant to Rule 12b-1 under the 1940 Act, the Goldman Sachs VIT fund paid a fee equal to an annual rate of 0.25% of the fund's average daily net assets. NOTE 4 - CHANGES IN UNITS OUTSTANDING The changes in units outstanding were as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 2013 2012 ------------------ ------------------ ALGER BALANCED PORTFOLIO CLASS I-2 Issuance of Units 3,216,092 2,035,148 Redemption of Units (5,325,193) (6,211,985) ------------------ ------------------ Net increase (decrease) (2,109,101) (4,176,837) ================== ================== ALGER CAPITAL APPRECIATION PORTFOLIO CLASS I-2 Issuance of Units 1,524,144 1,969,279 Redemption of Units (3,452,059) (3,567,303) ------------------ ------------------ Net increase (decrease) (1,927,915) (1,598,024) ================== ================== DREYFUS IP MIDCAP STOCK PORTFOLIO INITIAL SHARES Issuance of Units 301,591 227,638 Redemption of Units (2,364,505) (2,795,641) ------------------ ------------------ Net increase (decrease) (2,062,914) (2,568,003) ================== ================== DWS BOND VIP CLASS A Issuance of Units 3,417,637 25,862,078 Redemption of Units (6,824,049) (4,801,302) ------------------ ------------------ Net increase (decrease) (3,406,412) 21,060,776 ================== ================== DWS CAPITAL GROWTH VIP CLASS A Issuance of Units 2,504,873 2,443,363 Redemption of Units (12,792,899) (16,112,930) ------------------ ------------------ Net increase (decrease) (10,288,026) (13,669,567) ================== ================== DWS CORE EQUITY VIP CLASS A Issuance of Units 5,884,912 41,336,527 Redemption of Units (14,406,692) (13,649,267) ------------------ ------------------ Net increase (decrease) (8,521,780) 27,687,260 ================== ==================
SA-27 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - CHANGES IN UNITS OUTSTANDING (CONTINUED)
YEAR ENDED DECEMBER 31, -------------------------------------- 2013 2012 ------------------ ------------------ DWS EQUITY 500 INDEX VIP CLASS A Issuance of Units 5,319,054 3,596,911 Redemption of Units (8,463,704) (8,090,795) ------------------ ------------------ Net increase (decrease) (3,144,650) (4,493,884) ================== ================== DWS GLOBAL EQUITY VIP CLASS A (a) Issuance of Units 883,426 877,660 Redemption of Units (2,037,773) (2,371,791) ------------------ ------------------ Net increase (decrease) (1,154,347) (1,494,131) ================== ================== DWS GLOBAL GROWTH VIP CLASS A (a) Issuance of Units 498,097 765,922 Redemption of Units (3,563,822) (2,386,590) ------------------ ------------------ Net increase (decrease) (3,065,725) (1,620,668) ================== ================== DWS GLOBAL INCOME BUILDER VIP CLASS A Issuance of Units 2,172,249 2,316,791 Redemption of Units (6,296,980) (7,202,440) ------------------ ------------------ Net increase (decrease) (4,124,731) (4,885,649) ================== ================== DWS GLOBAL SMALL CAP GROWTH VIP CLASS A Issuance of Units 676,160 716,777 Redemption of Units (2,326,696) (2,574,345) ------------------ ------------------ Net increase (decrease) (1,650,536) (1,857,568) ================== ================== DWS GOVERNMENT & AGENCY SECURITIES VIP CLASS A Issuance of Units 3,331,626 2,143,998 Redemption of Units (7,527,704) (7,036,824) ------------------ ------------------ Net increase (decrease) (4,196,078) (4,892,826) ================== ================== DWS HIGH INCOME VIP CLASS A Issuance of Units 3,890,657 3,681,269 Redemption of Units (7,256,141) (7,409,212) ------------------ ------------------ Net increase (decrease) (3,365,484) (3,727,943) ================== ================== DWS INTERNATIONAL VIP CLASS A Issuance of Units 1,447,285 985,409 Redemption of Units (2,949,566) (3,031,275) ------------------ ------------------ Net increase (decrease) (1,502,281) (2,045,866) ================== ==================
(a) Name change. See Note 1. SA-28 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - CHANGES IN UNITS OUTSTANDING (CONTINUED)
YEAR ENDED DECEMBER 31, -------------------------------------- 2013 2012 ------------------ ------------------ DWS LARGE CAP VALUE VIP CLASS A Issuance of Units 1,891,410 1,514,672 Redemption of Units (9,344,742) (10,049,839) ------------------ ------------------ Net increase (decrease) (7,453,332) (8,535,167) ================== ================== DWS MONEY MARKET VIP CLASS A Issuance of Units 21,348,287 15,065,738 Redemption of Units (24,615,213) (18,888,343) ------------------ ------------------ Net increase (decrease) (3,266,926) (3,822,605) ================== ================== DWS SMALL MID CAP GROWTH VIP CLASS A Issuance of Units 1,710,133 1,402,784 Redemption of Units (4,719,566) (5,714,987) ------------------ ------------------ Net increase (decrease) (3,009,433) (4,312,203) ================== ================== DWS SMALL MID CAP VALUE VIP CLASS A (a) Issuance of Units 912,378 595,262 Redemption of Units (5,505,605) (2,858,244) ------------------ ------------------ Net increase (decrease) (4,593,227) (2,262,982) ================== ================== DWS UNCONSTRAINED INCOME VIP CLASS A Issuance of Units 1,683,146 1,737,067 Redemption of Units (3,750,172) (3,600,374) ------------------ ------------------ Net increase (decrease) (2,067,026) (1,863,307) ================== ================== GOLDMAN SACHS VIT GLOBAL MARKETS NAVIGATOR FUND SERVICE SHARES Issuance of Units 51,923 77,580 Redemption of Units (22,162) (74,323) ------------------ ------------------ Net increase (decrease) 29,761 3,257 ================== ================== INVESCO V.I. UTILITIES FUND SERIES I SHARES Issuance of Units 1,256,825 1,227,331 Redemption of Units (2,195,051) (2,679,063) ------------------ ------------------ Net increase (decrease) (938,226) (1,451,732) ================== ================== JANUS ASPEN JANUS PORTFOLIO INSTITUTIONAL SHARES Issuance of Units 6,773 30,769 Redemption of Units (28,612) (22,996) ------------------ ------------------ Net increase (decrease) (21,839) 7,773 ================== ==================
(a) Name change. See Note 1. SA-29 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - CHANGES IN UNITS OUTSTANDING (CONTINUED)
YEAR ENDED DECEMBER 31, -------------------------------------- 2013 2012 ------------------ ------------------ THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. INITIAL SHARES Issuance of Units 71,605 19,401 Redemption of Units (352,363) (516,884) ------------------ ------------------ Net increase (decrease) (280,758) (497,483) ================== ==================
NOTE 5 - PURCHASES AND SALES OF INVESTMENTS The cost of purchases and proceeds from sales of shares of the Underlying Funds of the Separate Account during the year ended December 31, 2013 were as follows:
