-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N1pLwV6xAAW0x2jlddA4W4b44SXtos/48HnWHeyLLrIXn6OAKD+PN8HMrclEr9gL C6SknPsCpcjb1q1qYiGcwQ== 0000950144-03-000982.txt : 20030131 0000950144-03-000982.hdr.sgml : 20030131 20030131163227 ACCESSION NUMBER: 0000950144-03-000982 CONFORMED SUBMISSION TYPE: N-6/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20030131 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WRL SERIES LIFE ACCOUNT CENTRAL INDEX KEY: 0000778209 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-6/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-100993 FILM NUMBER: 03534901 BUSINESS ADDRESS: STREET 1: 570 CARILLON PARKWAY CITY: ST PETERSBURG STATE: FL ZIP: 33716 BUSINESS PHONE: 2722991800 MAIL ADDRESS: STREET 1: 201 HIGHLAND AVENUE CITY: LARGO STATE: FL ZIP: 33770 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WRL SERIES LIFE ACCOUNT CENTRAL INDEX KEY: 0000778209 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-6/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-04420 FILM NUMBER: 03534902 BUSINESS ADDRESS: STREET 1: 570 CARILLON PARKWAY CITY: ST PETERSBURG STATE: FL ZIP: 33716 BUSINESS PHONE: 2722991800 MAIL ADDRESS: STREET 1: 201 HIGHLAND AVENUE CITY: LARGO STATE: FL ZIP: 33770 N-6/A 1 g80413nv6za.txt WRL FREEDOM ELITE ADVISOR As filed with the Securities and Exchange Commission on January 31, 2003 Registration No. 333-100993/811-4420 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM N-6 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PRE-EFFECTIVE AMENDMENT NO. 1 (X) POST-EFFECTIVE AMENDMENT NO. ( ) and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 2 (X) (Check appropriate box or boxes) WRL SERIES LIFE ACCOUNT (Exact Name of Registrant) WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO (Name of Depositor) 570 Carillon Parkway St. Petersburg, FL 33716 (Address of Depositor's Principal Executive Offices) (Zip Code) Depositor's Telephone Number, including Area Code: (727) 299-1800 Thomas E. Pierpan, Esq. Senior Vice President, Assistant Secretary and General Counsel Western Reserve Life Assurance Co. of Ohio 570 Carillon Parkway St. Petersburg, FL 33716 (Name and Address of Agent for Service) Copy to: Mary Jane Wilson-Bilik, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Avenue, N.W. Washington, D.C. 20004-2415 APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after effectiveness of this registration statement. -------------------- The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. -------------------- TITLE OF SECURITIES BEING REGISTERED: Units of interest in a separate account under individual flexible premium variable life policies. PART A INFORMATION REQUIRED IN A PROSPECTUS PROSPECTUS February __ 2003 WRL FREEDOM ELITE ADVISOR(SM) ISSUED THROUGH WRL SERIES LIFE ACCOUNT BY WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO 570 CARILLON PARKWAY ST. PETERSBURG, FLORIDA 33716 1-800-851-9777 (727) 299-1800 AN INDIVIDUAL FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY This prospectus describes the WRL Freedom Elite Advisor(SM), a flexible premium variable life insurance policy (the "Policy"). You can allocate your Policy's cash value to the fixed account (which credits a specified guaranteed interest rate) and/or to the WRL Series Life Account, which invests through its subaccounts in portfolios of the AEGON/Transamerica Series Fund, Inc. - Initial Class (the "fund"). The portfolios of the fund available to you under this Policy are: [ ] Munder Net50 [ ] Dreyfus Mid Cap [ ] Van Kampen Emerging Growth [ ] PBHG/NWQ Value Select [ ] T. Rowe Price Small Cap [ ] PBHG Mid Cap Growth [ ] Transamerica U.S. Government Securities [ ] T. Rowe Price Dividend Growth [ ] Alger Aggressive Growth [ ] Transamerica Value Balanced [ ] Third Avenue Value [ ] Value Line Aggressive Growth [ ] LKCM Strategic Total Return [ ] American Century International [ ] Clarion Real Estate Securities [ ] Gabelli Global Growth [ ] Federated Growth & Income [ ] Great Companies--Global2 [ ] Janus Balanced [ ] Great Companies--Technology(SM) [ ] AEGON Bond [ ] Janus Growth [ ] Transamerica Money Market [ ] LKCM Capital Growth [ ] Marsico Growth [ ] Conservative Asset Allocation [ ] GE U.S. Equity [ ] Moderate Asset Allocation [ ] Great Companies--America(SM) [ ] Moderately Aggressive Asset Allocation [ ] Salomon All Cap [ ] Aggressive Asset Allocation [ ] Capital Guardian Value [ ] Transamerica Convertible Securities [ ] Capital Guardian U.S. Equity [ ] PIMCO Total Return [ ] Transamerica Growth Opportunities [ ] Transamerica Equity [ ] Janus Global [ ] J.P. Morgan Enhanced Index
If you already own a life insurance policy, it may not be to your advantage to buy additional insurance or to replace your Policy with the Policy described in this prospectus. And it may not be to your advantage to borrow money to purchase this Policy or to take withdrawals from another Policy you own to make premium payments under this Policy. A prospectus for the portfolios of the fund must accompany this prospectus. Certain portfolios may not be available in all states. Please read these documents before investing and save them for future reference. An investment in this Policy is not a bank deposit. The Policy is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. TABLE OF CONTENTS Policy Benefits/Risks Summary.......................................................................... 1 Policy Benefits.................................................................................... 1 The Policy in General........................................................................... 1 Flexible Premiums............................................................................... 1 Variable Death Benefit.......................................................................... 1 No Lapse Guarantee.............................................................................. 2 Cash Value...................................................................................... 2 Transfers....................................................................................... 2 Loans........................................................................................... 2 Cash Withdrawals and Surrenders................................................................. 3 Policy Risks....................................................................................... 3 Investment Risks................................................................................ 3 Risk of Lapse................................................................................... 3 Tax Risks (Income Tax and MEC).................................................................. 4 Loan Risks...................................................................................... 4 Portfolio Risks........................................................................................ 4 Fee Tables............................................................................................. 4 Range of Expenses for the Portfolios............................................................ 10 Western Reserve, The Separate Account, the Fixed Account and the Portfolios............................ 11 Western Reserve................................................................................. 11 The Separate Account............................................................................ 11 The Fixed Account............................................................................... 12 The Portfolios.................................................................................. 12 Addition, Deletion, or Substitution of Investments.............................................. 16 Your Right to Vote Portfolio Shares............................................................. 17 Charges and Deductions................................................................................. 17 Premium Charge.................................................................................. 17 Monthly Deduction............................................................................... 18 Mortality and Expense Risk Charge............................................................... 19 Transfer Charge................................................................................. 19 Change in Net Premium Allocation Charge......................................................... 20 Cash Withdrawal Charge.......................................................................... 20 Taxes........................................................................................... 20 Portfolio Expenses.............................................................................. 20 The Policy............................................................................................. 20 Ownership Rights................................................................................ 20 Modifying the Policy............................................................................ 21 Purchasing a Policy............................................................................. 21 Tax-Free "Section 1035" Exchanges............................................................... 21 When Insurance Coverage Takes Effect............................................................ 21 Backdating a Policy............................................................................. 23 Policy Features........................................................................................ 23 Premiums........................................................................................... 23 Allocating Premiums............................................................................. 23 Premium Flexibility............................................................................. 24 Planned Periodic Payments....................................................................... 24 Minimum Monthly Guarantee Premium............................................................... 24 No Lapse Period................................................................................. 24 Premium Limitations............................................................................. 25 Making Premium Payments......................................................................... 25
This Policy is not available in the State of New York. i Transfers.............................................................................................. 25 General......................................................................................... 25 Fixed Account Transfers......................................................................... 27 Conversion Rights............................................................................... 27 Dollar Cost Averaging........................................................................... 27 Asset Rebalancing Program....................................................................... 28 Third Party Asset Allocation Services........................................................... 28 Policy Values.......................................................................................... 29 Cash Value...................................................................................... 29 Net Surrender Value............................................................................. 29 Subaccount Value................................................................................ 29 Subaccount Unit Value........................................................................... 30 Fixed Account Value............................................................................. 30 Death Benefit.......................................................................................... 30 Death Benefit Proceeds.......................................................................... 30 Death Benefit................................................................................... 31 Effect of Cash Withdrawals on the Death Benefit................................................. 33 Choosing Death Benefit Options.................................................................. 33 Changing the Death Benefit Option............................................................... 33 Decreasing the Specified Amount................................................................. 33 Payment Options................................................................................. 34 Surrenders and Cash Withdrawals........................................................................ 34 Surrenders...................................................................................... 34 Cash Withdrawals................................................................................ 34 Canceling a Policy.............................................................................. 35 Loans.................................................................................................. 35 General......................................................................................... 35 Interest Rate Charged........................................................................... 36 Loan Reserve Interest Rate Credited............................................................. 36 Effect of Policy Loans.......................................................................... 36 Policy Lapse and Reinstatement......................................................................... 36 Lapse........................................................................................... 36 No Lapse Period................................................................................. 37 Reinstatement................................................................................... 37 Federal Income Tax Considerations...................................................................... 38 Tax Status of the Policy........................................................................ 38 Tax Treatment of Policy Benefits................................................................ 38 Special Rules for 403(b) Arrangements........................................................... 40 Other Policy Information............................................................................... 41 Benefits at Maturity............................................................................ 41 Payments We Make................................................................................ 41 Split Dollar Arrangements....................................................................... 42 Policy Termination.............................................................................. 42 Supplemental Benefits (Riders)......................................................................... 43 Children's Insurance Rider...................................................................... 43 Accidental Death Benefit Rider.................................................................. 43 Other Insured Rider............................................................................. 43 Disability Waiver Rider......................................................................... 44 Disability Waiver and Income Rider.............................................................. 44 Primary Insured Rider ("PIR") and Primary Insured Rider Plus ("PIR Plus")....................... 44 Living Benefit Rider (an Accelerated Death Benefit)............................................. 45 Additional Information................................................................................. 46 Sale of the Policies............................................................................ 46 Legal Proceedings............................................................................... 46 Financial Statements............................................................................ 46
ii Performance Data....................................................................................... 46 Rates of Return................................................................................. 46 Table of Contents of the Statement of Additional Information........................................... 49 Glossary .............................................................................................. 50 Appendix A - Wealth Indices of Investments in the U.S. Capital Market.................................. 53 Appendix B - Premium Expense Level Per Thousand (Based on the gender and rate class of the insured).... 55 Prospectus Back Cover.................................................................................. 57 Personalized Illustrations of Policy Benefits.................................................... 57 Inquiries........................................................................................ 57
iii POLICY BENEFITS/RISKS SUMMARY WRL FREEDOM ELITE ADVISORSM This summary describes the Policy's important benefits and risks. More detailed information about the Policy appears later in this prospectus and in the Statement of Additional Information ("SAI"). For your convenience, we have provided a Glossary at the end of this prospectus that defines certain words and phrases used in this prospectus. POLICY BENEFITS THE POLICY IN GENERAL - - The WRL Freedom Elite Advisor(SM) is an individual flexible premium variable life insurance policy. The Policy gives you the potential for long-term life insurance coverage with the opportunity for tax-deferred cash value accumulation. The Policy's cash value will increase or decrease depending on the investment performance of the subaccounts, the premiums you pay, the fees and charges we deduct, the interest we credit to the fixed account, and the effects of any Policy transactions (such as transfers, loans and partial withdrawals). - - The Policy is designed to be long-term in nature in order to provide significant life insurance benefits for you. However, purchasing this Policy involves certain risks. You should consider the Policy in conjunction with other insurance you own. THE POLICY IS NOT SUITABLE AS A SHORT-TERM SAVINGS VEHICLE. - - Fixed Account. You may place money in the fixed account where it earns at least 3% annual interest. We may declare higher rates of interest, but are not obligated to do so. The fixed account is part of our general account. - - Separate Account. You may direct the money in your Policy to any of the subaccounts of the separate account. Each subaccount invests exclusively in one of the portfolios listed on the cover of this prospectus. Money you place in a subaccount is subject to investment risk and its value will vary each day according to the investment performance of the portfolios in which the subaccounts invest. - - Supplemental Benefits (Riders).Supplemental riders are available under the Policy. We deduct charges for these riders from cash value as part of the monthly deduction. These riders may not be available in all states. FLEXIBLE PREMIUMS - - You select a premium payment plan but the plan is flexible - you are not required to pay premiums according to the plan. You can change the frequency and amount, within limits, and can skip premium payments. Unplanned premiums may be made, within limits. Premium payments must be at least $50. - - You increase your risk of lapse if you do not regularly pay premiums at least as large as the current minimum monthly guarantee premium. Under certain circumstances, extra premiums may be required to prevent lapse. - - Once we deliver your Policy, the FREE-LOOK PERIOD begins. You may return the Policy during this period and receive a refund. Depending on the laws of the state governing your Policy (usually the state where you live), we will either allocate your net premium to the accounts you indicated on your application, or we will place your net premium in the reallocation account until the reallocation date as shown on your Policy schedule page. VARIABLE DEATH BENEFIT - - If the insured dies while the Policy is in force, we will pay a death benefit to the beneficiary(ies). The amount of the death benefit depends on the specified amount of insurance you select, the death benefit option you chose, and any additional insurance provided by riders you purchase. - - CHOICE AMONG DEATH BENEFIT OPTIONS.You must choose one of three death benefit options. We offer the following: - Option A is the greater of: - the current specified amount, or - a specified percentage, multiplied by the Policy's cash value on the date of the insured's death. - Option B is the greater of: - the current specified amount, plus the Policy's cash value on the date of the insured's death, or - a specified percentage, multiplied by the Policy's cash value on the date of the insured's death. 1 - Option C is the greater of: - the amount payable under Option A, or - the current specified amount, multiplied by an age-based "factor," plus the Policy's cash value on the date of the insured's death. We will reduce the death benefit proceeds by any outstanding loan amount, including accrued interest, and any due and unpaid charges. We will increase the death benefit proceeds by any additional insurance benefits you add by rider. - - Under current tax law, the death benefit should generally be U.S. federal income tax free to the beneficiary. Other taxes, such as estate taxes, may apply. - - CHANGE IN DEATH BENEFIT OPTION AND SPECIFIED AMOUNT. After the third Policy year and once each Policy year thereafter, you may make one of the following changes: change the death benefit option or decrease the specified amount. We reserve the right to limit any decrease in specified amount to no more than 20% of the specified amount prior to the decrease. The new specified amount cannot be less than the minimum specified amount as shown in your Policy. NO LAPSE GUARANTEE - - We guarantee that your Policy will not lapse until the no lapse date shown on your Policy schedule page, so long as on any Monthiversary you have paid total premiums (MINUS any cash withdrawals, MINUS any outstanding loan amount and MINUS any accrued loan interest) that equal or exceed the sum of the minimum monthly guarantee premiums in effect for each month since the Policy date up to and including the current month. If you take a cash withdrawal or a loan, or if you decrease your specified amount or if you add, increase or decrease a rider, you may need to pay additional premiums in order to keep the no lapse guarantee in place. CASH VALUE - - Cash value is the starting point for calculating important values under the Policy, such as net surrender value and the death benefit. There is no guaranteed minimum cash value. The Policy may lapse if you do not have sufficient cash value in the Policy to pay the monthly deductions and/or any outstanding loan amount(s) and accrued loan interest. - - The Policy will not lapse during the no lapse period so long as you have paid sufficient premiums. TRANSFERS - - You can transfer cash value among the subaccounts and the fixed account. You may make transfers in writing, by telephone, by fax or electronically through our website. - - We charge a $25 transfer processing fee for each transfer after the first 12 transfers in a Policy year. - - Dollar cost averaging and asset rebalancing programs are available. - - You may make one transfer per Policy year from the fixed account, and we must receive at our office your request to transfer from the fixed account within 30 days after a Policy anniversary unless you select dollar cost averaging from the fixed account. LOANS - - After the first Policy year (as long as your Policy is in force), you may take a loan against the Policy up to 90% of the cash value MINUS any outstanding loan amount, including accrued interest. We may permit a loan prior to the first anniversary for Policies issued pursuant to 1035 Exchanges. The minimum loan amount is generally $500. - - Prior to the 10th Policy year, we currently charge 3.75% interest annually, payable in arrears, on any outstanding loan amount. This charge is guaranteed not to exceed 4.0%. Interest not paid when due is added to the amount of the loan to be repaid. - - To secure the loan, we transfer an amount equal to your loan from your cash value to a loan reserve account. The loan reserve account is part of the fixed account. We will credit 3.0% interest annually on amounts in the loan reserve account. - - After the 10th Policy year, you may borrow at preferred loan rates an amount equal to the cash value MINUS total premiums paid (reduced by any cash withdrawals), MINUS any outstanding loan amount and MINUS any accrued loan interest. We currently charge 3.0% interest on preferred loans. THIS RATE IS NOT GUARANTEED. 2 - - Federal income taxes and a penalty tax may apply to loans you take against the Policy. The federal tax consequence of loans with preferred rates is uncertain. CASH WITHDRAWALS AND SURRENDERS - - You may take one withdrawal of cash value per Policy year after the first Policy year. The amount of the withdrawal may be limited to: - at least $500 and the remaining net surrender value following a withdrawal may not be less than $500. - - We will deduct a processing fee equal to $25 or 2% of the amount you withdraw (whichever is less) from the withdrawal, and we will pay you the balance. - - A cash withdrawal will reduce the death benefit by at least the amount of the withdrawal. - - You may fully surrender the Policy at any time before the insured's death or the maturity date. Life insurance coverage will end. You will receive the net surrender value (cash value MINUS any outstanding loan amount and accrued loan interest). There are no surrender charges on this Policy. - - A cash withdrawal will reduce the cash value, so it will increase the risk that the Policy will lapse. A cash withdrawal may also increase the risk that the no lapse period will not remain in effect. - - Federal income taxes and a penalty tax may apply to cash withdrawals and surrenders. POLICY RISKS INVESTMENT RISKS If you invest your Policy's cash value in one or more subaccounts, then you will be subject to the risk that investment performance of the subaccounts will be unfavorable and that the cash value in your Policy will decrease. You could lose everything you invest and your Policy could lapse without value, unless you pay additional premiums. If you allocate premiums to the fixed account, then we credit your fixed account value with a declared rate of interest. You assume the risk that the interest rate on the fixed account may decrease, although it will never be lower than a guaranteed minimum annual effective rate of 3%. RISK OF LAPSE If your Policy fails to meet certain conditions, we will notify you that the Policy has entered a 61-day grace period and will lapse without value unless you make a sufficient payment during the grace period. Your Policy contains a no lapse period. Your Policy will not lapse before the no lapse date stated in your Policy, as long as you pay sufficient minimum guarantee premiums. If you do not pay sufficient premiums, you will automatically lose the no lapse guarantee and you will increase the risk that your Policy will lapse. If you take a cash withdrawal or Policy loan, if you decrease the specified amount, or if you add, increase or decrease a rider, you will increase the risk of losing the no lapse guarantee. We deduct the total amount of your withdrawals and any outstanding loan amount, including accrued loan interest, from your premiums paid when we determine whether your premium payments are high enough to keep the no lapse period in effect. You will lessen the risk of Policy lapse if you keep the no lapse period in effect. Before you take a cash withdrawal, loan, decrease the specified amount or add, increase or decrease a rider, you should consider carefully the effect it will have on the no lapse guarantee. After the no lapse period, your Policy may lapse if loans, cash withdrawals, the monthly deductions, and insufficient investment returns reduce the net surrender value to zero. The Policy will enter a grace period if on any Monthiversary the net surrender value (that is, the cash value minus any outstanding loan amount and accrued loan interest) is not enough to pay the monthly deduction due. A Policy lapse may have adverse tax consequences. 3 You may reinstate this Policy within five years after it has lapsed (and prior to the maturity date), if the insured meets the insurability requirements and you pay the amount we require. TAX RISKS (INCOME TAX AND MEC) We expect that the Policy will generally be deemed a life insurance contract under federal tax law, and that the death benefit paid to the beneficiary will generally not be subject to federal income tax. However, due to lack of guidance, there is less certainty in this regard with respect to Policies issued on a substandard basis. Depending on the total amount of premiums you pay, the Policy may be treated as a modified endowment contract ("MEC") under federal tax laws. If a Policy is treated as a MEC, partial withdrawals, surrenders, pledges and loans will be taxable as ordinary income to the extent there are earnings in the Policy. In addition, a 10% penalty tax may be imposed on cash withdrawals, surrenders, pledges and loans taken before you reach age 59 1/2. If a Policy is not treated as a MEC, partial surrenders and withdrawals will not be subject to tax to the extent of your investment in the Policy. Amounts in excess of your investment in the Policy, while subject to tax as ordinary income, will not be subject to a 10% penalty tax. You should consult a qualified tax advisor for assistance in all tax matters involving your Policy. LOAN RISKS A Policy loan, whether or not repaid, will affect cash value over time because we subtract the amount of the loan from the subaccounts and the fixed account and place that amount in the loan reserve as collateral. We then credit a fixed interest rate of 3.0% to the loan collateral. As a result, the loan collateral does not participate in the investment results of the subaccounts and may not continue to receive the current interest rates credited to the unloaned portion of the fixed account. The longer the loan is outstanding, the greater the effect is likely to be. Depending on the investment results of the subaccounts and the interest rates credited to the fixed account, the effect could be favorable or unfavorable. We also currently charge interest on Policy loans at a rate of 3.75%, payable in arrears. This charge will not exceed 4.0%. Interest is added to the amount of the loan to be repaid. A Policy loan could make it more likely that a Policy would lapse. A Policy loan will increase the risk that the no lapse period will not remain in effect. There is also a risk that if the loan, insurance charges and unfavorable investment experience reduce your net surrender value and the no lapse period is no longer in effect, then the Policy will lapse. Adverse tax consequences may result. If a loan from a Policy is outstanding when the Policy is canceled or lapses, or if a loan is taken out and the Policy is a MEC, then the amount of the outstanding indebtedness will be taxed as if it were a withdrawal from the Policy. Moreover, the tax treatment of loans with preferred rates is uncertain. PORTFOLIO RISKS A comprehensive discussion of the risks of each portfolio may be found in each portfolio's prospectus. Please refer to the prospectuses for the portfolios for more information. There is no assurance that any of the portfolios will achieve its stated investment objective. FEE TABLES The following tables describe the fees and expenses that you will pay when buying and owning the Policy. If the amount of a charge depends on the personal characteristics of the insured or the owner, then the fee table lists the minimum and maximum charges we assess under the Policy, and the fees and charges of a typical policyowner with the characteristics set forth below. These charges may not be typical of the charges you will pay. The first table describes the fees and expenses that you will pay when buying the Policy, paying premiums, making cash withdrawals from the Policy or transferring Policy cash value among the subaccounts and the fixed account. 4
- ------------------------------------------------------------------------------------------------------------------------------- TRANSACTION FEES - ------------------------------------------------------------------------------------------------------------------------------- AMOUNT DEDUCTED CHARGE WHEN CHARGE IS GUARANTEED CURRENT DEDUCTED CHARGE CHARGE - ------------------------------------------------------------------------------------------------------------------------------- PREMIUM CHARGE Upon payment of each 10.0% of cumulative 10.0% of cumulative premiums Premium Expense Charge premium premiums paid in a Policy paid in a Policy year up to year up to the premium the premium expense expense level;(1) and level;(1) and 3.0% of premiums in excess 3.0% of premiums in excess of of the premium expense the premium expense level(1) level (1) during the first during the first ten Policy ten Policy years; 3.0% on years; 3.0% on all premiums all premiums in years 11+ in years 11+ - ------------------------------------------------------------------------------------------------------------------------------- CASH WITHDRAWAL CHARGE(2) Upon withdrawal 2.0% of the amount 2.0% of the amount withdrawn, withdrawn, not to exceed not to exceed $25 $25 - ------------------------------------------------------------------------------------------------------------------------------- TRANSFER CHARGE Upon transfer $25 First 12 transfers in a Policy year are free, $25 for each subsequent transfer - ------------------------------------------------------------------------------------------------------------------------------- CHANGE IN NET PREMIUM Upon change of $25 None ALLOCATION CHARGE allocation instructions for premium payments - -------------------------------------------------------------------------------------------------------------------------------
- ---------------------------- (1) The premium expense level is set on the Policy date and is based on an insured's issue age, gender and underwriting class. (2) When we incur the expense of expedited delivery of your partial withdrawal or complete surrender payment, we will assess the following charges: $20 for overnight delivery ($30 for Saturday delivery); and $25 for wire service. 5 The table below describes the fees and expenses that you will pay periodically during the time that he or she owns the Policy, not including portfolio fees and expenses.
- ------------------------------------------------------------------------------------------------------------------------------- PERIODIC CHARGES OTHER THAN PORTFOLIO OPERATING EXPENSES - ------------------------------------------------------------------------------------------------------------------------------- AMOUNT DEDUCTED CHARGE WHEN CHARGE IS GUARANTEED CURRENT DEDUCTED CHARGE CHARGE - ------------------------------------------------------------------------------------------------------------------------------- MONTHLY POLICY CHARGE Monthly on the Policy $10.00 per month $7.00 per month date and on each Monthiversary - ------------------------------------------------------------------------------------------------------------------------------- COST OF INSURANCE (3) Monthly on the Policy date and on each - Minimum Charge Monthiversary until $.06 per $1,000 monthly of $.05 per $1,000 monthly of the insured reaches net amount at risk(5)(female, net amount at risk (female, age 100 age 10, juvenile) age 10, juvenile) - Maximum Charge(4) $83.33 per $1,000 monthly of $47.45 per $1,000 monthly of net amount at risk (male, net amount at risk (male, - Charge for a male age 99, standard tobacco age 99, standard tobacco use) insured, issue age use) 30, in the ultimate select non-tobacco $0.11 per $1,000 monthly of use class, in Policy $0.12 per $1,000 monthly of net amount at risk per month year 1 net amount at risk per month - ------------------------------------------------------------------------------------------------------------------------------- MORTALITY AND EXPENSE RISK Daily Annual rate of 0.90% of Annual rate of 0.90% for CHARGE daily net assets of each Policy years 1- 15 and 0.75% subaccount in which you are for Policy years 16+ of invested daily net assets of each subaccount in which you are invested - ------------------------------------------------------------------------------------------------------------------------------- OPTIONAL RIDER CHARGES:(6) - -------------------------------------------------------------------------------------------------------------------------------
- --------------------------- (3) Cost of insurance charges are based on the insured's issue age, gender, underwriting class, the Policy year and net amount at risk. The cost of insurance charges shown in the table may not be representative of the charges you will pay. The rate you will pay will increase each year with the age of the insured. Your Policy's schedule page will indicate the guaranteed cost of insurance charge applicable to your Policy. You can obtain more information about your cost of insurance charges by contacting your agent. (4) Maximum charge does not reflect any additional rating. This maximum charge is based on an insured's issue age, gender and underwriting class. (5) The net amount at risk equals the death benefit on a Monthiversary, divided by 1.0024663, minus the cash value on such Monthiversary. (6) Optional rider charges are based on the insured's issue age, gender, underwriting class, the Policy year, the rider's specified amount, the Base Policy's specified amount, and/or the net amount at risk. Charges based on actual age may increase as the insured ages. The rider charges shown in the table may not be representative of the charges you will pay. The rider will indicate the maximum guaranteed rider charges applicable to your Policy. You can obtain more information about these rider charges by contacting your agent. 6
- ---------------------------------------------------------------------------------------------------------------------------------- PERIODIC CHARGES OTHER THAN PORTFOLIO OPERATING EXPENSES - ---------------------------------------------------------------------------------------------------------------------------------- AMOUNT DEDUCTED CHARGE WHEN CHARGE IS GUARANTEED CURRENT DEDUCTED CHARGE CHARGE - --------------------------------------------------------------------------------------------------------------------------------- Accidental Death Benefit Monthly on the Policy Charge assessed per $1,000 Charge assessed per $1,000 Rider (7) date and on each of rider face amount each of rider face amount each Monthiversary month: month: $0.10 per $1,000 monthly $0.10 per $1,000 monthly - Minimum Charge (attained ages 15 - 45, (attained ages 15 - 45, male and female) male and female) - Maximum Charge $0.18 per $1,000 monthly $0.18 per $1,000 monthly (attained ages 66 - 69, (attained ages 66 - 69, male and female) male and female) - Charge for a male $0.10 per $1,000 monthly $0.10 per $1,000 monthly insured, issue age 30, in Policy year 1 - ---------------------------------------------------------------------------------------------------------------------------------- Disability Waiver Monthly on the Policy Charge assessed per $1,000 Charge assessed per $1,000 Rider(7)(8) date and on each of base Policy specified of base Policy specified Monthiversary amount each month: amount each month: $0.03 per $1,000 monthly $0.03 per $1,000 monthly - Minimum Charge (issue ages 15 - 25, male) (issue ages 15 - 25, male) - Maximum Charge $0.39 per $1,000 monthly $0.39 per $1,000 monthly (issue age 55, female) (issue age 55, female) - Charge for a male $0.04 per $1,000 monthly $0.04 per $1,000 monthly insured, issue age 30, in Policy year 1 - ----------------------------------------------------------------------------------------------------------------------------------
- ---------------------------- (7) The initial charge for this rider is based on the insured's attained age and gender when the rider is added to the Policy. This charge does not vary once it is added to the Policy. (8) Disability Waiver charges shown are for base Policy only (no riders and benefits). The addition of other riders and benefits would increase these charges. 7
- ---------------------------------------------------------------------------------------------------------------------------------- PERIODIC CHARGES OTHER THAN PORTFOLIO OPERATING EXPENSES - ---------------------------------------------------------------------------------------------------------------------------------- AMOUNT DEDUCTED CHARGE WHEN CHARGE IS GUARANTEED CURRENT DEDUCTED CHARGE CHARGE - --------------------------------------------------------------------------------------------------------------------------------- Disability Waiver and Monthly on the Policy Charge assessed per $1,000 Charge assessed per $1,000 Income Rider (7) date and on each of base Policy specified of base Policy specified Monthiversary amount each month: amount each month: - Minimum Charge $0.20 per $1,000 monthly $0.20 per $1,000 monthly (issue ages 19 - 27, male) (issue ages 19 - 27, male) - Maximum Charge $0.86 per $1,000 monthly $0.86 per $1,000 monthly (issue age 55, male) (issue age 55, male) - Charge for a male $0.23 per $1,000 monthly $0.23 per $1,000 monthly insured, issue age 30, in Policy year 1 - ---------------------------------------------------------------------------------------------------------------------------------- Children's Insurance Monthly on Policy Charge assessed per $1,000 Charge assessed per $1,000 Rider date and on each of rider face amount each of rider face amount each Monthiversary month: month: $0.60 per $1,000 monthly $0.60 per $1,000 monthly (attained ages 0 - 25, (attained ages 0 - 25, male and female) male and female) - ---------------------------------------------------------------------------------------------------------------------------------- Other Insured Rider(9) Monthly on Policy Charge assessed per $1,000 Charge assessed per $1,000 of date and on each of rider face amount each rider face amount each month: Monthiversary month: - Minimum Charge $0.06 per $1,000 monthly $0.06 per $1,000 monthly (female, age 10, juvenile) (female, age 10, juvenile) - Maximum Charge $83.33 per $1,000 monthly $70.83 per $1,000 monthly (male, female, attained (male, attained age 99, age 99, all underwriting standard tobacco use class) - Charge for a male $0.12 per $1,000 monthly $0.12 per $1,000 monthly insured, issue age 30, in the ultimate select non-tobacco use class, in Policy year 1 - ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------- (9) Charges for this rider are based on the insured's age, gender, underwriting class and rider face amount. The rate you will pay for this rider will increase each year as the insured ages. 8
- ---------------------------------------------------------------------------------------------------------------------------------- PERIODIC CHARGES OTHER THAN PORTFOLIO OPERATING EXPENSES - ---------------------------------------------------------------------------------------------------------------------------------- AMOUNT DEDUCTED CHARGE WHEN CHARGE IS GUARANTEED CURRENT DEDUCTED CHARGE CHARGE - ---------------------------------------------------------------------------------------------------------------------------------- Primary Insured Rider (9) Monthly on Policy date Charge assessed per $1,000 Charge assessed per $1,000 of and on each of rider face amount each rider face amount each month: Monthiversary month: - Minimum Charge $0.06 per $1,000 monthly $0.05 per $1,000 monthly (female, age 10, juvenile) (female, age 10, juvenile) - Maximum Charge $24.86 per $1,000 monthly $20.06 per $1,000 monthly (male, attained age 94, (male, attained age 94, standard tobacco user) standard tobacco user) - Charge for a male $0.12 per $1,000 monthly $0.10 per $1,000 monthly insured, issue age 30, in the ultimate select non-tobacco use class, in Policy year 1 - ---------------------------------------------------------------------------------------------------------------------------------- Primary Insured Plus Monthly on Policy date Charge assessed per $1,000 Charge assessed per $1,000 of Rider (9) and on each of rider face amount each rider face amount each month: Monthiversary month: - Minimum Charge $0.08 per $1,000 monthly $0.03 per $1,000 monthly (female, age 18, ultimate select (band 2(10), female, issue age 29 non-tobacco use) ultimate select non-tobacco use, Policy year 1) - Maximum Charge $18.46 per $1,000 monthly $14.91 per $1,000 monthly (male, attained age 89, (band 1(11) male, standard standard tobacco use) tobacco use, issue age 74, Policy year 16) - Charge for a male $0.12 per $1,000 monthly $0.06 per $1,000 monthly insurer, issue age (band 1) 30, in the ultimate select non-tobacco use class, in Policy year 1 - ---------------------------------------------------------------------------------------------------------------------------------- Living Benefit Rider No charge None None - ----------------------------------------------------------------------------------------------------------------------------------
- ---------------------------- (10) Band 2 applies to rider face amounts of $1,000,000 and above. (11) Band 1 applies to rider face amounts of $25,000 - $999,999. 9 The next 2 tables describe the portfolio fees and expenses that you will pay periodically during the time that you own the Policy. The fees and expenses are for the fiscal year ended December 31, 2001. Expenses of the portfolios may be higher or lower in the future. More detail concerning each portfolio's fees and expenses is contained in the prospectus for each portfolio. The first table shows the minimum and maximum fees and expenses (before waiver or reimbursement) charged by any of the portfolios for the fiscal year ended December 31, 2001. RANGE OF EXPENSES FOR THE PORTFOLIOS
- -------------------------------------------------------------------------------------------------------------------------------- MINIMUM MAXIMUM ------- ------- - -------------------------------------------------------------------------------------------------------------------------------- TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES (total of all 0 .39% - 5.89% expenses that are deducted from portfolio assets, including management fees, 12b-1 fees, and other expenses) - -------------------------------------------------------------------------------------------------------------------------------- NET ANNUAL TOTAL PORTFOLIO OPERATING EXPENSES (total of all 0.39% - 1.50% expenses that are deducted from portfolio assets, including management fees, 12b-1 fees, and other expenses, after contractual waiver of fees and expenses) - --------------------------------------------------------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES(1) (as a percentage of average portfolio assets) This table shows the fees and expenses charged by each portfolio. More detail concerning each portfolio's fees and expenses is contained in the fund prospectuses.