INVESTMENT PORTFOLIOS PURCHASES SALES --------------------- --------- ----- Alger Balanced Portfolio Class I-2 $ 2,241,912 $ 5,014,386 Alger Capital Appreciation Portfolio Class I-2 3,316,801 3,985,189 Dreyfus IP MidCap Stock Portfolio Initial Shares 530,317 4,936,253 DWS Bond VIP Class A 2,593,393 6,880,548 DWS Capital Growth VIP Class A 1,689,705 16,002,622 DWS Core Equity VIP Class A 4,145,990 14,249,587 DWS Equity 500 Index VIP Class A 4,545,635 7,562,515 DWS Global Equity VIP Class A (a) 885,687 2,508,998 DWS Global Growth VIP Class A (a) 548,388 5,565,516 DWS Global Income Builder VIP Class A 2,556,978 9,341,852 DWS Global Small Cap Growth VIP Class A 2,152,383 4,810,859 DWS Government & Agency Securities VIP Class A 3,462,978 9,071,722 DWS High Income VIP Class A 9,314,615 13,738,479 DWS International VIP Class A 1,645,496 2,723,787 DWS Large Cap Value VIP Class A 2,830,099 20,932,438 DWS Money Market VIP Class A 17,063,299 21,519,886 DWS Small Mid Cap Growth VIP Class A 1,271,118 6,186,048 DWS Small Mid Cap Value VIP Class A (a) 1,272,872 16,069,190 DWS Unconstrained Income VIP Class A 2,885,469 5,671,796 Goldman Sachs VIT Global Markets Navigator Fund Service Shares 51,796 17,649 Invesco V.I. Utilities Fund Series I Shares 1,493,704 2,418,386 Janus Aspen Janus Portfolio Institutional Shares 3,392 26,539 The Dreyfus Socially Responsible Growth Fund, Inc. Initial Shares 90,121 391,500
(a) Name change. See Note 1. SA-30 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - FINANCIAL HIGHLIGHTS Unit fair values, units outstanding, income and expense ratios and total returns for the Separate Account were as follows:
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 -------------- ------------------------------- UNIT FAIR UNIT FAIR INVESTMENT EXPENSE EXPENSE TOTAL TOTAL VALUES VALUES INCOME RATIOS RATIOS RETURNS RETURNS LOWEST HIGHEST NET RATIOS LOWEST HIGHEST LOWEST HIGHEST UNITS ($) (4) ($) (4) ASSETS ($) (%) (1) (%) (2) (%) (2) (%) (3)(4) (%) (3)(4) ----- --------- --------- ---------- ---------- -------- -------- ---------- ---------- ALGER BALANCED PORTFOLIO CLASS I-2 2013 19,632,724 1.313909 1.375378 26,967,150 1.17 1.40 1.70 13.32 13.69 2012 21,741,825 1.159482 1.209802 26,270,520 1.38 1.40 1.70 4.42 4.74 2011 25,918,662 1.110353 1.155004 29,904,888 2.87 1.40 1.70 (1.67) (1.37) 2010 30,993,620 1.129252 1.171093 36,260,177 2.57 1.40 1.70 8.46 8.79 2009 35,955,781 1.041168 1.076460 38,667,428 3.23 1.40 1.70 27.05 27.44 ALGER CAPITAL APPRECIATION PORTFOLIO CLASS I-2 2013 12,908,881 1.988867 1.643299 21,348,971 0.36 1.40 1.70 32.89 33.32 2012 14,836,796 1.496607 1.232566 18,381,332 1.02 1.40 1.70 16.29 16.65 2011 16,434,820 1.286949 1.056672 17,458,921 0.12 1.40 1.70 (2.00) (1.70) 2010 24,209,323 1.313190 1.074941 26,124,428 0.40 1.40 1.70 12.09 12.43 2009 28,462,285 1.171548 0.956084 27,342,547 N/A 1.40 1.70 48.54 48.99 DREYFUS IP MIDCAP STOCK PORTFOLIO INITIAL SHARES 2013 10,353,136 2.149214 2.436264 25,164,687 1.42 1.40 1.70 32.70 33.13 2012 12,416,050 1.619583 1.829966 22,670,705 0.47 1.40 1.70 17.64 18.00 2011 14,984,053 1.376720 1.550823 23,178,716 0.54 1.40 1.70 (1.31) (1.01) 2010 19,950,678 1.395030 1.566675 31,150,251 1.02 1.40 1.70 24.94 25.32 2009 24,407,269 1.116576 1.250150 30,415,768 1.47 1.40 1.70 33.21 33.61 DWS BOND VIP CLASS A 2013 17,654,364 1.136610 1.438514 25,292,020 3.77 1.40 1.70 (4.66) (4.37) 2012 21,060,776 1.192165 1.504232 31,553,759 N/A 1.40 1.70 3.98 4.19 DWS CAPITAL GROWTH VIP CLASS A 2013 59,755,771 1.357345 1.611133 95,967,538 1.28 1.40 1.70 32.38 32.79 2012 70,043,797 1.025312 1.213320 84,746,992 0.89 1.40 1.70 14.08 14.43 2011 83,713,364 0.898770 1.060342 88,525,938 0.65 1.40 1.70 (6.10) (5.81) 2010 75,437,170 0.957128 1.125740 84,670,031 0.93 1.40 1.70 14.73 15.07 2009 91,318,406 0.834277 0.978269 89,080,560 1.09 1.40 1.70 24.71 25.09
SA-31 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 -------------- ------------------------------- UNIT FAIR UNIT FAIR INVESTMENT EXPENSE EXPENSE TOTAL TOTAL VALUES VALUES INCOME RATIOS RATIOS RETURNS RETURNS LOWEST HIGHEST NET RATIOS LOWEST HIGHEST LOWEST HIGHEST UNITS ($) (4) ($) (4) ASSETS ($) (%) (1) (%) (2) (%) (2) (%) (3)(4) (%) (3)(4) ----- --------- --------- ---------- ---------- -------- -------- ---------- ---------- DWS CORE EQUITY VIP CLASS A 2013 50,862,518 1.498162 1.379159 70,200,449 1.46 1.40 1.70 35.02 35.43 2012 59,384,298 1.109585 1.018343 60,523,254 0.74 1.40 1.70 13.85 14.19 2011 31,697,038 0.974640 0.891767 28,295,941 1.30 1.40 1.70 (1.84) (1.54) 2010 36,733,422 0.992940 0.905747 33,313,949 1.67 1.40 1.70 12.45 12.80 2009 41,856,421 0.882991 0.803000 33,655,855 2.09 1.40 1.70 31.87 32.27 DWS EQUITY 500 INDEX VIP CLASS A 2013 28,773,810 1.475764 1.401046 40,361,463 1.79 1.40 1.70 29.71 30.11 2012 31,918,460 1.137736 1.076854 34,426,214 1.74 1.40 1.70 13.73 14.08 2011 36,412,344 1.000359 0.943952 34,436,057 1.77 1.40 1.70 0.10 0.41 2010 43,593,221 0.999327 0.940108 41,114,810 1.93 1.40 1.70 12.75 13.10 2009 51,624,445 0.886286 0.831223 43,045,877 2.86 1.40 1.70 24.18 24.56 DWS GLOBAL EQUITY VIP CLASS A (a) 2013 9,711,087 1.354838 1.705412 16,497,090 2.43 1.40 1.70 17.31 17.67 2012 10,865,434 1.154921 1.449358 15,694,561 2.88 1.40 1.70 15.35 15.70 2011 12,359,565 1.001250 1.252691 15,427,268 2.00 1.40 1.70 (13.57) (13.30) 2010 14,955,456 1.158434 1.444939 21,540,872 2.33 1.40 1.70 9.05 9.38 2009 17,660,495 1.062336 1.321060 23,263,019 6.19 1.40 1.70 27.16 27.55 DWS GLOBAL GROWTH VIP CLASS A (a) 2013 6,617,056 1.615175 1.861567 12,290,025 1.27 1.40 1.70 20.02 20.39 2012 9,682,781 1.345716 1.546276 14,946,901 1.45 1.40 1.70 16.58 16.94 2011 11,303,449 1.154317 1.322324 14,920,662 0.64 1.40 1.70 (15.84) (15.59) 2010 14,205,923 1.371620 1.566473 22,218,621 0.97 1.40 1.70 11.72 12.06 2009 15,505,764 1.227691 1.397831 21,639,984 1.51 1.40 1.70 41.38 41.81 DWS GLOBAL INCOME BUILDER VIP CLASS A 2013 28,831,414 1.300331 1.874306 53,628,597 2.09 1.40 1.70 14.67 15.02 2012 32,956,145 1.133989 1.629590 53,323,554 1.58 1.40 1.70 11.06 11.40 2011 37,841,794 1.021060 1.462846 54,973,430 1.61 1.40 1.70 (3.10) (2.81) 2010 43,921,276 1.053750 1.505083 65,647,086 3.23 1.40 1.70 9.34 9.67 2009 51,866,034 0.963771 1.372387 70,703,536 3.86 1.40 1.70 21.33 21.70
(a) Name change. See Note 1. SA-32 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 -------------- ------------------------------- UNIT FAIR UNIT FAIR INVESTMENT EXPENSE EXPENSE TOTAL TOTAL VALUES VALUES INCOME RATIOS RATIOS RETURNS RETURNS LOWEST HIGHEST NET RATIOS LOWEST HIGHEST LOWEST HIGHEST UNITS ($) (4) ($) (4) ASSETS ($) (%) (1) (%) (2) (%) (2) (%) (3)(4) (%) (3)(4) ----- --------- --------- ----------- ---------- -------- -------- ---------- ---------- DWS GLOBAL SMALL CAP GROWTH VIP CLASS A 2013 7,922,440 2.035477 2.825508 22,317,967 0.66 1.40 1.70 33.66 34.06 2012 9,572,976 1.522916 2.107581 20,105,845 0.69 1.40 1.70 13.41 13.76 2011 11,430,544 1.342850 1.852728 21,104,294 1.77 1.40 1.70 (11.43) (11.16) 2010 14,103,136 1.516194 2.085504 29,243,577 0.41 1.40 1.70 24.49 24.87 2009 16,341,095 1.217943 1.670182 27,145,776 1.66 1.40 1.70 45.69 46.13 DWS GOVERNMENT & AGENCY SECURITIES VIP CLASS A 2013 17,171,820 1.429885 1.841783 31,510,359 3.09 1.40 1.70 (4.67) (4.38) 2012 21,367,898 1.499991 1.926207 40,890,222 4.02 1.40 1.70 1.18 1.48 2011 26,260,724 1.482563 1.898027 49,509,586 4.43 1.40 1.70 5.64 5.96 2010 32,865,035 1.403445 1.791275 58,465,317 4.78 1.40 1.70 4.80 5.12 2009 39,841,327 1.339139 1.704015 67,469,629 4.85 1.40 1.70 6.24 6.57 DWS HIGH INCOME VIP CLASS A 2013 19,625,430 1.964179 2.202600 43,165,074 7.53 1.40 1.70 6.10 6.42 2012 22,990,914 1.851282 2.069679 47,518,639 8.18 1.40 1.70 12.96 13.31 2011 26,718,857 1.638871 1.826628 48,723,165 9.22 1.40 1.70 2.07 2.38 2010 32,105,809 1.605602 1.784106 57,188,044 8.36 1.40 1.70 12.06 12.40 2009 38,908,356 1.432786 1.587232 61,659,470 10.79 1.40 1.70 37.61 38.03 DWS INTERNATIONAL VIP CLASS A 2013 11,147,719 1.062290 1.154380 12,838,722 5.36 1.40 1.70 18.21 18.57 2012 12,650,000 0.898666 0.973604 12,297,085 2.18 1.40 1.70 18.60 18.96 2011 14,695,866 0.757760 0.818442 12,012,684 1.84 1.40 1.70 (18.09) (17.84) 2010 17,401,775 0.925118 0.996156 17,308,392 2.20 1.40 1.70 (0.10) 0.20 2009 19,526,556 0.926084 0.994160 19,384,184 4.42 1.40 1.70 31.25 31.65 DWS LARGE CAP VALUE VIP CLASS A 2013 37,987,936 1.745511 2.822712 105,800,994 2.01 1.40 1.70 28.69 29.09 2012 45,441,268 1.356324 2.186700 98,197,404 1.96 1.40 1.70 7.92 8.25 2011 53,976,435 1.256767 2.020023 107,720,485 1.22 1.40 1.70 (1.77) (1.47) 2010 29,265,603 1.279383 2.050112 59,449,353 2.05 1.40 1.70 8.89 9.22 2009 34,100,368 1.174939 1.877024 63,323,243 1.57 1.40 1.70 23.24 23.61
SA-33 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 -------------- ------------------------------- UNIT FAIR UNIT FAIR INVESTMENT EXPENSE EXPENSE TOTAL TOTAL VALUES VALUES INCOME RATIOS RATIOS RETURNS RETURNS LOWEST HIGHEST NET RATIOS LOWEST HIGHEST LOWEST HIGHEST UNITS ($) (4) ($) (4) ASSETS ($) (%) (1) (%) (2) (%) (2) (%) (3)(4) (%) (3)(4) ----- --------- --------- ---------- ---------- -------- -------- ---------- ---------- DWS MONEY MARKET VIP CLASS A 2013 27,363,224 0.989531 1.209311 33,034,348 0.01 1.40 1.70 (1.68) (1.38) 2012 30,630,150 1.006421 1.226184 37,490,944 0.01 1.40 1.70 (1.69) (1.39) 2011 34,452,755 1.023772 1.243524 42,749,728 0.01 1.40 1.70 (1.69) (1.39) 2010 34,739,609 1.041416 1.261096 43,761,791 0.01 1.40 1.70 (1.69) (1.39) 2009 42,603,753 1.059363 1.278934 54,391,103 0.37 1.40 1.70 (1.37) (1.07) DWS SMALL MID CAP GROWTH VIP CLASS A 2013 22,070,060 1.097767 1.793085 39,096,283 0.12 1.40 1.70 40.38 40.81 2012 25,079,493 0.781971 1.273376 31,552,116 N/A 1.40 1.70 12.41 12.75 2011 29,391,696 0.695665 1.129383 32,755,570 0.35 1.40 1.70 (5.54) (5.25) 2010 17,597,739 0.736477 1.191987 20,723,835 N/A 1.40 1.70 27.24 27.63 2009 20,534,631 0.578803 0.933954 18,956,643 N/A 1.40 1.70 38.22 38.64 DWS SMALL MID CAP VALUE VIP CLASS A (a) 2013 12,509,066 3.194870 3.789201 47,238,358 1.14 1.40 1.70 32.97 33.37 2012 17,102,293 2.402722 2.841034 48,448,814 1.15 1.40 1.70 11.83 12.17 2011 19,365,275 2.148512 2.532728 48,900,605 1.08 1.40 1.70 (7.68) (7.40) 2010 22,777,204 2.327179 2.735011 62,090,269 1.30 1.40 1.70 20.98 21.35 2009 26,298,235 1.923653 2.253893 59,072,722 1.96 1.40 1.70 27.50 27.89 DWS UNCONSTRAINED INCOME VIP CLASS A 2013 9,599,975 1.876817 2.066079 19,798,830 5.25 1.40 1.70 (2.71) (2.41) 2012 11,667,001 1.929051 2.117129 24,671,241 6.16 1.40 1.70 11.15 11.49 2011 13,530,308 1.735478 1.898889 25,659,040 5.66 1.40 1.70 3.52 3.83 2010 15,791,131 1.676493 1.828767 28,839,349 6.39 1.40 1.70 8.18 8.51 2009 16,402,147 1.549724 1.685338 27,607,223 5.07 1.40 1.70 20.65 21.01 GOLDMAN SACHS VIT GLOBAL MARKETS NAVIGATOR FUND SERVICE SHARES 2013 33,018 1.173138 1.173138 38,734 0.06 1.40 1.40 12.00 12.00 2012 3,257 1.047447 1.047447 3,411 N/A 1.40 1.40 4.74 4.74
(a) Name change. See Note 1. SA-34 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 -------------- ------------------------------- UNIT FAIR UNIT FAIR INVESTMENT EXPENSE EXPENSE TOTAL TOTAL VALUES VALUES INCOME RATIOS RATIOS RETURNS RETURNS LOWEST HIGHEST NET RATIOS LOWEST HIGHEST LOWEST HIGHEST UNITS ($) (4) ($) (4) ASSETS ($) (%) (1) (%) (2) (%) (2) (%) (3)(4) (%) (3)(4) ----- --------- --------- ---------- ---------- -------- -------- ---------- ---------- INVESCO V.I. UTILITIES FUND SERIES I SHARES 2013 5,891,832 1.241779 1.291033 7,600,218 2.89 1.40 1.70 8.90 9.23 2012 6,830,058 1.140343 1.181965 8,067,505 3.01 1.40 1.70 1.84 2.15 2011 8,281,790 1.119687 1.157035 9,576,161 3.23 1.40 1.70 14.47 14.82 2010 8,527,221 0.978163 1.007713 8,588,246 3.54 1.40 1.70 4.49 4.81 2009 9,554,001 0.936098 0.961438 9,182,266 4.81 1.40 1.70 12.98 13.32 JANUS ASPEN JANUS PORTFOLIO INSTITUTIONAL SHARES 2013 115,564 1.244511 1.244511 143,820 0.77 1.40 1.40 28.54 28.54 2012 137,403 0.968216 0.968216 133,036 0.56 1.40 1.40 16.93 16.93 2011 129,630 0.828038 0.828038 107,338 0.55 1.40 1.40 (6.63) (6.63) 2010 192,126 0.886819 0.886819 170,381 1.05 1.40 1.40 12.92 12.92 2009 262,530 0.785382 0.785382 206,186 0.54 1.40 1.40 34.44 34.44 THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. INITIAL SHARES 2013 1,984,806 1.199167 1.179575 2,341,455 1.27 1.40 1.70 32.04 32.49 2012 2,265,564 0.908164 0.890325 2,017,868 0.82 1.40 1.70 10.08 10.41 2011 2,763,047 0.825022 0.806399 2,228,847 0.96 1.40 1.70 (0.80) (0.51) 2010 3,391,336 0.831702 0.810561 2,750,403 0.89 1.40 1.70 12.87 13.21 2009 4,041,599 0.736882 0.715983 2,895,911 0.99 1.40 1.70 31.48 31.88