GROSS FEES TOTAL PORTFOLIO AND EXPENSES NET TOTAL MANAGEMENT OTHER RULE 12b-1 ANNUAL WAIVED OR PORTFOLIO PORTFOLIO FEES EXPENSES FEES(2) EXPENSES REIMBURSED(3) EXPENSES - --------- ---- -------- ---- -------- ---------- -------- Munder Net50 0.90% 0.82% N/A 1.72% 0.72% 1.00% Van Kampen Emerging Growth 0.80% 0.12% N/A 0.92% N/A 0.92% T. Rowe Price Small Cap 0.75% 0.30% N/A 1.05% 0.05% 1.00% PBHG Mid Cap Growth 0.87% 0.21% N/A 1.08% 0.08% 1.00% Alger Aggressive Growth 0.80% 0.17% N/A 0.97% N/A 0.97% Third Avenue Value 0.80% 0.12% N/A 0.92% N/A 0.92% Value Line Aggressive Growth 0.80% 0.76% N/A 1.56% 0.56% 1.00% American Century International 1.00% 0.63% N/A 1.63% 0.13% 1.50% Janus Global 0.80% 0.15% N/A 0.95% N/A 0.95% Gabelli Global Growth 1.00% 0.28% N/A 1.28% 0.08% 1.20% Great Companies--Global(2) 0.80% 0.79% N/A 1.59% 0.59% 1.00% Great Companies--Technology(SM) 0.80% 0.19% N/A 0.99% N/A 0.99% Janus Growth 0.80% 0.09% N/A 0.89% N/A 0.89% LKCM Capital Growth 0.80% 2.38% N/A 3.18% 2.18% 1.00% Marsico Growth 0.90% 0.31% N/A 1.21% 0.21% 1.00% GE U.S. Equity 0.80% 0.14% N/A 0.94% N/A 0.94% Great Companies--America(SM) 0.80% 0.09% N/A 0.89% N/A 0.89% Salomon All Cap 0.85% 0.15% N/A 1.00% N/A 1.00% Dreyfus Mid Cap 0.85% 0.49% N/A 1.34% 0.34% 1.00% PBHG/NWQ Value Select 0.80% 0.14% N/A 0.94% N/A 0.94% T. Rowe Price Dividend Growth 0.90% 0.28% N/A 1.18% 0.18% 1.00% Transamerica Value Balanced 0.75% 0.11% N/A 0.86% N/A 0.86% LKCM Strategic Total Return 0.80% 0.09% N/A 0.89% N/A 0.89% Clarion Real Estate Securities 0.80% 0.33% N/A 1.13% 0.13% 1.00% Federated Growth & Income 0.75% 0.11% N/A 0.86% N/A 0.86% Janus Balanced(4) 0.90% 0.50% N/A 1.40% N/A 1.40% AEGON Bond 0.45% 0.10% N/A 0.55% N/A 0.55% Transamerica Money Market(5) 0.35% 0.04% N/A 0.39% N/A 0.39% Conservative Asset Allocation(4)(6) 0.10% 1.26% N/A 1.36% N/A 1.36% Moderate Asset Allocation(4)(6) 0.10% 1.25% N/A 1.35% N/A 1.35% Moderately Aggressive Asset Allocation(4)(6) 0.10% 1.23% N/A 1.33% N/A 1.33% Aggressive Asset Allocation(4)(6) 0.10% 1.22% N/A 1.32% N/A 1.32%
10 Transamerica Convertible Securities(4) 0.80% 0.50% N/A 1.30% N/A 1.30% PIMCO Total Return(4) 0.70% 0.50% N/A 1.20% N/A 1.20% Transamerica Equity 0.75% 0.16% N/A 0.91% 0.06% 0.85% Transamerica Growth Opportunities 0.85% 5.04% N/A 5.89% 4.69% 1.20% Transamerica U.S. Government Securities 0.65% 0.10% N/A 0.75% N/A 0.75% J.P. Morgan Enhanced Index 0.75% 0.12% N/A 0.87% N/A 0.87% Capital Guardian Value 0.85% 0.09% N/A 0.94% N/A 0.94% Capital Guardian U.S. Equity 0.85% 0.23% N/A 1.08% N/A 1.08%
(1) The fee table information relating to the portfolios was provided to Western Reserve by the fund. Western Reserve has not independently verified such information. (2) Effective January 1, 1997, the Board of the fund authorized the fund to charge each portfolio of the fund an annual Rule 12b-1 fee of up to 0.15% of each portfolio's average daily net assets. However, the fund will not deduct the fee from any portfolio before April 30, 2003. You will receive advance written notice if a Rule 12b-1 fee is to be deducted. See the fund prospectus for more details. (3) The portfolio's investment adviser, AEGON/Transamerica Fund Advisers, Inc. ("ATFA"), has voluntarily agreed to waive a portion of its advisory fees and/or assume certain portfolio expenses. The expenses shown in the Annual Portfolio Operating Expenses table are the expenses paid for 2002. The table includes the Gross Total Portfolio Annual Expenses, less the Fees and Expenses Waived or Reimbursed, as per ATFA's agreement. This waiver is in effect through April 30, 2004, at which time ATFA may or may not agree to continue the waiver. ATFA is entitled to reimbursement by each portfolio of fees waived or reduced on such portfolio's behalf during any of the previous 36 months, beginning on the date of the expense limitation agreement, if on any day the estimated annualized portfolio operating expenses are less than the portfolio's expense cap. (4) Because this portfolio did not commence operations until May 1, 2002, the percentages set forth as "Other Expenses" and "Total Annual Expenses" are annualized. (5) Effective May 1, 2002, the management fee was reduced to 0.35%. (6) This portfolio is a "fund of funds" that invests in other fund portfolios. The fund prospectus provides specific information on the fees and expenses of this portfolio. This portfolio has its own set of operating expenses, as does each of the underlying fund portfolios in which it invests. The range of the average weighted expense ratio, including such indirect expenses of the underlying fund portfolios, is expected to be 0.64% to 1.75% for the Moderate Asset Allocation, Moderately Aggressive Asset Allocation and Aggressive Asset Allocation portfolios. The range for the Conservative Asset Allocation portfolio is expected to be 0.64% to 1.65%. A range is provided since the allocation of assets to various underlying fund portfolios will fluctuate. Over time, the cost of investment in an asset allocation "fund of funds" portfolio will increase the cost of your investment and may cost you more than investing in a Series Fund portfolio without asset allocation. The purpose of the preceding table is to help you understand the various costs and expenses that you will bear directly and indirectly. The table reflects charges and expenses of the portfolios of the fund for the fiscal year ended December 31, 2001 (except as noted in the footnotes). Expenses of the fund may be higher or lower in the future. For more information on the portfolio expenses described in this table, see the fund prospectuses, which accompany this prospectus. WESTERN RESERVE, THE SEPARATE ACCOUNT, THE FIXED ACCOUNT AND THE PORTFOLIOS WESTERN RESERVE Western Reserve Life Assurance Co. of Ohio located at 570 Carillon Parkway, St. Petersburg, Florida 33716 is the insurance company issuing the Policy. We are obligated to pay all benefits under the Policy. THE SEPARATE ACCOUNT The separate account is a separate account of Western Reserve, established under Ohio law. We own the assets in the separate account and we may use assets in the separate account to support other variable life insurance policies we issue. 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"). The separate account is divided into subaccounts, each of which invests in shares of a specific portfolio of the fund. These subaccounts buy and sell portfolio shares at net asset value without any sales charge. Any dividends and distributions from a portfolio are reinvested at net asset value in shares of that portfolio. Income, gains, and losses credited to, or charged against, a subaccount of the separate account reflect the subaccount's own investment experience and not the investment experience of our other assets. The separate account's assets may not be used to pay any of our liabilities other than those arising from the Policies and other variable life insurance policies we issue. If the separate account's assets exceed the required reserves and other liabilities, we may transfer the excess to our general account. 11 CHANGES TO THE SEPARATE ACCOUNT. As permitted by applicable law, we reserve the right to make certain changes to the structure and operation of the separate account, including, among others, the right to: - Remove, combine, or add subaccounts and make the new subaccounts available to you at our discretion; - Substitute shares of another registered open-end management company, which may have different fees and expenses, for shares of a subaccount at our discretion; - Close subaccounts to allocations of new premiums by existing or new Policyowners at any time in our discretion; - Transfer assets supporting the Policies from one subaccount to another or from the separate account to another separate account; - Combine the separate account with other separate accounts, and/or create new separate accounts; - Deregister the separate account under the 1940 Act, or operate the separate account as a management investment company under the 1940 Act, or as any other form permitted by law; and - Modify the provisions of the Policy to reflect changes to the subaccounts and the separate account and to comply with applicable law. Some, but not all, of these future changes, may be the result of changes in applicable laws or interpretation of the law. The portfolios, which sell their shares to the subaccounts, may discontinue offering their shares to the subaccounts. We will not make any such changes without receiving any necessary approval of the SEC and applicable state insurance departments. We will notify you of any changes. We reserve the right to make other structural and operational changes affecting the separate account. THE FIXED ACCOUNT The fixed account is part of Western Reserve's general account. We use general account assets to support our insurance and annuity obligations other than those funded by separate accounts. Subject to applicable law, Western Reserve has sole discretion over the investment of the fixed account's assets. Western Reserve bears the full investment risk for all amounts contributed to the fixed account. Western Reserve guarantees that the amounts allocated to the fixed account will be credited interest daily at an annual net effective interest rate of at least 3.0%. We will determine any interest rate credited in excess of the guaranteed rate at our sole discretion. Money you place in the fixed account will earn interest compounded daily at a current interest rate in effect at the time of your allocation. Unless otherwise required by state law, we may restrict your allocations and transfers to the fixed account if the fixed account value following the allocation or transfer would exceed $100,000. We may declare current interest rates from time to time. We may declare more than one interest rate for different money based upon the date of allocation or transfer to the fixed account. When we declare a higher current interest rate on amounts allocated to the fixed account, we guarantee the higher rate on those amounts for at least one year (the "guarantee period") unless those amounts are transferred to the loan reserve. At the end of the guarantee period we may declare a new current interest rate on those amounts and any accrued interest thereon. We will guarantee this new current interest rate for another guarantee period. We credit interest greater than 3.0% during any guarantee period at our sole discretion. You bear the risk that interest we credit will not exceed 3.0%. We allocate amounts from the fixed account for cash withdrawals, transfers to the subaccounts, or monthly deduction charges on a last in, first out basis ("LIFO") for the purpose of crediting interest. THE FIXED ACCOUNT HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION AND THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE FIXED ACCOUNT. THE PORTFOLIOS The separate account invests in shares of the portfolios of the fund. Each portfolio is an investment division of the fund, which is an open-end management investment company registered with the SEC. Such registration does not involve supervision of the management or investment practices or policies of the portfolios by the SEC. 12 Each portfolio's assets are held separate from the assets of the other portfolios, and each portfolio has investment objectives and policies that are different from those of the other portfolios. Thus, each portfolio operates as a separate investment fund, and the income or loss of one portfolio has no effect on the investment performance of any other portfolio. Pending any prior approval by a state insurance regulatory authority, certain subaccounts and corresponding portfolios may not be available to residents of some states. Each portfolio's investment objective(s) and policies are summarized below. THERE IS NO ASSURANCE THAT ANY OF THE PORTFOLIOS WILL ACHIEVE ITS STATED OBJECTIVE(S). Certain portfolios may have investment objectives and policies similar to other portfolios that are managed by the same investment adviser or sub-adviser. The investment results of the portfolios, however, may be higher or lower than those of such other portfolios. We do not guarantee or make any representation that the investment results of the portfolios will be comparable to any other portfolio, even those with the same investment adviser or manager. YOU CAN FIND MORE DETAILED INFORMATION ABOUT THE PORTFOLIOS, INCLUDING A DESCRIPTION OF RISKS, IN THE FUND PROSPECTUSES. YOU MAY OBTAIN A FREE COPY OF THE FUND PROSPECTUSES BY CONTACTING US AT 1-800-851-9777 OR VISITING OUR WEBSITE AT WWW.WESTERNRESERVE.COM. YOU SHOULD READ THE FUND PROSPECTUSES CAREFULLY.
PORTFOLIO SUB-ADVISER OR ADVISER AND INVESTMENT OBJECTIVE - ---------- -------------------- MUNDER NET50 MUNDER CAPITAL MANAGEMENT Seeks long-term capital. appreciation. VAN KAMPEN EMERGING GROWTH VAN KAMPEN ASSET MANAGEMENT INC. Seeks capital appreciation by investing primarily in common stocks of small and medium-sized companies. T. ROWE PRICE SMALL CAP T. ROWE PRICE ASSOCIATES, INC. Seeks long-term growth of capital by investing primarily in common stocks of small growth companies. PBHG MID CAP GROWTH PILGRIM BAXTER & Associates, Ltd. Seeks capital appreciation. ALGER AGGRESSIVE GROWTH FRED ALGER MANAGEMENT, INC. Seeks long-term capital appreciation. THIRD AVENUE VALUE EQSF ADVISERS, INC. Seeks long-term capital appreciation. VALUE LINE AGGRESSIVE GROWTH VALUE LINE, INC. Seeks to realize capital growth. AMERICAN CENTURY INTERNATIONAL AMERICAN CENTURY INVESTMENT MANAGEMENT, Inc. Seeks capital growth. JANUS GLOBAL JANUS CAPITAL MANAGEMENT LLC Seeks long-term growth of capital in a manner consistent with the preservation of capital. GABELLI GLOBAL GROWTH GABELLI ASSET MANAGEMENT COMPANY Seeks to provide investors with appreciation of capital. Current income is secondary objective.
13
PORTFOLIO SUB-ADVISER OR ADVISER AND INVESTMENT OBJECTIVE - ---------- -------------------- GREAT COMPANIES--GLOBAL(2) GREAT COMPANIES, L.L.C. Seeks long-term growth of capital in a manner consistent with preservation of capital. GREAT COMPANIES--TECHNOLOGY(SM) GREAT COMPANIES, L.L.C. Seeks long-term growth of capital. JANUS GROWTH JANUS CAPITAL MANAGEMENT LLC Seeks growth of capital. LKCM CAPITAL GROWTH LUTHER KING CAPITAL MANAGEMENT CORPORATION Seeks long-term growth of capital through a disciplined investment approach focusing on companies with superior growth prospects. MARSICO GROWTH BANC OF AMERICA CAPITAL MANAGEMENT, LLC Seeks long-term growth of capital. GE U.S. EQUITY GE ASSET MANAGEMENT INCORPORATED Seeks long-term growth of capital. GREAT COMPANIES--AMERICA(SM) GREAT COMPANIES, L.L.C. Seeks long-term growth of capital. SALOMON ALL CAP SALOMON BROTHERS ASSET MANAGEMENT INC Seeks capital appreciation. DREYFUS MID CAP The Dreyfus Corporation Seeks total investment returns (including capital appreciation and income), which consistently outperform the S&P 400 Mid Cap Index. PBHG/NWQ VALUE NWQ INVESTMENT MANAGEMENT COMPANY, INC. SELECT and Pilgrim Baxter & Associates, Ltd. Seeks to achieve maximum, consistent total return with minimum risk to principal. T. ROWE PRICE DIVIDEND GROWTH T. ROWE PRICE ASSOCIATES, INC. Seeks to provide an increasing level of dividend income, long-term capital appreciation and reasonable current income through investments primarily in dividend paying stocks. TRANSAMERICA VALUE BALANCED TRANSAMERICA INVESTMENT MANAGEMENT, LLC Seeks preservation of capital and competitive investment returns. LKCM STRATEGIC TOTAL RETURN LUTHER KING CAPITAL MANAGEMENT Corporation Seeks to provide current income, long-term growth of income and capital appreciation.
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PORTFOLIO SUB-ADVISER OR ADVISER AND INVESTMENT OBJECTIVE - ---------- -------------------- CLARION REAL ESTATE SECURITIES CLARION CRA SECURITIES, LP Seeks long-term total return from investments primarily in equity securities of real estate companies. Total return will consist of realized and unrealized capital gains and losses plus income. FEDERATED GROWTH & INCOME FEDERATED INVESTMENT COUNSELING Seeks total return by investing in securities that have defensive characteristics. JANUS BALANCED JANUS CAPITAL MANAGEMENT LLC Seeks long-term capital growth, consistent with preservation of capital and balanced by current income. AEGON BOND BANC ONE INVESTMENT ADVISORS CORP. Seeks the highest possible current income within the confines of the primary goal of insuring the protection of capital. TRANSAMERICA MONEY MARKET TRANSAMERICA INVESTMENT MANAGEMENT, LLC Seeks to provide maximum current income consistent with preservation of principal and maintenance of liquidity. CONSERVATIVE ASSET ALLOCATION* AEGON/TRANSAMERICA FUND ADVISERS, INC. Seeks current income and preservation of capital. MODERATE ASSET ALLOCATION* AEGON/TRANSAMERICA FUND ADVISERS, INC. Seeks capital appreciation. MODERATELY AGGRESSIVE ASSET AEGON/TRANSAMERICA FUND ADVISERS, INC. ALLOCATION* Seeks capital appreciation. AGGRESSIVE ASSET ALLOCATION* AEGON/TRANSAMERICA FUND ADVISERS, INC. Seeks capital appreciation and current income. TRANSAMERICA CONVERTIBLE SECURITIES TRANSAMERICA INVESTMENT MANAGEMENT, LLC Seeks maximum total return through a combination of current income and capital appreciation. PIMCO TOTAL RETURN PACIFIC INVESTMENT MANAGEMENT COMPANY, LLC Seeks maximum total return consistent with preservation of capital and prudent investment management. TRANSAMERICA EQUITY TRANSAMERICA INVESTMENT MANAGEMENT, LLC Seeks to maximize long-term growth. TRANSAMERICA GROWTH OPPORTUNITIES TRANSAMERICA INVESTMENT MANAGEMENT, LLC Seeks to maximize long-term growth.
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PORTFOLIO SUB-ADVISER OR ADVISER AND INVESTMENT OBJECTIVE - ---------- -------------------- TRANSAMERICA U.S. GOVERNMENT TRANSAMERICA INVESTMENT MANAGEMENT, LLC SECURITIES Seeks to provide as high a level of total return as is consistent with prudent investment strategies by investing under normal conditions at least 80% of its assets in U.S. government debt obligations and mortgage-backed securities issued or guaranteed by the U.S. government, its agencies or government-sponsored entities. J.P. MORGAN ENHANCED INDEX J.P. MORGAN INVESTMENT MANAGEMENT INC. Seeks to earn a total return modestly in excess of the total return performance of the S&P 500 Index (including the reinvestment of dividends) while maintaining a volatility of return similar to the S&P 500 Index. CAPITAL GUARDIAN VALUE CAPITAL GUARDIAN TRUST COMPANY Seeks to provide long-term growth of capital and income through investments in a portfolio comprised primarily of equity securities of U.S. issuers and securities whose principal markets are in the U.S. (including American Depositary Receipts) and other U.S. registered foreign securities. CAPITAL GUARDIAN U.S. EQUITY CAPITAL GUARDIAN TRUST COMPANY Seeks to provide long-term growth of capital.
- ---------------------------- * Each asset allocation portfolio invests in a combination of underlying Series Fund portfolios. AEGON/Transamerica Fund Advisers, Inc. ("AEGON/Transamerica Advisers"), located at 570 Carillon Parkway, St. Petersburg, Florida 33716, a wholly-owned subsidiary of Western Reserve, serves as investment adviser to the fund and manages the fund in accordance with policies and guidelines established by the fund's Board of Directors. For certain portfolios, AEGON/Transamerica Advisers has engaged investment sub-advisers to provide portfolio management services. AEGON/Transamerica Advisers and each investment sub-adviser are registered investment advisers under the Investment Advisers Act of 1940, as amended. See the fund prospectuses for more information regarding AEGON/Transamerica Advisers and the investment sub-advisers. Morningstar Associates, LLC ("Morningstar"), located at 225 West Wacker Drive, Chicago, Illinois 60606, serves as a "consultant" to AEGON/Transamerica Advisers for investment model creation and maintenance to the Conservative Asset Allocation, Moderate Asset Allocation, Moderately Aggressive Asset Allocation and Aggressive Asset Allocation portfolios of the fund. Morningstar will be paid an annual fee for its services. See the fund prospectuses for more information regarding Morningstar. ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS We do not guarantee that each portfolio will always be available for investment through the Policy. We reserve the right, subject to compliance with applicable law, to add new portfolios or portfolio classes, close existing portfolios or portfolio classes, or substitute portfolio shares that are held by any subaccount for shares of a different portfolio. New or substitute portfolios may have different fees and expenses and their availability may be limited to certain classes of purchasers. We will not add, delete or substitute any shares attributable to your interest in a subaccount without notice to you and prior approval of the SEC, to the extent required by the 1940 Act or other applicable law. We may also decide to purchase for the separate 16 account securities from other portfolios. We reserve the right to transfer separate account assets to another separate account that we determine to be associated with the class of contracts to which the Policy belongs. YOUR RIGHT TO VOTE PORTFOLIO SHARES Even though we are the legal owner of the portfolio shares held in the subaccounts, and have the right to vote on all matters submitted to shareholders of the portfolios, we will vote our shares only as policyowners instruct, so long as such action is required by law. Before a vote of a portfolio's shareholders occurs, you will receive voting materials from us. We will ask you to instruct us on how to vote and to return your proxy to us in a timely manner. You will have the right to instruct us on the number of portfolio shares that corresponds to the amount of cash value you have in that portfolio (as of a date set by the portfolio). If we do not receive voting instructions on time from some policyowners, we will vote those shares in the same proportion as the timely voting instructions we receive. Should federal securities laws, regulations and interpretations change, we may elect to vote portfolio shares in our own right. If required by state insurance officials, or if permitted under federal regulation, we may disregard certain owner voting instructions. If we ever disregard voting instructions, we will send you a summary in the next annual report to policyowners advising you of the action and the reasons we took such action. CHARGES AND DEDUCTIONS This section describes the charges and deductions that we make under the Policy in consideration for: (1) the services and benefits we provide; (2) the costs and expenses we incur; (3) the risks we assume; and (4) our profit expectations. SERVICES AND BENEFITS WE PROVIDE - the death benefit, cash and loan UNDER THE POLICY: benefits; - investment options, including premium allocations; - administration of elective options; and - the distribution of reports to owners. COSTS AND EXPENSES WE INCUR: - costs associated with processing and underwriting applications; - expenses of issuing and administering the Policy (including any Policy riders); - overhead and other expenses for providing services and benefits and sales and marketing expenses, including compensation paid in connection with the sale of the Policies; and - other costs of doing business, such as collecting premiums, maintaining records, processing claims, effecting transactions, and paying federal, state and local premium and other taxes and fees. RISKS WE ASSUME: - that the charges we may deduct may be insufficient to meet our actual claims because insureds die sooner than we estimate; and that the costs of providing the services and benefits under the Policies may exceed the charges we are allowed to deduct. Some or all the charges we deduct are used to pay aggregate Policy costs and expenses we incur in providing the services and benefits under the Policy and assuming the risks associated with the Policy. PREMIUM CHARGE Before we allocate the net premium payments you make, we will deduct the following charges. 17 PREMIUM EXPENSE CHARGE - The premium expense level is the amount of premium used to determine the charge applied to premium payments. The premium expense level varies depending on the primary insured's gender, issue age, and underwriting class and is listed on your Policy's schedule page. The premium expense charge equals: - 10.0% of cumulative premiums paid in each Policy year up to the premium expense level and 3.0% of premiums in excess of the premium expense level during the first ten Policy years; and - 3.0% on all premiums thereafter. - Certain events (such as decreases in the specified amount, a change in death benefit option, or a cash withdrawal if you choose the Option A death benefit) may affect the specified amount in force. Premium expense charges will be based on the specified amount at issue for the Base Policy. MONTHLY DEDUCTION We take a monthly deduction from the cash value on the Policy date and on each Monthiversary. We deduct this charge on a pro rata basis from all accounts (i.e., in the same proportion that the value in each subaccount and the fixed account bears to the total cash value on the Monthiversary). Because portions of the monthly deduction (such as cost of insurance) can vary monthly, the monthly deduction will also vary. THE MONTHLY DEDUCTION IS - the monthly Policy charge; PLUS EQUAL TO: - the monthly cost of insurance charge for the Policy; PLUS - the monthly charge for any benefits provided by riders attached to the Policy. MONTHLY POLICY CHARGE: - This charge currently equals $7.00 each Policy month. After the first Policy year, we may increase this charge. - We guarantee this charge will never be more than $10.00 per month. - We may waive this charge at issue on additional policies (not on the original Policy) purchased naming the same owner and insured. - This charge is used to cover aggregate Policy expenses. COST OF INSURANCE CHARGE: - We deduct this charge each month. It varies each month and is determined as follows: 1. divide the death benefit on the Monthiversary by 1.0024663 (this factor reduces the net amount at risk, for purposes of computing the cost of insurance, by taking into account assumed monthly earnings at an annual rate of 3.0%); 2. reduce the result in 1. by the cash value on the Monthiversary; 18 3. multiply the result in 2. by the appropriate monthly cost of insurance rate. OPTIONAL INSURANCE RIDERS: - The monthly deduction will include charges for any optional insurance benefits you add to your Policy by rider. To determine the monthly cost of insurance rates we refer to a schedule of current cost of insurance rates using the insured's gender, attained age, plan of insurance and underwriting class. The factors that affect the amount at risk include investment performance, payment of premiums and charges to the Policy. The actual monthly cost of insurance rates are primarily based on our expectations as to future mortality experience and expenses. Monthly cost of insurance rates may be changed by us from time to time. The rates will never be greater than the Table of Guaranteed Maximum Life Insurance Rates stated in your Policy. These guaranteed rates are based on the Commissioners 1980 Standard Ordinary Tobacco and Non-Tobacco Mortality Tables ("1980 C.S.O. Tables") and the insured's attained age, gender, and rate class. For standard rate classes, these guaranteed rates will never be greater than the rates in the 1980 C.S.O. Tables. The underwriting class of the insured will affect the cost of insurance rates. We use a standard method of underwriting in determining underwriting classes, which are based on the health of the insured. We currently place insureds into preferred and standard classes. We also place insureds into sub-standard classes with extra ratings, which reflect higher mortality risks, and will result in higher cost of insurance rates. We may issue certain Policies on a simplified or expedited basis. Cost of insurance rates charged for any Policies issued on a simplified or expedited basis would not cause healthy individuals to pay higher cost of insurance rates than they would pay under a substantially similar Policy that we offer using different underwriting criteria. The cost of insurance charge for any optional insurance rider and for any increase in rider specified amount is calculated in the same manner used to determine the Base Policy's cost of insurance charges. Generally, the current cost of insurance rates for the optional riders are lower than the current cost of insurance rates on the Base Policy's net amount at risk. The guaranteed cost of insurance rates under the riders are substantially the same as the guaranteed cost of insurance rates on the Policy's net amount at risk. MORTALITY AND EXPENSE RISK CHARGE We deduct a daily charge from your Policy's cash value in each subaccount to compensate us for aggregate Policy expenses and mortality and expense costs we assume. This charge is equal to: - your Policy's cash value in each subaccount multiplied by - the daily equivalent of the annual mortality and expense risk charge rate of 0.90%. The annual rate is equal to 0.90% of the average daily net assets of each subaccount. We intend to reduce this charge to 0.75% after the first 15 Policy years, but we do not guarantee that we will do so, and we reserve the right to maintain this charge at the 0.90% level after the 15th Policy year. The mortality risk is that the insured will live for a shorter time than we project. The expense risk is that the expenses that we incur will exceed the administrative charge limits we set in the Policy. If this charge combined with other Policy charges, does not cover our total actual costs, we absorb the loss. Conversely, if the charge more than covers actual costs, the excess is added to our surplus. We expect to profit from this charge. We may use any profits to cover distribution and other costs. TRANSFER CHARGE - We currently allow you to make 12 transfers each year free from charge. - We charge $25 for each additional transfer. 19 - For purposes of assessing the transfer charge, all transfers made in one day, regardless of the number of subaccounts affected by the transfer, is considered a single transfer. - We deduct the transfer charge from the amount being transferred. - Transfers due to loans, exercise of conversion rights, or from the fixed account do not count as transfers for the purpose of assessing this charge. - Transfers under dollar cost averaging and asset rebalancing are transfers for purposes of this charge. - We will not increase this charge. CHANGE IN NET PREMIUM ALLOCATION CHARGE We currently do not charge you if you change your net premium allocation. However, in the future we may decide to charge you $25 if you make more than one change per Policy year quarter. We will notify you if we decide to impose this charge. CASH WITHDRAWAL CHARGE - After the first Policy year, you may take one cash withdrawal per Policy year. The amount of the withdrawal may be limited to at least $500 and the remaining net surrender value following a withdrawal may not be less than $500. - When you make a cash withdrawal, we charge a processing fee of $25 or 2% of the amount you withdraw, whichever is less. - We deduct this amount from the withdrawal, and we pay you the balance. - We will not increase this charge. TAXES We currently do not make any deductions for taxes from the separate account. We may do so in the future if such taxes are imposed by federal or state agencies. PORTFOLIO EXPENSES The portfolios deduct management fees and expenses from the amounts you have invested in the portfolios. These fees and expenses reduce the value of your portfolio shares. These fees and expenses currently range from 0.39% to 1.50%. See the Portfolio Annual Expense Table on p. 10 in this prospectus, and the fund prospectuses. THE POLICY OWNERSHIP RIGHTS The Policy belongs to the owner named in the application. The owner may exercise all of the rights and options described in the Policy. The owner is the insured unless the application specifies a different person as the insured. If the owner dies before the insured and no contingent owner is named, then ownership of the Policy will pass to the owner's estate. The principal rights an owner may exercise are: - to designate or change beneficiaries; - to receive amounts payable before the death of the insured; - to assign the Policy (if you assign the Policy, your rights and the rights of anyone who is to receive payment under the Policy are subject to the terms of that assignment); - to change the owner of this Policy; and - to change the specified amount of this Policy. No designation or change in designation of an owner will take effect unless we receive written request thereof. When received, the request will take effect as of the date it was signed, subject to payment or other action taken by us before it was received. 20 MODIFYING THE POLICY Any modifications or waiver of any rights or requirements under the Policy must be in writing and signed by our president or secretary. NO AGENT MAY BIND US BY MAKING ANY PROMISE NOT CONTAINED IN THIS POLICY. Upon notice to you, we may modify the Policy: - to make the Policy or the separate account comply with any law or regulation issued by a governmental agency to which we are subject; or - to assure continued qualification of the Policy under the Internal Revenue Code or other federal or state laws relating to variable life policies; or - to reflect a change in the operation of the separate account; or - to provide additional subaccounts and/or fixed account options. PURCHASING A POLICY To purchase a Policy, you must submit a completed application and an initial premium to us through any licensed life insurance agent who is also a registered representative of a broker-dealer having a selling agreement with AFSG Securities Corporation, the principal underwriter for the Policy, and us. You select the specified amount of insurance coverage for your Policy within the following limits. Our current minimum specified amount for a Policy for issue ages 0 - 49 is generally $250,000. It declines to $100,000 for issue ages 50 - 85. We will generally only issue a Policy to you if you provide sufficient evidence that the insured meets our insurability standards. Your application is subject to our underwriting rules, and we may reject any application for any reason permitted by law. We will not issue a Policy to you if the insured is over age 85. The insured must be insurable and acceptable to us under our underwriting rules on the later of: - the date of your application; or - the date the insured completes all of the medical tests and examinations that we require. TAX-FREE "SECTION 1035" EXCHANGES You can generally exchange one life insurance policy for another covering the same insured in a "tax-free exchange" under Section 1035 of the Internal Revenue Code. Before making an exchange, you should compare both life insurance policies carefully. Remember that if you exchange another life insurance policy for the one described in this prospectus, you might have to pay a surrender charge on your old policy, other charges may be higher (or lower) and the benefits may be different. If the exchange does not qualify for Section 1035 treatment, you may also have to pay federal income tax on the exchange. You should not exchange another life insurance policy for this one unless you determine, after knowing all the facts, that the exchange is in your best interest and not just better for the person selling you the Policy (that person will generally earn a commission if you buy this Policy through an exchange or otherwise). WHEN INSURANCE COVERAGE TAKES EFFECT Insurance coverage under the Policy will take effect only if the insured(s) is alive and in the same condition of health as described in the application when the Policy is delivered to the owner, and if the initial premium required under the Policy as issued is paid. Conditional Insurance Coverage. If you pay the full initial premium listed in the conditional receipt attached to the application, and we deliver the conditional receipt to you, the insured will have conditional insurance coverage under the terms of the conditional receipt. Because we do not accept initial premiums in advance for Policies with a specified amount in excess of $1,000,000, we do not offer conditional insurance coverage for Policies issued with a specified amount in excess of $1,000,000. Conditional insurance coverage is void if the check or draft you gave us to pay the initial premium is not honored when we first present it for payment. 21 THE AMOUNT OF CONDITIONAL INSURANCE - the specified amount applied for; or COVERAGE IS THE LESSER OF: - $300,000 reduced by all amounts payable under all life insurance applications that the insured has pending with us. CONDITIONAL LIFE INSURANCE COVERAGE - the date of your application and the BEGINS ON THE LATER OF: full initial premium is paid; or - the date the insured completes all of the medical tests and examinations that we require; or - the date of issue, if any, requested in the application. CONDITIONAL LIFE INSURANCE COVERAGE TERMINATES AUTOMATICALLY ON THE - the date we determine the insured has EARLIEST OF: satisfied our underwriting requirements and the insurance applied for takes effect (the Policy date); or - 60 days from the date the application was completed; or - the date we determine that any person proposed for insurance in the application is not insurable according to our rules, limits and standards for the plan, amount and rate class shown in the application; or - the date we modify the plan, amount, riders and/or the premium rate class shown in the application, or any supplemental agreements; or - the date we mail notice of the ending of coverage and we refund the first premium to the applicant at the address shown on the application. SPECIAL LIMITATIONS OF THE - the conditional receipt will be void: CONDITIONAL RECEIPT: - if not signed by an authorized agent of Western Reserve; or - in the event the application contains any fraud or material misrepresentation; or - if, on the date of the conditional receipt, the proposed insured is under 15 days of age or over 85 years of age. - the conditional receipt does not provide benefits for disability and accidental death benefits. - the conditional receipt does not provide benefits if any proposed insured commits suicide. In this case, Western Reserve's liability will be limited to return of the first premium paid with the application. Full Insurance Coverage and Allocation of Initial Premium. Once we determine that the insured meets our underwriting requirements and you have paid the initial premium, full insurance coverage will begin and we will begin to take the monthly deductions from your net premium. This date is the Policy date. On the Policy date (or on the record date if your Policy is backdated), we will allocate your initial net premium, minus monthly deductions, to the fixed account and the subaccounts you selected on your application, provided you live in a state that does not require a refund of full premium during the free-look period. If your state requires us to return the full premium in the event you exercise your free-look right, we will place your net premium in the reallocation account until the reallocation date. While held in the reallocation account, premium(s) will be credited with interest at the current fixed account rate. On any day we credit net premiums or transfer cash value to a subaccount, we will convert the dollar amount of the net premium (or transfer) into subaccount units at the unit value for that subaccount, determined at the end of the day on which we receive the premium or transaction request at our office. We will credit amounts to the subaccounts only on a valuation date, that is, on a date the New York Stock Exchange ("NYSE") is open for trading. 