(1) These amounts represent the dividends, excluding distributions of capital gains, received by the Sub-Account from the Underlying Fund, net of management fees assessed by the fund manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense charges, that result in direct reductions in the unit fair values. The recognition of investment income by the Sub-Account is affected by the timing of the declaration of dividends by the Underlying Fund in which the Sub-Accounts invest. (2) These ratios represent the annualized contract expenses of the Separate Account, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit fair values. See Note 3 for a list of all unit fair value charges. Charges made directly to contract owner accounts through the redemption of units and expenses of the Underlying Fund are excluded. (3) These amounts represent the total return for the periods indicated, including changes in the value of the Underlying Fund, and reflect deductions for all items included in the expense ratio. The total return does not include any expenses assessed through the redemption of units; inclusion of these expenses in the calculation would result in a reduction in the total return presented. Investment options with a date notation indicate the effective date of that investment option in the variable account. The total return is calculated for the period indicated or from the effective date through the end of the reporting period. (4) The highest unit fair value and total return correspond with the product with the lowest expense ratio. The lowest unit fair value and total return correspond with the product with the highest expense ratio. SA-35 SEPARATE ACCOUNT KG NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7 - SUBSEQUENT EVENTS On January 2, 2014, GAFG acquired Forethought Financial Group, Inc. ("Forethought"), a Delaware company, through a merger transaction. As a result of the merger, GAFG effectuated certain internal restructuring transactions. As a result of such restructuring, Forethought Financial Services, LLC, a Delaware company, which is a wholly-owned subsidiary of Forethought, owns approximately 79% of the outstanding ordinary shares of Commonwealth Annuity. Global Atlantic (Fin) Company reduced its ownership of Commonwealth Annuity from 100% to approximately 21% of the outstanding ordinary shares of Commonwealth Annuity. Commonwealth Annuity remains a wholly-owned indirect subsidiary of GAFG. SA-36 PART C. OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (a) FINANCIAL STATEMENTS Financial Statements Included in Part A None Financial Statements for Commonwealth Annuity and Life Insurance Company (the "Company" and "Depositor") and Financial Statements for Separate Account KG of Commonwealth Annuity and Life Insurance Company Financial Statements Included in Part B Financial Statements Included in Part C None (b) EXHIBITS EXHIBIT 1 Vote of Board of Directors Authorizing Establishment of Registrant dated June 13, 1996 was previously filed on August 9, 1996 in Initial Registration Statement No. 333-09965/811-7767, and is incorporated by reference herein. EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance Company may hold the assets of the Registrant NOT pursuant to a trust indenture or other such instrument. EXHIBIT 3 (a) Form of Service Agreement by and between Epoch Securities, Inc., Commonwealth Annuity and Life Insurance Company, First Allmerica Financial Life Insurance Company and the "Broker-Dealer" was previously filed on April 25, 2008 in Post-Effective Amendment No. 29 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. (b) Consolidated Underwriting and Administrative Service Agreement dated April 30, 2010 between and among Commonwealth Annuity and Life Insurance Company and Epoch Securities, Inc was filed on April 30, 2010 in Post-Effective Amendment No. 31 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein Service Agreement dated March 13, 2012 by and between Epoch Securities, Inc., Commonwealth Annuity and Life Insurance Company, se2, Inc. and Security Distributor's Inc. was previously filed on April 25, 2012 in Post-Effective Amendment No. 33 (Registration Statement No. 33-39702/811-06293), and is incorporated by reference herein. (c) Shared Services Agreement dated August 5, 2010 between Commonwealth Annuity and Life Insurance Company and Epoch Securities, Inc. was filed on April 25, 2013 in Post-Effective Amendment No. 34 to Registration Statement No. 33-39702/811-6293, and is incorporated by reference herein. EXHIBIT 4 The following documents were previously filed on June 18, 1999 in Registrant's Initial Registration Statement No. 333-81019/811-7767, and are incorporated by reference herein. (a) Contract Form A3028-99; (b) Specification Pages Form A8028-99; (c) Enhanced Death Benefit "EDB" Rider (Form 3263-99); (d) Enhanced Death Benefit "EDB" Rider (Form 3264-99); (e) Enhanced Death Benefit "EDB" Rider (Form 3265-99); (f) Minimum Guaranteed Annuity Payout ("M-GAP") Rider (Form 3269-99); (g) Trail Employee Program Endorsement (Form 3274-99); (h) Trail Employee Program Endorsement (Form 3275-99) (i) EER Rider (Form 3240-01) was previously filed on August 3, 2001 in Post-Effective Amendment No. 6 of Registration Statement (File Nos. 333-78245, 811-6632), and is incorporated by reference herein. (j) EDB Rider (Form 3241-01) was previously filed on August 3, 2001 in Post-Effective Amendment No. 6 of Registration Statement (File Nos. 333-78245, 811-6632), and is incorporated by reference herein. (k) Form of 7% EDB Rider (Form 3303-1) and 7% EDB Rider with Annual Step-up Rider (Form 3304-01 were previously filed on October 30, 2001 in Post-Effective Amendment No. 5 Registrant's Registration Statement No. 333-81019/811-07776, and is incorporated by reference herein. (l) TSA-Endorsement 4012-07 (Rev. 12-08) was filed on April 28, 2009 in Post-Effective Amendment No. 30 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. EXHIBIT 5 Application Form SML-1460K was previously filed on June 18, 1999 in Registrant's Initial Registration Statement No. 333-81019/811-7767, and is incorporated by reference herein. EXHIBIT 6 Articles of Organization and Bylaws, as amended of the Company, effective as of September 1, 2006 were previously filed on February 28, 2007 in Post-Effective Amendment No. 32 (File Nos. 33-47216, 811-6632) and are incorporated by reference herein. Bylaws, as amended of the Company, effective as of December 30, 2005 was previously filed on April 28, 2006 in Post-Effective Amendment No. 27 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. EXHIBIT 7 (a) Variable Annuity GMDB Reinsurance Agreement between Commonwealth Annuity and Life Insurance Company and (Canada Life) effective as of December 31, 2012 was filed in Post-Effective Amendment No. 34 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. (b) Variable Annuity GMDB Reinsurance Agreement between Commonwealth Annuity and Life Insurance Company and (Canada Life) effective as of March 31, 2012 was filed on April 25, 2013 in Post-Effective Amendment No. 34 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. (c) Recapture and Release Agreement by and between Commonwealth Annuity and Life Insurance Company and Ariel Capital Reinsurance Company Limited dated April 1, 2013 is filed in Post-Effective Amendment No. 35 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. (d) Coinsurance and Modified Coinsurance Agreement by and between Commonwealth Annuity and Life Insurance Company and Commonwealth Annuity and Life Reinsurance Company Limited dated May 1, 2013 is filed in Post-Effective Amendment No. 35 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. EXHIBIT 8 (a) Third Party Administrator Agreement dated April 1, 2013 between Commonwealth Annuity and Life Insurance Company, se2, Inc., and Security Distributors, Inc. was filed on April 25, 2013 in Post-Effective Amendment No. 34 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. (b) Work Assignment dated April 1, 2013 between Commonwealth Annuity and Life Insurance Company, se2, Inc., and Security Distributors, Inc. was filed on April 25, 2013 in Post-Effective Amendment No. 34 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. (c) Directors' Powers of Attorney are filed herewith. EXHIBIT 9 Opinion of Counsel was previously filed on April 25, 2008 in Registrant's Post-Effective Amendment No. 52 of Registration Statement Nos. 333-81019/811-7767, and is incorporated by reference. EXHIBIT 10 Consent of Independent Registered Public Accounting Firm is filed herewith. EXHIBIT 11 None. EXHIBIT 12 None. Exhibit 13 (a) Supplement dated April 29, 2012 Participation Agreements (SVS I and SVS II) dated May 1, 2002 with Deutsche Investment Management Americas Inc (formerly Scudder Investments Inc.) and DWS Investments Distributors, Inc. (formerly Scudder Distributors) was previously filed on April 25, 2012 in Post-Effective Amendment No. 33 (Registration Statement No. 33-39702/811-06293), and is incorporated by reference herein. Participation Agreements (SVS I and SVS II) dated May 1, 2002 with Scudder Investments Inc. and Scudder Distributors was previously filed on April 28, 2003 in Post-Effective Amendment No. 23 of Registration Statement No. 33-39702/811-6293, and is incorporated by reference herein. (b) Amendment dated April 15, 2011 to the Fund Participation Agreement with Dreyfus was previously filed on April 29, 2011 in Registrant's Post-Effective Amendment No. 17 (Registration Statement No. 333-81019/811-7767), and is incorporated by reference herein. Amendment dated December 15, 2001 with Dreyfus on April 28, 2003 in Post-Effective Amendment No. 11 of Registration Statement No. 33-09965/811-7767, and is incorporated by reference herein. Amendment dated December 19, 2000 with Dreyfus was previously filed on April 27, 2001 in Post-Effective Amendment No. 8 of Registration Statement No. 333-09965/811-7767, and is incorporated by reference herein. Participation Agreement with Dreyfus was previously filed on June 23, 1999 in Post-Effective Amendment No. 3 (Registration Statement Nos. 333-63091/811-7767), and is incorporated by reference herein. (c) Amendment dated June 1, 2002 with Alger was previously filed on April 28, 2003 in Post-Effective Amendment No. 8 of Registration Statement No. 333-81019/811-7767, and is incorporated by reference herein. Amendment dated May 31, 2000 with Alger was previously filed in April 27, 2001 in Post-Effective Amendment No. 4 of Registration Statement No. 333-81281/811-6293, and is incorporated by reference herein. Amendment dated May 30, 2000 with Alger was previously filed in December 2000 in Post-Effective Amendment No. 4 of Registration Statement No. 333-81281/811-6293, and is incorporated by reference herein. Participation Agreement with Alger was previously filed in April 2000 in Post-Effective Amendment No. 7 of Registration Statement No. 333-09965/811-7767, and is incorporated by reference herein. (d) Amendment dated October 31, 2001 to the Participation Agreement with INVESCO was previously filed in April 19, 2002 in Post-Effective Amendment No. 22 of Registration Statement No. 33-39702/811-6293, and is incorporated by reference herein. Amendment dated May 1, 2001 to the Participation Agreement with INVESCO was previously filed in April 19, 2001 in Post-Effective Amendment No. 19 of Registration Statement No. 33-39702/811-6293, and is incorporated by reference herein. Participation Agreement with INVESCO was previously filed on April 21, 2000 in Post-Effective Amendment No. 1 of Registration Statement No. 333-87099/811-6293 and is incorporated by reference herein. (e) Amendment No. 2 dated April 30, 2010 and Amendment No. 1 dated February 21, 2008 to the Amended and Restated Participation Agreement by and among AIM Variable Insurance Funds, Inc., A I M Distributors, Inc. and Commonwealth Annuity and Life Insurance Company dated July 31, 2007 were previously filed on April 29, 2011 in Post-Effective Amendment No. 32 (Registration Statement No. 33-39702/811-06293), and are incorporated by reference herein. Amended and Restated Participation Agreement by and among AIM Variable Insurance Funds, Inc., A I M Distributors, Inc. and Commonwealth Annuity and Life Insurance Company dated July 31, 2007 was previously filed on April 25, 2008 in Post-Effective Amendment No. 29 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. (f) Amendment dated May 1, 2012, Amendment dated May 1, 2011, Amendment No. 3 dated February 11, 2011, Amendment dated September 1, 2010 and Fund/SERV and Networking Supplement dated August 12, 2008 to the Amended and Restated Participation Agreement dated August 1, 2007 by and between Goldman Sachs Variable Insurance Trust, Goldman, Sachs & Co., and Commonwealth Annuity and Life Insurance Company was previously filed on April 25, 2012 in Post-Effective Amendment No. 33 (Registration Statement No. 33-39702/811-06293), and is incorporated by reference herein. Amendment dated May 1, 2011 to Participation Agreement, Amendment No. 1 to the Amended and Restated Participation Agreement dated August 1, 2007 by and between Goldman Sachs Variable Insurance Trust, Goldman, Sachs & Co., and Commonwealth Annuity and Life Insurance Company was previously filed on June 12, 2009 in Pre-Effective Amendment No. 1 (Registration Statement No. 33-157121/811-22024), and is incorporated by reference herein. Amended and Restated Participation Agreement dated August 1, 2007 by and between Goldman Sachs Variable Insurance Trust, Goldman, Sachs & Co., and Commonwealth Annuity and Life Insurance Company was previously filed on April 25, 2008 in Post-Effective Amendment No. 29 (Registration Statement No. 33-39702/811-6293), and is incorporated by reference herein. ITEM 25. DIRECTORS AND EXECUTIVE OFFICERS OF THE DEPOSITOR 7 World Trade Center 250 Greenwich Street New York, NY 10007 The principal business address of most of the following Directors and Officers** is: 82 Hopmeadow Street, Second Floor Simsbury, CT 06089. The principal business address of most of the following Directors and Officers*** is: 2250 Point Blvd, Ste 245 Aurora, IL 60506 The principal business address of the other following Directors and Officers is: 132 Turnpike Road, Suite 210 Southborough, MA 01772.