22 BACKDATING A POLICY If you request, we may backdate a Policy by assigning a Policy date earlier than the date the Policy is issued. However, in no event will we backdate a Policy earlier than the earliest date allowed by state law or by our underwriting rules. Your request must be in writing and, if we approve the request, will amend your application. Cost of insurance charges are based in part on the age of the insured on the Policy date. Generally, cost of insurance charges are lower at a younger age. We will deduct the monthly deduction, including cost of insurance charges, for the period that the Policy is backdated. THIS MEANS THAT WHILE THE MONTHLY DEDUCTION MAY BE LOWER THAN WHAT WOULD HAVE BEEN CHARGED HAD WE NOT BACKDATED THE POLICY, YOU WILL BE PAYING FOR INSURANCE DURING A PERIOD WHEN THE POLICY WAS NOT IN FORCE. POLICY FEATURES PREMIUMS ALLOCATING PREMIUMS You must instruct us on how to allocate your net premium among the subaccounts and the fixed account. The fixed account may not be available in all states to direct or transfer money into. You must follow these guidelines: - allocation percentages must be in whole numbers; - if you select dollar cost averaging, you must have at least $5,000 in each subaccount from which we will make transfers and you must transfer at least a total of $100 monthly; - if you select asset rebalancing, the cash value of your Policy, if an existing Policy, or your minimum initial premium, if a new Policy, must be at least $5,000; and - unless otherwise required by state law, we may restrict your allocations to the fixed account if the fixed account value following the allocation would exceed $100,000. Currently, you may change the allocation instructions for additional premium payments without charge at any time by writing us or calling us at 1-800-851-9777 Monday - Friday 8:30 a.m. - 7:00 p.m. Eastern time. The change will be effective at the end of the valuation date on which we receive the change. Upon instructions from you, the registered representative/agent of record for your Policy may also change your allocation instructions for you. The minimum amount you can allocate to a particular subaccount is 1.0% of a net premium payment. We reserve the right to limit the number of premium allocation changes or to charge $25 for each change in excess of one per Policy year quarter. Whenever you direct money into a subaccount, we will credit your Policy with the number of units for that subaccount that can be bought for the dollar payment. We price each subaccount unit on each valuation date using the unit value determined at the closing of the regular business session of the NYSE (usually at 4:00 p.m. Eastern time). We will credit amounts to the subaccounts only on a valuation date, that is, on a date the NYSE is open for trading. Your cash value will vary with the investment experience of the subaccounts in which you invest. YOU BEAR THE INVESTMENT RISK FOR AMOUNTS YOU ALLOCATE TO THE SUBACCOUNTS. You should periodically review how your cash value is allocated among the subaccounts and the fixed account because market conditions and your overall financial objectives may change. Reallocation Account. If your state requires us to return your initial premium in the event you exercise your free-look right, we will allocate the initial net premium on the Policy date (or the record date if your Policy is backdated) to the reallocation account as shown on your Policy schedule page. While held in the reallocation account, net premium(s) will be credited with interest at the current fixed account rate and reduced by any monthly deductions due. The net premiums will remain in the reallocation account until the reallocation date. The reallocation date is the Policy date (or the record date if your Policy is backdated), plus the number of days in your state's free-look period, plus five days. Please contact your agent for details concerning the free-look period for your state. 23 On the first valuation date on or after the reallocation date, we will reallocate all cash value from the reallocation account to the fixed account and the subaccounts you selected on the application. If you requested dollar cost averaging, on the reallocation date we will reallocate the cash value either to the fixed account, the WRL Transamerica Money Market subaccount or the WRL AEGON Bond subaccount (depending on which account you selected on your application). For states that do not require a full refund of the initial premium, the reallocation date is the same as the Policy date. On the Policy date, we will allocate your initial net premium, minus monthly deductions, to the fixed account and the subaccounts in accordance with the instructions you gave us on your application. PREMIUM FLEXIBILITY You generally have flexibility to determine the frequency and the amount of the premiums you pay. Unlike conventional insurance policies, you do not have to pay your premiums according to a rigid and inflexible premium schedule. Before we issue the Policy to you, we may require you to pay a premium at least equal to a minimum monthly guarantee premium set forth in your Policy. Thereafter (subject to the limitations described below), you may make unscheduled premium payments at any time and in any amount over $50. Under some circumstances, you may be required to pay extra premiums to prevent a lapse. Your minimum monthly guarantee premium may change if you request a change in your Policy. If this happens, we will notify you of the new minimum monthly guarantee premium. PLANNED PERIODIC PAYMENTS You will determine a planned periodic payment schedule, which allows you to pay level premiums at fixed intervals over a specified period of time. You are not required to pay premiums according to this schedule. You may change the amount, frequency, and the time period over which you make your planned periodic payments. Please be sure to notify us or your agent/registered representative of any address changes so that we may be able to keep your current address on record. Even if you make your planned periodic payments on schedule, your Policy may still lapse. The duration of your Policy depends on the Policy's net surrender value. If the net surrender value is not high enough to pay the monthly deduction when due (and your no lapse period has expired) then your Policy will lapse (unless you make the payment we specify during the 61-day grace period). MINIMUM MONTHLY GUARANTEE PREMIUM The full initial premium is the only premium you are required to pay under the Policy. However, you greatly increase your risk of lapse if you do not regularly pay premiums at least as large as the current minimum monthly guarantee premium. Until the no lapse date shown on your Policy schedule page, we guarantee that your Policy will not lapse, so long as on any Monthiversary you have paid total premiums (MINUS any cash withdrawals and MINUS any outstanding loan amount and MINUS any accrued loan interest) that equal or exceed the sum of the minimum monthly guarantee premiums times the number of months from the Policy date up to and including the current month. If you take a cash withdrawal or a loan, or if you decrease your specified amount or if you add, increase or decrease a rider, you may need to pay additional premiums in order to keep the no lapse guarantee in place. The initial minimum monthly guarantee premium is shown on your Policy's schedule page, and depends on a number of factors, including the age, gender, and rate class of the insured, and the specified amount requested. We will adjust the minimum monthly guarantee premium if you change death benefit options, decrease the specified amount, or if any of the riders are added, increased or decreased. We will notify you of the new minimum monthly guarantee premium. AFTER THE NO LAPSE PERIOD ENDS, PAYING THE CURRENT MINIMUM MONTHLY GUARANTEE PREMIUM EACH MONTH WILL NOT NECESSARILY KEEP YOUR POLICY IN FORCE. YOU MAY NEED TO PAY ADDITIONAL PREMIUMS TO KEEP THE POLICY IN FORCE. NO LAPSE PERIOD Until the no lapse date shown on your Policy schedule page, your Policy will remain in force and no grace period will begin, even if your net surrender value is too low to pay the monthly deduction, so long as: 24 - the total amount of the premiums you paid (MINUS any cash withdrawals, MINUS any outstanding loan amount and MINUS any accrued interest) is equal to or exceeds: - the sum of the minimum monthly guarantee premium in effect for each month from the Policy date up to and including the current month. PREMIUM LIMITATIONS Premium payments must be at least $50 ($1,000 if by wire). We may return premiums less than $50. We will not allow you to make any premium payments that would cause the total amount of the premiums you pay to exceed the current maximum premium limitations, which qualify the Policy as life insurance according to federal tax laws. This maximum is set forth in your Policy. If you make a payment that would cause your total premiums to be greater than the maximum premium limitations, we will return the excess portion of the premium payment. We will not permit you to make additional premium payments until they are allowed by the maximum premium limitations. In addition, we reserve the right to refund a premium if the premium would increase the death benefit by more than the amount of the premium. MAKING PREMIUM PAYMENTS We will consider any payments you make to be premium payments, unless you clearly mark them as loan repayments. We will deduct certain charges from your premium payments. We will accept premium payments by wire transfer. If you wish to make payments by wire transfer, you should instruct your bank to wire federal funds as follows: All First Bank of Baltimore ABA #052000113 For credit to: Western Reserve Life Account #: 89539639 Policyowner's Name: Policy Number: Attention: General Accounting Tax-Free Exchanges ("1035 Exchanges"). We will accept part or all of your initial premium from one or more contracts insuring the same insured that qualify for tax-free exchanges under Section 1035 of the Internal Revenue Code. If you contemplate such an exchange, you should consult a competent tax advisor to learn the potential tax effects of such a transaction. Subject to our underwriting requirements, we will permit you to make one additional cash payment within three business days of receipt at our office of the proceeds from the 1035 Exchange before we finalize your Policy's specified amount. TRANSFERS GENERAL You or your agent/registered representative of record may make transfers among the subaccounts or from the subaccounts to the fixed account. We determine the amount you have available for transfers at the end of the valuation period when we receive your transfer request at our office. We may, at any time, discontinue transfer privileges, modify our procedures, or limit the number of transfers we permit. The following features apply to transfers under the Policy: - You may make one transfer from the fixed account in a Policy year (unless you choose dollar cost averaging from the fixed account). - Unless otherwise required by state law, we may restrict transfers to the fixed account, if the fixed account value following the transfer would exceed $100,000. - You may request transfers in writing (in a form we accept), by fax, by telephone to our office or electronically through our website. - There is no minimum amount that must be transferred. - There is no minimum amount that must remain in a subaccount after a transfer. - We deduct a $25 charge from the amount transferred for each transfer in excess of 12 transfers in a Policy year. 25 - We consider all transfers made in any one day to be a single transfer. - Transfers resulting from loans, conversion rights, reallocation of cash value immediately after the reallocation date, and transfers from the fixed account are not treated as transfers for the purpose of the transfer charge. - Transfers under dollar cost averaging and asset rebalancing are treated as transfers for purposes of the transfer charge. Some investors try to profit from various strategies known as market timing; for example, switching money into mutual funds when they expect prices to rise and taking money out when they expect prices to fall, or switching from one portfolio to another and then back out again after a short period of time. As money is shifted in and out, a fund incurs expenses for buying and selling securities. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. This is why all portfolios have adopted special policies to discourage short-term trading. Specifically, each portfolio reserves the right to reject any transfer request that it regards as disruptive to efficient portfolio management. A transfer request could be rejected because of the timing of the investment or because of a history of excessive transfers by the owner. The Policy you are purchasing was not designed for professional market timing organizations or other persons that use programmed, large, or frequent transfers. The use of such transfers may be disruptive to the underlying portfolio and increase transaction costs. We reserve the right to reject any premium payment or transfer request from any person if, in our judgment, the payment or transfer or series of transfers would have a negative impact on a portfolio's operations or if a portfolio would reject our purchase order. We may impose other restrictions on transfers or even prohibit them for any owner who, in our view, has abused, or appears likely to abuse, the transfer privilege. The portfolios do not permit market timing. Do not invest with us if you are a market timer. When we identify you as a market timer, we will immediately notify your agent who will then notify you that any additional requests for transfers will be subject to certain restrictions, including the loss of electronic and telephone transfer privileges. Your Policy, as applied for and issued, will automatically receive telephone transfer privileges unless you provide other instructions. The telephone transfer privileges allow you to give authority to the registered representative or agent of record for your Policy to make telephone transfers and to change the allocation of future payments among the subaccounts and the fixed account on your behalf according to your instructions. To make a telephone transfer, you may call us at 1-800-851-9777 Monday - Friday 8:30 a.m. - 7:00 p.m. Eastern time, or fax your instructions to 727-299-1648. Please note the following regarding telephone or fax transfers: - We will employ reasonable procedures to confirm that telephone instructions are genuine. - If we follow these procedures, we are not liable for any loss, damage, cost or expense from complying with telephone instructions we reasonably believe to be authentic. You bear the risk of any such loss. - If we do not employ reasonable confirmation procedures, we may be liable for losses due to unauthorized or fraudulent instructions. - Such procedures may include requiring forms of personal identification prior to acting upon telephone instructions, providing written confirmation of transactions to owners, and/or tape recording telephone instructions received from owners. - We may also require written confirmation of your order. - If you do not want the ability to make telephone transfers, you should notify us in writing at our office. - Telephone or fax orders must be received at our office before 4:00 p.m. Eastern time to assure same-day pricing of the transaction. - WE WILL NOT BE RESPONSIBLE FOR SAME-DAY PROCESSING OF TRANSFERS IF FAXED TO A NUMBER OTHER THAN 727-299-1648. - We will not be responsible for any transmittal problems when you fax us your order unless you report it to us within five business days and send us proof of your fax transmittal. We may discontinue this option at any time. We cannot guarantee that telephone and faxed transactions will always be available. For example, our offices may be closed during severe weather emergencies or there may be interruptions in telephone or fax service beyond our control. If the volume of calls is unusually high, we might not have someone immediately available to receive your order. Although we have taken precautions to help our systems handle heavy use, we cannot promise complete reliability under all circumstances. 26 Online transactions may not always be possible. Telephone and computer systems, whether yours, your Internet service provider's, your agent's or Western Reserve's, can experience outages or slowdowns for a variety of reasons. These outages or slowdowns may prevent or delay our receipt of your request. If you are experiencing problems, you should make your request or inquiry in writing. You should protect your personal identification number (PIN) because self-service options will be available to your agent of record and to anyone who provides your PIN. We will not be able to verify that the person using your PIN and providing instructions online is you or one authorized by you. We will process any transfer order we receive at our office before the NYSE closes (usually 4:00 p.m. Eastern time) using the subaccount unit value determined at the end of that session of the NYSE. If we receive the transfer order after the NYSE closes, we will process the order using the subaccount unit value determined at the close of the next regular business session of the NYSE. FIXED ACCOUNT TRANSFERS You may make one transfer per Policy year from the fixed account unless you select dollar cost averaging from the fixed account. We reserve the right to require that you make the transfer request in writing. We must receive the transfer request no later than 30 days after a Policy anniversary. We will make the transfer at the end of the valuation date on which we receive the written request. The maximum amount you may transfer is limited to the greater of: - 25% of the amount in the fixed account (currently we allow up to 50% of your value, but the 50% limit is not guaranteed); or - the amount you transferred from the fixed account in the immediately prior Policy year; or - unless otherwise required by state law, we may restrict your allocations and transfers to the fixed account if the fixed account value following the allocation or transfer would exceed $100,000. CONVERSION RIGHTS If, within 24 months of your Policy date, you transfer all of your subaccount values to the fixed account, then we will not charge you a transfer fee, even if applicable. You must make your request in writing to our office. DOLLAR COST AVERAGING Dollar cost averaging is an investment strategy designed to reduce the average purchase price per unit. The strategy spreads the allocation of your premium into the subaccounts over a period of time. This potentially allows you to reduce the risk of investing most of your premium into the subaccounts at a time when prices are high. The success of this strategy is not assured and depends on market trends. You should consider carefully your financial ability to continue the program over a long enough period of time to purchase units when their value is low as well as when it is high. We make no guarantee that dollar cost averaging will result in a profit or protect you against loss. Under dollar cost averaging, we automatically transfer a set dollar amount from the WRL Transamerica Money Market subaccount, the WRL AEGON Bond subaccount or the fixed account to a subaccount that you choose. We will make the transfers monthly as of the end of the valuation date after the first Monthiversary after the reallocation date. We will make the first transfer in the month after we receive your request at our office, provided that we receive the form by the 25th day of the month. TO START DOLLAR COST AVERAGING: - you must submit a completed form to us at our office requesting dollar cost averaging; - you must have at least $5,000 in each account from which we will make transfers; - your total transfers each month under dollar cost averaging must be at least $100; and - each month, you may not transfer more than one-tenth of the amount that was in your fixed account at the beginning of dollar cost averaging. 27 You may request dollar cost averaging at any time. There is no charge for dollar cost averaging. However, each transfer under dollar cost averaging counts towards your 12 free transfers each year. DOLLAR COST AVERAGING WILL - we receive your request to cancel your TERMINATE IF: participation; - the value in the accounts from which we make the transfers is depleted; - you elect to participate in the asset rebalancing program; OR - you elect to participate in any asset allocation services provided by a third party. We may modify, suspend, or discontinue dollar cost averaging at any time. ASSET REBALANCING PROGRAM We also offer an asset rebalancing program under which you may transfer amounts periodically to maintain a particular percentage allocation among the subaccounts you have selected. Cash value allocated to each subaccount will grow or decline in value at different rates. The asset rebalancing program automatically reallocates the cash value in the subaccounts at the end of each period to match your Policy's currently effective premium allocation schedule. Cash value in the fixed account and the dollar cost averaging program is not available for this program. This program does not guarantee gains. A subaccount may still have losses. You may elect asset rebalancing to occur on each quarterly, semi-annual or annual anniversary of the Policy date. Once we receive the asset rebalancing request form at our office, we will effect the initial rebalancing of cash value on the next such anniversary, in accordance with the Policy's current premium allocation schedule. You may modify your allocations quarterly. We will credit the amounts transferred at the unit value next determined on the dates the transfers are made. If a day on which rebalancing would ordinarily occur falls on a day on which the NYSE is closed, rebalancing will occur on the next day that the NYSE is open. TO START ASSET REBALANCING: - you must submit a completed asset rebalancing request form to us at our office before the maturity date; and - you must have a minimum cash value of $5,000 or make a $5,000 initial premium payment. There is no charge for the asset rebalancing program. However, each reallocation we make under the program counts towards your 12 free transfers each year. ASSET REBALANCING WILL CEASE IF: - you elect to participate in the dollar cost averaging program; - we receive your request to discontinue participation at our office; - you make any transfer to or from any subaccount other than under a scheduled rebalancing; or - you elect to participate in any asset allocation services provided by a third party. You may start and stop participation in the asset rebalancing program at any time; but we restrict your right to re-enter the program to once each Policy year. If you wish to resume the asset rebalancing program, you must complete a new request form. We may modify, suspend, or discontinue the asset rebalancing program at any time. THIRD PARTY ASSET ALLOCATION SERVICES We may provide administrative or other support services to independent third parties you authorize to conduct transfers on your behalf, or who provide recommendations as to how your subaccount values should be allocated. This includes, but is not limited to, transferring subaccount values among subaccounts in accordance with various investment allocation strategies that these third parties employ. These independent third parties may or may not be appointed Western Reserve agents for the sale of Policies. Western Reserve does not engage any third parties to offer investment allocation services of any type, so that 28 persons or firms offering such services do so independent from any agency relationship they may have with Western Reserve for the sale of Policies. Western Reserve therefore takes no responsibility for the investment allocations and transfers transacted on your behalf by such third parties or any investment allocation recommendations made by such parties. Western Reserve does not currently charge you any additional fees for providing these support services. Western Reserve reserves the right to discontinue providing administrative and support services to owners utilizing independent third parties who provide investment allocation and transfer recommendations. POLICY VALUES CASH VALUE - Varies from day to day, depending on the investment experience of the subaccounts you choose, the interest credited to the fixed account, the charges deducted and any other Policy transactions (such as additional premium payments, transfers, withdrawals and Policy loans). - Serves as the starting point for calculating values under a Policy. - Equals the sum of all values in each subaccount and the fixed account. - Is determined on the Policy date and on each valuation date. - Has no guaranteed minimum amount and may be more or less than premiums paid. - Includes any amounts held in the fixed account to secure any outstanding Policy loan. NET SURRENDER VALUE The net surrender value is the amount we pay when you surrender your Policy. We determine the net surrender value at the end of the valuation period when we receive your written surrender request at our office. NET SURRENDER VALUE ON ANY - the cash value as of such date; MINUS VALUATION DATE EQUALS: - any outstanding Policy loan amount; MINUS - any accrued Policy loan interest. SUBACCOUNT VALUE Each subaccount's value is the cash value in that subaccount. At the end of any valuation period, the subaccount's value is equal to the number of units that the Policy has in the subaccount, multiplied by the unit value of that subaccount. THE NUMBER OF UNITS IN ANY - the initial units purchased at SUBACCOUNT ON ANY VALUATION DATE unit value on the Policy date, or EQUALS: reallocation date, if different; PLUS - units purchased with additional net premium(s); PLUS - units purchased via transfers from another subaccount or the fixed account; MINUS - units redeemed to pay for monthly deductions; MINUS - units redeemed to pay for cash withdrawals; MINUS - units redeemed as part of a transfer to another subaccount or the fixed account. Every time you allocate, transfer or withdraw money to or from a subaccount, we convert that dollar amount into units. We determine the number of units we credit to, or subtract from, your Policy by dividing the dollar amount of the allocation, transfer or cash withdrawal by the unit value for that subaccount next determined at the end of the valuation period on which the premium allocation, transfer request or cash withdrawal request is received at our office. 29 SUBACCOUNT UNIT VALUE The value (or price) of each subaccount unit will reflect the investment performance of the portfolio in which the subaccount invests. Unit values will vary among subaccounts. The unit value of each subaccount was originally established at $10 per unit. The unit value may increase or decrease from one valuation period to the next. THE UNIT VALUE OF ANY - the total value of the portfolio SUBACCOUNT AT THE END OF A shares held in the subaccount, VALUATION PERIOD IS including the value of any dividends CALCULATED AS: or capital gains distribution declared and reinvested by the portfolio during the valuation period. This value is determined by multiplying the number of portfolio shares owned by the subaccount by the portfolio's net asset value per share determined at the end of the valuation period; MINUS - a charge equal to the daily net assets of the subaccount multiplied by the daily equivalent of the daily mortality and expense risk charge; MINUS - the accrued amount of reserve for any taxes or other economic burden resulting from applying tax laws that we determine to be properly attributable to the subaccount; AND THE RESULT DIVIDED BY - the number of outstanding units in the subaccount before the purchase or redemption of any units on that date. The portfolio in which any subaccount invests will determine its net asset value per share once daily, as of the close of the regular business session of the NYSE (usually 4:00 p.m. Eastern time) except on customary national holidays on which the NYSE is closed, which coincides with the end of each valuation period. FIXED ACCOUNT VALUE On the Policy date, or the reallocation date, if different, the fixed account value is equal to the cash value allocated to the fixed account. THE FIXED ACCOUNT VALUE AT THE END - the sum of net premium(s) allocated to OF ANY VALUATION PERIOD IS EQUAL TO: the fixed account; PLUS - any amounts transferred from a subaccount to the fixed account; PLUS - total interest credited to the fixed account; MINUS - amounts charged to pay for monthly deductions; MINUS - amounts withdrawn from the fixed account to pay for cash withdrawals; MINUS - amounts transferred from the fixed account to a subaccount. DEATH BENEFIT DEATH BENEFIT PROCEEDS As long as the Policy is in force, we will pay the death benefit proceeds on an individual Policy once we receive satisfactory proof of the insured's death. We may require return of the Policy. We will pay the death benefit proceeds to the primary beneficiary(ies), if living, or to a contingent beneficiary. If each beneficiary dies before the insured and there is no contingent beneficiary, we will pay the death benefit proceeds to the owner or the owner's estate. We will pay the death benefit proceeds in a lump sum or under a payment option. DEATH BENEFIT PROCEEDS EQUAL: - the death benefit (described below); MINUS 30 - any monthly deductions due during the grace period (if applicable); MINUS - any outstanding loan amount and accrued loan interest; PLUS - any additional insurance in force provided by rider. We may further adjust the amount of the death benefit proceeds if we contest the Policy or if you misstate the insured's age or gender. DEATH BENEFIT The Policy provides a death benefit. The death benefit is determined at the end of the valuation period in which the insured dies. You must select one of the three death benefit options we offer in your application. No matter which death benefit option you choose, we guarantee that, so long as the Policy does not lapse, the death benefit will never be less than the specified amount on the date of the insured's death. DEATH BENEFIT OPTION A - the current specified amount; OR EQUALS THE GREATER OF: - a specified percentage called the "limitation percentage," MULTIPLIED BY - the cash value on the insured's date of death; OR - the amount required for the Policy to qualify as a life insurance contract under Section 7702 of the Internal Revenue Code. Under Option A, your death benefit remains level unless the limitation percentage multiplied by the cash value is greater than the specified amount; then the death benefit will vary as the cash value varies. The limitation percentage is the minimum percentage of cash value we must pay as the death benefit under federal tax requirements. It is based on the attained age of the insured at the beginning of each Policy year. The following table indicates the limitation percentages for different ages:
ATTAINED AGE LIMITATION PERCENTAGE 40 and under 250% 41 to 45 250% of cash value minus 7% for each age over age 40 46 to 50 215% of cash value minus 6% for each age over age 45 51 to 55 185% of cash value minus 7% for each age over age 50 56 to 60 150% of cash value minus 4% for each age over age 55 61 to 65 130% of cash value minus 2% for each age over age 60 66 to 70 120% of cash value minus 1% for each age over age 65 71 to 75 115% of cash value minus 2% for each age over age 70 76 to 90 105% 91 to 95 105% of cash value minus 1% for each age over age 90 96 and older 100%
If the federal tax code requires us to determine the death benefit by reference to these limitation percentages, the Policy is described as "in the corridor." An increase in the cash value will increase our risk, and we will increase the cost of insurance we deduct from the cash value. Option A Illustration. Assume that the insured's attained age is under 40, there have been no withdrawals or decreases in specified amount, and that there are no outstanding loans. Under Option A, a Policy with a $500,000 specified amount will generally pay $500,000 in death benefits. However, because the death benefit must be equal to or be greater than 250% of cash value, any time the cash value of the Policy exceeds $200,000, the death benefit will exceed the $500,000 specified amount. Each additional dollar added to the cash value above $200,000 will increase the death benefit by $2.50. 31 Similarly, so long as the cash value exceeds $200,000, each dollar taken out of the cash value will reduce the death benefit by $2.50. If at any time the cash value multiplied by the limitation percentage is less than the specified amount, the death benefit will equal the specified amount of the Policy reduced by the dollar value of any cash withdrawals. DEATH BENEFIT OPTION B - the current specified amount; PLUS EQUALS THE GREATER OF: - the cash value on the insured's date of death; OR - the limitation percentage, MULTIPLIED BY - the cash value on the insured's date of death; OR - the amount required for the Policy to qualify as a life insurance contract under Section 7702 of the Internal Revenue Code. Under Option B, the death benefit always varies as the cash value varies. Option B Illustration. Assume that the insured's attained age is under 40 and that there are no outstanding loans. Under Option B, a Policy with a specified amount of $500,000 will generally pay a death benefit of $500,000 plus cash value. Thus, a Policy with a cash value of $10,000 will have a death benefit of $510,000 ($500,000 + $10,000). The death benefit, however, must be at least 250% of cash value. As a result, if the cash value of the Policy exceeds $333,333, the death benefit will be greater than the specified amount plus cash value. Each additional dollar of cash value above $333,333 will increase the death benefit by $2.50. Similarly, any time cash value exceeds $333,333, each dollar taken out of cash value will reduce the death benefit by $2.50. If at any time, cash value multiplied by the limitation percentage is less than the specified amount plus the cash value, then the death benefit will be the specified amount plus the cash value of the Policy. DEATH BENEFIT OPTION C - death benefit Option A; OR EQUALS THE GREATER OF: - the current specified amount, MULTIPLIED BY - an age-based "factor" equal to the lesser of - 1.0 or - 0.04 TIMES (95 MINUS insured's attained age at death) (the "factor" will never be less than zero); PLUS - the cash value on the insured's date of death; OR - the amount required for the Policy to qualify as a life insurance contract under Section 7702 of the Internal Revenue Code. Under Option C, the death benefit varies with the cash value and the insured's attained age. Option C--Three Illustrations. 1. Assume that the insured is under age 40 and that there are no outstanding loans. Under Option C, a Policy with a specified amount of $500,000 and with a cash value of $10,000 will have a death benefit of $510,000 ($500,000 times the minimum of (1.0 and (0.04 (95-40))) + $10,000). Until the insured attains age 71, this benefit is the same as the Option B benefit. 2. Assume that the insured is attained age 75 and that there are no outstanding loans. Under Option C, a Policy with a specified amount of $500,000 and with a cash value of $110,000 will have a death benefit of $510,000 ($500,000 times the minimum of (1.0 and (0.04 (95-75))) + $110,000). 