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY ---------------------------- -------------------------------------------------------------- Nicholas H. von Moltke* President and CEO Peter Seroka** Executive Vice President Scott D. Silverman SVP, GC and Corp Sec John J. Fowler SVP, CFO & Treasurer Kim Lee* EVP and Chief Risk Officer Joel Volcy SVP and COO Jill Nieskes SVP Jean M. Perrigo SVP-HR Brian Hendry* SVP Jonathan Hecht SVP Robert J. Egan VP and Chief Actuary Gilles M. Dellaert* EVP and CIO Jane S. Grosso Senior Vice President and Controller Kevin F. Leavey VP and Product Actuary Justin MacNeil VP-Tax Jason M. Roach VP-Operations Margot K. Wallin VP, SIO and CCO Robert E. Winawer Senior Vice President Sheila B. St. Hilaire VP, Asst Gen Counsel & Asst Corp Sec Gary Silber* VP and Asst General Counsel Virginia H. Johnson VP, Asst Gen Counsel & Asst Corp Sec Michael J. O'Neill*** VP, Marketing-403(b) Valerie F. Zablocki VP-Actuary Brian R. Salvi VP-Controllers Gregory Antonuccio VP-Controllers Shari Januszewski* VP Andrew Byers Vice President-Compliance Jason Izzo Vice President-Controllers
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT GLOBAL ATLANTIC FINANCIAL GROUP LIMITED These entities are directly or indirectly controlled by or under common control with the Company. [GLOBAL ATLANTIC FINANCIAL GROUP LIMITED]
----------------- | THE GOLDMAN | ------------- | SACHS GROUP, | | 3RD PARTY | | INC.(Delaware)| | INVESTORS | ----------------- ------------- | | | | ---22%--- --78%-- | | | | --------------------------- | GLOBAL ATLANTIC | | FINANCIAL GROUP LIMITED | | (Bermuda) | --------------------------- | | --100%--- | | ------------ | GLOBAL | | ATLANTIC | | FINANCIAL|----------------------- | LIFE | | | LIMITED | | | (Bermuda)| | ------------ | | | 100% | | | ------------ | | GLOBAL | | | ATLANTIC | | ---------------------------------| (FIN) |-------- 100% | | COMPANY | | | 100% |(Delaware)| | | | ------------ | | --------------- | | | | FORETHOUGHT | 21% | | | FINANCIAL | | | | | GROUP, | | | | | INC. | | | | | (Delaware) | | | | --------------- | | | | | | | | | | | --------------------------------------------------- | | | | | | | | | | 100% 100% 100% 100% | | ---------------- | | | | | | | COMMONWEALTH | --------------- --------------- ---------------- --------------- | | | RE MIDCO | | FORETHOUGHT | | FORETHOUGHT | | FORETHOUGHT | | FORETHOUGHT | | | | LIMITED | | CAPITAL | | INVESTMENT | | DISTRIBUTORS,| | SERVICES, | | | | (Bermuda) | | FUNDING, | | ADVISORS, | | LLC | | LLC | | | ---------------- | INC. | | LLC | | (Delaware) | | (Delaware) | | | | | (Delaware) | | (Indiana) | | | | | | | 100% --------------- --------------- --------------- --------------- | | | | | | | ---------------- | 79% | | | COMMONWEALTH | | | ----------------- | | ANNUITY | | | | COMMONWEALTH | | | AND LIFE | | |--| ANNUITY & | | | REINSURANCE | | | LIFE | | | COMPANY | ----------------------------------------------- | INSURANCE | | | LIMITED | | | | | COMPANY | | | (Bermuda) | | | | |(Massachusetts)| | ---------------- | | | ----------------- |--------------------- | | | | | | | | ------------^------------------------------------------- | | | | | | | | | | | ------------- 100% 5% 95% 5% 95% 100% 100% | 100% | EPOCH | | | | | | | | | | |SECURITIES,| ------------ --------------- --------------- ----------------- ------------ | ---| INC. | | FORELIFE | | FORETHOUGHT | | FORETHOUGHT | | FIRST | | ACCORDIA | | | |(Delaware) | | AGENCY, | | LIFE | | NATIONAL | | ALLMERICA | | LIFE AND | | | ------------- | INC. | | INSURANCE | | LIFE | | FINANCIAL | | ANNUITY | | | |(Indiana) | | COMPANY | | INSURANCE | | LIFE INSURANCE | | COMPANY | | 100% ------------ ------------ | (Indiana) | | COMPANY | | COMPANY | | (Iowa) | | | | GLOBAL | --------------- | (Texas) | |(Massachusetts) | ------------ | ---| ATLANTIC | | --------------- ------------------ | | | | RISK | | | | | | | ADVISORS,| 100% | | | | | L.P. | | 100% | | | |(Delaware)| | | | | | ------------ ------------------- --------------- | 10% | ------------ | FLIC PROPERTIES,| | FORETHOUGHT | | | 100% | GA RISK | | LLC | | HOLDINGS, | | | | | ADVISORS,| | (Indiana) | | LLC | | | ---| INC. | ------------------- | (Indiana) | | | | |(Delaware)| --------------- | | | ------------ | | | ------------ | | 100% | GLOBAL | --------------------------------------------------------------------- | | | ATLANTIC | | | | | | | | ---| RISK | 100% 100% 100% 100% 100% 90% | | | SERVICES,| | | | | | | | | | LLC | ------------- ------------ ---------- ----------- ------------ ------------------------ | |(Delaware)| | TAPIOCA | | GOTHAM | | CAPE | | CAPE | | CAPE | | GOTHAM ISSUER, | | ------------ | VIEW, LLC | | RE, INC. | | VERITY | | VERITY | | VERITY | | LLC | | ------------ |(Delaware) | |(Vermont) | | I,INC. | | II,INC. | | III,INC. | | (Delaware) | 100% | GLOBAL | ------------- ------------ | (Iowa) | | (Iowa) | | (Iowa) | ------------------------ | | ATLANTIC | ---------- ----------- ------------ ---| FINANCIAL| | COMPANY | |(Delaware)| ------------ ----------------- | THE GOLDMAN | ------------- | SACHS GROUP, | | 3RD PARTY | | INC.(Delaware)| | INVESTORS | ----------------- ------------- | | | | ---22%--- --78%-- | | | | --------------------------- | GLOBAL ATLANTIC | | FINANCIAL GROUP LIMITED | | (Bermuda) | --------------------------- | | -----------------------------100%--------------- | | -------------------------------- | ARIEL RE (HOLDINGS) LIMITED | -------------| (Bermuda) |------------------------------100%------- | -------------------------------- | | 100% | | | | | 100% | ------------- -----100%------100%----- | | | ARIEL P&C | | | | | | MIDCO | -------------- ----------------- ----------------------- ----------------- | LIMITED | | AFCL INC. | | ARIEL RE BDA | | ARROW CORPORATE | | ARIEL RE UK | | (Bermuda) | | (Delaware) | | LIMITED | | MEMBER HOLDINGS LLC | | LIMITED | ------------- -------------- | (Bermuda | | (Delaware) | | (UK employing | | | | coverholder) | ----------------------- | entity) | 100% 100% ----------------- | ----------------- | | | ----------- ------------- | | ACRC | | ARIEL | ------100%-----------100%----- | LIMITED | | FINANCIAL | | | |(Bermuda)| | COMPANY | | | ----------- | LIMITED | | | | (Bermuda) | -------------- -------------------- ------------- | ARIEL RE | | ARIEL INDEMNITY | | PROPERTY & | | LIMITED | | CASUALTY | |(Bermuda, 953(d)) | | (UK) | -------------------- -------------- | 100% | ------------------- | ARIEL CORPORATE | | MEMBER LIMITED | | (UK) | ------------------- | 100% | -------------------- | SYNDICATE 1910 | |(Lloyd's Syndicate)| ---------------------
------------------------------------------------------------------------------------------------------------------------------------ Legal Entity Name Business Description Parent 1 Ownership Interest Parent 2 Ownership Interest ------------------------------------------------------------------------------------------------------------------------------------ Accordia Life and Annuity Life insurance company Commonwealth Annuity 100% Company and Life Insurance Company ------------------------------------------------------------------------------------------------------------------------------------ ACRC Limited Writes collateralized Ariel P&C Midco Limited 100% reinsurance business for the P&C business of GAFGL ------------------------------------------------------------------------------------------------------------------------------------ AFCL Inc. Holdco for a Bermuda Ariel Re (Holdings) 100% derivative company Limited ------------------------------------------------------------------------------------------------------------------------------------ Ariel Corporate Member Corporate member of a Ariel Re Property & 100% Limited Lloyd's syndicate Casualty ------------------------------------------------------------------------------------------------------------------------------------ Ariel Financial Company Derivative company in AFCL Inc. 100% Limited Bermuda ------------------------------------------------------------------------------------------------------------------------------------ Ariel Indemnity Limited Reinsurance company Arrow Corporate Member 100% running off certain Holdings LLC Ariel Re transactions ------------------------------------------------------------------------------------------------------------------------------------ Ariel P&C Midco Limited Holdco for the P&C Ariel Re (Holdings) 100% business of GAFG Limited ------------------------------------------------------------------------------------------------------------------------------------ Ariel Re (Holdings) Holdco for the P&C Global Atlantic 100% Limited business of GAFG Financial Group Limited ------------------------------------------------------------------------------------------------------------------------------------ Ariel Re Bda Limited Coverholder for the Ariel Re (Holdings) 100% Lloyd's syndicate and Limited service company employing Bermuda staff ------------------------------------------------------------------------------------------------------------------------------------ Ariel Re Property & Holding company for Arrow Corporate Member 100% Casualty Lloyd's corporate Holdings LLC member ------------------------------------------------------------------------------------------------------------------------------------ Ariel Re UK Limited UK service company Ariel Re (Holdings) 100% employing UK staff Limited ------------------------------------------------------------------------------------------------------------------------------------ Arrow Corporate Member Holding company for Ariel Re (Holdings) 100% Holdings LLC Lloyd's corporate Limited member and Ariel Indemnity ------------------------------------------------------------------------------------------------------------------------------------ Cape Verity I, Inc. Captive reinsurer for Accordia Life and 100% ALAC business Annuity Company ------------------------------------------------------------------------------------------------------------------------------------ Cape Verity II, Inc. Captive reinsurer for Accordia Life and 100% ALAC business Annuity Company ------------------------------------------------------------------------------------------------------------------------------------ Cape Verity III, Inc. Captive reinsurer for Accordia Life and 100% ALAC business Annuity Company ------------------------------------------------------------------------------------------------------------------------------------ Commonwealth Annuity and Life insurance company Forethought Services, 79% Global Atlantic 21% Life Insurance Company LLC (Fin) Co ------------------------------------------------------------------------------------------------------------------------------------ Commonwealth Annuity and Reinsurance company Commonwealth Re Midco 100% Life Reinsurance Company Limited Limited ------------------------------------------------------------------------------------------------------------------------------------ Commonwealth Re Midco Intermediate holding Global Atlantic 100% Limited company for L&A Financial Life Limited business of GAFGL ------------------------------------------------------------------------------------------------------------------------------------ Epoch Securities, Inc. Registered Global Atlantic (Fin) 100% broker/dealer Co ------------------------------------------------------------------------------------------------------------------------------------ First Allmerica Financial Life insurance company Commonwealth Annuity 100% Life Insurance Company and Life Insurance Company ------------------------------------------------------------------------------------------------------------------------------------ FLIC Properties Title holder of Forethought Life 100% certain real estate Insurance Company properties on behalf of FLIC ------------------------------------------------------------------------------------------------------------------------------------ ForeLife Agency, Inc. Holder of Texas Forethought Services, 100% preneed permit LLC enabling FLIC to sell preneed life insurance in Texas ------------------------------------------------------------------------------------------------------------------------------------ Forethought Capital Insurance policy Forethought Financial 100% Funding, Inc assignment business Group, Inc (for deceased policyholders only) assignment business ------------------------------------------------------------------------------------------------------------------------------------ Forethought Distributors, Securities Forethought Financial 100% LLC Broker-dealer Group, Inc registered with SEC and FINRA ------------------------------------------------------------------------------------------------------------------------------------ Forethought Financial Forethought Group Global Atlantic (Fin) 100% Group, Inc holding company; Co parent company of life insurance holding company system ------------------------------------------------------------------------------------------------------------------------------------ Forethought Holdings, LLC Marketing Company for Forethought National 100% affiliates' products Life Insurance Company and services ------------------------------------------------------------------------------------------------------------------------------------ Forethought Investment Investment advisor Forethought Financial 100% Advisors, Inc. registered with SEC Group, Inc ------------------------------------------------------------------------------------------------------------------------------------ Forethought Life Issuer of life Commonwealth Annuity 95% Forethought 5% Insurance Company insurance and and Life Insurance Services, LLC annuities contracts Company ------------------------------------------------------------------------------------------------------------------------------------ Forethought National Life Issuer of life Commonwealth Annuity 95% Forethought 5% Insurance Company insurance and and Life Insurance Services, LLC reinsurer of annuity Company contracts ------------------------------------------------------------------------------------------------------------------------------------ Forethought Services, LLC Intermediate holding Forethought Financial 100% company of life Group, Inc insurance holding company system; paymaster for employees of FFG entities ------------------------------------------------------------------------------------------------------------------------------------ GA Risk Advisors, Inc. General partner of Global Atlantic (Fin) 100% Global Atlantic Risk Co Advisors, L.P. ------------------------------------------------------------------------------------------------------------------------------------ Global Atlantic (Fin) Intermediate holding Global Atlantic 100% Company company for L&A Financial Life Limited business of GAFGL ------------------------------------------------------------------------------------------------------------------------------------ Global Atlantic Financial Service company and Global Atlantic (Fin) 100% Company common employer for Co the L&A business of GAFG ------------------------------------------------------------------------------------------------------------------------------------ Global Atlantic Financial Ultimate parent and The Goldman Sachs 22% Third-party 78% Group Limited holding company Group, Inc. Investors ------------------------------------------------------------------------------------------------------------------------------------ Global Atlantic Financial Parent and holding Global Atlantic 100% Life Limited company for L&A Financial Group Limited business of GAFGL ------------------------------------------------------------------------------------------------------------------------------------ Global Atlantic Risk Reinsurance Global Atlantic (Fin) 100% Advisors, L.P. intermediary Co ------------------------------------------------------------------------------------------------------------------------------------ Global Atlantic Risk Insurance producer Global Atlantic (Fin) 100% Services, LLC and reinsurance Co intermediary ------------------------------------------------------------------------------------------------------------------------------------ Gotham Issuer, LLC "Limited Liability Accordia Life and 100% company with limited Annuity Company purpose of issuing notes related to Gotham Re, Inc. ------------------------------------------------------------------------------------------------------------------------------------ Gotham Re, Inc. Vermont special Accordia Life and 100% purpose financial Annuity Company insurance company ------------------------------------------------------------------------------------------------------------------------------------ Syndicate 1910 Lloyd's underwriting Ariel Corporate 100% syndicate Member Limited ------------------------------------------------------------------------------------------------------------------------------------ Tapioca View, LLC Limited liability Accordia Life and 100% company with limited Annuity Company purpose of making note payments and any applicable early termination fees related to Cape Verity I, LLC.