3. Assume that the insured is attained age 75 and that there are no outstanding loans. Under Option C, a Policy with a specified amount of $500,000 and with a cash value of $10,000 will have a death benefit equal to the specified amount of $500,000, since the calculation of $500,000 times the minimum of (1.0 and (0.04 (95-75))) plus $10,000 is less than the specified amount. The Policy is intended to qualify under Section 7702 of the Internal Revenue Code as a life insurance contract for federal tax purposes. The death benefit under the Policy is intended to qualify for the federal income tax exclusion. The 32 provisions of the Policy (including any rider or endorsement) will be interpreted to ensure tax qualification, regardless of any language to the contrary. To the extent that the death benefit is increased to maintain qualification as a life insurance policy, appropriate adjustments will be made in any monthly deductions or supplemental benefits as of that time, retroactively or otherwise, that are consistent with such an increase. Retroactive adjustments to the monthly deduction may be deducted from the cash value or may be made by right of setoff against any death benefits payable. Prospective adjustments will be reflected in the monthly deduction. EFFECT OF CASH WITHDRAWALS ON THE DEATH BENEFIT If you choose Option A, a cash withdrawal will reduce the specified amount by an amount equal to the amount of the cash withdrawal. Regardless of the death benefit option you choose, a cash withdrawal will reduce the death benefit by at least the amount of the withdrawal. CHOOSING DEATH BENEFIT OPTIONS You must choose one death benefit option on your application. This is an important decision. The death benefit option you choose will have an impact on the dollar value of the death benefit, on your cash value, and on the amount of cost of insurance charges you pay. If you do not select a death benefit option on your application, we will assume you selected death benefit Option A and will ask you to confirm the selection of Option A in writing or choose one of the other death benefit options. You may find Option A more suitable for you if your goal is to increase your cash value through positive investment experience. You may find Option B more suitable if your goal is to increase your total death benefit. You may find Option C more suitable if your goal is to increase your total death benefit before you reach attained age 70, and to increase your cash value through positive investment experience thereafter. CHANGING THE DEATH BENEFIT OPTION After the third Policy year, you may change your death benefit option once each Policy year if you have not decreased the specified amount that year. We will notify you of the new specified amount. - You must send your written request to our office. - The effective date of the change will be the Monthiversary on or following the date when we receive your request for a change. - You may not make a change that would decrease the specified amount below the minimum specified amount shown on your Policy schedule page. - There may be adverse federal tax consequences. You should consult a tax advisor before changing your Policy's death benefit option. DECREASING THE SPECIFIED AMOUNT After the Policy has been in force for three years, you may decrease the specified amount once each Policy year if you have not changed the death benefit option that year. A decrease in the specified amount will affect your cost of insurance charge and your minimum monthly guarantee premium, and may have adverse federal tax consequences. You should consult a tax advisor before decreasing your Policy's specified amount. CONDITIONS FOR DECREASING - you must send your written request to THE SPECIFIED AMOUNT: our office; - you may not change your death benefit option in the same Policy year that you decrease your specified amount; - you may not decrease your specified amount lower than the minimum specified amount shown on your Policy schedule page; 33 - you may not decrease your specified amount if it would disqualify your Policy as life insurance under the Internal Revenue Code; - we may limit the amount of the decrease to no more than 20% of the specified amount; and - a decrease in specified amount will take effect on the Monthiversary on or after we receive your written request. PAYMENT OPTIONS There are several ways of receiving proceeds under the death benefit and surrender provisions of the Policy, other than in a lump sum. SURRENDERS AND CASH WITHDRAWALS SURRENDERS You must make a written request containing an original signature to surrender your Policy for its net surrender value as calculated at the end of the valuation date on which we receive your request at our office. The insured must be alive, the Policy must be in force, and it must be before the maturity date when you make your written request. A surrender is effective as of the date when we receive your written request. The signature of the owner's spouse is required if the owner is a resident of California, Nevada or Washington. Once you surrender your Policy, all coverage and other benefits under it cease and cannot be reinstated. We will normally pay you the net surrender value in a lump sum within seven days or under a settlement option. A surrender may have tax consequences. See Federal Income Tax Considerations p. 38. CASH WITHDRAWALS After the first Policy year, you may request a cash withdrawal of a portion of your cash value subject to certain conditions. CASH WITHDRAWAL CONDITIONS: - You must send your written cash withdrawal request with an original signature to our office. - Signature of the owner's spouse is required if the owner is a resident of California, Nevada or Washington. - We only allow one cash withdrawal per Policy year. - We may limit the amount you can withdraw to at least $500 and the remaining net surrender value following a withdrawal may not be less than $500. - You may not take a cash withdrawal if it will reduce the specified amount below the minimum specified amount set forth in the Policy. - You may specify the subaccount(s) and the fixed account from which to make the withdrawal. If you do not specify an account, we will take the withdrawal from each account in accordance with your current premium allocation instructions. - We generally will pay a cash withdrawal request within seven days following the valuation date we receive the request at our office. - We will deduct a processing fee equal to $25 or 2% of the amount you withdraw, whichever is less. We deduct this amount from the withdrawal, and we pay you the balance. - You may not take a cash withdrawal that would disqualify your Policy as life insurance under the Internal Revenue Code. - A cash withdrawal may have tax consequences. 34 A cash withdrawal will reduce the cash value by the amount of the cash withdrawal, and will reduce the death benefit by at least the amount of the cash withdrawal. When death benefit Option A is in effect, a cash withdrawal will reduce the specified amount by an amount equal to the amount of the cash withdrawal. You also may have to pay higher minimum monthly guarantee premiums and premium expense charges. When we incur extraordinary expenses, such as overnight mail expenses or wire service fees, for expediting delivery of your partial withdrawal or complete surrender payment, we will deduct that charge from the payment. We charge $20 for an overnight delivery ($30 for Saturday delivery) and $25 for wire service. CANCELING A POLICY You may cancel a Policy for a refund during the "free-look period" by returning it to our office, to one of our branch offices or to the agent who sold you the Policy. The free-look period expires 10 days after you receive the Policy. In some states you may have more than 10 days. If you decide to cancel the Policy during the free-look period, we will treat the Policy as if it had never been issued. We will pay the refund within seven days after we receive the returned Policy at our office. The amount of the refund will be: - any charges and taxes we deduct from your premiums; PLUS - any monthly deductions or other charges we deducted from amounts you allocated to the subaccounts and the fixed account; PLUS - your cash value in the subaccounts and the fixed account on the date we (or our agent) receive the returned Policy at our office. Some states may require us to refund all of the premiums you paid for the Policy. LOANS GENERAL After the first Policy year (as long as the Policy is in force) you may borrow money from us using the Policy as the only security for the loan. We may permit a loan prior to the first anniversary for Policies issued pursuant to 1035 Exchanges. A loan that is taken from, or secured by, a Policy may have tax consequences. See Federal Income Tax Considerations p. 38. POLICY LOANS ARE SUBJECT TO - we may require you to borrow at CERTAIN CONDITIONS: least $500; - the maximum amount you may borrow is 90% of the cash value, minus any outstanding loan amount, including accrued loan interest; and - signature of the owner's spouse is required if the owner is a resident of California, Nevada or Washington. When you take a loan, we will withdraw an amount equal to the requested loan from each of the subaccounts and the fixed account based on your current premium allocation instructions (unless you specify otherwise). We will transfer that amount to the loan reserve. The loan reserve is the portion of the fixed account used as collateral for a Policy loan. We normally pay the amount of the loan within seven days after we receive a proper loan request at our office. We may postpone payment of loans under certain conditions. You may request a loan by telephone by calling us at 1-800-851-9777 Monday - Friday 8:30 a.m. - 7:00 p.m. Eastern time. If the loan amount you request exceeds $50,000 or if the address of record has been changed within the past 10 days, we may reject your request. If you do not want the ability to request a loan by telephone, you should notify us in writing at our office. You will be required to provide certain information for identification purposes when you request a loan by telephone. We may ask you to provide us with written confirmation of your request. We will not be liable for processing a loan request if we believe the request is genuine. 35 You may also fax your loan request to us at 727-299-1667. We will not be responsible for any transmittal problems when you fax your request unless you report it to us within five business days and send us proof of your fax transmittal. You can repay a loan at any time while the Policy is in force. Loan repayments must be sent to our office and will be credited as of the date received. WE WILL CONSIDER ANY PAYMENTS YOU MAKE ON THE POLICY TO BE PREMIUM PAYMENTS UNLESS THE PAYMENTS ARE CLEARLY SPECIFIED AS LOAN REPAYMENTS. BECAUSE WE DO NOT APPLY THE PREMIUM EXPENSE CHARGE TO LOAN REPAYMENTS, IT IS VERY IMPORTANT THAT YOU INDICATE CLEARLY IF YOUR PAYMENT IS INTENDED TO REPAY ALL OR PART OF A LOAN. At each Policy anniversary, we will compare the outstanding loan amount, including accrued loan interest, to the amount in the loan reserve. We will also make this comparison any time you repay all or part of the loan, or make a request to borrow an additional amount. At each such time, if the outstanding loan amount, including accrued loan interest, exceeds the amount in the loan reserve, we will withdraw the difference from the subaccounts and the fixed account and transfer it to the loan reserve, in the same manner as when a loan is made. If the amount in the loan reserve exceeds the amount of the outstanding loan, including accrued loan interest, we will withdraw the difference from the loan reserve and transfer it to the subaccounts and the fixed account in the same manner as current premiums are allocated. No charge will be imposed for these transfers, and these transfers are not treated as transfers in calculating the transfer charge. WE RESERVE THE RIGHT TO REQUIRE A TRANSFER TO THE FIXED ACCOUNT IF THE LOANS WERE ORIGINALLY TRANSFERRED FROM THE FIXED ACCOUNT. INTEREST RATE CHARGED We currently charge you an annual interest rate on a Policy loan that is equal to 3.75% (4.0% maximum guaranteed) and is payable in arrears on each Policy anniversary. We may declare various lower Policy loan interest rates. We also may apply different loan interest rates to different parts of the loan. Loan interest that is unpaid when due will be added to the amount of the loan on each Policy anniversary and will bear interest at the same rate. After the 10th Policy year, on all amounts that you have borrowed, you may receive preferred loan rates on an amount equal to the cash value MINUS total premiums paid (reduced by any cash withdrawals), MINUS any outstanding loan amount, and MINUS any accrued loan interest. THIS PREFERRED LOAN RATE IS CURRENTLY 3.0% AND IS NOT GUARANTEED. The tax consequences of preferred loans are uncertain. LOAN RESERVE INTEREST RATE CREDITED We will credit the amount in the loan reserve with interest at an effective annual rate of 3.0%. EFFECT OF POLICY LOANS A Policy loan reduces the death benefit proceeds and net surrender value by the amount of any outstanding loan amount, including accrued loan interest. Repaying the loan causes the death benefit proceeds and net surrender value to increase by the amount of the repayment. As long as a loan is outstanding, we hold an amount equal to the loan as of the last Policy anniversary plus any accrued interest net of any loan payments. This amount is not affected by the separate account's investment performance and may not be credited with the interest rates accruing on the unloaned portion of the fixed account. Amounts transferred from the separate account to the loan reserve will affect the value in the separate account because we credit such amounts with an interest rate declared by us rather than a rate of return reflecting the investment results of the separate account. There are risks involved in taking a Policy loan, including the potential for a Policy to lapse if projected earnings, taking into account outstanding loans, are not achieved. A Policy loan may also have possible adverse tax consequences. You should consult a tax advisor before taking out a Policy loan. We will notify you (and any assignee of record) if the sum of your loan amount is more than the net surrender value. If you do not submit a sufficient payment within 61 days from the date of the notice, your Policy may lapse. POLICY LAPSE AND REINSTATEMENT LAPSE Your Policy may not necessarily lapse (terminate without value) if you fail to make a planned periodic payment. However, even if you make all your planned periodic payments, there is no guarantee that your Policy will not lapse. This 36 Policy provides a no lapse period. See below. Once your no lapse period ends, your Policy may lapse (terminate without value) if the net surrender value on any Monthiversary is less than the monthly deductions due on that day. Such lapse might occur if unfavorable investment experience, loans and cash withdrawals cause a decrease in the net surrender value, or you have not paid sufficient premiums as discussed below to offset the monthly deductions. If the net surrender value is not enough to pay the monthly deductions, we will mail a notice to your last known address and any assignee of record. The notice will specify the minimum payment you must pay and the final date by which we must receive the payment to prevent a lapse. We generally require that you make the payment within 61 days after the date of the notice. This 61-day period is called the grace period. If we do not receive the specified minimum payment by the end of the GRACE PERIOD, all coverage under the Policy will terminate without value. NO LAPSE PERIOD This Policy provides a no lapse period. As long as you keep the no lapse period in effect, your Policy will not lapse and no grace period will begin. Even if your net surrender value is not enough to pay your monthly deduction, the Policy will not lapse so long as the no lapse period is in effect. The no lapse period will not extend beyond the no lapse date stated in your Policy. Each month we determine whether the no lapse period is still in effect. NO LAPSE DATE - For a Policy issued to any insured ages 0-60, the no lapse date is determined by either the number of years to attained age 65 or the twentieth Policy anniversary, whichever is earlier. - For a Policy issued to an insured ages 61-85, the no lapse date is the fifth Policy anniversary. - The no lapse date is specified in your Policy. EARLY TERMINATION OF - The no lapse period coverage will THE NO LAPSE PERIOD end immediately if you do not pay sufficient minimum monthly guarantee premiums. - You must pay total premiums (minus withdrawals and outstanding loan amounts) that equal at least: - the sum of the minimum monthly guarantee premiums in effect for each month from the Policy date up to and including the current month. You will lessen the risk of Policy lapse if you keep the no lapse period in effect. Before you take a cash withdrawal or a loan or decrease the specified amount or add, increase or decrease a rider you should consider carefully the effect it will have on the no lapse period guarantee. In addition, if you change death benefit options, decrease the specified amount, or add, increase or decrease a rider, we will adjust the minimum monthly guarantee premium. See Minimum Monthly Guarantee Premium for a discussion of how the minimum monthly guarantee premium is calculated and can change. REINSTATEMENT We will reinstate a lapsed Policy within five years after the lapse (and prior to the maturity date). To reinstate the Policy you must: - submit a written application for reinstatement to our office; - provide evidence of insurability satisfactory to us; - make a minimum premium payment sufficient to provide a net premium that is large enough to cover: - three monthly deductions. We will not reinstate any indebtedness. The cash value of the loan reserve on the reinstatement date will be zero. Your net surrender value on the reinstatement date will equal the cash value at the time your Policy lapsed, PLUS any net premiums you pay at reinstatement, MINUS one monthly deduction. The reinstatement date for your Policy will be the Monthiversary on or following the day we approve your application for reinstatement. We may decline a request for reinstatement. 37 FEDERAL INCOME TAX CONSIDERATIONS The following summarizes some of the basic federal income tax considerations associated with a Policy and does not purport to be complete or to cover all situations. This discussion is not intended as tax advice. Please consult counsel or other qualified tax advisors for more complete information. We base this discussion on our understanding of the present federal income tax laws as they are currently interpreted by the Internal Revenue Service (the "IRS"). Federal income tax laws and the current interpretations by the IRS may change. TAX STATUS OF THE POLICY A Policy must satisfy certain requirements set forth in the Internal Revenue Code (the "Code") in order to qualify as a life insurance policy for federal income tax purposes and to receive the tax treatment normally accorded life insurance policies under federal tax law. Guidance as to how these requirements are to be applied is limited. Nevertheless, we believe that a Policy issued on the basis of a standard rate class should generally satisfy the applicable Code requirements. Because of the absence of pertinent interpretations of the Code requirements, there is, however, less certainty about the application of such requirements to a Policy issued on a substandard basis. It is also uncertain whether death benefits under policies where the maturity date has been extended will be excludible from the beneficiary's gross income and whether policy cash value will be deemed to be distributed to you on the original maturity date. Such a deemed distribution may be taxable. If it is subsequently determined that a Policy does not satisfy the applicable requirements, we may take appropriate steps to bring the Policy into compliance with such requirements and we reserve the right to restrict Policy transactions in order to do so. In certain circumstances, owners of variable life insurance policies have been considered for federal income tax purposes to be the owners of the assets of the separate account supporting their policies due to their ability to exercise investment control over those assets. Where this is the case, the policyowners have been currently taxed on income and gains attributable to the separate account assets. There is little guidance in this area, and some features of the Policies, such as your flexibility to allocate premiums and cash values, have not been explicitly addressed in published rulings. While we believe that the Policy does not give you investment control over separate account assets, we reserve the right to modify the Policy as necessary to prevent you from being treated as the owner of the separate account assets supporting the Policy. In addition, the Code requires that the investments of the separate account be "adequately diversified" in order to treat the Policy as a life insurance policy for federal income tax purposes. We intend that the separate account, through the portfolios, will satisfy these diversification requirements. The following discussion assumes that the Policy will qualify as a life insurance policy for federal income tax purposes. TAX TREATMENT OF POLICY BENEFITS In General. We believe that the death benefit under a Policy should be excludible from the beneficiary's gross income. Federal, state and local transfer, estate and other tax consequences of ownership or receipt of Policy proceeds depend on your circumstances and the beneficiary's circumstances. A tax advisor should be consulted on these consequences. Generally, you will not be deemed to be in constructive receipt of the cash value until there is a distribution. When distributions from a Policy occur, or when loans are taken out from or secured by a Policy (e.g., by assignment), the tax consequences depend on whether the Policy is classified as a "Modified Endowment Contract" ("MEC"). Modified Endowment Contracts. Under the Code, certain life insurance policies are classified as MECs and receive less favorable tax treatment than other life insurance policies. The rules are too complex to summarize here, but generally depend on the amount of premiums paid during the first seven Policy years or in the seven Policy years following certain changes in the Policy. Certain changes in the Policy after it is issued could also cause the Policy to be classified as a MEC. Due to the Policy's flexibility, each Policy's circumstances will determine whether the Policy is classified as a MEC. Among other things, a reduction in benefits could cause a Policy to become a MEC. If you do not want your Policy to be classified as a MEC, 38 you should consult a tax advisor to determine the circumstances, if any, under which your Policy would or would not be classified as a MEC. Upon issue of your Policy, we will notify you as to whether or not your Policy is classified as a MEC based on the initial premium we receive. If your Policy is not a MEC at issue, then you will also be notified of the maximum amount of additional premiums you can pay without causing your Policy to be classified as a MEC. If a payment would cause your Policy to become a MEC, you and your agent will be notified immediately. At that time, you will need to notify us if you want to continue your Policy as a MEC. Unless you notify us that you do want to continue your Policy as a MEC, we will refund the dollar amount of the excess premium that would cause the Policy to become a MEC. Distributions (other than Death Benefits) from MECs. Policies classified as MECs are subject to the following tax rules: - All distributions other than death benefits from a MEC, including distributions upon surrender and cash withdrawals, will be treated first as distributions of gain taxable as ordinary income. They will be treated as tax-free recovery of the owner's investment in the Policy only after all gain has been distributed. Your investment in the Policy is generally your total premium payments. When a distribution is taken from the Policy, your investment in the Policy is reduced by the amount of the distribution that is tax-free. - Loans taken from or secured by (e.g., by assignment) such a Policy are treated as distributions and taxed accordingly. - A 10% additional federal income tax is imposed on the amount included in income except where the distribution or loan is made when you have attained age 59 1/2 or are disabled, or where the distribution is part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and the beneficiary. - If a Policy becomes a MEC, distributions that occur during the Policy year will be taxed as distributions from a MEC. In addition, distributions from a Policy within two years before it becomes a MEC will be taxed in this manner. This means that a distribution from a Policy that is not a MEC at the time when the distribution is made could later become taxable as a distribution from a MEC. Distributions (other than Death Benefits) from Policies that are not MECs. Distributions from a Policy that is not a MEC are generally treated first as a recovery of your investment in the Policy, and as taxable income after the recovery of all investment in the Policy. However, certain distributions which must be made in order to enable the Policy to continue to qualify as a life insurance policy for federal income tax purposes if Policy benefits are reduced during the first 15 Policy years may be treated in whole or in part as ordinary income subject to tax. Loans from or secured by a Policy that is not a MEC are generally not treated as distributions. Instead, such loans are treated as indebtedness. However, the tax consequences associated with Policy loans outstanding after the first 10 Policy years with preferred loan rates are less clear and a tax advisor should be consulted about such loans. Finally, distributions from or loans from or secured by a Policy that is not a MEC are not subject to the 10% additional tax. Multiple Policies. All MECs that we issue (or that our affiliates issue) to the same owner during any calendar year are treated as one MEC for purposes of determining the amount includible in the owner's income when a taxable distribution occurs. Withholding. To the extent that Policy distributions are taxable, they are generally subject to withholding for the recipient's federal income tax liability. With the exception of amounts that represent eligible rollover distributions from 403(b) arrangements, which are subject to mandatory withholding of 20% for federal tax, recipients can generally elect, however, not to have tax withheld from distributions. If the taxable distributions are delivered to foreign countries, withholding will apply unless 39 you certify to us that you are not a U.S. person residing abroad. Taxable distributions to non-resident aliens are generally subject to withholding unless withholding is eliminated under an international treaty with the United States. Investment in the Policy. Your investment in the Policy is generally the sum of the premium payments you made. When a distribution from the Policy occurs, your investment in the Policy is reduced by the amount of the distribution that is tax-free. Policy Loans. If a loan from a Policy that is not a MEC is outstanding when the Policy is canceled or lapses, or if a loan is taken out and the Policy is a MEC, then the amount of the outstanding indebtedness will be taxed as if it were a distribution. Deductibility of Policy Loan Interest. In general, interest you pay on a loan from a Policy will not be deductible. Before taking out a Policy loan, you should consult a tax advisor as to the tax consequences. Business Uses of the Policy. The Policy may be used in various arrangements, including nonqualified deferred compensation or salary continuance plans, split dollar insurance plans, executive bonus plans, retiree medical benefit plans and others. The tax consequences of such plans and business uses of the Policy may vary depending on the particular facts and circumstances of each individual arrangement and business uses of the Policy. Therefore, if you are contemplating using the Policy in any arrangement the value of which depends in part on its tax consequences, you should be sure to consult a tax advisor as to tax attributes of the arrangement. In recent years, moreover, Congress has adopted new rules relating to life insurance owned by businesses and the IRS has recently issued new guidelines on split-dollar arrangements. Any business contemplating the purchase of a new Policy or a change in an existing Policy should consult a tax advisor. Alternative Minimum Tax. There also may be an indirect tax upon the income in the Policy or the proceeds of a Policy under the federal corporate alternative minimum tax, if the policyowner is subject to that tax. Living Benefit Rider (an Accelerated Death Benefit). We believe that the single-sum payment we make under this rider should be fully excludible from the gross income of the beneficiary, except in certain business contexts. You should consult a tax advisor about the consequences of adding this rider to your Policy, or requesting a single-sum payment. Other Tax Considerations. The transfer of the Policy or designation of a beneficiary may have federal, state, and/or local transfer and inheritance tax consequences, including the imposition of gift, estate, and generation-skipping transfer taxes. The individual situation of each owner or beneficiary will determine the extent, if any, to which federal, state, and local transfer and inheritance taxes may be imposed and how ownership or receipt of Policy proceeds will be treated for purposes of federal, state and local estate, inheritance, generation-skipping and other taxes. Possible Tax Law Changes. Although the likelihood of legislative changes is uncertain, there is always a possibility that the tax treatment of the Policies could change by legislation or otherwise. You should consult a tax advisor with respect to legal developments and their effect on the Policy. SPECIAL RULES FOR 403(b) ARRANGEMENTS If this Policy is purchased by participants in a 403(b) plan or program of public school systems and certain tax-exempt organizations, then the federal, state and estate tax consequences could differ from those stated in the prospectus. A competent tax advisor should be consulted in connection with such purchase. Certain restrictions apply. The Policy must be purchased in connection with a tax-sheltered annuity described in section 403(b) of the Code. Premiums, distributions, and other transactions in connection with the Policy must be administered in coordination with the section 403(b) annuity. The amount of life insurance protection that may be purchased on behalf of a participant in a 403(b) plan is limited. The current cost of insurance for the net amount at risk is treated under the Code as a "current economic benefit" and must be included annually in the plan participant's gross income. This cost (formerly referred to as the "P.S. 58" cost) is based on IRS Table 2001 and is reported to the IRS and the participant annually as ordinary income. Life insurance protection cannot extend beyond retirement under a 403(b) program. 40 If the participant dies while covered by the 403(b) plan and the Policy proceeds are paid to the participant's beneficiary, then the excess of the death benefit over the cash value will generally not be taxable. However, the cash value will generally be taxable to the extent it exceeds the participant's cost basis in the Policy. Policies owned under these types of plans may be subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), which may impose additional requirements on the purchase of the Policy, on Policy loans and other Policy provisions. Whether or not ERISA applies, plan loans must also satisfy tax requirements in order to be treated, and remain, non-taxable. Your 403(b) plan loan requirements and provisions may differ from the Policy loan provisions stated in the prospectus. You should consult a qualified advisor regarding ERISA and loans in general. OTHER POLICY INFORMATION BENEFITS AT MATURITY If the insured is living and the Policy is in force, the Policy will mature on the Policy anniversary nearest the insured's 100th birthday. This is the maturity date. On the maturity date we will pay you the net surrender value of your Policy. If requested in writing at our office, we will extend the maturity date if your Policy is still in force on the maturity date. Any riders in force on the scheduled maturity date will terminate on that date and will not be extended. Policy loans, partial withdrawals, and subaccount transfers may continue during the extension. Interest on any outstanding Policy loans will continue to accrue during the period for which the maturity date is extended. You must submit a written request to our office for the extension between 90 and 180 days prior to the maturity date and elect one of the following: 1. If you had previously selected death benefit Option B or C, we will change the death benefit to Option A. On each valuation date, we will adjust the specified amount to equal the cash value, and the limitation percentage will be 100%. We will not permit you to make additional premium payments unless it is required to prevent the Policy from lapsing. We will waive all future monthly deductions; or 2. We will automatically extend the maturity date until the next Policy anniversary. You must submit a written request to our office, between 90 and 180 days before each subsequent Policy anniversary, stating that you wish to extend the maturity date for another Policy year. All benefits and charges will continue as set forth in your Policy. We will charge the then current cost of insurance rates. If you choose 2 above, you may change your election to 1 above at any time. However, if you choose 1 above, then you may not change your election to 2 above. The tax consequences of extending the maturity date beyond the 100th birthday of the insured are uncertain, including that the death benefit may be taxable. You should consult a tax advisor as to those consequences. PAYMENTS WE MAKE We usually pay the amounts of any surrender, cash withdrawal, death benefit proceeds, or settlement options within seven business days after we receive all applicable written notices and/or due proofs of death at our office. However, we can postpone such payments if: - the NYSE is closed, other than customary weekend and holiday closing, or trading on the NYSE is restricted as determined by the SEC; OR - the SEC permits, by an order, the postponement for the protection of policyowners; OR - the SEC determines that an emergency exists that would make the disposal of securities held in the separate account or the determination of their value not reasonably practicable. 41 If you have submitted a recent check or draft, we have the right to defer payment of surrenders, cash withdrawals, death benefit proceeds, or payments under a settlement option until such check or draft has been honored. We also reserve the right to defer payment of transfers, cash withdrawals, death benefit proceeds, or surrenders from the fixed account for up to six months. If mandated under applicable law, we may be required to reject a premium payment and/or block a policyowner's account and thereby refuse to pay any request for transfers, withdrawals, surrenders, loans or death benefits until instructions are received from the appropriate regulators. SPLIT DOLLAR ARRANGEMENTS You may enter into a split dollar arrangement with another owner or another person(s) whereby the payment of premiums and the right to receive the benefits under the Policy (i.e., cash surrender value of insurance proceeds) are split between the parties. There are different ways of allocating these rights. For example, an employer and employee might agree that under a Policy on the life of the employee, the employer will pay the premiums and will have the right to receive the cash surrender value. The employee may designate the beneficiary to receive any insurance proceeds in excess of the cash surrender value. If the employee dies while such an arrangement is in effect, the employer would receive from the insurance proceeds the amount that he would have been entitled to receive upon surrender of the Policy and the employee's beneficiary would receive the balance of the proceeds. No transfer of Policy rights pursuant to a split dollar arrangement will be binding on us unless in writing and received by us at our office. Split dollar arrangements may have tax consequences. You should consult a tax advisor before entering into a split dollar arrangement. On July 30, 2002, President Bush signed into law significant accounting and corporate governance reform legislation, known as the Sarbanes-Oxley Act of 2002 (the "Act"). The Act prohibits, with limited exceptions, PUBLICLY-TRADED companies, including non-U.S. companies that have securities listed on exchanges in the United States, from extending, directly or through a subsidiary, many types of personal loans to their directors or executive officers. It is possible that this prohibition may be interpreted as applying to split-dollar life insurance policies for directors and executive officers of such companies, since such insurance arguably can be viewed as involving a loan from the employer for at least some purposes. Although the prohibition on loans of publicly-traded companies is generally effective as of July 30, 2002, there is an exception for loans outstanding as of the date of enactment, so long as there is no material modification to the loan terms and the loan is not renewed after July 30, 2002. Any affected business contemplating the payment of a premium on an existing Policy, or the purchase of a new Policy, in connection with a split-dollar life insurance arrangement should consult legal counsel. In addition, the IRS recently issued guidance that affects the tax treatment of split-dollar arrangements and the Treasury Department recently issued proposed regulations that, if finalized, would significantly affect the tax treatment of such arrangements. The IRS guidance and the proposed regulations affect all split dollar arrangements, not just those involving publicly-traded companies. Consult your qualified tax advisor with respect to the effect of this current and proposed guidance on your split dollar policy. POLICY TERMINATION Your Policy will terminate on the earliest of: - the maturity date; - the end of the grace period; or - the date the insured dies; - the date the Policy is surrendered. 