ITEM 27. NUMBER OF CONTRACT OWNERS As of February 28, 2014, there were 2,728 Contract holders of qualified Contracts and 3,907 Contract holders of non-qualified Contracts. ITEM 28. INDEMNIFICATION Article VI of the Company's Bylaws states: The Corporation shall indemnify to the full extent permitted by applicable law any person made or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person or such person's testator or intestate is or was a director, officer or employee of the Corporation or serves or served at the request of the Corporation any other enterprise as a director, officer or employee. Expenses, including attorneys' fees, incurred by any such person in defending any such action, suit or proceeding shall be paid or reimbursed by the Corporation promptly upon receipt by it of an undertaking of such person to repay such expenses if such person if finally adjudicated not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the Corporation or other enterprise. The Corporation shall accept such undertaking without reference to the financial ability of such person to make repayment. Notwithstanding the foregoing, no indemnification shall be provided for any person with respect to any matter as to which such person shall have been finally adjudicated not to have acted in good faith in the reasonable belief that the action was in best interests of the Corporation or other enterprise. No matter disposed of by settlement, compromise, the entry of a consent decree or the entry of any plea in a criminal proceeding, shall of itself be deemed an adjudication of not having acted in good faith in the reasonable belief that the action was in the best interest of the Corporation. The rights provided to any person by this by-law shall be enforceable against the Corporation by such person who shall be presumed to have relied upon it in serving or continuing to serve as director, officer or employee as provided above. No amendment of this by-law shall impair the rights of any person arising at any time with respect to events occurring prior to such amendment. ITEM 29. PRINCIPAL UNDERWRITERS (a) Epoch Securities, Inc. also acts as a principal underwriter for the following: - VEL Account, VEL II Account, VEL Account III, Separate Account SPL-D, Separate Account IMO, Select Account III, Inheiritage Account, Separate Accounts VA A, VA B, VA C, VA G, VA H, VA K, VA-P, Commonwealth Select Separate Account II, Group VEL Account, Separate Account KG, Separate Account KGC, Fulcrum Separate Account, Fulcrum Variable Life Separate Account, Separate Account FUVUL, Separate Account IMO, Commonwealth Select Separate Account, and Commonwealth Annuity Separate Account A of Commonwealth Annuity and Life Insurance Company - Inheiritage Account, VEL II Account, Separate Account I, Separate Account VA K, Separate Account VA-P, Allmerica Select Separate Account II, Group VEL Account, Separate Account KG, Separate Account KGC, Fulcrum Separate Account, and Allmerica Select Separate Account of First Allmerica Financial Life Insurance Company. (b) The principal business address of most of the following Directors and Officers is: 7 World Trade Center 250 Greenwich Street New York, NY 10007 The principal business address of the other following Directors and Officers* is: 132 Turnpike Road, Suite 210 Southborough, MA 01772. NAME POSITION OR OFFICE WITH UNDERWRITER ---- ----------------------------------- Gilles M. Dellaert Director Kathleen M. Redgate Director Hanben K. Lee Director and Executive Vice President Manu Sareen Senior Vice President Philip Sherrill Senior Vice President Scott D. Silverman* Senior Vice President and Secretary John Donahue Chief Financial Officer Joel Volcy* Chief Operating Officer and Vice President Nicholas H. von Moltke Director, President and Chief Executive Officer Margot Wallin* Chief Compliance Officer (c) As indicated in Part B (Statement of Additional Information), the following commissions and other compensation were received by Epoch Securities, Inc., directly or indirectly, from the Registrant during the Registrant's last fiscal year.
(2) NET UNDERWRITING (1) NAME OF PRINCIPAL DISCOUNTS AND (3) COMPENSATION ON (4) BROKERAGE (5) OTHER UNDERWRITER COMMISSIONS REDEMPTION COMMISSIONS COMPENSATION ---------------------- ------------------- ------------------- ------------- ------------ Epoch Securities, Inc. None None N/A N/A
As indicated in Part B (Statement of Additional Information) in response to Item 20(c), there were no commissions retained by Epoch Securities, Inc., the principal underwriter of the Contracts, for sales of variable contracts funded by the Registrant in 2013. No other commission or other compensation was received by Epoch Securities, Inc., directly or indirectly, from the Registrant during the Registrant's last fiscal year. ITEM 30. LOCATION OF ACCOUNTS AND RECORDS Each account, book or other document required to be maintained by Section 31(a) of the Investment Company Act of 1940 and Rules 31a 1 to 31a 3 thereunder are maintained for the Company by se2, Inc. at One Security Benefit Place, Topeka, Kansas. ITEM 31. MANAGEMENT SERVICES The Company provides daily unit value calculations and related services for the Company's separate accounts. ITEM 32. UNDERTAKINGS (a) The Registrant hereby undertakes to file a post-effective amendment to this registration statement as frequently as is necessary to ensure that the audited financial statements in the registration statement are never more than 16 months old for so long as payments under the variable annuity contracts may be accepted. (b) The Registrant hereby undertakes to include in the prospectus a toll-free telephone number that the Contract Owner can call to request a Statement of Additional Information. (c) The Registrant hereby undertakes to deliver a Statement of Additional Information and any financial statements promptly upon written or oral request, according to the requirements of Form N-4. (d) Insofar as indemnification for liability arising under the 1933 Act may be permitted to Directors, Officers and Controlling Persons of Registrant under any registration statement, underwriting agreement or otherwise, Registrant has been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a Director, Officer or Controlling Person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such Director, Officer or Controlling Person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. (e) The Company hereby represents that the aggregate fees and charges under the Contracts are reasonable in relation to the services rendered, expenses expected to be incurred, and risks assumed by the Company. ITEM 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b) PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM Registrant, a separate account of Commonwealth Annuity and Life Insurance Company ("Company"), states that it is (a) relying on Rule 6c-7 under the 1940 Act with respect to withdrawal restrictions under the Texas Optional Retirement Program ("Program") and (b) relying on the "no-action" letter (Ref. No. IP-6-88) issued on November 28, 1988 to the American Council of Life Insurance, in applying the withdrawal restrictions of Internal Revenue Code Section 403(b)(11). Registrant has taken the following steps in reliance on the letter: 1. Appropriate disclosures regarding the redemption restrictions imposed by the Program and by Section 403(b)(11) have been included in the prospectus of each registration statement used in connection with the offer of the Company's variable contracts. 2. Appropriate disclosures regarding the redemption restrictions imposed by the Program and by Section 403(b)(11) have been included in sales literature used in connection with the offer of the Company's variable contracts. 3. Sales Representatives who solicit participants to purchase the variable contracts have been instructed to specifically bring the redemption restrictions imposed by the Program and by Section 403(b)(11) to the attention of potential participants. 4. A signed statement acknowledging the participant's understanding of (I) the restrictions on redemption imposed by the Program and by Section 403(b)(11) and (ii) the investment alternatives available under the employer's arrangement will be obtained from each participant who purchases a variable annuity contract prior to or at the time of purchase. Registrant hereby represents that it will not act to deny or limit a transfer request except to the extent that a Service-Ruling or written opinion of counsel, specifically addressing the fact pattern involved and taking into account the terms of the applicable employer plan, determines that denial or limitation is necessary for the variable annuity contracts to meet the requirements of the Program or of Section 403(b). Any transfer request not so denied or limited will be effected as expeditiously as possible. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940 the Registrant certifies that it meets all of the requirements for effectiveness of this Post-Effective Amendment to the Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Southborough, and Commonwealth of Massachusetts, on the 11th day of April, 2014. SEPARATE ACCOUNT KG OF COMMONWEALTH ANNUITY AND LIFE INSURANCE COMPANY By: /s/ Scott D. Silverman ------------------------ Scott D. Silverman, Senior Vice President, General Counsel, and Secretary Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, this Post-Effective Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ John J. Fowler Senior Vice President, Chief Financial Officer and April 11, 2014 ---------------------------- Treasurer John J. Fowler Allan S. Levine* Chairman of the Board ---------------------------- Kathleen M. Redgate* Director ---------------------------- Nicholas H. von Moltke* Director, President and Chief Executive Officer ---------------------------- Richard V. Spencer* Director ---------------------------- Hanben K. Lee* Director, Executive Vice President and Chief Risk Officer ---------------------------- Gilles M. Dellaert* Director, Executive Vice President and Chief Investment ---------------------------- Officer Michael A. Reardon* Director ---------------------------- /s/ Jane S. Grosso Senior Vice President and Controller (Chief Accounting ---------------------------- Officer) Jane S. Grosso
*Scott D. Silverman, by signing his name hereto, does hereby sign this document on behalf of each of the above-named Directors and Officers of the Registrant pursuant to the Powers of Attorney dated April 8, 2014 duly executed by such persons. /s/ Scott D. Silverman ---------------------------- Scott D. Silverman, Attorney-in-Fact (333-81019) Scudder Plus EXHIBIT TABLE Exhibit 8 (c) Directors' Powers of Attorney Exhibit 10 Consent of Independent Registered Public Accounting Firm