42 SUPPLEMENTAL BENEFITS (RIDERS) The following supplemental benefits (riders) are available and may be added to a Policy. Monthly charges for these riders are deducted from cash value as part of the monthly deduction. The riders available with the Policies do not build cash value and provide benefits that do not vary with the investment experience of the separate account. For purposes of the riders, the primary insured is the person insured under the Policy. These riders may not be available in all states. Adding these supplemental benefits to an existing Policy or canceling them may have tax consequences and you should consult a tax advisor before doing so. CHILDREN'S INSURANCE RIDER This rider provides a face amount on the primary insured's children. Our current minimum face amount for this rider for issue ages 15 days-18 years of age is $5,000. The maximum face amount is $20,000. At the age of 25 or upon the death of the primary insured, whichever happens first, this rider may be converted to a new policy with a maximum face amount of up to five times the face amount of the rider. We will pay a death benefit once we receive proof that the insured child died while both the rider and coverage were in force for that child. If the primary insured dies while the rider is in force, we will terminate the rider 31 days after the death, and we will offer a separate life insurance policy to each insured child. ACCIDENTAL DEATH BENEFIT RIDER Our current minimum face amount for this rider for issue ages 15-59 is $10,000. The maximum face amount available for this rider is $150,000 (up to 150% of specified amount). Subject to certain limitations, we will pay a face amount if the primary insured's death results solely from accidental bodily injury where: - the death is caused by external, violent, and accidental means; - the death occurs within 90 days of the accident; and - the death occurs while the rider is in force. The rider will terminate on the earliest of: - the Policy anniversary nearest the primary insured's 70th birthday; - the date the Policy terminates; or - the Monthiversary when the rider terminates at the owner's request. OTHER INSURED RIDER This rider insures the spouse or life partner and/or dependent children of the primary insured. Subject to the terms of the rider, we will pay the face amount of the rider to the primary insured. Our current minimum face amount for this rider for issue ages 0-85 is $10,000. The maximum face amount is the lesser of $500,000 or the amount of coverage on the primary insured. The maximum number of Other Insured Riders that is allowed on any one Policy is five (5). We will pay the rider's face amount when we receive proof at our office of the other insured's death. On any Monthiversary while the rider is in force, you may convert it to a new policy on the other insured's life (without evidence of insurability). CONDITIONS TO CONVERT THE RIDER: - your request must be in writing and sent to our office; - the rider has not reached the anniversary nearest to the other insured's 70th birthday; - the new policy is any permanent insurance policy that we currently offer; - subject to the minimum specified amount required for the new policy, the amount of the insurance under the new policy will equal the face amount in force under the rider as long as it meets 43 the minimum face amount requirements of the original Policy; and - we will base your premium on the other insured's rate class under the rider. TERMINATION OF THE RIDER: The rider will terminate on the earliest of: - the maturity date of the Policy; - the anniversary nearest to the other insured's 100th birthday; - the date the Policy terminates for any reason except for death of the primary insured; - 31 days after the death of the primary insured; - the date of conversion of this rider; or - the Monthiversary on which the rider is terminated upon written request by the owner. DISABILITY WAIVER RIDER Subject to certain conditions, we will waive the Policy's monthly deductions while you are disabled. This rider may be purchased if your issue age is 15-55 years of age. We must receive proof that: - you are totally disabled; - the rider was in force when you became disabled; - you became disabled before the anniversary nearest your 60th birthday; and - you are continuously disabled for at least six months. We will not waive any deduction that becomes due more than one year before we receive written notice of your claim. DISABILITY WAIVER AND INCOME RIDER This rider has the same benefits as the Disability Waiver Rider, but adds a monthly income benefit for up to 120 months. This rider may be purchased if your issue age is 15-55 years of age. The minimum income amount for this rider is $10. The maximum income amount is the lesser of 0.2% of your specified amount or $300 per month. PRIMARY INSURED RIDER ("PIR") AND PRIMARY INSURED RIDER PLUS ("PIR PLUS") Under the PIR and the PIR Plus, we provide term insurance coverage on a different basis from the coverage in your Policy. FEATURES OF PIR AND PIR PLUS: - the rider increases the Policy's death benefit by the rider's face amount; - the PIR may be purchased from issue ages 0-85; - the PIR Plus may be purchased from issue ages 18-85; - the PIR terminates when the insured turns 95, and the PIR Plus terminates when the insured turns 90; - the minimum purchase amount for the PIR and PIR Plus is $25,000. There is no maximum purchase amount; - generally PIR and PIR Plus coverage costs less than the insurance coverage under the Policy, but has no cash value; - you may cancel or reduce your rider coverage without decreasing your Policy's specified amount; and - you may generally decrease your specified amount without reducing your rider coverage. CONDITIONS TO CONVERT THE RIDER: - your request must be in writing and sent to our office; 44 - the rider has not reached the anniversary nearest to the primary insured's 70th birthday; - the new policy is any permanent insurance policy that we currently offer; - subject to the minimum specified amount required for the new policy, the amount of the insurance under the new policy will equal the specified amount in force under the rider as long as it meets the minimum specified amount requirements of a Base Policy; and - we will base your premium on the primary insured's rate class under the rider. It may cost you more to keep a higher specified amount under the Base Policy, because the specified amount may have a cost of insurance that is higher than the cost of the same amount of coverage under your PIR or PIR Plus. You should consult your registered representative to determine if you would benefit from PIR or PIR Plus. We may discontinue offering PIR or PIR Plus at any time. We may also modify the terms of these riders for new policies. LIVING BENEFIT RIDER (AN ACCELERATED DEATH BENEFIT) This rider allows us to pay all or a portion of the death benefit once we receive satisfactory proof that the insured is ill and has a life expectancy of one year or less. A doctor must certify the insured's life expectancy. We will pay a "single-sum benefit" equal to: - the death benefit on the date we pay the single-sum benefit; multiplied by - the election percentage of the death benefit you elect to receive; divided by - 1 + i ("i" equals the current yield on 90-day Treasury bills or the Policy loan interest rate, whichever is greater); minus - any indebtedness at the time we pay the single-sum benefit, multiplied by the election percentage. The maximum terminal illness death benefit used to determine the single-sum benefit as defined above is equal to: - the death benefit available under the Policy once we receive satisfactory proof that the insured is ill; plus - the benefit available under any PIR or PIR Plus in force. - a single-sum benefit may not be greater than $500,000. The election percentage is a percentage that you select. It may not be greater than 100%. We will not pay a benefit under the rider if the insured's terminal condition results from self-inflicted injuries that occur during the period specified in your Policy's suicide provision. The rider terminates at the earliest of: - the date the Policy terminates; - the date a settlement option takes effect; - the date we pay a single-sum benefit; or - the date you terminate the rider. We do not charge for this rider. This rider may not be available in all states, or its terms may vary depending on a state's insurance law requirements. The tax consequences of adding this rider to an existing Policy or requesting payment under the rider are uncertain and you should consult a tax advisor before doing so. 45 ADDITIONAL INFORMATION SALE OF THE POLICIES We will pay sales commissions to our life insurance agents who are registered representatives of broker-dealers. Other payments may be made for other services related to sale of the Policies. We have entered into a distribution agreement with AFSG Securities Corporation ("AFSG Securities") for the distribution and sale of the Policies. AFSG Securities is affiliated with us. AFSG Securities may sell the Policies by entering into selling agreements with other broker-dealers who in turn may sell the Policies through their sales representatives. See "Sale of the Policies" in the SAI for more information concerning compensation paid for the sale of Policies. LEGAL PROCEEDINGS Western Reserve, like other life insurance companies, is involved in lawsuits, including class action lawsuits. In some lawsuits involving insurers, substantial damages have been sought and/or material settlement payments have been made. Although the outcome of any litigation cannot be predicted with certainty, at the present time, it appears that there are no pending or threatened lawsuits that are likely to have a material adverse impact on the separate account, on AFSG's ability to perform under its principal underwriting agreement, or on Western Reserve's ability to meet its obligations under the Policy. FINANCIAL STATEMENTS The financial statements of Western Reserve and the separate account are included in the SAI. PERFORMANCE DATA RATES OF RETURN The average rates of return in Table 1 reflect each subaccount's actual investment performance. The Table shows the historical investment experience of the subaccounts based on the subaccounts' historical investment experience. We do not show performance for subaccounts in operation for less than six months. This information does not represent or project future investment performance. Some portfolios began operation before their corresponding subaccount. For these portfolios, we have included in Table 2 below adjusted portfolio performance from the portfolio's inception date. The adjusted portfolio performance is designed to show the performance that would have resulted if the subaccount had been in operation during the time the portfolio was in operation. The numbers reflect the annual mortality and expense risk charge, investment management fees and direct fund expenses. These rates of return do not reflect other charges that are deducted under the Policy or from the separate account (such as the premium expense charge or the monthly deduction). IF THESE CHARGES WERE DEDUCTED, PERFORMANCE WOULD BE SIGNIFICANTLY LOWER. These rates of return are not estimates, projections or guarantees of future performance. We also show below comparable figures for the unmanaged Standard & Poor's Index of 500 Common Stocks ("S&P 500"), a widely used measure of stock market performance. The S&P 500 does not reflect any deduction for the expenses of operating and managing an investment portfolio. 46 TABLE 1 AVERAGE ANNUAL SUBACCOUNT TOTAL RETURN FOR THE PERIODS ENDED ON DECEMBER 31, 2001
10 YEARS SUBACCOUNT OR INCEPTION SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS INCEPTION DATE - ---------- ------ ------- ------- --------- ---- WRL AEGON Bond(dagger).................. 7.11% 4.22% 5.82% 5.81% 10/02/86 WRL Alger Aggressive Growth............. (17.20)% (1.91)% 11.36% 12.47% 03/01/94 WRL American Century International...... (24.12)% (7.50)% N/A (1.17)% 01/02/97 WRL Clarion Real Estate Securities...... 10.06% 10.47% N/A 3.63% 05/01/98 WRL Dreyfus Mid Cap..................... (4.80)% N/A N/A 2.96% 07/01/99 WRL Federated Growth & Income........... 14.67% 11.59% 11.88% 11.09% 03/01/94 WRL Gabelli Global Growth............... (10.92)% N/A N/A (14.78)% 09/01/00 WRL GE U.S. Equity...................... (9.69)% 1.37% N/A 9.82% 01/02/97 WRL Great Companies--America(SM)........ (12.98)% N/A N/A (0.95)% 05/01/00 WRL Great Companies--Global(2).......... (17.58)% N/A N/A (23.36)% 09/01/00 WRL Great Companies--Technology(SM)..... (37.51)% N/A N/A (40.66)% 05/01/00 WRL Janus Global........................ (23.53)% 1.94% 9.94% 14.24% 03/01/94 WRL Janus Growth(dagger)................ (28.85)% (7.45)% 8.52% 9.31% 10/02/86 WRL LKCM Capital Growth(2).............. N/A N/A N/A (35.70)% 02/05/01 WRL LKCM Strategic Total Return......... (3.06)% 0.88% 6.14% 8.79% 03/01/93 WRL Marsico Growth...................... (14.86)% N/A N/A (5.14)% 07/01/99 WRL Munder Net50........................ (26.09)% N/A N/A (8.62)% 07/01/99 WRL PBHG Mid Cap Growth................. (36.50)% N/A N/A (5.81)% 07/01/99 WRL PBHG/NWQ Value Select............... (2.68)% 5.92% 6.80% 8.20% 05/01/96 WRL Salomon All Cap..................... 1.18% N/A N/A 10.01% 07/01/99 WRL T. Rowe Price Dividend Growth....... (5.02)% N/A N/A (2.00)% 07/01/99 WRL T. Rowe Price Small Cap............. (10.52)% N/A N/A (0.03)% 07/01/99 WRL Third Avenue Value.................. 5.22% 17.44% N/A 10.60% 01/02/98 WRL Transamerica Money Market(dagger)(1) 3.05% 3.98% 4.11% 3.52% 10/02/86 WRL Transamerica Value Balanced......... 1.54% 3.32% 6.47% 9.16% 01/03/95 WRL Value Line Aggressive Growth........ (11.21)% N/A N/A (12.72)% 05/01/00 WRL Van Kampen Emerging Growth.......... (33.83)% 5.50% 13.98% 16.15% 03/01/93 S&P 500(dagger)......................... (11.89)% (1.03)% 10.70% 12.94% 10/02/86
(dagger) Shows ten year performance. (1) The current yield, which is for the seven day period ended 12/31/01, more closely reflects the current earnings of the subaccount than the total return. An investment in this subaccount is not insured or guaranteed by the FDIC. While this subaccount's investment in shares of the underlying portfolio seeks to preserve its value at $1.00 per share, it is possible to lose money by investing in this subaccount. (2) Not annualized. Because WRL Janus Balanced, WRL Conservative Asset Allocation, WRL Moderate Asset Allocation, WRL Moderately Aggressive Asset Allocation, WRL Aggressive Asset Allocation, WRL Transamerica Convertible Securities, WRL PIMCO Total Return, WRL Transamerica Equity, WRL Transamerica Growth Opportunities, WRL Transamerica U.S. Government Securities, WRL J. P. Morgan Enhanced Index, WRL Capital Guardian Value and WRL Capital Guardian U.S. Equity subaccounts commenced operations on May 1, 2002, the above Table does not reflect rates of return for these subaccounts. 47 TABLE 2 ADJUSTED HISTORICAL PORTFOLIO AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED ON DECEMBER 31, 2001
10 YEARS PORTFOLIO OR INCEPTION PORTFOLIO 1 YEAR 3 YEARS 5 YEARS INCEPTION DATE - --------- ------ ------- ------- --------- ---- AEGON Bond(dagger)...................... 7.11% 4.22% 5.82% 5.81% 10/02/86 Alger Aggressive Growth................. (17.20)% (1.91)% 11.36% 12.47% 03/01/94 American Century International.......... (24.12)% 7.50% N/A (1.17)% 01/02/97 Capital Guardian U.S. Equity(7)......... (4.25)% N/A N/A (2.85)% 10/09/00 Capital Guardian Value(6)............... 5.68% 2.03% 6.97% 10.81% 05/27/93 Clarion Real Estate Securities.......... 10.06% 10.47% N/A 3.63% 05/01/98 Dreyfus Mid Cap......................... (4.80)% N/A N/A 4.87% 05/03/99 Federated Growth & Income............... 14.67% 11.59% 11.88% 11.09% 03/01/94 Gabelli Global Growth................... (10.92)% N/A N/A (14.78)% 09/01/00 GE U.S. Equity.......................... (9.69)% 1.37% N/A 9.82% 01/02/97 Great Companies--America(SM)............ (12.98)% N/A N/A (0.95)% 05/01/00 Great Companies--Global (2)............. (17.58)% N/A N/A (23.36)% 09/01/00 Great Companies--Technology(SM)......... (37.51)% N/A N/A (40.66)% 05/01/00 J.P. Morgan Enhanced Index(5)........... (12.77)% (3.39)% N/A 8.02% 05/02/97 Janus Global............................ (23.53)% 1.94% 9.94% 14.24% 12/03/92 Janus Growth(dagger).................... (28.85)% (7.45)% 8.52% 9.31% 10/02/86 LKCM Capital Growth..................... (39.54)% N/A N/A (30.36)% 12/01/00 LKCM Strategic Total Return............. (3.06)% 0.88% 6.14% 8.79% 03/01/93 Marsico Growth.......................... (14.86)% N/A N/A (3.63)% 05/03/99 Munder Net50............................ (26.09)% N/A N/A (5.82)% 05/03/99 PBHG Mid Cap Growth..................... (36.50)% N/A N/A (1.78)% 05/03/99 PBHG/NWQ Value Select................... (2.68)% 5.92% 6.80% 8.20% 05/01/96 Salomon All Cap......................... 1.18% N/A N/A 12.32% 05/03/99 T. Rowe Price Dividend Growth........... (5.02)% N/A N/A (1.84)% 05/03/99 T. Rowe Price Small Cap................. (10.52)% N/A N/A 4.26% 05/03/99 Third Avenue Value...................... 5.22% 17.44% N/A 10.60% 01/02/98 Transamerica Equity(3) (dagger)......... (18.37)% (0.08)% 15.51% 19.21% 02/26/69 Transamerica Growth Opportunities(2)(4) N/A N/A N/A 10.79% 05/02/01 Transamerica Money Market(1) (dagger)... 3.06% 3.98% 4.11% 3.52% 10/02/86 Transamerica U.S. Government Securities(8)...................... 4.15% 3.76% 5.16% 5.19% 05/13/94 Transamerica Value Balanced............. 1.55% 3.32% 6.47% 9.16% 01/03/95 Value Line Aggressive Growth............ (11.21)% N/A N/A (12.72)% 05/01/00 Van Kampen Emerging Growth.............. (33.83)% 5.50% 13.98% 16.12% 03/01/93 S&P 500(dagger)................................ (11.89)% (1.03)% 10.70% 12.94% 10/02/86
(dagger) Shows ten year performance. (1) The current yield, which is for the seven day period ended 12/31/01, more closely reflects the current earnings of the subaccount than the total return. An investment in this subaccount is not insured or guaranteed by the FDIC. While this subaccount's investment in shares of the underlying portfolio seeks to preserve its value at $1.00 per share, it is possible to lose money by investing in this subaccount. (2) Not annualized. (3) The historical financial information for periods prior to May 1, 2002 has been derived from the financial history of the predecessor portfolio, Growth Portfolio of Transamerica Variable Insurance Fund, Inc. (4) The historical financial information for periods prior to May 1, 2002 has been derived from the financial history of the predecessor portfolio, Small Company Portfolio of Transamerica Variable Insurance Fund, Inc. (5) The historical financial information for periods prior to May 1, 2002 has been derived from the financial history of the predecessor portfolio, Endeavor Enhanced Index Portfolio of Endeavor Series Trust. (6) The historical financial information for periods prior to May 1, 2002 has been derived from the financial history of the predecessor portfolio, Capital Guardian Value Portfolio of Endeavor Series Trust. (7) The historical financial information for periods prior to May 1, 2002 has been derived from the financial history of the predecessor portfolio, Capital Guardian U.S. Equity Portfolio of Endeavor Series Trust. 48 (8) The historical financial information for periods prior to May 1, 2002 has been derived from the financial history of the predecessor portfolio, Dreyfus U.S. Government Securities Portfolio of Endeavor Series Trust. Because Janus Balanced, Conservative Asset Allocation, Moderate Asset Allocation, Moderately Aggressive Asset Allocation, Aggressive Asset Allocation, Transamerica Convertible Securities and PIMCO Total Return portfolios commenced operations on May 1, 2002, the above Table does not reflect rates of return for these portfolios. The annualized yield for the WRL Transamerica Money Market subaccount for the seven days ended December 31, 2001 was 1.01%. Additional information regarding the investment performance of the portfolios appears in the fund prospectuses, which accompany this prospectus. TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION Glossary The Policy - General Provisions Ownership Rights Our Right to Contest the Policy Suicide Exclusion Misstatement of Age or Gender Modifying the Policy Mixed and Shared Funding Addition, Deletion, or Substitution of Investments Additional Information Settlement Options Additional Information about Western Reserve and the Separate Account Legal Matters Variations in Policy Provisions Personalized Illustrations of Policy Benefits Sale of the Policies Report to Owners Records Experts Financial Statements Underwriters Underwriting Standards IMSA Performance Data Other Performance Data in Advertising Sales Literature Western Reserve's Published Ratings Index to Financial Statements WRL Series Life Account Western Reserve Life Assurance Co. of Ohio 49 GLOSSARY accounts The options to which you can allocate your money. The accounts include the fixed account and the subaccounts in the separate account. attained age The issue age of the person insured, plus the number of completed years since the Policy date. Base Policy The WRL Freedom Elite Advisor variable life insurance policy without any supplemental riders. beneficiary(ies) The person or persons you select to receive the death benefit from this Policy. You name the primary beneficiary and contingent beneficiaries. cash value The sum of your Policy's value in the subaccounts and the fixed account. If there is a Policy loan outstanding, the cash value includes any amounts held in our fixed account to secure the Policy loan. death benefit proceeds The amount we will pay to the beneficiary(ies) on the insured's death. We will reduce the death benefit proceeds by the amount of any outstanding loan amount, including accrued loan interest, and any due and unpaid monthly deductions. fixed account An option to which you may allocate net premiums and cash value. We guarantee that any amounts you allocate to the fixed account will earn interest at a declared rate. free-look period The period during which you may return the Policy and receive a refund as described in this prospectus. The length of the free-look period varies by state. The free-look period is listed in the Policy. fund Investment company that is registered with the U.S. Securities and Exchange Commission. The Policy allows you to invest in the portfolios of the fund through our subaccounts. We reserve the right to add other registered investment companies to the Policy in the future. in force While coverage under the Policy is active and the insured's life remains insured. initial premium The amount you must pay before insurance coverage begins under this Policy. The initial premium is shown on the schedule page of your Policy. insured The person whose life is insured by this Policy. issue age The insured's age on his or her birthday nearest to the Policy date. lapse When life insurance coverage ends because you do not have enough cash value in the Policy to pay the monthly deduction and any outstanding loan amount, including accrued loan interest, and you have not made a sufficient payment by the end of a grace period. loan reserve A part of the fixed account to which amounts account are transferred as collateral for Policy loans. maturity date The Policy anniversary nearest the insured's 100th birthday if the insured is living and the Policy is still in force. It is the date when life insurance coverage under this Policy ends. You may continue coverage, at your option, under the Policy's extended maturity date benefit provision. 50 minimum monthly The amount shown on your Policy schedule page that we guarantee premium use during the no lapse period to determine whether a grace period will begin. We will adjust the minimum monthly guarantee premium if you change death benefit options, take a cash withdrawal or loan, decrease the specified amount, or add, increase or decrease a rider, and you may need to pay additional premiums in order to keep the no lapse guarantee in place. Monthiversary This is the day of each month when we determine Policy charges and deduct them from cash value. It is the same date each month as the Policy date. If there is no valuation date in the calendar month that coincides with the Policy date, the Monthiversary is the next valuation date. monthly deduction The monthly Policy charge, plus the monthly cost of insurance, plus the monthly charge for any riders added to your Policy. net premium The part of your premium that we allocate to the fixed account or the subaccounts. The net premium is equal to the premium you paid minus the premium expense charge. net surrender value The amount we will pay you if you surrender the Policy while it is in force. The net surrender value on the date you surrender is equal to: the cash value minus any outstanding loan amount and accrued loan interest. no lapse date For a Policy issued to any insured ages 0-60, the no lapse date is either the anniversary on which the insured's attained age is 65 or the twentieth Policy anniversary, whichever is earlier. For a Policy issued to an insured ages 61-85, the no lapse date is the fifth Policy anniversary. The no lapse date is specified in your Policy. no lapse period The period of time between the Policy date and the no lapse date during which the Policy will not lapse if certain conditions are met. office Our administrative office and mailing address is P.O. Box 5068, Clearwater, Florida 33758-5068. Our street address is 570 Carillon Parkway, St. Petersburg, Florida 33716. Our phone number is 1-800-851-9777. Our hours are Monday - Friday from 8:30 a.m. - 7:00 p.m. Eastern time. planned periodic A premium payment you make in a level amount at a premium fixed interval over a specified period of time. Policy date The date when our underwriting process is complete, full life insurance coverage goes into effect, the initial premium payment has been received, and we begin to make the monthly deductions. The Policy date is shown on the schedule page of your Policy. If you request, we may backdate a Policy by assigning a Policy date earlier than the date the Policy is issued. We measure Policy months, years, and anniversaries from the Policy date. portfolio One of the separate investment portfolios of the fund. premiums All payments you make under the Policy other than loan repayments. premium expense The amount of premium used to determine the expense level applied to premium payments. reallocation account That portion of the fixed account where we hold the net premium(s) from the record date until the reallocation date. 51 reallocation date The date we reallocate all cash value held in the reallocation account to the fixed account and subaccounts you selected on your application. We place your net premium in the reallocation account only if your state requires us to return the full premium in the event you exercise your free-look right. In those states the reallocation date is the Policy date, plus the number of days in your state's free-look period, plus five days. In all other states, the reallocation date is the Policy date. record date The date we record your Policy on our books as an in force Policy. The record date is generally the Policy date, unless the Policy is backdated. separate account The WRL Series Life Account. It is a separate investment account that is divided into subaccounts. We established the separate account to receive and invest net premiums under the Policy and other variable life insurance policies we issue. specified amount The minimum death benefit we will pay under the Policy provided the Policy is in force. The initial specified amount is the amount shown on the Base Policy's schedule page that you receive when the Policy is issued. The specified amount in force is the initial specified amount, adjusted for any decreases in the Base Policy's specified amount. Other events such as a request to decrease the specified amount, change in death benefit option or take a cash withdrawal (if you choose Option A death benefit) may also affect the specified amount in force. subaccount A subdivision of the separate account that invests exclusively in shares of one investment portfolio of the fund. termination When the insured's life is no longer insured under the Policy. valuation date Each day the New York Stock Exchange is open for trading. Western Reserve is open for business whenever the New York Stock Exchange is open. valuation period The period of time over which we determine the change in the value of the subaccounts. Each valuation period begins at the close of normal trading on the New York Stock Exchange (currently 4:00 p.m. Eastern time on each valuation date) and ends at the close of normal trading of the New York Stock Exchange on the next valuation date. we, us, our Western Reserve Life Assurance Co. of Ohio. (Western Reserve) written notice The written notice you must sign and send us to request or exercise your rights as owner under the Policy. To be complete, it must: (1) be in a form we accept, (2) contain the information and documentation that we determine we need to take the action you request, and (3) be received at our office. you, your (owner The person entitled to exercise all rights as owner or policyowner) under the Policy. 52 APPENDIX A WEALTH INDICES OF INVESTMENTS IN THE U.S. CAPITAL MARKET The information below graphically depicts the growth of $1.00 invested in large company stocks, small company stocks, long-term government bonds, Treasury bills, and hypothetical asset returning the inflation rate over the period from the end of 1925 to the end of 2001. All results assume reinvestment of dividends on stocks or coupons on bonds and no taxes. Transaction costs are not included, except in the small stock index starting in 1982. Each of the cumulative index values is initialized at $1.00 at year-end 1925. The graph illustrates that large company stocks and small company stocks have the best performance over the entire 76-year period: investments of $1.00 in these assets would have grown to $2,279.13 and $7,860.05, respectively, by year-end 2001. This higher growth was achieved by investments involving substantial risk. In contrast, long-term government bonds (with an approximate 20-year maturity), which exposed the holder to much less risk, grew to only $50.66. The lowest-risk strategy over the past 76 years (for those with short-term time horizons) was to buy U.S. Treasury bills. Since U.S. Treasury bills tended to track inflation, the resulting real (inflation-adjusted) returns were near zero for the entire 1925 - 2001 period. 53 [COMPOUND ANNUAL RATES OF RETURN BY DECADE CHART] COMPOUND ANNUAL RATES OF RETURN BY DECADE
1920s* 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s(**) 1992-01 ------ ----- ----- ----- ----- ----- ----- ----- --------- ------- Large Company.............. 19.2% -0.1% 9.2% 19.4% 7.8% 5.9% 17.5% 18.2% -10.5% 12.9% Small Company.............. -4.5 1.4 20.7 16.9 15.5 11.5 15.8 15.1 8.8 15.6 Long-Term Corp............. 5.2 6.9 2.7 1.0 1.7 6.2 13.0 8.3 11.8 8.1 Long-Term Govt............. 5.0 4.9 3.2 -0.1 1.4 5.5 12.6 9.0 12.2 8.7 Inter-Term Govt............ 4.2 4.6 1.8 1.3 3.5 7.0 11.9 7.2 10.1 6.7 Treasury Bills............. 3.7 0.6 0.4 1.9 3.9 6.3 8.9 4.9 4.9 4.6 Inflation.................. -1.1 -2.0 5.4 2.2 2.5 7.4 5.1 2.9 2.5 2.5
* Based on the period 1926-1929. ** Based on the period 2000-2001. Used with permission.(C)2002 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from copyrighted works of Roger G. Ibbotson and Rex Sinquefield.] 54 APPENDIX B PREMIUM EXPENSE LEVEL PER THOUSAND (BASED ON THE GENDER AND RATE CLASS OF THE INSURED)
MALE MALE MALE/ FEMALE FEMALE ISSUE ULTIMATE SELECT/ ULTIMATE STANDARD/ FEMALE ULTIMATE SELECT/ ULTIMATE STANDARD/ AGE SELECT STANDARD JUVENILE SELECT STANDARD - --- ------ -------- -------- ------ -------- 0 N/A N/A 11.76 N/A N/A 1 N/A N/A 8.16 N/A N/A 2 N/A N/A 8.16 N/A N/A N/A N/A 7.92 N/A N/A 4 N/A N/A 7.68 N/A N/A 5 N/A N/A 7.68 N/A N/A 6 N/A N/A 7.68 N/A N/A 7 N/A N/A 7.68 N/A N/A 8 N/A N/A 7.68 N/A N/A 9 N/A N/A 7.68 N/A N/A 10 N/A N/A 7.68 N/A N/A 11 N/A N/A 7.68 N/A N/A 12 N/A N/A 7.68 N/A N/A 13 N/A N/A 7.92 N/A N/A 14 N/A N/A 8.16 N/A N/A 15 N/A N/A 8.40 N/A N/A 16 N/A N/A 8.52 N/A N/A 17 N/A N/A 8.88 N/A N/A 18 8.72 9.20 8.72 9.20 19 8.84 9.32 8.84 9.32 20 8.96 9.44 8.96 9.44 21 9.16 9.88 9.16 9.64 22 9.32 10.04 9.32 9.80 23 9.52 10.24 9.52 10.00 24 9.68 10.40 9.68 10.40 25 9.88 10.84 9.88 10.60 26 10.56 11.28 10.32 11.04 27 11.00 11.72 10.76 11.48 28 11.40 12.12 11.16 12.12 29 12.08 12.80 11.84 12.56 30 12.52 13.24 12.28 13.00 31 13.04 14.00 12.80 13.52 32 13.76 14.48 13.52 14.24 33 14.28 15.24 14.04 14.76 34 14.76 15.96 14.52 15.48 35 15.52 16.48 15.28 16.00 36 16.20 17.40 15.96 16.92 37 17.20 18.40 16.72 17.92 38 18.12 19.56 17.64 18.60 39 19.08 20.76 18.36 19.56
55
MALE MALE FEMALE FEMALE ISSUE ULTIMATE SELECT/ ULTIMATE STANDARD/ ULTIMATE SELECT/ ULTIMATE STANDARD/ AGE SELECT STANDARD SELECT STANDARD - --- ------ -------- -------- -------- 40 20.28 21.96 19.32 20.52 41 21.64 23.56 20.68 22.12 42 23.08 25.24 22.12 23.80 43 24.44 27.08 23.72 25.40 44 26.04 29.16 25.08 27.00 45 27.44 31.04 26.48 28.64 46 28.72 32.80 27.52 30.16 47 30.00 34.56 28.80 31.92 48 31.28 36.32 29.84 33.44 49 33.04 38.32 31.12 35.20 50 34.56 40.56 32.40 36.96 51 36.32 42.56 33.68 38.72 52 38.04 45.24 35.64 40.92 53 40.00 47.68 37.36 43.36 54 41.72 50.84 39.32 45.56 55 44.08 54.16 41.44 48.64 56 47.04 58.08 44.40 52.08 57 50.68 62.44 47.32 56.44 58 53.76 66.48 49.68 59.76 59 55.68 69.36 50.64 61.68 60 60.08 74.00 54.08 65.84 61 64.80 79.04 58.24 70.56 62 69.60 84.08 62.48 75.12 63 74.40 89.12 66.72 79.68 64 79.20 94.16 70.96 84.24 65 84.00 99.20 75.20 88.80 66 87.60 104.24 78.68 93.36 67 91.20 109.28 82.16 97.92 68 94.80 114.32 85.64 102.48 69 98.40 119.36 89.12 107.04 70 102.00 124.40 92.60 111.60 71 105.60 129.44 96.08 116.16 72 109.20 134.48 99.56 120.72 73 112.80 139.52 103.04 125.28 74 116.40 144.56 106.52 129.84 75 120.00 149.60 110.00 134.40 76 126.00 154.64 115.00 138.96 77 132.00 159.68 120.00 143.52 78 138.00 164.72 125.00 148.08 79 144.00 169.76 130.00 152.64 80 150.00 174.80 135.00 157.20 81 156.00 179.84 140.00 161.76 82 162.00 184.88 145.00 166.32 83 168.00 189.92 150.00 170.88 84 174.00 194.96 155.00 175.44 85 180.00 200.00 160.00 180.00
56 PROSPECTUS BACK COVER PERSONALIZED ILLUSTRATIONS OF POLICY BENEFITS In order to help you understand how your Policy values could vary over time under different sets of assumptions, we will provide you, without charge, with certain personalized hypothetical illustrations upon request. These will be based on the age and insurance risk characteristics of the insured persons under your Policy and such factors as the specified amount, death benefit option, premium payment amounts, and hypothetical rates of return (within limits) that you request. The illustrations also will reflect the arithmetic average portfolio expenses for 2001 and are not a representation or guarantee of investment returns or cash value. You may request illustrations that reflect the expenses of the portfolios in which you intend to invest. INQUIRIES To learn more about the Policy, you should read the SAI dated the same date as this prospectus. The SAI has been filed with the SEC and is incorporated herein by reference. The table of contents of the SAI is included near the end of this prospectus. For a free copy of the SAI, for other information about the Policy, and to obtain personalized illustrations, please contact your agent, or our office at: Western Reserve Life P.O. Box 5068 Clearwater, Florida 33758-5068 1-800-851-9777 Facsimile: 1-727-299-1648 (Monday - Friday from 8:30 a.m. - 7:00 p.m. Eastern time) www.westernreserve.com More information about the Registrant (including the SAI) may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. For information on the operation of the Public Reference Room, please contact the SEC at 202-942-8090. You may also obtain copies of reports and other information about the Registrant on the SEC's website at http://www.sec.gov and copies of this information may be obtained, upon payment of a duplicating fee, by writing the Public Reference Section of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549-0102. The Registrant's file numbers are listed below. SEC File No. 333-100993/811-4420 57 PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION STATEMENT OF ADDITIONAL INFORMATION FEBRUARY __, 2003 WRL FREEDOM ELITE ADVISOR(SM) ISSUED THROUGH WRL SERIES LIFE ACCOUNT BY WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO 570 CARILLON PARKWAY ST. PETERSBURG, FLORIDA 33716 1-800-851-9777 (727) 299-1800 This Statement of Additional Information ("SAI") expands upon subjects discussed in the current prospectus for the WRL Freedom Elite Advisor(SM) flexible premium variable life insurance policy offered by Western Reserve Life Assurance Co. of Ohio. You may obtain a copy of the prospectus dated February __, 2003 by calling 1-800-851-9777 (Monday - Friday from 8:30 a.m. - 7:00 p.m. Eastern time), or by writing to the administrative office at, Western Reserve Life, P.O. Box 5068, Clearwater, Florida 33758-5068. The prospectus sets forth information that a prospective investor should know before investing in a Policy. Terms used in this SAI have the same meanings as in the prospectus for the Policy. THIS SAI IS NOT A PROSPECTUS AND SHOULD BE READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE POLICY AND THE AEGON/TRANSAMERICA SERIES FUND, INC. TABLE OF CONTENTS Glossary .......................................................................................................... 1 The Policy - General Provisions ................................................................................... 4 Ownership Rights.......................................................................................... 4 Our Right to Contest the Policy........................................................................... 5 Suicide Exclusion......................................................................................... 5 Misstatement of Age or Gender............................................................................. 5 Modifying the Policy...................................................................................... 5 Mixed and Shared Funding ................................................................................. 5 Addition, Deletion, or Substitution of Investments........................................................ 6 Additional Information............................................................................................. 6 Settlement Options........................................................................................ 6 Additional Information about Western Reserve and the Separate Account..................................... 7 Legal Matters............................................................................................. 8 Variations in Policy Provisions........................................................................... 8 Personalized Illustrations of Policy Benefits............................................................. 8 Sale of the Policies...................................................................................... 8 Reports to Owners......................................................................................... 9 Records................................................................................................... 9 Experts................................................................................................... 9 Financial Statements...................................................................................... 9 Underwriters....................................................................................................... 10 Underwriting Standards.................................................................................... 10 IMSA .......................................................................................................... 10 Performance Data................................................................................................... 10 Other Performance Data in Advertising Sales Literature.................................................... 10 Western Reserve's Published Ratings....................................................................... 11 Index to Financial Statements...................................................................................... 11 WRL Series Life Account................................................................................... 12 Western Reserve Life Assurance Co. of Ohio................................................................ 55
i GLOSSARY accounts The options to which you can allocate your money. The accounts include the fixed account and the subaccounts in the separate account. attained age The issue age of the person insured, plus the number of completed years since the Policy date. Base Policy The WRL Freedom Elite Advisor variable life insurance policy without any supplemental riders. beneficiary(ies) The person or persons you select to receive the death benefit from this Policy. You name the primary beneficiary and contingent beneficiaries. cash value The sum of your Policy's value in the subaccounts and the fixed account. If there is a Policy loan outstanding, the cash value includes any amounts held in our fixed account to secure the Policy loan. death benefit proceeds The amount we will pay to the beneficiary(ies) on the insured's death. We will reduce the death benefit proceeds by the amount of any outstanding loan amount, including any accrued loan interest, and any due and unpaid monthly deductions. fixed account An option to which you may allocate net premiums and cash value. We guarantee that any amounts you allocate to the fixed account will earn interest at a declared rate. free-look period The period during which you may return the Policy and receive a refund as described in the prospectus. The length of the free-look period varies by state. The free-look period is listed in the Policy. fund Investment company that is registered with the U.S. Securities and Exchange Commission. The Policy allows you to invest in the portfolios of the fund through our subaccounts. We reserve the right to add other registered investment companies to the Policy in the future. in force While coverage under the Policy is active and the insured's life remains insured. initial premium The amount you must pay before insurance coverage begins under this Policy. The initial premium is shown on the schedule page of your Policy. insured The person whose life is insured by this Policy. issue age The insured's age on his or her birthday nearest to the Policy date. lapse When life insurance coverage ends because you do not have enough cash value in the Policy to pay the monthly deduction and any outstanding loan amount, including any accrued loan interest, and you have not made a sufficient payment by the end of a grace period. loan reserve A part of the fixed account to which amounts are account transferred as collateral for Policy loans. maturity date The Policy anniversary nearest the insured's 100th birthday if the insured is living and the Policy is still in force. It is the date when life insurance coverage under this Policy ends. You may continue coverage, at your option, under the Policy's extended maturity date benefit provision. 1 minimum monthly The amount shown on your Policy schedule page that we guarantee premium use during the no lapse period to determine whether a grace period will begin. We will adjust the minimum monthly guarantee premium if you change death benefit options, take a cash withdrawal or loan, decrease the specified amount, or add, increase or decrease a rider, and you may need to pay additional premiums in order to keep the no lapse guarantee in place. Monthiversary This is the day of each month when we determine Policy charges and deduct them from cash value. It is the same date each month as the Policy date. If there is no valuation date in the calendar month that coincides with the Policy date, the Monthiversary is the next valuation date. monthly deduction The monthly Policy charge, plus the monthly cost of insurance, plus the monthly charge for any riders added to your Policy. net premium The part of your premium that we allocate to the fixed account or the subaccounts. The net premium is equal to the premium you paid minus the premium expense charge. net surrender value The amount we will pay you if you surrender the Policy while it is in force. The net surrender value on the date you surrender is equal to: the cash value minus any outstanding loan amount and accrued loan interest. no lapse date For a Policy issued to any insured ages 0-60, the no lapse date is either the anniversary on which the insured's attained age is 65 or the twentieth Policy anniversary, whichever is earlier. For a Policy issued to an insured ages 61-85, the no lapse date is the fifth Policy anniversary. The no lapse date is specified in your Policy. no lapse period The period of time between the Policy date and the no lapse date during which the Policy will not lapse if certain conditions are met. office Our administrative office and mailing address is P.O. Box 5068, Clearwater, Florida 33758-5068. Our street address is 570 Carillon Parkway, St. Petersburg, Florida 33716. Our phone number is 1-800-851-9777. Our hours are Monday - Friday from 8:30 a.m. - 7:00 p.m. Eastern time. planned periodic A premium payment you make in a level amount at a premium fixed interval over a specified period of time. Policy date The date when our underwriting process is complete, full life insurance coverage goes into effect, the initial premium payment has been received, and we begin to make the monthly deductions. The Policy date is shown on the schedule page of your Policy. If you request, we may backdate a Policy by assigning a Policy date earlier than the date the Policy is issued. We measure Policy months, years, and anniversaries from the Policy date. portfolio One of the separate investment portfolios of the fund. premiums All payments you make under the Policy other than loan repayments. premium expense The amount of premium used to determine the charge level applied to premium payments. reallocation account That portion of the fixed account where we hold the net premium(s) from the record date until the reallocation date. 2 reallocation date The date we reallocate all cash value held in the reallocation account to the fixed account and subaccounts you selected on your application. We place your net premium in the reallocation account only if your state requires us to return the full premium in the event you exercise your free-look right. In those states the reallocation date is the Policy date, plus the number of days in your state's free-look period, plus five days. In all other states, the reallocation date is the Policy date. record date The date we record your Policy on our books as an in force Policy. The record date is generally the Policy date, unless the Policy is backdated. separate account The WRL Series Life Account. It is a separate investment account that is divided into subaccounts. We established the separate account to receive and invest net premiums under the Policy and other variable life insurance policies we issue. specified amount The minimum death benefit we will pay under the Policy provided the Policy is in force. The initial specified amount is the amount shown on the Base Policy's schedule page that you receive when the Policy is issued. The specified amount in force is the initial specified amount, adjusted for any decreases in the Base Policy's specified amount. Other events such as a request to decrease the specified amount, a change in death benefit option or take a cash withdrawal (if you choose Option A death benefit) may also affect the specified amount in force. subaccount A subdivision of the separate account that invests exclusively in shares of one investment portfolio of the fund. termination When the insured's life is no longer insured under the Policy. valuation date Each day the New York Stock Exchange is open for trading. Western Reserve is open for business whenever the New York Stock Exchange is open. valuation period The period of time over which we determine the change in the value of the subaccounts. Each valuation period begins at the close of normal trading on the New York Stock Exchange (currently 4:00 p.m. Eastern time on each valuation date) and ends at the close of normal trading of the New York Stock Exchange on the next valuation date. we, us, our Western Reserve Life Assurance Co. of Ohio. (Western Reserve) written notice The written notice you must sign and send us to request or exercise your rights as owner under the Policy. To be complete, it must: (1) be in a form we accept, (2) contain the information and documentation that we determine we need to take the action you request, and (3) be received at our office. you, your (owner The person entitled to exercise all rights as owner or policyowner) under the Policy. 3 In order to supplement the description in the prospectus, the following provides additional information about Western Reserve and the Policy, which may be of interest to a prospective purchaser. THE POLICY - GENERAL PROVISIONS OWNERSHIP RIGHTS The Policy belongs to the owner named in the application. The owner may exercise all of the rights and options described in the Policy. The owner is the insured unless the application specifies a different person as the insured. If the owner dies before the insured and no contingent owner is named, then ownership of the Policy will pass to the owner's estate. The owner may exercise certain rights described below. CHANGING THE OWNER - Change the owner by providing written notice to us at our office at any time while the insured is alive and the Policy is in force. - Change is effective as of the date that the written notice is accepted by us at our office. - Changing the owner does not automatically change the beneficiary. - Signature of the owner's spouse is required if the owner is a resident of: California, Nevada or Washington. - Changing the owner may have tax consequences. You should consult a tax advisor before changing the owner. - We are not liable for payments we made before we received the written notice at our office. CHOOSING THE BENEFICIARY - The owner designates the beneficiary (the person to receive the death benefit when the insured dies) in the application. - If the owner designates more than one beneficiary, then each beneficiary shares equally in any death benefit proceeds unless the beneficiary designation states otherwise. - If the beneficiary dies before the insured, then any contingent beneficiary becomes the beneficiary. - If both the beneficiary and contingent beneficiary die before the insured, then the death benefit will be paid to the owner or the owner's estate upon the insured's death. CHANGING THE BENEFICIARY - The owner changes the beneficiary by providing written notice to us at our office. - Change is effective as of the date the owner signs the written notice. - Signature of the owner's spouse is required if the owner is a resident of: California, Nevada or Washington. - We are not liable for any payments we made before we received the written notice at our office. ASSIGNING THE POLICY - The owner may assign Policy rights while the insured is alive. - Signature of the owner's spouse is required if the owner is a resident of: California, Nevada or Washington. - The owner retains any ownership rights that are not assigned. - Assignee may not change the owner or the beneficiary, and may not elect or change an optional method of payment. Any amount payable to the assignee will be paid in a lump sum. - Claims under any assignment are subject to proof of interest and the extent of the assignment. - We are not: 4 - bound by any assignment unless we receive a written notice of the assignment at our office; - responsible for the validity of any assignment; - liable for any payment we made before we received written notice of the assignment at our office; or - bound by any assignment which results in adverse tax consequences to the owner, insured(s) or beneficiary(ies). - Assigning the Policy may have tax consequences. You should consult a tax advisor before assigning the Policy. OUR RIGHT TO CONTEST THE POLICY In issuing this Policy, we rely on all statements made by or for the insured in the application or in a supplemental application. Therefore, if you make any material misrepresentation of a fact in the application (or any supplemental application), then we may contest the Policy's validity or may resist a claim under the Policy. In the absence of fraud, we cannot bring any legal action to contest the validity of the Policy after the Policy has been in force during the insured's lifetime for two years from the Policy date, or if reinstated, for two years from the date of reinstatement. SUICIDE EXCLUSION If the insured commits suicide, while sane or insane, within two years of the Policy date (or two years from the reinstatement date, if the Policy lapses and is reinstated), the Policy will terminate and our liability is limited to an amount equal to the premiums paid, less any outstanding loan amount, and less any cash withdrawals. We will pay this amount to the beneficiary in one sum. MISSTATEMENT OF AGE OR GENDER If the age or gender of the insured was stated incorrectly in the application or any supplemental application, then the death benefit will be adjusted based on what the cost of insurance charge for the most recent monthly deduction would have purchased based on the insured's correct age and gender. MODIFYING THE POLICY Only our President or Secretary may modify this Policy or waive any of our rights or requirements under this Policy. Any modification or waiver must be in writing. No agent may bind us by making any promise not contained in this Policy. If we modify the Policy, we will provide you notice and we will make appropriate endorsements to the Policy. MIXED AND SHARED FUNDING In addition to the separate account, shares of the portfolios are also sold to other separate accounts that we (or our affiliates) establish to support variable annuity contracts and variable life insurance policies. It is possible that, in the future, it may become disadvantageous for variable life insurance separate accounts and variable annuity separate accounts to invest in the portfolios simultaneously. Neither the fund nor we currently foresee any such disadvantages, either to variable life insurance policyowners or to variable annuity contract owners. However, the fund's Board of Directors will monitor events in order to identify any material conflicts between the interests of such variable life insurance policyowners and variable annuity contract owners, and will determine what action, if any, it should take. Such action could include the sale of portfolio shares by one or more of the separate accounts, which could have adverse consequences. Material conflicts could result from, for example, (1) changes in state insurance laws, (2) changes in federal income tax laws, or (3) differences in voting instructions between those given by variable life insurance policyowners and those given by variable annuity contract owners. 5 If the fund's Board of Directors were to conclude that separate funds should be established for variable life insurance and variable annuity separate accounts, Western Reserve will bear the attendant expenses, but variable life insurance policyowners and variable annuity contract owners would no longer have the economies of scale resulting from a larger combined fund. ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS We do not guarantee that each portfolio will always be available for investment through the Policy. We reserve the right, subject to compliance with applicable law, to add new portfolios, close existing portfolios, or substitute portfolio shares that are held by any subaccount for shares of a different portfolio. New or substitute portfolios may have different fees and expenses and their availability may be limited to certain classes of purchasers. We will only add, delete or substitute shares of another portfolio of a fund (or of another open-end, registered investment company) if the shares of a portfolio are no longer available for investment, or if in our judgement further investment in any portfolio would become inappropriate in view of the purposes of the separate account. We will not add, delete or substitute any shares attributable to your interest in a subaccount without notice to you and prior approval of the SEC, to the extent required by the 1940 Act or other applicable law. We may also decide to purchase for the separate account securities from other portfolios. We reserve the right to transfer separate account assets to another separate account that we determine to be associated with the class of contracts to which the Policy belongs. We also reserve the right to establish additional subaccounts of the separate account, each of which would invest in a new portfolio of the fund, or in shares of another investment company, with specified investment objectives. We may establish new subaccounts when, in our sole discretion, marketing, tax or investment conditions warrant. We will make any new subaccounts available to existing owners on a basis we determine. We may also eliminate one or more subaccounts for the same reasons as stated above. In the event of any such substitution or change, we may make such changes in this and other policies as may be necessary or appropriate to reflect such substitution or change. If we deem it to be in the best interests of persons having voting rights under the Policies, and when permitted by law, the separate account may be (1) operated as a management company under the 1940 Act, (2) deregistered under the 1940 Act in the event such registration is no longer required, (3) managed under the direction of a committee, or (4) combined with one or more other separate accounts, or subaccounts. ADDITIONAL INFORMATION SETTLEMENT OPTIONS If you surrender the Policy, you may elect to receive the net surrender value in either a lump sum or as a series of regular income payments under one of the three settlement options described below. In either event, life insurance coverage ends. Also, when the insured dies, the beneficiary may apply the lump sum death benefit proceeds to one of the same settlement options. If the regular payment under a settlement option would be less than $100, we will instead pay the proceeds in one lump sum. We may make other settlement options available in the future. Once we begin making payments under a settlement option, you or the beneficiary will no longer have any value in the subaccounts or the fixed account. Instead, the only entitlement will be the amount of the regular payment for the period selected under the terms of the settlement option chosen. Depending upon the circumstances, the effective date of a settlement option is the surrender date or the insured's date of death. Under any settlement option, the dollar amount of each payment will depend on four things: - the amount of the surrender on the surrender date or death benefit proceeds on the insured's date of death; - the interest rate we credit on those amounts (we guarantee a minimum annual interest rate of 3.0%); - the mortality tables we use; and - the specific payment option(s) you choose. 6 OPTION 1--EQUAL MONTHLY - We will pay the proceeds, plus INSTALLMENTS FOR A FIXED PERIOD interest, in equal monthly installments for a fixed period of your choice, but not longer than 240 months. - We will stop making payments once we have made all the payments for the period selected. OPTION 2--EQUAL MONTHLY At your or the beneficiary's direction, INSTALLMENTS FOR LIFE we will make equal monthly installments: (LIFE INCOME) - only for the life of the payee, at the end of which payments will end; or - for the longer of the payee's life, or for 10 years if the payee dies before the end of the first 10 years of payments; or - for the longer of the payee's life, or until the total amount of all payments we have made equals the proceeds that were applied to the settlement option. OPTION 3--EQUAL MONTHLY - We will make equal monthly payments INSTALLMENTS FOR THE during the joint lifetime of two LIFE OF THE PAYEE AND THEN TO persons, first to a chosen payee, A DESIGNATED SURVIVOR and then to a co-payee, if living, (JOINT AND SURVIVOR) upon the death of the payee. - Payments to the co-payee, if living, upon the payee's death will equal either: - the full amount paid to the payee before the payee's death; or - two-thirds of the amount paid to the payee before the payee's death. - All payments will cease upon the death of the co-payee. ADDITIONAL INFORMATION ABOUT WESTERN RESERVE AND THE SEPARATE ACCOUNT Western Reserve is a stock life insurance company that is wholly-owned by First AUSA Life Insurance Company, which, in turn, is wholly-owned indirectly by AEGON USA, Inc., which conducts most of its operations through subsidiary companies engaged in the insurance business or in providing non-insurance financial services. Western Reserve's office is located at 570 Carillon Parkway, St. Petersburg, Florida 33716-1202 and the mailing address is P.O. Box 5068, Clearwater, Florida 33758-5068. Western Reserve was incorporated in 1957 under the laws of Ohio and is subject to regulation by the Insurance Department of the State of Ohio, as well as by the insurance departments of all other states and jurisdictions in which it does business. Western Reserve is licensed to sell insurance in all states (except New York), Puerto Rico, Guam, and in the District of Columbia. Western Reserve submits annual statements on its operations and finances to insurance officials in all states and jurisdictions in which it does business. The Policy described in the prospectus has been filed with, and where required, approved by, insurance officials in those jurisdictions in which it is sold. Western Reserve established the separate account as a separate investment account under Ohio law in 1985. We own the assets in the separate account and are obligated to pay all benefits under the Policies. The separate account is used to support other life insurance policies of Western Reserve, as well as for other purposes permitted by law. The separate account is registered with the SEC as a unit investment trust under the 1940 Act and qualifies as a "separate account" within the meaning of the federal securities laws. Western Reserve holds the assets of the separate account physically segregated and apart from the general account. Western Reserve maintains records of all purchases and sales of portfolio shares by each of the subaccounts. A blanket bond was issued to AEGON USA, Inc. ("AEGON USA") in the aggregate amount of $12 million, covering all of the employees of 7 AEGON USA and its affiliates, including Western Reserve. A Stockbrokers Blanket Bond, issued to AEGON U.S.A. Securities, Inc. providing fidelity coverage, covers the activities of registered representatives of AFSG to a limit of $10 million. LEGAL MATTERS Sutherland Asbill & Brennan LLP of Washington, D.C. has provided advice on certain matters relating to the federal securities laws. All matters of Ohio law pertaining to the Policy have been passed upon by Thomas E. Pierpan, Senior Vice President, General Counsel and Assistant Secretary of Western Reserve. VARIATIONS IN POLICY PROVISIONS Certain provisions of the Policy may vary from the descriptions in the prospectus, depending on when and where the Policy was issued, in order to comply with different state laws. These variations may include restrictions on use of the fixed account and different interest rates charged and credited on Policy loans. Please refer to your Policy, since any variations will be included in your Policy or in riders or endorsements attached to your Policy. PERSONALIZED ILLUSTRATIONS OF POLICY BENEFITS In order to help you understand how your Policy values would vary over time under different sets of assumptions, we will provide you with certain personalized illustrations upon request. These will be based on the age and insurance risk characteristics of the insured persons under your Policy and such factors as the specified amount, death benefit option, premium payment amounts, and rates of return (within limits) that you request. The illustrations also will reflect the average portfolio expenses for 2001. You may request illustrations that reflect the expenses of the portfolios in which you intend to invest. SALE OF THE POLICIES The Policy will be sold by individuals who are licensed as our life insurance agents and who are also registered representatives of broker-dealers having written sales agreements for the Policy with Western Reserve and AFSG Securities Corporation ("AFSG"), the principal underwriter of the Policy. Both AFSG and Western Reserve are indirect subsidiaries of AEGON U.S. Corporation. AFSG is located at 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499. AFSG is registered with the SEC under the Securities Exchange Act of 1934 as a broker-dealer, and is a member of the National Association of Securities Dealers, Inc. ("NASD"). AFSG was organized on March 12, 1986 under the laws of the State of Pennsylvania. The Principal Underwriting Agreement between AFSG and Western Reserve on behalf of its separate account went into effect May 1, 1999. More information about AFSG is available at http://www.nasdr.com or by calling 1-800-289-9999. The sales commission payable to Western Reserve agents or other registered representatives may vary with the sales agreement, but it is not expected to be greater than: - 17.44% of all premiums you make up to the premium expense level in the first Policy year, PLUS - 12.00% of all premiums you make up to the premium expense level in Policy years 2 through 10; PLUS - 3.00% of all premiums in excess of the premium expense level in Policy years 1 - 10; PLUS - 3.00% of all premiums in Policy years 11+. We will pay an additional trail commission of up to 0.50% of the Policy's cash value on the Policy anniversary for Policy years 5 - 10 and 1.00% of the Policy's cash value on the Policy anniversary for Policy years 11+ and each anniversary thereafter where the cash value (minus amounts attributable to loans) equals at least $5,000. In addition, certain production, persistency and managerial bonuses may be paid. To the extent permitted by NASD rules, promotional incentives or payments may also be provided to broker-dealers based on sales volumes, the assumption of wholesaling functions or other sales-related criteria. Payments may also be made for other services that do not directly involve the sale of the Policies. These services may include the recruitment and training of personnel, production of promotional literatures, and similar services. 8 We intend to recoup commissions and other sales expenses through: the premium expense charge, the cost of insurance charge, the mortality and expense risk charge, and earnings on amounts allocated under the Policies to the fixed account and the loan account. Commissions paid on sales of the Policies, including other sales incentives, are not directly charged to policyowners. We offer the Policies to the public on a continuous basis. We anticipate continuing to offer the Policies, but reserve the right to discontinue the offering. We intend to recoup commissions and other sales expenses through fees and charges imposed under the Policy. Commissions paid on the Policy, including other incentives or payments, are not charged directly to the policyowners or the separate account. REPORTS TO OWNERS At least once each year, or more often as required by law, we will mail to policyowners at their last known address a report showing the following information as of the end of the report period: - - the current cash value - any activity since the last report - - the current net surrender value - projected values - - the current death benefit - investment experience of each subaccount - - outstanding loans - any other information required by law You may request additional copies of reports, but we may charge a fee for such additional copies. In addition, we will send written confirmations of any premium payments and other financial transactions you request including: changes in specified amount, changes in death benefit option, transfers, partial withdrawals, increases in loan amount, loan interest payments, loan repayments, lapses and reinstatements. We also will send copies of the annual and semi-annual report to shareholders for each portfolio in which you are indirectly invested. RECORDS We will maintain all records relating to the separate account and the fixed account. EXPERTS The financial statements of WRL Series Life Account at December 31, 2002 and for the periods indicated thereon, appearing in this Statement of Additional Information and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. The statutory-basis financial statements and schedules of Western Reserve at December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001, appearing in this Statement of Additional Information and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. Actuarial matters included in this SAI have been examined by Lorne Schinbein, Vice President and Managing Actuary of Western Reserve, as stated in the opinion filed as an exhibit to the registration statement. FINANCIAL STATEMENTS Western Reserve's financial statements and schedules appear on the following pages. These financial statements and schedules should be distinguished from the separate account's financial statements and you should consider these financial statements and schedules only as bearing upon Western Reserve's ability to meet our obligations under the Policies. You should not consider our financial statements and schedules as bearing upon the investment performance of the assets held in the separate account. 9 Western Reserve's financial statements and schedules at December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001, have been prepared on the basis of statutory accounting principles rather than accounting principles generally accepted in the United States. UNDERWRITERS UNDERWRITING STANDARDS This Policy uses mortality tables that distinguish between men and women. As a result, the Policy pays different benefits to men and women of the same age. Montana prohibits our use of actuarial tables that distinguish between males and females to determine premiums and policy benefits for policies issued on the lives of its residents. Therefore, we will base the premiums and benefits in Policies that we issue in Montana, to insure residents of that state, on actuarial tables that do not differentiate on the basis of gender. Your cost of insurance charge will vary by the insured's gender, issue age on the Policy date, and rate class. We currently place insureds into the following rate classes: - ultimate select (preferred) non-tobacco use; - select (non-preferred) non-tobacco use; - ultimate standard (preferred) tobacco use; - standard (non-preferred) tobacco use; and - juvenile-under 18. We also place insureds in various sub-standard rate classes, which involve a higher mortality risk and higher charges. We generally charge higher rates for insureds who use tobacco. We currently charge lower cost of insurance rates for insureds who are in an "ultimate class." An ultimate class is only available if our underwriting guidelines require you to take a blood test because of the specified amount you have chosen. IMSA We are a member of the Insurance Marketplace Standards Association ("IMSA"). IMSA is an independent, voluntary organization of life insurance companies. It promotes high ethical standards in the sales and advertising of individual life insurance, long-term care insurance and annuity products. Through its Principles and Code of Ethical Market Conduct, IMSA encourages its member companies to develop and implement policies and procedures to promote sound market practices. Companies must undergo a rigorous self and independent assessment of their practices to become a member of IMSA. The IMSA logo in our sales literature shows our ongoing commitment to these standards. You may find more information about IMSA and its ethical standards at www.imsaethics.org in the "Consumer" section or by contacting IMSA at 240-497-2900. PERFORMANCE DATA OTHER PERFORMANCE DATA IN ADVERTISING SALES LITERATURE We may compare each subaccount's performance to the performance of: - other variable life issuers in general; - variable life insurance policies which invest in mutual funds with similar investment objectives and policies, as reported by Lipper Analytical Services, Inc. ("Lipper") and Morningstar, Inc. ("Morningstar"); and other services, companies, individuals, or industry or financial publications (e.g., Forbes, Money, The Wall Street Journal, Business Week, Barron's, Kiplinger's Personal Finance, and Fortune); - Lipper and Morningstar rank variable annuity contracts and variable life policies. Their performance analysis ranks such policies and contracts on the basis of total return, and assumes reinvestment of distributions; but it does not show sales charges, redemption fees or certain expense deductions at the separate account level. 10 - the Standard & Poor's Index of 500 Common Stocks, or other widely recognized indices; - unmanaged indices may assume the reinvestment of dividends, but usually do not reflect deductions for the expenses of operating or managing an investment portfolio; or - other types of investments, such as: - certificates of deposit; - savings accounts and U.S. Treasuries; - certain interest rate and inflation indices (e.g., the Consumer Price Index); or - indices measuring the performance of a defined group of securities recognized by investors as representing a particular segment of the securities markets (e.g., Donoghue Money Market Institutional Average, Lehman Brothers Corporate Bond Index, or Lehman Brothers Government Bond Index). WESTERN RESERVE'S PUBLISHED RATINGS We may publish in advertisements, sales literature, or reports we send to you the ratings and other information that an independent ratings organization assigns to us. These organizations include: A.M. Best Company, Moody's Investors Service, Inc., Standard & Poor's Insurance Rating Services, and Fitch Ratings. These ratings are opinions regarding an operating insurance company's financial capacity to meet the obligations of its insurance policies in accordance with their terms. These ratings do not apply to the separate account, the subaccounts, the fund or it's portfolios, or to their performance. INDEX TO FINANCIAL STATEMENTS WRL SERIES LIFE ACCOUNT: Report of Independent Auditors, dated January 31, 2003 Statements of Assets and Liabilities at December 31, 2002 Statements of Operations for the year ended December 31, 2002 Statements of Changes in Net Assets for the years ended December 31, 2002 and 2001 Notes to the Financial Statements WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO Statutory-Basis Balance Sheet as of September 30, 2002 (unaudited) Statutory-Basis Statement of Operations for the nine months ended September 30, 2002 (unaudited) Statutory-Basis Statement of Changes in Capital and Surplus (unaudited) Statutory-Basis Statement of Cash Flow for the nine months ended September 30, 2002 (unaudited) Notes to Financial Statements--Statutory-Basis for the nine months ended September 30, 2002 (unaudited) Report of Independent Auditors, dated February 15, 2002 Statutory-Basis Balance Sheets at December 31, 2001 and 2000 Statutory-Basis Statements of Operations for the years ended December 31, 2001, 2000 and 1999 Statutory-Basis Statements of Changes in Capital and Surplus for the years ended December 31, 2001, 2000 and 1999 Statutory-Basis Statements of Cash Flow for the years ended December 31, 2001, 2000 and 1999 Notes to Financial Statements--Statutory-Basis Statutory-Basis Financial Statement Schedules 11 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Policy Owners of the WRL Series Life Account Western Reserve Life Assurance Company of Ohio We have audited the accompanying statements of assets and liabilities of each of the subaccounts constituting the WRL Series Life Account (the "Separate Account," a separate account of Western Reserve Life Assurance Co. of Ohio) as of December 31, 2002, and the related statements of operations and changes in net assets for the periods indicated thereon. These financial statements are the responsibility of the Separate Account's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of mutual fund shares owned as of December 31, 2002, by correspondence with the mutual fund's transfer agent. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of each of the respective subaccounts constituting the WRL Series Life Account at December 31, 2002, and the results of their operations and changes in net assets for the periods indicated thereon, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Des Moines, Iowa January 31, 2003 12 WRL SERIES LIFE ACCOUNT STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 2002 (ALL AMOUNTS EXCEPT PER UNIT AMOUNTS IN THOUSANDS)
WRL WRL WRL WRL WRL LKCM TRANSAMERICA AEGON JANUS JANUS STRATEGIC MONEY MARKET BOND GROWTH GLOBAL TOTAL RETURN SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ASSETS: Investment in securities: Number of shares........................ 93,408 4,831 20,721 16,624 6,385 ======== ======== =========== ========= ======== Cost.................................... $ 93,408 $ 57,478 $ 1,014,354 $ 409,780 $ 96,728 ======== ======== =========== ========= ======== Investment, at net asset value............. $ 93,408 $ 61,263 $ 474,095 $ 218,777 $ 79,807 Dividend receivable........................ 3 0 0 0 0 Transfers receivable from depositor........ 0 48 0 0 3 -------- -------- ----------- --------- -------- Total assets............................ 93,411 61,311 474,095 218,777 79,810 -------- -------- ----------- --------- -------- LIABILITIES: Accrued expenses........................... 0 0 0 0 0 Transfers payable to depositor............. 23 0 87 12 0 -------- -------- ----------- --------- -------- Total liabilities....................... 23 0 87 12 0 -------- -------- ----------- --------- -------- Net assets.............................. $ 93,388 $ 61,311 $ 474,008 $ 218,765 $ 79,810 ======== ======== =========== ========= ======== NET ASSETS CONSISTS OF: Policy owners' equity...................... $ 93,388 $ 61,311 $ 474,008 $ 218,765 $ 79,810 Depositor's equity......................... 0 0 0 0 0 -------- -------- ----------- --------- -------- Net assets applicable to units outstanding........................... $ 93,388 $ 61,311 $ 474,008 $ 218,765 $ 79,810 ======== ======== =========== ========= ======== Policy owners' units....................... 4,901 2,171 9,348 12,274 4,266 Depositor's units.......................... 0 0 0 0 0 -------- -------- ----------- --------- -------- Units outstanding....................... 4,901 2,171 9,348 12,274 4,266 ======== ======== =========== ========= ======== Accumulation unit value................. $ 19.06 $ 28.24 $ 50.70 $ 17.82 $ 18.71 ======== ======== =========== ========= ========
See accompanying notes. 13 WRL SERIES LIFE ACCOUNT STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 2002 (ALL AMOUNTS EXCEPT PER UNIT AMOUNTS IN THOUSANDS)
WRL WRL WRL WRL VAN KAMPEN ALGER FEDERATED TRANSAMERICA WRL EMERGING AGGRESSIVE GROWTH & VALUE PBHG/NWQ GROWTH GROWTH INCOME BALANCED VALUE SELECT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ASSETS: Investment in securities: Number of shares......................... 19,306 15,381 5,512 5,229 2,617 ========= ========= ======== ======== ======== Cost..................................... $ 514,880 $ 322,194 $ 78,860 $ 68,625 $ 35,296 ========= ========= ======== ======== ======== Investment, at net asset value............. $ 250,972 $ 164,884 $ 79,092 $ 55,745 $ 30,437 Dividend receivable........................ 0 0 0 0 0 Transfers receivable from depositor........ 0 0 118 17 0 --------- --------- -------- -------- -------- Total assets............................. 250,972 164,884 79,210 55,762 30,437 --------- --------- -------- -------- -------- LIABILITIES: Accrued expenses........................... 0 0 0 0 0 Transfers payable to depositor............. 13 27 0 0 148 --------- --------- -------- -------- -------- Total liabilities........................ 13 27 0 0 148 --------- --------- -------- -------- -------- Net assets............................... $ 250,959 $ 164,857 $ 79,210 $ 55,762 $ 30,289 ========= ========= ======== ======== ======== NET ASSETS CONSISTS OF: Policy owners' equity...................... $ 250,959 $ 164,857 $ 79,210 $ 55,762 $ 30,289 Depositor's equity......................... 0 0 0 0 0 --------- --------- -------- -------- -------- Net assets applicable to units outstanding............................ $ 250,959 $ 164,857 $ 79,210 $ 55,762 $ 30,289 ========= ========= ======== ======== ======== Policy owners' units....................... 10,076 10,072 3,465 3,535 2,278 Depositor's units.......................... 0 0 0 0 0 --------- --------- -------- -------- -------- Units outstanding........................ 10,076 10,072 3,465 3,535 2,278 ========= ========= ======== ======== ======== Accumulation unit value.................. $ 24.91 $ 16.37 $ 22.86 $ 15.77 $ 13.30 ========= ========= ======== ======== ========
See accompanying notes. 14 WRL SERIES LIFE ACCOUNT STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 2002 (ALL AMOUNTS EXCEPT PER UNIT AMOUNTS IN THOUSANDS)
WRL WRL WRL AMERICAN WRL THIRD CLARION WRL CENTURY GE AVENUE REAL ESTATE MARSICO INTERNATIONAL U.S. EQUITY VALUE SECURITIES GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ASSETS: Investment in securities: Number of shares......................... 1,326 2,480 3,042 1,700 664 ======== ======== =========== ========= ======== Cost..................................... $ 11,549 $ 36,268 $ 42,642 $ 19,813 $ 5,021 ======== ======== =========== ========= ======== Investment, at net asset value............. $ 7,972 $ 26,762 $ 37,689 $ 19,392 $ 4,460 Dividend receivable........................ 0 0 0 0 0 Transfers receivable from depositor........ 2 12 0 172 4 -------- -------- ----------- --------- -------- Total assets............................. 7,974 26,774 37,689 19,564 4,464 -------- -------- ----------- --------- -------- LIABILITIES: Accrued expenses........................... 0 0 0 0 0 Transfers payable to depositor............. 0 0 33 0 0 -------- -------- ----------- --------- -------- Total liabilities........................ 0 0 33 0 0 -------- -------- ----------- --------- -------- Net assets............................... $ 7,974 $ 26,774 $ 37,656 $ 19,564 $ 4,464 ======== ======== =========== ========= ======== NET ASSETS CONSISTS OF: Policy owners' equity...................... $ 7,974 $ 26,774 $ 37,656 $ 19,564 $ 4,464 Depositor's equity......................... 0 0 0 0 0 -------- -------- ----------- --------- -------- Net assets applicable to units outstanding............................ $ 7,974 $ 26,774 $ 37,656 $ 19,564 $ 4,464 ======== ======== =========== ========= ======== Policy owners' units....................... 1,082 2,109 2,882 1,671 694 Depositor's units.......................... 0 0 0 0 0 -------- -------- ----------- --------- -------- Units outstanding........................ 1,082 2,109 2,882 1,671 694 ======== ======== =========== ========= ======== Accumulation unit value.................. $ 7.37 $ 12.70 $ 13.07 $ 11.71 $ 6.43 ======== ======== =========== ========= ========
See accompanying notes. 15 WRL SERIES LIFE ACCOUNT STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 2002 (ALL AMOUNTS EXCEPT PER UNIT AMOUNTS IN THOUSANDS)
WRL T. ROWE WRL WRL WRL PRICE T. ROWE WRL PBHG MUNDER DIVIDEND PRICE SALOMON MID CAP NET50 GROWTH SMALL CAP ALL CAP GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ASSETS: Investment in securities: Number of shares......................... 490 588 837 2,843 3,760 ======= ======= ======= ======== ======== Cost..................................... $ 2,622 $ 5,300 $ 8,264 $ 36,191 $ 51,708 ======= ======= ======= ======== ======== Investment, at net asset value............. $ 2,435 $ 4,589 $ 6,667 $ 27,581 $ 25,982 Dividend receivable........................ 0 0 0 0 0 Transfers receivable from depositor........ 4 5 0 2 19 ------- ------- ------- -------- -------- Total assets............................. 2,439 4,594 6,667 27,583 26,001 ------- ------- ------- -------- -------- LIABILITIES: Accrued expenses........................... 0 0 0 0 0 Transfers payable to depositor............. 0 0 0 0 0 ------- ------- ------- -------- -------- Total liabilities........................ 0 0 0 0 0 ------- ------- ------- -------- -------- Net assets............................... $ 2,439 $ 4,594 $ 6,667 $ 27,583 $ 26,001 ======= ======= ======= ======== ======== NET ASSETS CONSISTS OF: Policy owners' equity...................... $ 2,439 $ 4,594 $ 6,667 $ 27,583 $ 26,001 Depositor's equity......................... 0 0 0 0 0 ------- ------- ------- -------- -------- Net assets applicable to units outstanding............................ $ 2,439 $ 4,594 $ 6,667 $ 27,583 $ 26,001 ======= ======= ======= ======== ======== Policy owners' units....................... 501 603 927 2,912 4,256 Depositor's units.......................... 0 0 0 0 0 ------- ------- ------- -------- -------- Units outstanding........................ 501 603 927 2,912 4,256 ======= ======= ======= ======== ======== Accumulation unit value.................. $ 4.87 $ 7.62 $ 7.20 $ 9.47 $ 6.11 ======= ======= ======= ======== ========
See accompanying notes. 16 WRL SERIES LIFE ACCOUNT STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 2002 (ALL AMOUNTS EXCEPT PER UNIT AMOUNTS IN THOUSANDS) WRL WRL WRL WRL WRL VALUE LINE GREAT GREAT GREAT DREYFUS AGGRESSIVE COMPANIES - COMPANIES - COMPANIES - MID CAP GROWTH AMERICA(SM) TECHNOLOGY(SM) GLOBAL(2) SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ASSETS: Investment in securities: Number of shares......................... 964 213 4,596 1,957 732 ======== ======= ======== ======= ======= Cost..................................... $ 10,910 $ 1,581 $ 54,535 $ 7,108 $ 4,662 ======== ======= ======== ======= ======= Investment, at net asset value............. $ 9,500 $ 1,327 $ 36,217 $ 5,147 $ 4,079 Dividend receivable........................ 0 0 0 0 0 Transfers receivable from depositor........ 0 4 19 48 5 -------- ------- -------- ------- ------- Total assets............................. 9,500 1,331 36,236 5,195 4,084 -------- ------- -------- ------- ------- LIABILITIES: Accrued expenses........................... 0 0 0 0 0 Transfers payable to depositor............. 2 0 0 0 0 -------- ------- -------- ------- ------- Total liabilities........................ 2 0 0 0 0 -------- ------- -------- ------- ------- Net assets............................... $ 9,498 $ 1,331 $ 36,236 $ 5,195 $ 4,084 ======== ======= ======== ======= ======= NET ASSETS CONSISTS OF: Policy owners' equity...................... $ 9,498 $ 1,210 $ 36,081 $ 5,144 $ 4,070 Depositor's equity......................... 0 121 155 51 14 -------- ------- -------- ------- ------- Net assets applicable to units outstanding............................ $ 9,498 $ 1,331 $ 36,236 $ 5,195 $ 4,084 ======== ======= ======== ======= ======= Policy owners' units....................... 1,016 199 4,663 2,003 745 Depositor's units.......................... 0 20 20 20 3 -------- ------- -------- ------- ------- Units outstanding........................ 1,016 219 4,683 2,023 748 ======== ======= ======== ======= ======= Accumulation unit value.................. $ 9.35 $ 6.08 $ 7.74 $ 2.57 $ 5.46 ======== ======= ======== ======= =======
See accompanying notes. 17 WRL SERIES LIFE ACCOUNT STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 2002 (ALL AMOUNTS EXCEPT PER UNIT AMOUNTS IN THOUSANDS)
WRL WRL WRL WRL GABELLI LKCM CONSERVATIVE MODERATE GLOBAL CAPITAL ASSET ASSET GROWTH GROWTH ALLOCATION ALLOCATION SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ASSETS: Investment in securities: Number of shares......................... 1,592 257 465 1,217 ======== ======= ======= ======== Cost..................................... $ 12,713 $ 1,172 $ 4,167 $ 10,784 ======== ======= ======= ======== Investment, at net asset value............. $ 10,841 $ 775 $ 4,230 $ 10,725 Dividend receivable........................ 0 0 0 0 Transfers receivable from depositor........ 11 0 146 53 -------- ------- ------- -------- Total assets............................. 10,852 775 4,376 10,778 -------- ------- ------- -------- LIABILITIES: Accrued expenses........................... 0 0 0 0 Transfers payable to depositor............. 0 0 0 0 -------- ------- ------- -------- Total liabilities........................ 0 0 0 0 -------- ------- ------- -------- Net assets............................... $ 10,852 $ 775 $ 4,376 $ 10,778 ======== ======= ======= ======== NET ASSETS CONSISTS OF: Policy owners' equity...................... $ 10,836 $ 768 $ 4,353 $ 10,756 Depositor's equity......................... 16 7 23 22 -------- ------- ------- -------- Net assets applicable to units outstanding............................ $ 10,852 $ 775 $ 4,376 $ 10,778 ======== ======= ======= ======== Policy owners' units....................... 1,616 268 481 1,228 Depositor's units.......................... 3 3 3 3 -------- ------- ------- -------- Units outstanding........................ 1,619 271 484 1,231 ======== ======= ======= ======== Accumulation unit value.................. $ 6.70 $ 2.86 $ 9.04 $ 8.76 ======== ======= ======= ======== WRL MODERATELY AGGRESSIVE ASSET ALLOCATION SUBACCOUNT ASSETS: Investment in securities: Number of shares......................... 1,760 ======== Cost..................................... $ 15,204 ======== Investment, at net asset value............. $ 14,996 Dividend receivable........................ 0 Transfers receivable from depositor........ 58 -------- Total assets............................. 15,054 -------- LIABILITIES: Accrued expenses........................... 0 Transfers payable to depositor............. 0 -------- Total liabilities........................ 0 -------- Net assets............................... $ 15,054 ======== NET ASSETS CONSISTS OF: Policy owners' equity...................... $ 15,033 Depositor's equity......................... 21 -------- Net assets applicable to units outstanding............................ $ 15,054 ======== Policy owners' units....................... 1,775 Depositor's units.......................... 3 -------- Units outstanding........................ 1,778 ======== Accumulation unit value.................. $ 8.47 ========
See accompanying notes. 18 WRL SERIES LIFE ACCOUNT STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 2002 (ALL AMOUNTS EXCEPT PER UNIT AMOUNTS IN THOUSANDS)
WRL WRL AGGRESSIVE WRL WRL TRANSAMERICA WRL ASSET PIMCO JANUS CONVERTIBLE TRANSAMERICA ALLOCATION TOTAL RETURN BALANCED SECURITIES EQUITY SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ASSETS: Investment in securities: Number of shares......................... 825 695 251 33 199 ======= ======= ======= ======= ======= Cost..................................... $ 6,952 $ 7,086 $ 2,385 $ 314 $ 2,767 ======= ======= ======= ======= ======= Investment, at net asset value............. $ 6,740 $ 7,380 $ 2,380 $ 311 $ 2,740 Dividend receivable........................ 0 0 0 0 0 Transfers receivable from depositor........ 11 0 0 0 41 ------- ------- ------- ------- ------- Total assets............................. 6,751 7,380 2,380 311 2,781 ------- ------- ------- ------- ------- LIABILITIES: Accrued expenses........................... 0 0 0 0 0 Transfers payable to depositor............. 0 4 61 0 0 ------- ------- ------- ------- ------- Total liabilities........................ 0 4 61 0 0 ------- ------- ------- ------- ------- Net assets............................... $ 6,751 $ 7,376 $ 2,319 $ 311 $ 2,781 ======= ======= ======= ======= ======= NET ASSETS CONSISTS OF: Policy owners' equity...................... $ 6,731 $ 7,349 $ 2,295 $ 288 $ 2,759 Depositor's equity......................... 20 27 24 23 22 ------- ------- ------- ------- ------- Net assets applicable to units outstanding............................ $ 6,751 $ 7,376 $ 2,319 $ 311 $ 2,781 ======= ======= ======= ======= ======= Policy owners' units....................... 828 696 243 31 323 Depositor's units.......................... 3 3 3 3 3 ------- ------- ------- ------- ------- Units outstanding........................ 831 699 246 34 326 ======= ======= ======= ======= ======= Accumulation unit value.................. $ 8.12 $ 10.56 $ 9.43 $ 9.26 $ 8.53 ======= ======= ======= ======= =======
See accompanying notes. 19 WRL SERIES LIFE ACCOUNT STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 2002 (ALL AMOUNTS EXCEPT PER UNIT AMOUNTS IN THOUSANDS)
WRL WRL WRL TRANSAMERICA WRL TRANSAMERICA J.P. MORGAN GROWTH CAPITAL U.S. GOVERNMENT ENHANCED OPPORTUNITIES GUARDIAN VALUE SECURITIES INDEX SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ASSETS: Investment in securities: Number of shares......................... 58 14 18 5 ======= ====== ======= ======= Cost..................................... $ 562 $ 206 $ 215 $ 55 ======= ====== ======= ======= Investment, at net asset value............. $ 552 $ 181 $ 221 $ 50 Dividend receivable........................ 0 0 0 0 Transfers receivable from depositor........ 0 0 0 0 ------- ------ ------- ------- Total assets............................. 552 181 221 50 ------- ------ ------- ------- LIABILITIES: Accrued expenses........................... 0 0 0 0 Transfers payable to depositor............. 0 0 0 0 ------- ------ ------- ------- Total liabilities........................ 0 0 0 0 ------- ------ ------- ------- Net assets............................... $ 552 $ 181 $ 221 $ 50 ======= ====== ======= ======= NET ASSETS CONSISTS OF: Policy owners' equity...................... $ 532 $ 161 $ 195 $ 30 Depositor's equity......................... 20 20 26 20 ------- ------ ------- ------- Net assets applicable to units outstanding............................ $ 552 $ 181 $ 221 $ 50 ======= ====== ======= ======= Policy owners' units....................... 67 20 18 3 Depositor's units.......................... 3 3 3 3 ------- ------ ------- ------- Units outstanding........................ 70 23 21 6 ======= ====== ======= ======= Accumulation unit value.................. $ 7.92 $ 7.91 $ 10.47 $ 8.11 ======= ====== ======= ======= WRL CAPITAL GUARDIAN U.S. EQUITY SUBACCOUNT ASSETS: Investment in securities: Number of shares......................... 20 ====== Cost..................................... $ 158 ====== Investment, at net asset value............. $ 144 Dividend receivable........................ 0 Transfers receivable from depositor........ 0 ------ Total assets............................. 144 ------ LIABILITIES: Accrued expenses........................... 0 Transfers payable to depositor............. 0 ------ Total liabilities........................ 0 ------ Net assets............................... $ 144 ====== NET ASSETS CONSISTS OF: Policy owners' equity...................... $ 124 Depositor's equity......................... 20 ------ Net assets applicable to units outstanding............................ $ 144 ====== Policy owners' units....................... 15 Depositor's units.......................... 3 ------ Units outstanding........................ 18 ====== Accumulation unit value.................. $ 8.04 ======
See accompanying notes. 20 WRL SERIES LIFE ACCOUNT STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 2002 (ALL AMOUNTS EXCEPT PER UNIT AMOUNTS IN THOUSANDS)
FIDELITY VIP GROWTH FIDELITY VIP FIDELITY VIP OPPORTUNITIES CONTRAFUND(R) EQUITY-INCOME SUBACCOUNT SUBACCOUNT SUBACCOUNT ASSETS: Investment in securities: Number of shares......................... 158 365 342 ======= ======= ======= Cost..................................... $ 2,153 $ 7,018 $ 7,287 ======= ======= ======= Investment, at net asset value............. $ 1,844 $ 6,549 $ 6,162 Dividend receivable........................ 0 0 0 Transfers receivable from depositor........ 1 3 5 ------- ------- ------- Total assets............................. 1,845 6,552 6,167 ------- ------- ------- LIABILITIES: Accrued expenses........................... 0 0 0 Transfers payable to depositor............. 0 0 0 ------- ------- ------- Total liabilities........................ 0 0 0 ------- ------- ------- Net assets............................... $ 1,845 $ 6,552 $ 6,167 ======= ======= ======= NET ASSETS CONSISTS OF: Policy owners' equity...................... $ 1,831 $ 6,534 $ 6,167 Depositor's equity......................... 14 18 0 ------- ------- ------- Net assets applicable to units outstanding............................ $ 1,845 $ 6,552 $ 6,167 ======= ======= ======= Policy owners' units....................... 326 895 728 Depositor's units.......................... 3 3 0 ------- ------- ------- Units outstanding........................ 329 898 728 ======= ======= ======= Accumulation unit value.................. $ 5.60 $ 7.29 $ 8.48 ======= ======= =======
See accompanying notes. 21 WRL SERIES LIFE ACCOUNT STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (ALL AMOUNTS IN THOUSANDS)
WRL WRL WRL WRL WRL LKCM TRANSAMERICA AEGON JANUS JANUS STRATEGIC MONEY MARKET BOND GROWTH GLOBAL TOTAL RETURN SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT INVESTMENT INCOME: Dividend income......................... $ 1,262 $ 1,990 $ 0 $ 7,028 $ 2,660 ---------- --------- ---------- ---------- -------- EXPENSES: Mortality and expense risk.............. 792 454 5,012 2,359 785 ---------- --------- ---------- ---------- -------- Net investment income (loss).......... 470 1,536 (5,012) 4,669 1,875 ---------- --------- ---------- ---------- -------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on investment securities............................ 0 512 (12,389) (5,899) 878 Realized gain distributions............. 0 0 0 0 0 Change in unrealized appreciation (depreciation)........................ 0 2,261 (197,834) (81,748) (13,559) ---------- --------- ---------- ---------- -------- Net gain (loss) on investment securities.......................... 0 2,773 (210,223) (87,647) (12,681) ---------- --------- ---------- ---------- -------- Net increase (decrease) in net assets resulting from operations....................... $ 470 $ 4,309 $ (215,235) $ (82,978) $(10,806) ========== ========= ========== ========== ========
WRL WRL WRL WRL VAN KAMPEN ALGER FEDERATED TRANSAMERICA WRL EMERGING AGGRESSIVE GROWTH & VALUE PBHG/NWQ GROWTH GROWTH INCOME BALANCED VALUE SELECT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT INVESTMENT INCOME: Dividend income......................... $ 285 $ 0 $ 4,516 $ 1,949 $ 701 ---------- --------- ---------- ---------- -------- EXPENSES: Mortality and expense risk.............. 2,820 1,818 663 465 289 ---------- --------- ---------- ---------- -------- Net investment income (loss).......... (2,535) (1,818) 3,853 1,484 412 ---------- --------- ---------- ---------- -------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on investment securities............................ (112,559) (9,541) 978 (1,178) (705) Realized gain distributions............. 0 0 935 1,757 462 Change in unrealized appreciation (depreciation)........................ (15,225) (77,324) (6,777) (11,078) (5,665) ---------- --------- ---------- ---------- -------- Net gain (loss) on investment securities.......................... (127,784) (86,865) (4,864) (10,499) (5,908) ---------- --------- ---------- ---------- -------- Net increase (decrease) in net assets resulting from operations....................... $ (130,319) $ (88,683) $ (1,011) $ (9,015) $ (5,496) ========== ========= ========== ========== ========
See accompanying notes. 22 WRL SERIES LIFE ACCOUNT STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (ALL AMOUNTS IN THOUSANDS)
WRL WRL WRL AMERICAN WRL THIRD CLARION WRL CENTURY GE AVENUE REAL ESTATE MARSICO INTERNATIONAL U.S. EQUITY VALUE SECURITIES GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT INVESTMENT INCOME: Dividend income......................... $ 26 $ 132 $ 706 $ 276 $ 4 -------- -------- -------- -------- -------- EXPENSES: Mortality and expense risk.............. 76 260 348 131 33 -------- -------- -------- -------- -------- Net investment income (loss).......... (50) (128) 358 145 (29) -------- -------- -------- -------- -------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on investment securities............................ (2,143) (618) (41) 273 (631) Realized gain distributions............. 0 0 497 18 0 Change in unrealized appreciation (depreciation)........................ 116 (6,109) (6,894) (698) (554) -------- -------- -------- -------- -------- Net gain (loss) on investment securities.......................... (2,027) (6,727) (6,438) (407) (1,185) -------- -------- -------- -------- -------- Net increase (decrease) in net assets resulting from operations....................... $ (2,077) $ (6,855) $ (6,080) $ (262) $ (1,214) ======== ======== ======== ======== ========
WRL WRL WRL WRL T. ROWE T. ROWE WRL PBHG MUNDER PRICE PRICE SALOMON MID CAP NET50 DIVIDEND GROWTH SMALL CAP ALL CAP GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT INVESTMENT INCOME: Dividend income......................... $ 0 $ 20 $ 0 $ 324 $ 0 -------- ------ -------- -------- --------- EXPENSES: Mortality and expense risk.............. 19 35 61 272 258 -------- ------ -------- -------- --------- Net investment income (loss).......... (19) (15) (61) 52 (258) -------- ------ -------- -------- --------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on investment securities............................ (1,455) (65) (684) (1,188) (8,272) Realized gain distributions............. 0 0 0 56 0 Change in unrealized appreciation (depreciation)........................ 375 (757) (1,640) (8,330) (1,583) -------- ------ -------- -------- --------- Net gain (loss) on investment securities.......................... (1,080) (822) (2,324) (9,462) (9,855) -------- ------ -------- -------- --------- Net increase (decrease) in net assets resulting from operations....................... $ (1,099) $ (837) $ (2,385) $ (9,410) $ (10,113) ======== ====== ======== ======== =========
See accompanying notes. 23 WRL SERIES LIFE ACCOUNT STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (ALL AMOUNTS IN THOUSANDS)
WRL WRL WRL WRL WRL GREAT GREAT GREAT DREYFUS VALUE LINE COMPANIES - COMPANIES - COMPANIES - MID CAP AGGRESSIVE GROWTH AMERICA(SM) TECHNOLOGY(SM) GLOBAL(2) SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT INVESTMENT INCOME: Dividend income......................... $ 4 $ 0 $ 78 $ 0 $ 2 -------- ------- -------- -------- ------- EXPENSES: Mortality and expense risk.............. 81 12 257 49 29 -------- ------- -------- -------- ------- Net investment income (loss).......... (77) (12) (179) (49) (27) -------- ------- -------- -------- ------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on investment securities............................ (336) (210) (5,335) (2,577) (219) Realized gain distributions............. 0 0 0 0 0 Change in unrealized appreciation (depreciation)........................ (1,412) (139) (1,336) (197) (552) -------- ------- -------- -------- ------- Net gain (loss) on investment securities.......................... (1,748) (349) (6,671) (2,774) (771) -------- ------- -------- -------- ------- Net increase (decrease) in net assets resulting from operations....................... $ (1,825) $ (361) $ (6,850) $ (2,823) $ (798) ======== ======= ======== ======== =======
WRL WRL WRL GABELLI LKCM WRL WRL MODERATELY GLOBAL CAPITAL CONSERVATIVE MODERATE AGGRESSIVE GROWTH GROWTH ASSET ALLOCATION ASSET ALLOCATION ASSET ALLOCATION SUBACCOUNT SUBACCOUNT SUBACCOUNT(1) SUBACCOUNT(1) SUBACCOUNT(1) INVESTMENT INCOME: Dividend income......................... $ 38 $ 0 $ 0 $ 0 $ 0 -------- ------- -------- -------- ------- EXPENSES: Mortality and expense risk.............. 84 7 13 30 38 -------- ------- -------- -------- ------- Net investment income (loss).......... (46) (7) (13) (30) (38) -------- ------- -------- -------- ------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on investment securities............................ (181) (229) (22) (39) (39) Realized gain distributions............. 0 0 0 0 0 Change in unrealized appreciation (depreciation)........................ (1,493) (430) 63 (59) (208) -------- ------- -------- -------- ------- Net gain (loss) on investment securities.......................... (1,674) (659) 41 (98) (247) -------- ------- -------- -------- ------- Net increase (decrease) in net assets resulting from operations....................... $ (1,720) $ (666) $ 28 $ (128) $ (285) ======== ======= ======== ======== =======
See accompanying notes. 24 WRL SERIES LIFE ACCOUNT STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (ALL AMOUNTS IN THOUSANDS)
WRL WRL WRL WRL TRANSAMERICA AGGRESSIVE PIMCO JANUS CONVERTIBLE ASSET ALLOCATION TOTAL RETURN BALANCED SECURITIES SUBACCOUNT(1) SUBACCOUNT(1) SUBACCOUNT(1) SUBACCOUNT(1) INVESTMENT INCOME: Dividend income......................... $ 0 $ 0 $ 0 $ 0 ------ ----- ----- ---- EXPENSES: Mortality and expense risk.............. 19 28 6 1 ------ ----- ----- ---- Net investment income (loss).......... (19) (28) (6) (1) ------ ----- ----- ---- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on investment securities............................ (36) 38 (27) (5) Realized gain distributions............. 0 0 0 0 Change in unrealized appreciation (depreciation)........................ (212) 294 (5) (3) ------ ----- ----- ---- Net gain (loss) on investment securities.......................... (248) 332 (32) (8) ------ ----- ----- ---- Net increase (decrease) in net assets resulting from operations....................... $ (267) $ 304 $ (38) $ (9) ====== ===== ===== ====
WRL WRL TRANSAMERICA WRL TRANSAMERICA GROWTH CAPITAL EQUITY OPPORTUNITIES GUARDIAN VALUE SUBACCOUNT(1) SUBACCOUNT(1) SUBACCOUNT(1) INVESTMENT INCOME: Dividend income......................... $ 0 $ 0 $ 10 ----- ----- ----- EXPENSES: Mortality and expense risk.............. 8 2 1 ----- ----- ----- Net investment income (loss).......... (8) (2) 9 ----- ----- ----- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on investment securities............................ (20) (17) (36) Realized gain distributions............. 0 0 0 Change in unrealized appreciation (depreciation)........................ (27) (10) (25) ----- ----- ----- Net gain (loss) on investment securities.......................... (47) (27) (61) ----- ----- ----- Net increase (decrease) in net assets resulting from operations....................... $ (55) $ (29) $ (52) ===== ===== =====
See accompanying notes. 25 WRL SERIES LIFE ACCOUNT STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 (ALL AMOUNTS IN THOUSANDS)
WRL WRL WRL TRANSAMERICA J.P. MORGAN CAPITAL U.S. GOVERNMENT ENHANCED GUARDIAN SECURITIES INDEX U.S. EQUITY SUBACCOUNT(1) SUBACCOUNT(1) SUBACCOUNT(1) INVESTMENT INCOME: Dividend income......................... $ 1 $ 0 $ 1 ------- ------- ------- EXPENSES: Mortality and expense risk.............. 1 0 1 ------- ------- ------- Net investment income (loss).......... 0 0 0 ------- ------- ------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on sale of investment securities................. 0 0 (22) Realized gain distributions............. 0 0 0 Change in unrealized appreciation (depreciation)........................ 6 (5) (14) ------- ------- ------- Net gain (loss) on investment securities.......................... 6 (5) (36) ------- ------- ------- Net increase (decrease) in net assets resulting from operations....................... $ 6 $ (5) $ (36) ======= ======= =======
FIDELITY VIP FIDELITY VIP GROWTH FIDELITY VIP EQUITY - OPPORTUNITIES CONTRAFUND(R) INCOME SUBACCOUNT SUBACCOUNT SUBACCOUNT INVESTMENT INCOME: Dividend income......................... $ 11 $ 25 $ 74 ------- ------- ------- EXPENSES: Mortality and expense risk.............. 14 48 49 ------- ------- ------- Net investment income (loss).......... (3) (23) 25 ------- ------- ------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on sale of investment securities................. (98) (191) (154) Realized gain distributions............. 0 0 91 Change in unrealized appreciation (depreciation)........................ (282) (433) (1,102) ------- ------- ------- Net gain (loss) on investment securities.......................... (380) (624) (1,165) ------- ------- ------- Net increase (decrease) in net assets resulting from operations....................... $ (383) $ (647) $(1,140) ======= ======= =======
See accompanying notes. 26 WRL SERIES LIFE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED (ALL AMOUNTS IN THOUSANDS)
WRL WRL WRL TRANSAMERICA AEGON JANUS MONEY MARKET BOND GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------- ------------------- ------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, --------------------- ------------------- ------------------------ 2002 2001 2002 2001 2002 2001 --------- --------- -------- -------- ---------- ----------- OPERATIONS: Net investment income (loss)..................... $ 470 $ 1,940 $ 1,536 $ (88) $ (5,012) $ (6,861) Net gain (loss) on investment securities......... 0 0 2,773 2,274 (210,223) (274,731) --------- --------- -------- -------- ---------- ----------- Net increase (decrease) in net assets resulting from operations................................ 470 1,940 4,309 2,186 (215,235) (281,592) --------- --------- -------- -------- ---------- ----------- CAPITAL UNIT TRANSACTIONS: Proceeds from units sold (transferred)........... 28,184 31,666 19,850 21,257 80,390 126,273 --------- --------- -------- -------- ---------- ----------- Less cost of units redeemed: Administrative charges......................... 7,315 4,916 4,658 3,034 67,288 71,004 Policy loans................................... 1,698 2,096 514 586 0 10,816 Surrender benefits............................. 8,517 4,288 2,237 977 22,526 22,233 Death benefits................................. 153 168 148 72 996 1,980 --------- --------- -------- -------- ---------- ----------- 17,683 11,468 7,557 4,669 90,810 106,033 --------- --------- -------- -------- ---------- ----------- Increase (decrease) in net assets from capital unit transactions............................ 10,501 20,198 12,293 16,588 (10,420) 20,240 --------- --------- -------- -------- ---------- ----------- Net increase (decrease) in net assets.......... 10,971 22,138 16,602 18,774 (225,655) (261,352) Depositor's equity contribution.................. 0 0 0 0 0 0 NET ASSETS: Beginning of year................................ 82,417 60,279 44,709 25,935 699,663 961,015 --------- --------- -------- -------- ---------- ----------- End of year...................................... $ 93,388 $ 82,417 $ 61,311 $ 44,709 $ 474,008 $ 699,663 ========= ========= ======== ======== ========== =========== UNIT ACTIVITY: Units outstanding - beginning of year............ 4,349 3,278 1,725 1,072 9,583 9,366 Units issued..................................... 8,745 27,105 1,543 1,365 3,597 4,247 Units redeemed................................... (8,193) (26,034) (1,097) (712) (3,832) (4,030) --------- --------- -------- -------- ---------- ----------- Units outstanding - end of year.................. 4,901 4,349 2,171 1,725 9,348 9,583 ========= ========= ======== ======== ========== ===========
See accompanying notes. 27 WRL SERIES LIFE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED (ALL AMOUNTS IN THOUSANDS)
WRL WRL LKCM WRL JANUS STRATEGIC VAN KAMPEN GLOBAL TOTAL RETURN EMERGING GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------- -------------------- ----------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, ---------------------- -------------------- ----------------------- 2002 2001 2002 2001 2002 2001 --------- ---------- -------- --------- ---------- ---------- OPERATIONS: Net investment income (loss)..................... $ 4,669 $ 35 $ 1,875 $ (413) $ (2,535) $ (3,594) Net gain (loss) on investment securities......... (87,647) (97,544) (12,681) (2,662) (127,784) (195,822) --------- ---------- -------- --------- ---------- ---------- Net increase (decrease) in net assets resulting from operations................................ (82,978) (97,509) (10,806) (3,075) (130,319) (199,416) --------- ---------- -------- --------- ---------- ---------- CAPITAL UNIT TRANSACTIONS: Proceeds from units sold (transferred)........... 28,004 47,977 8,019 12,375 45,407 64,879 --------- ---------- -------- --------- ---------- ---------- Less cost of units redeemed: Administrative charges......................... 28,362 31,569 8,198 8,111 35,720 38,288 Policy loans................................... 921 4,476 440 1,157 1,402 6,127 Surrender benefits............................. 10,567 10,117 3,860 2,908 13,454 13,487 Death benefits................................. 323 503 236 259 456 860 --------- ---------- -------- --------- ---------- ---------- 40,173 46,665 12,734 12,435 51,032 58,762 --------- ---------- -------- --------- ---------- ---------- Increase (decrease) in net assets from capital unit transactions............................ (12,169) 1,312 (4,715) (60) (5,625) 6,117 --------- ---------- -------- --------- ---------- ---------- Net increase (decrease) in net assets.......... (95,147) (96,197) (15,521) (3,135) (135,944) (193,299) Depositor's equity contribution.................. 0 0 0 0 0 0 NET ASSETS: Beginning of year................................ 313,912 410,109 95,331 98,466 386,903 580,202 --------- ---------- -------- --------- ---------- ---------- End of year...................................... $ 218,765 $ 313,912 $ 79,810 $ 95,331 $ 250,959 $ 386,903 ========= ========== ======== ========= ========== ========== UNIT ACTIVITY: Units outstanding - beginning of year............ 12,912 12,899 4,517 4,523 10,305 10,226 Units issued..................................... 3,858 3,942 1,138 1,239 4,184 7,855 Units redeemed................................... (4,496) (3,929) (1,389) (1,245) (4,413) (7,776) --------- ---------- -------- --------- ---------- ---------- Units outstanding - end of year.................. 12,274 12,912 4,266 4,517 10,076 10,305 ========= ========== ======== ========= ========== ==========
See accompanying notes. 28 WRL SERIES LIFE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED (ALL AMOUNTS IN THOUSANDS)
WRL WRL WRL ALGER FEDERATED TRANSAMERICA AGGRESSIVE GROWTH GROWTH & INCOME VALUE BALANCED SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------------- ------------------- ------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, ---------------------- ------------------- ------------------- 2002 2001 2002 2001 2002 2001 --------- ---------- -------- -------- -------- -------- OPERATIONS: Net investment income (loss)..................... $ (1,818) $ (2,225) $ 3,853 $ 404 $ 1,484 $ 217 Net gain (loss) on investment securities......... (86,865) (47,770) (4,864) 4,997 (10,499) 91 --------- ---------- -------- -------- -------- -------- Net increase (decrease) in net assets resulting from operations...................... (88,683) (49,995) (1,011) 5,401 (9,015) 308 --------- ---------- -------- -------- -------- -------- CAPITAL UNIT TRANSACTIONS: Proceeds from units sold (transferred)........... 40,020 57,462 33,512 31,343 31,611 13,027 --------- ---------- -------- -------- -------- -------- Less cost of units redeemed: Administrative charges......................... 26,439 28,461 7,408 3,816 5,788 3,491 Policy loans................................... 471 3,294 371 422 242 671 Surrender benefits............................. 8,049 6,759 3,053 1,499 2,569 1,257 Death benefits................................. 273 373 290 59 169 195 --------- ---------- -------- -------- -------- -------- 35,232 38,887 11,122 5,796 8,768 5,614 --------- ---------- -------- -------- -------- -------- Increase (decrease) in net assets from capital unit transactions............... 4,788 18,575 22,390 25,547 22,843 7,413 --------- ---------- -------- -------- -------- -------- Net increase (decrease) in net assets.......... (83,895) (31,420) 21,379 30,948 13,828 7,721 Depositor's equity contribution.................. 0 0 0 0 0 0 NET ASSETS: Beginning of year................................ 248,752 280,172 57,831 26,883 41,934 34,213 --------- ---------- -------- -------- -------- -------- End of year...................................... $ 164,857 $ 248,752 $ 79,210 $ 57,831 $ 55,762 $ 41,934 ========= ========== ======== ======== ======== ======== UNIT ACTIVITY: Units outstanding - beginning of year............ 9,881 9,215 2,531 1,349 2,270 1,881 Units issued..................................... 4,879 4,796 2,434 2,283 2,440 1,125 Units redeemed................................... (4,688) (4,130) (1,500) (1,101) (1,175) (736) --------- ---------- -------- -------- -------- -------- Units outstanding - end of year.................. 10,072 9,881 3,465 2,531 3,535 2,270 ========= ========== ======== ======== ======== ========
See accompanying notes. 29 WRL SERIES LIFE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED (ALL AMOUNTS IN THOUSANDS)
WRL WRL WRL PBHG/NWQ AMERICAN CENTURY GE VALUE SELECT INTERNATIONAL U.S. EQUITY SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------- -------------------- ------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------- -------------------- ------------------- 2002 2001 2002 2001 2002 2001 -------- -------- -------- --------- -------- -------- OPERATIONS: Net investment income (loss)..................... $ 412 $ (234) $ (50) $ 192 $ (128) $ (215) Net gain (loss) on investment securities......... (5,908) (693) (2,027) (2,435) (6,727) (2,933) -------- -------- -------- --------- -------- -------- Net increase (decrease) in net assets resulting from operations................................ (5,496) (927) (2,077) (2,243) (6,855) (3,148) -------- -------- -------- --------- -------- -------- CAPITAL UNIT TRANSACTIONS: Proceeds from units sold (transferred)........... 7,488 8,780 3,468 3,756 6,882 8,860 -------- -------- -------- --------- -------- -------- Less cost of units redeemed: Administrative charges......................... 3,168 2,649 1,298 1,003 3,283 3,049 Policy loans................................... 162 294 22 76 95 319 Surrender benefits............................. 1,177 882 265 189 851 998 Death benefits................................. 86 26 15 6 44 97 -------- -------- -------- --------- -------- -------- 4,593 3,851 1,600 1,274 4,273 4,463 -------- -------- -------- --------- -------- -------- Increase (decrease) in net assets from capital unit transactions............................ 2,895 4,929 1,868 2,482 2,609 4,397 -------- -------- -------- --------- -------- -------- Net increase (decrease) in net assets.......... (2,601) 4,002 (209) 239 (4,246) 1,249 Depositor's equity contribution.................. 0 0 0 0 0 0 NET ASSETS: Beginning of year................................ 32,890 28,888 8,183 7,944 31,020 29,771 -------- -------- -------- --------- -------- -------- End of year...................................... $ 30,289 $ 32,890 $ 7,974 $ 8,183 $ 26,774 $ 31,020 ======== ======== ======== ========= ======== ======== UNIT ACTIVITY: Units outstanding - beginning of year............ 2,103 1,797 868 639 1,942 1,683 Units issued..................................... 1,061 1,040 930 647 1,000 1,000 Units redeemed................................... (886) (734) (716) (418) (833) (741) -------- -------- -------- --------- -------- -------- Units outstanding - end of year.................. 2,278 2,103 1,082 868 2,109 1,942 ======== ======== ======== ========= ======== ========
See accompanying notes. 30 WRL SERIES LIFE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED (ALL AMOUNTS IN THOUSANDS)
WRL WRL CLARION WRL THIRD AVENUE REAL ESTATE MARSICO VALUE SECURITIES GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------- ------------------- ------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------- ------------------- ------------------- 2002 2001 2002 2001 2002 2001 -------- -------- -------- -------- -------- -------- OPERATIONS: Net investment income (loss)..................... $ 358 $ (202) $ 145 $ 96 $ (29) $ (2) Net gain (loss) on investment securities......... (6,438) 1,396 (407) 308 (1,185) (284) -------- -------- -------- -------- -------- -------- Net increase (decrease) in net assets resulting from operations................................ (6,080) 1,194 (262) 404 (1,214) (286) -------- -------- -------- -------- -------- -------- CAPITAL UNIT TRANSACTIONS: Proceeds from units sold (transferred)........... 14,963 19,475 14,584 5,874 2,591 2,717 -------- -------- -------- -------- -------- -------- Less cost of units redeemed: Administrative charges......................... 3,735 2,064 1,838 545 538 273 Policy loans................................... 301 289 91 179 3 4 Surrender benefits............................. 1,400 698 660 131 117 22 Death benefits................................. 136 8 68 0 5 9 -------- -------- -------- -------- -------- -------- 5,572 3,059 2,657 855 663 308 -------- -------- -------- -------- -------- -------- Increase (decrease) in net assets from capital unit transactions............................ 9,391 16,416 11,927 5,019 1,928 2,409 -------- -------- -------- -------- -------- -------- Net increase (decrease) in net assets.......... 3,311 17,610 11,665 5,423 714 2,123 Depositor's equity contribution.................. 0 0 0 0 0 0 NET ASSETS: Beginning of year................................ 34,345 16,735 7,899 2,476 3,750 1,627 -------- -------- -------- -------- -------- -------- End of year...................................... $ 37,656 $ 34,345 $ 19,564 $ 7,899 $ 4,464 $ 3,750 ======== ======== ======== ======== ======== ======== UNIT ACTIVITY: Units outstanding - beginning of year............ 2,296 1,177 693 239 428 158 Units issued..................................... 2,107 2,223 2,043 945 863 552 Units redeemed................................... (1,521) (1,104) (1,065) (491) (597) (282) -------- -------- -------- -------- -------- -------- Units outstanding - end of year.................. 2,882 2,296 1,671 693 694 428 ======== ======== ======== ======== ======== ========
See accompanying notes. 31 WRL SERIES LIFE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED (ALL AMOUNTS IN THOUSANDS)
WRL WRL WRL T. ROWE PRICE T. ROWE PRICE MUNDER NET50 DIVIDEND GROWTH SMALL CAP SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------- ----------------- ----------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, ----------------- ----------------- ----------------- 2002 2001 2002 2001 2002 2001 ------- ------- ------- ------- ------- ------- OPERATIONS: Net investment income (loss)..................... $ (19) $ (7) $ (15) $ (19) $ (61) $ (35) Net gain (loss) on investment securities......... (1,080) (862) (822) (19) (2,324) (275) ------- ------- ------- ------- ------- ------- Net increase (decrease) in net assets resulting from operations................................ (1,099) (869) (837) (38) (2,385) (310) ------- ------- ------- ------- ------- ------- CAPITAL UNIT TRANSACTIONS: Proceeds from units sold (transferred)........... 1,112 3,046 2,656 2,751 3,498 5,178 ------- ------- ------- ------- ------- ------- Less cost of units redeemed: Administrative charges......................... 317 187 519 224 878 462 Policy loans................................... 0 17 25 3 76 27 Surrender benefits............................. 57 31 93 51 324 113 Death benefits................................. 4 0 7 1 0 2 ------- ------- ------- ------- ------- ------- 378 235 644 279 1,278 604 ------- ------- ------- ------- ------- ------- Increase (decrease) in net assets from capital unit transactions............................ 734 2,811 2,012 2,472 2,220 4,574 ------- ------- ------- ------- ------- ------- Net increase (decrease) in net assets.......... (365) 1,942 1,175 2,434 (165) 4,264 Depositor's equity contribution.................. 0 0 0 0 0 0 NET ASSETS: Beginning of year................................ 2,804 862 3,419 985 6,832 2,568 ------- ------- ------- ------- ------- ------- End of year...................................... $ 2,439 $ 2,804 $ 4,594 $ 3,419 $ 6,667 $ 6,832 ======= ======= ======= ======= ======= ======= UNIT ACTIVITY: Units outstanding - beginning of year............ 351 80 361 99 684 230 Units issued..................................... 771 453 529 484 1,055 898 Units redeemed................................... (621) (182) (287) (222) (812) (444) ------- ------- ------- ------- ------- ------- Units outstanding - end of year.................. 501 351 603 361 927 684 ======= ======= ======= ======= ======= =======
See accompanying notes. 32 WRL SERIES LIFE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED (ALL AMOUNTS IN THOUSANDS)
WRL WRL WRL SALOMON PBHG DREYFUS ALL CAP MID CAP GROWTH MID CAP SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------- ------------------- ------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------- ------------------- ------------------ 2002 2001 2002 2001 2002 2001 -------- -------- -------- -------- -------- ------- OPERATIONS: Net investment income (loss)..................... $ 52 $ 189 $ (258) $ (288) $ (77) $ 17 Net gain (loss) on investment securities......... (9,462) (476) (9,855) (15,752) (1,748) (142) -------- -------- -------- -------- -------- ------- Net increase (decrease) in net assets resulting from operations................................ (9,410) (287) (10,113) (16,040) (1,825) (125) -------- -------- -------- -------- -------- ------- CAPITAL UNIT TRANSACTIONS: Proceeds from units sold (transferred)........... 11,953 26,248 9,414 15,784 7,429 4,160 -------- -------- -------- -------- -------- ------- Less cost of units redeemed: Administrative charges......................... 4,191 2,370 5,227 5,547 956 404 Policy loans................................... 144 402 164 417 20 29 Surrender benefits............................. 941 646 744 530 442 85 Death benefits................................. 210 89 32 85 13 3 -------- -------- -------- -------- -------- ------- 5,486 3,507 6,167 6,579 1,431 521 -------- -------- -------- -------- -------- ------- Increase (decrease) in net assets from capital unit transactions............................ 6,467 22,741 3,247 9,205 5,998 3,639 -------- -------- -------- -------- -------- ------- Net increase (decrease) in net assets.......... (2,943) 22,454 (6,866) (6,835) 4,173 3,514 Depositor's equity contribution.................. 0 0 0 0 0 0 NET ASSETS: Beginning of year................................ 30,526 8,072 32,867 39,702 5,325 1,811 -------- -------- -------- -------- -------- ------- End of year...................................... $ 27,583 $ 30,526 $ 26,001 $ 32,867 $ 9,498 $ 5,325 ======== ======== ======== ======== ======== ======= UNIT ACTIVITY: Units outstanding - beginning of year............ 2,405 643 3,818 2,929 493 159 Units issued..................................... 2,208 2,831 2,861 3,589 1,315 636 Units redeemed................................... (1,701) (1,069) (2,423) (2,700) (792) (302) -------- -------- -------- -------- -------- ------- Units outstanding - end of year.................. 2,912 2,405 4,256 3,818 1,016 493 ======== ======== ======== ======== ======== =======
See accompanying notes. 33 WRL SERIES LIFE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED (ALL AMOUNTS IN THOUSANDS)
WRL WRL WRL GREAT GREAT VALUE LINE COMPANIES - COMPANIES - AGGRESSIVE GROWTH AMERICA(SM) TECHNOLOGY(SM) SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------- ------------------- ----------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, ----------------- ------------------- ----------------- 2002 2001 2002 2001 2002 2001 ------- ------- -------- -------- ------- ------- OPERATIONS: Net investment income (loss)..................... $ (12) $ (9) $ (179) $ (65) $ (49) $ (34) Net gain (loss) on investment securities......... (349) (98) (6,671) (1,083) (2,774) (1,814) ------- ------- -------- -------- ------- ------- Net increase (decrease) in net assets resulting from operations................................ (361) (107) (6,850) (1,148) (2,823) (1,848) ------- ------- -------- -------- ------- ------- CAPITAL UNIT TRANSACTIONS: Proceeds from units sold (transferred)........... 630 434 31,951 10,837 3,029 5,801 ------- ------- -------- -------- ------- ------- Less cost of units redeemed: Administrative charges......................... 147 66 4,060 1,180 908 508 Policy loans................................... 13 30 545 106 0 36 Surrender benefits............................. 55 5 833 151 246 43 Death benefits................................. 6 10 34 136 4 7 ------- ------- -------- -------- ------- ------- 221 111 5,472 1,573 1,158 594 ------- ------- -------- -------- ------- ------- Increase (decrease) in net assets from capital unit transactions............................ 409 323 26,479 9,264 1,871 5,207 ------- ------- -------- -------- ------- ------- Net increase (decrease) in net assets.......... 48 216 19,629 8,116 (952) 3,359 Depositor's equity contribution.................. 0 0 0 0 0 0 NET ASSETS: Beginning of year................................ 1,283 1,067 16,607 8,491 6,147 2,788 ------- ------- -------- -------- ------- ------- End of year...................................... $ 1,331 $ 1,283 $ 36,236 $ 16,607 $ 5,195 $ 6,147 ======= ======= ======== ======== ======= ======= UNIT ACTIVITY: Units outstanding - beginning of year............ 161 119 1,687 751 1,468 416 Units issued..................................... 209 155 4,889 1,591 2,408 1,793 Units redeemed................................... (151) (113) (1,893) (655) (1,853) (741) ------- ------- -------- -------- ------- ------- Units outstanding - end of year.................. 219 161 4,683 1,687 2,023 1,468 ======= ======= ======== ======== ======= =======
See accompanying notes. 34 WRL SERIES LIFE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED (ALL AMOUNTS IN THOUSANDS)
WRL WRL GREAT WRL LKCM COMPANIES- GABELLI CAPITAL GLOBAL(2) GLOBAL GROWTH GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------- ------------------ ---------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, ----------------- ------------------ ---------------- 2002 2001 2002 2001 2002 2001(1) ------- ------- -------- ------- ------ ------- OPERATIONS: Net investment income (loss)..................... $ (27) $ (11) $ (46) $ (34) $ (7) $ 0 Net gain (loss) on investment securities......... (771) (79) (1,674) (399) (659) (7) ------- ------- -------- ------- ------ ------- Net increase (decrease) in net assets resulting from operations................................ (798) (90) (1,720) (433) (666) (7) ------- ------- -------- ------- ------ ------- CAPITAL UNIT TRANSACTIONS: Proceeds from units sold (transferred)........... 3,465 2,057 7,022 8,042 444 1,164 ------- ------- -------- ------- ------ ------- Less cost of units redeemed: Administrative charges......................... 647 176 1,709 837 119 21 Policy loans................................... 29 12 22 18 9 3 Surrender benefits............................. 139 35 272 66 23 1 Death benefits................................. 6 0 37 69 9 0 ------- ------- -------- ------- ------ ------- 821 223 2,040 990 160 25 ------- ------- -------- ------- ------ ------- Increase (decrease) in net assets from capital unit transactions............................ 2,644 1,834 4,982 7,052 284 1,139 ------- ------- -------- ------- ------ ------- Net increase (decrease) in net assets.......... 1,846 1,744 3,262 6,619 (382) 1,132 Depositor's equity contribution.................. 0 0 0 0 0 25 NET ASSETS: Beginning of year................................ 2,238 494 7,590 971 1,157 0 ------- ------- -------- ------- ------ ------- End of year...................................... $ 4,084 $ 2,238 $ 10,852 $ 7,590 $ 775 $ 1,157 ======= ======= ======== ======= ====== ======= UNIT ACTIVITY: Units outstanding - beginning of year............ 319 58 939 107 180 0 Units issued..................................... 861 434 1,351 1,191 424 211 Units redeemed................................... (432) (173) (671) (359) (333) (31) ------- ------- -------- ------- ------ ------- Units outstanding - end of year.................. 748 319 1,619 939 271 180 ======= ======= ======== ======= ====== =======
See accompanying notes. 35 WRL SERIES LIFE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED (ALL AMOUNTS IN THOUSANDS)
WRL WRL WRL WRL CONSERVATIVE MODERATE MODERATELY AGGRESSIVE ASSET ASSET AGGRESSIVE ASSET ASSET ALLOCATION ALLOCATION ALLOCATION ALLOCATION SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------ ------------ ---------------- ------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------ ------------ ---------------- ------------ 2002(1) 2002(1) 2002(1) 2002(1) ------------ ------------ ---------------- ------------ OPERATIONS: Net investment income (loss)..................... $ (13) $ (30) $ (38) $ (19) Net gain (loss) on investment securities......... 41 (98) (247) (248) ------- ------- ------- ------- Net increase (decrease) in net assets resulting from operations................................ 28 (128) (285) (267) ------- ------- ------- ------- CAPITAL UNIT TRANSACTIONS: Proceeds from units sold (transferred)........... 4,723 11,575 16,346 7,553 ------- ------- ------- ------- Less cost of units redeemed: Administrative charges......................... 150 492 865 472 Policy loans................................... 70 35 0 0 Surrender benefits............................. 180 107 167 88 Death benefits................................. 0 60 0 0 ------- ------- ------- ------- 400 694 1,032 560 ------- ------- ------- ------- Increase (decrease) in net assets from capital unit transactions............................ 4,323 10,881 15,314 6,993 ------- ------- ------- ------- Net increase (decrease) in net assets.......... 4,351 10,753 15,029 6,726 Depositor's equity contribution.................. 25 25 25 25 NET ASSETS: Beginning of year................................ 0 0 0 0 ------- ------- ------- ------- End of year...................................... $ 4,376 $10,778 $15,054 $ 6,751 ======= ======= ======= ======= UNIT ACTIVITY: Units outstanding - beginning of year............ 0 0 0 0 Units issued..................................... 633 1,478 2,083 1,011 Units redeemed................................... (149) (247) (305) (180) ------- ------- ------- ------- Units outstanding - end of year.................. 484 1,231 1,778 831 ======= ======= ======= =======
See accompanying notes. 36 WRL SERIES LIFE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED (ALL AMOUNTS IN THOUSANDS)
WRL WRL PIMCO WRL TRANSAMERICA WRL TOTAL JANUS CONVERTIBLE TRANSAMERICA RETURN BALANCED SECURITIES EQUITY SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------ ------------ ---------------- ------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------ ------------ ---------------- ------------ 2002(1) 2002(1) 2002(1) 2002(1) ------------ ------------ ---------------- ------------ OPERATIONS: Net investment income (loss)..................... $ (28) $ (6) $ (1) $ (8) Net gain (loss) on investment securities......... 332 (32) (8) (47) ------- ------- ------- ------- Net increase (decrease) in net assets resulting from operations................................ 304 (38) (9) (55) ------- ------- ------- ------- CAPITAL UNIT TRANSACTIONS: Proceeds from units sold (transferred)........... 7,623 2,421 309 2,916 ------- ------- ------- ------- Less cost of units redeemed: Administrative charges......................... 304 73 13 80 Policy loans................................... 109 0 0 0 Surrender benefits............................. 161 6 1 23 Death benefits................................. 2 10 0 2 ------- ------- ------- ------- 576 89 14 105 ------- ------- ------- ------- Increase (decrease) in net assets from capital unit transactions............................ 7,047 2,332 295 2,811 ------- ------- ------- ------- Net increase (decrease) in net assets.......... 7,351 2,294 286 2,756 Depositor's equity contribution.................. 25 25 25 25 NET ASSETS: Beginning of year................................ 0 0 0 0 ------- ------- ------- ------- End of year...................................... $ 7,376 $ 2,319 $ 311 $ 2,781 ======= ======= ======= ======= UNIT ACTIVITY: Units outstanding - beginning of year............ 0 0 0 0 Units issued..................................... 986 352 43 381 Units redeemed................................... (287) (106) (9) (55) ------- ------- ------- ------- Units outstanding - end of year.................. 699 246 34 326 ======= ======= ======= =======
See accompanying notes. 37 WRL SERIES LIFE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED (ALL AMOUNTS IN THOUSANDS)
WRL WRL TRANSAMERICA TRANSAMERICA WRL U.S. GROWTH CAPITAL GOVERNMENT OPPORTUNITIES GUARDIAN VALUE SECURITIES SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- -------------- ------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------- -------------- ------------- 2002(1) 2002(1) 2002(1) ------------- -------------- ------------- OPERATIONS: Net investment income (loss)..................... $ (2) $ 9 $ 0 Net gain (loss) on investment securities......... (27) (61) 6 ------- ------- ------- Net increase (decrease) in net assets resulting from operations................................ (29) (52) 6 ------- ------- ------- CAPITAL UNIT TRANSACTIONS: Proceeds from units sold (transferred)........... 599 217 195 ------- ------- ------- Less cost of units redeemed: Administrative charges......................... 25 9 5 Policy loans................................... 0 0 0 Surrender benefits............................. 13 0 0 Death benefits................................. 5 0 0 ------- ------- ------- 43 9 5 ------- ------- ------- Increase (decrease) in net assets from capital unit transactions............................ 556 208 190 ------- ------- ------- Net increase (decrease) in net assets.......... 527 156 196 Depositor's equity contribution.................. 25 25 25 NET ASSETS: Beginning of year................................ 0 0 0 ------- ------- ------- End of year...................................... $ 552 $ 181 $ 221 ======= ======= ======= UNIT ACTIVITY: Units outstanding - beginning of year............ 0 0 0 Units issued..................................... 89 37 22 Units redeemed................................... (19) (14) (1) ------- ------- ------- Units outstanding - end of year.................. 70 23 21 ======= ======= =======
See accompanying notes. 38 WRL SERIES LIFE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED (ALL AMOUNTS IN THOUSANDS)
WRL WRL J.P. MORGAN CAPITAL ENHANCED GUARDIAN INDEX U.S. EQUITY SUBACCOUNT SUBACCOUNT ------------ ------------ DECEMBER 31, DECEMBER 31, ------------ ------------ 2002(1) 2002(1) ------------ ------------ OPERATIONS: Net investment income (loss).............................. $ 0 $ 0 Net gain (loss) on investment securities.................. (5) (36) ------- ------- Net increase (decrease) in net assets resulting from operations.............................................. (5) (36) ------- ------- CAPITAL UNIT TRANSACTIONS: Proceeds from units sold (transferred).................... 33 160 ------- ------- Less cost of units redeemed: Administrative charges.................................. 3 5 Policy loans............................................ 0 0 Surrender benefits...................................... 0 0 Death benefits.......................................... 0 0 ------- ------- 3 5 ------- ------- Increase (decrease) in net assets from capital unit transactions.......................................... 30 155 ------- ------- Net increase (decrease) in net assets................... 25 119 Depositor's equity contribution........................... 25 25 NET ASSETS: Beginning of year......................................... 0 0 ------- ------- End of year............................................... $ 50 $ 144 ======= ======= UNIT ACTIVITY: Units outstanding - beginning of year..................... 0 0 Units issued.............................................. 6 27 Units redeemed............................................ 0 (9) ------- ------- Units outstanding - end of year........................... 6 18 ======= =======
See accompanying notes. 39 WRL SERIES LIFE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED (ALL AMOUNTS IN THOUSANDS)
FIDELITY VIP FIDELITY VIP FIDELITY VIP GROWTH OPPORTUNITIES CONTRAFUND(R) EQUITY-INCOME SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------- ----------------- ----------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, --------------------- ----------------- ----------------- 2002 2001 2002 2001 2002 2001 --------- --------- ------- ------- ------- ------- OPERATIONS: Net investment income (loss)..................... $ (3) $ (6) $ (23) $ (9) $ 25 $ (8) Net gain (loss) on investment securities......... (380) (118) (624) (146) (1,165) (66) ------- ------- ------- ------- ------- ------- Net increase (decrease) in net assets resulting from operations................................ (383) (124) (647) (155) (1,140) (74) ------- ------- ------- ------- ------- ------- CAPITAL UNIT TRANSACTIONS: Proceeds from units sold (transferred)........... 1,196 1,100 4,843 2,727 4,084 4,211 ------- ------- ------- ------- ------- ------- Less cost of units redeemed: Administrative charges......................... 301 117 762 249 738 225 Policy loans................................... 18 9 40 0 12 0 Surrender benefits............................. 39 15 171 18 186 31 Death benefits................................. 7 0 6 0 2 0 ------- ------- ------- ------- ------- ------- 365 141 979 267 938 256 ------- ------- ------- ------- ------- ------- Increase (decrease) in net assets from capital unit transactions............................ 831 959 3,864 2,460 3,146 3,955 ------- ------- ------- ------- ------- ------- Net increase (decrease) in net assets.......... 448 835 3,217 2,305 2,006 3,881 Depositor's equity contribution.................. 0 0 0 0 0 (27) NET ASSETS: Beginning of year................................ 1,397 562 3,335 1,030 4,161 307 ------- ------- ------- ------- ------- ------- End of year...................................... $ 1,845 $ 1,397 $ 6,552 $ 3,335 $ 6,167 $ 4,161 ======= ======= ======= ======= ======= ======= UNIT ACTIVITY: Units outstanding - beginning of year............ 193 66 410 110 403 28 Units issued..................................... 307 242 1,039 504 679 571 Units redeemed................................... (171) (115) (551) (204) (354) (196) ------- ------- ------- ------- ------- ------- Units outstanding - end of year.................. 329 193 898 410 728 403 ======= ======= ======= ======= ======= =======
See accompanying notes. 40 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2002 NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The WRL Series Life Account (the "Life Account"), was established as a variable life insurance separate account of Western Reserve Life Assurance Co. of Ohio ("WRL", or the "depositor") and is registered as a unit investment trust under the Investment Company Act of 1940, as amended. The Life Account contains forty-three investment options referred to as subaccounts. Each subaccount invests exclusively in a corresponding Portfolio (the "Portfolio") of a Series Fund, which collectively is referred to as the "Fund". The WRL Series Life Account contains four funds (collectively referred to as the "Funds"). Each fund is a registered management investment company under the Investment Company Act of 1940, as amended. SUBACCOUNT INVESTMENT BY FUND: - ------------------------------- AEGON/TRANSAMERICA SERIES FUND, INC. Transamerica Money Market AEGON Bond Janus Growth Janus Global LKCM Strategic Total Return Van Kampen Emerging Growth Alger Aggressive Growth Federated Growth & Income Transamerica Value Balanced PBHG/NWQ Value Select American Century International GE U.S. Equity Third Avenue Value Clarion Real Estate Securities Marsico Growth Munder Net50 T. Rowe Price Dividend Growth T. Rowe Price Small Cap Salomon All Cap PBHG Mid Cap Growth Dreyfus Mid Cap Value Line Aggressive Growth Great Companies - America(SM) Great Companies - Technology(SM) AEGON/TRANSAMERICA SERIES FUND, INC. (CONTINUED) Great Companies - Global(2) Gabelli Global Growth LKCM Capital Growth Conservative Asset Allocation Moderate Assets Allocation Moderately Aggressive Asset Allocation Aggressive Asset Allocation PIMCO Total Return Janus Balanced Transamerica Convertible Securities Transamerica Equity Transamerica Growth Opportunities Capital Guardian Value Transamerica U.S. Government Securities J.P. Morgan Enhanced Index Capital Guardian U.S. Equity VARIABLE INSURANCE PRODUCTS FUNDS (VIP) - SERVICE CLASS 2 Fidelity VIP Growth Opportunities Portfolio Fidelity VIP Contrafund(R) Portfolio Fidelity VIP Equity-Income Portfolio The following portfolio names have changed:
PORTFOLIO FORMERLY - --------- -------- Transamerica Money Market J.P. Morgan Money Market PBHG/NWQ Value Select NWQ Value Equity American Century International Equity International Clarion Real Estate J.P. Morgan Real Estate Securities Securities Marsico Growth Goldman Sachs Growth PBHG Mid Cap Growth Pilgrim Baxter Mid Cap Growth Fidelity VIP Growth Fidelity VIP III Growth Opportunities Portfolio Opportunities Portfolio - Service Class 2 Fidelity VIP Contrafund(R) Fidelity VIP II Portfolio Contrafund(R) Portfolio - Service Class 2 Fidelity VIP Equity-Income Fidelity VIP Equity-Income Portfolio Portfolio - Service Class 2
41 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 1 -- (CONTINUED) In accordance with the shareholder approved agreements and plans of reorganization, the following mergers of the underlying funds occurred within 2002:
DATE ACQUIRING FUND ACQUIRED FUND - ---- -------------- ------------- Mergers of portfolios within the AEGON/Transamerica Series Fund, Inc.: 2/28/02 American Century American Century International International (formerly International Equity) 4/26/02 Transamerica Value AEGON Balanced Balanced 4/26/02 Great Companies - C.A.S.E. Growth American(SM)
The AEGON/Transamerica Series Fund, Inc. has entered into annually renewable investment advisory agreements for each Portfolio with AEGON/Transamerica Fund Advisers, Inc. ("ATFA") as investment adviser. Costs incurred in connection with the advisory services rendered by ATFA are paid by each Portfolio. ATFA has entered into sub-advisory agreements with various management companies ("Sub-Advisers"), some of which are affiliates of WRL. Each Sub-Adviser is compensated directly by ATFA. The other Fund has entered into participation agreements for each Portfolio with WRL. Each period reported on within the financial statements reflects a full twelve month period except as follows:
SUBACCOUNT INCEPTION DATE - ---------- -------------- WRL Third Avenue Value 01/02/1998 WRL Clarion Real Estate Securities 05/01/1998 WRL Marsico Growth 07/01/1999 WRL Munder Net50 07/01/1999 WRL T. Rowe Price Dividend Growth 07/01/1999 WRL T. Rowe Price Small Cap 07/01/1999 WRL Salomon All Cap 07/01/1999 WRL PBHG Mid Cap Growth 07/01/1999 WRL Dreyfus Mid Cap 07/01/1999
SUBACCOUNT INCEPTION DATE - ---------- -------------- WRL Value Line Aggressive Growth 05/01/2000 WRL Great Companies - America(SM) 05/01/2000 WRL Great Companies - Technology(SM) 05/01/2000 WRL Great Companies - Global(2) 09/01/2000 WRL Gabelli Global Growth 09/01/2000 WRL LKCM Capital Growth 02/05/2001 WRL Conservative Asset Allocation 05/01/2002 WRL Moderate Asset Allocation 05/01/2002 WRL Moderately Aggressive Asset Allocation 05/01/2002 WRL Aggressive Asset Allocation 05/01/2002 WRL PIMCO Total Return 05/01/2002 WRL Janus Balanced 05/01/2002 WRL Transamerica Convertible Securities 05/01/2002 WRL Transamerica Equity 05/01/2002 WRL Transamerica Growth Opportunities 05/01/2002 WRL Capital Guardian Value 05/01/2002 WRL Transamerica U.S. Government Securities 05/01/2002 WRL J.P. Morgan Enhanced Index 05/01/2002 WRL Capital Guardian U.S. Equity 05/01/2002 Fidelity VIP Growth Opportunities 05/01/2000 Fidelity VIP Contrafund(R) 05/01/2000 Fidelity VIP Equity-Income 05/01/2000
On May 1, 2002, WRL made initial contributions totaling $325,000 to the Life Account. The respective amounts of the contributions and units received are as follows:
SUBACCOUNT CONTRIBUTION UNITS - ---------- ------------ ----- WRL Conservative Asset Allocation $ 25,000 2,500 WRL Moderate Asset Allocation 25,000 2,500 WRL Moderately Aggressive Asset Allocation 25,000 2,500 WRL Aggressive Asset Allocation 25,000 2,500 WRL PIMCO Total Return 25,000 2,500 WRL Janus Balanced 25,000 2,500
42 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 1 -- (CONTINUED)
SUBACCOUNT CONTRIBUTION UNITS - ---------- ------------ ----- WRL Transamerica Convertible Securities $ 25,000 2,500 WRL Transamerica Equity 25,000 2,500 WRL Transamerica Growth Opportunities 25,000 2,500 WRL Capital Guardian Value 25,000 2,500 WRL Transamerica U.S. Government Securities 25,000 2,500 WRL J.P. Morgan Enhanced Index 25,000 2,500 WRL Capital Guardian U.S. Equity 25,000 2,500
The Life Account holds assets to support the benefits under certain flexible premium variable universal life insurance policies (the "Policies") issued by WRL. The Life Account's equity transactions are accounted for using the appropriate effective date at the corresponding accumulation unit value. The following significant accounting policies, which are in conformity with accounting principles generally accepted in the United States, have been consistently applied in the preparation of the Life Account Financial Statements. The preparation of the Financial Statements required management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. A. VALUATION OF INVESTMENTS AND SECURITIES TRANSACTIONS Investments in the Funds' shares are valued at the closing net asset value ("NAV") per share of the underlying Portfolio, as determined by the Funds. Investment transactions are accounted for on the trade date at the Portfolio NAV next determined after receipt of sale or redemption orders without sales charges. Dividend income and capital gains distributions are recorded on the ex-dividend date. The cost of investments sold is determined on a first-in, first-out basis. B. FEDERAL INCOME TAXES The operations of the Life Account are a part of and are taxed with the total operations of WRL, which is taxed as a life insurance company under the Internal Revenue Code. Under the Internal Revenue Code law, the investment income of the Life Account, including realized and unrealized capital gains, is not taxable to WRL, as long as earnings are credited under the Policies. Accordingly, no provision for Federal income taxes has been made. NOTE 2 -- EXPENSES AND RELATED PARTY TRANSACTIONS Charges are assessed by WRL in connection with the issuance and administration of the Policies. A. POLICY CHARGES Under some forms of the Policies, a sales charge and premium taxes are deducted by WRL prior to allocation of policy owner payments to the subaccounts. Contingent surrender charges may also apply. Under all forms of the Policy, monthly charges against policy cash values are made to compensate WRL for costs of insurance provided. B. LIFE ACCOUNT CHARGES A daily charge equal to an annual rate of .90% of average daily net assets is assessed to compensate WRL for assumption of mortality and expense risks in connection with issuance and administration of the Policies. This charge (not assessed at the individual contract level) effectively reduces the value of a unit outstanding during the year. C. RELATED PARTY TRANSACTIONS ATFA is the investment adviser for the AEGON/Transamerica Series Fund, Inc. ("Fund"). The Fund has entered into annually renewable investment advisory agreements for each portfolio. The agreements provide for an advisory fee at the following annual rate to ATFA as a percentage of the average daily net assets of the portfolio.
PORTFOLIO ADVISORY FEE - --------- ------------ Transamerica Money Market(1) 0.35 % AEGON Bond 0.45 % Janus Growth 0.80 % Janus Global 0.80 % LKCM Strategic Total Return 0.80 % Van Kampen Emerging Growth 0.80 % Alger Aggressive Growth 0.80 % Federated Growth & Income 0.75 % Transamerica Value Balanced 0.75 % PBHG/NWQ Value Select 0.80 % American Century International(2) 1.00 % GE U.S. Equity 0.80 % Third Avenue Value 0.80 % Clarion Real Estate Securities 0.80 %
43 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 2 -- (CONTINUED)
PORTFOLIO ADVISORY FEE - --------- ------------ Marsico Growth(3) 0.90 % Munder Net50 0.90 % T. Rowe Price Dividend Growth(3) 0.90 % T. Rowe Price Small Cap 0.75 % Salomon All Cap(3) 0.90 % PBHG Mid Cap Growth(3) 0.90 % Dreyfus Mid Cap(4) 0.85 % Value Line Aggressive Growth 0.80 % Great Companies - America(SM) 0.80 % Great Companies - Technology(SM) 0.80 % Great Companies - Global(2) 0.80 % Gabelli Global Growth(5) 1.00 % LKCM Capital Growth 0.80 % Conservative Asset Allocation 0.10 % Moderate Assets Allocation 0.10 % Moderately Aggressive Asset Allocation 0.10 % Aggressive Asset Allocation 0.10 % PIMCO Total Return 0.70 % Janus Balanced(6) 0.90 % Transamerica Convertible Securities(7) 0.80 % Transamerica Equity 0.75 % Transamerica Growth Opportunities 0.85 % Capital Guardian Value(8) 0.85 % Transamerica US Government Securities 0.65 % J.P. Morgan Enhanced Index 0.75 % Capital Guardian U.S. Equity(8) 0.85 %
AEGON/Transamerica Fund Services, Inc. ("ATFS") provides the Fund with administrative and transfer agency services. ATFA and ATFS are wholly owned subsidiaries of WRL. WRL is an indirect wholly owned subsidiary of AEGON NV, a Netherlands corporation. - --------------- (1) On May 1, 2002 the advising fee for Transamerica Money Market was reduced from .40% to .35% of average daily net assets. (2) AEGON/Transamerica Advisers receives compensation for its services at 1.00% for the first $50 million of the portfolio's average daily net assets; 0.95% of assets over $50 million up to $150 million; 0.90% of assets over $150 million up to $500 million; and 0.85% of assets in excess of $500 million. (3) AEGON/Transamerica Advisers receives compensation for its services at 0.90% for the first $100 million of the portfolio's average daily net assets; and 0.80% of assets in excess of $100 million. (4) AEGON/Transamerica Advisers receives compensation for its services at 0.85% for the first $100 million of the portfolio's average daily net assets; and 0.80% of assets in excess of $100 million. (5) AEGON/Transamerica Advisers receives compensation for its services at 1.00% for the first $500 million of the portfolio's average daily net assets; 0.90% of assets over $500 million up to $1 billion; and 0.80% of assets in excess of $1 billion. (6) AEGON/Transamerica Advisers receives compensation for its services at 0.90% for the first $500 million of the portfolio's average daily net assets; and 0.85% of assets over $500 million up to $1 billion; and 0.80% of assets in excess of $1 billion. (7) AEGON/Transamerica Advisers receives compensation for its services at 0.80% for the first $500 million of the portfolio's average daily net assets; and 0.70% of assets in excess of $500 million. (8) AEGON/Transamerica Advisers receives compensation for its services at 0.85% for the first $300 million of the portfolio's average daily net assets; and 0.80% of assets over $300 million up to $500 million; and 0.775% of assets in excess of $500 million. NOTE 3 -- DIVIDEND DISTRIBUTIONS Dividends are not declared by the Life Account, since the increase in the value of the underlying investment in the Fund is reflected daily in the accumulation unit value used to calculate the equity value within the Life Account. Consequently, a dividend distribution by the underlying Fund does not change either the accumulation unit value or equity values within the Life Account. NOTE 4 -- SECURITIES TRANSACTIONS Securities transactions for the year ended December 31, 2002 are as follows (in thousands):
PURCHASES PROCEEDS OF FROM SALES SUBACCOUNT SECURITIES OF SECURITIES - ---------- ------------ ------------- WRL Transamerica Money Market $ 97,098 $ 85,845 WRL AEGON Bond 24,986 11,904 WRL Janus Growth 50,560 65,665 WRL Janus Global 20,085 27,488 WRL LKCM Strategic Total Return 5,930 8,751 WRL Van Kampen Emerging Growth 38,062 46,006 WRL Alger Aggressive Growth 35,295 32,146
44 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 4 -- (CONTINUED)
PURCHASES PROCEEDS OF FROM SALES SUBACCOUNT SECURITIES OF SECURITIES - ---------- ------------ ------------- WRL Federated Growth & Income $ 32,908 $ 5,617 WRL Transamerica Value Balanced 32,348 5,354 WRL PBHG/NWQ Value Select 7,341 3,411 WRL American Century International 4,252 2,245 WRL GE U.S. Equity 5,577 3,080 WRL Third Avenue Value 15,644 5,301 WRL Clarion Real Estate Securities 15,351 3,399 WRL Marsico Growth 4,691 2,783 WRL Munder Net50 3,239 2,516 WRL T. Rowe Price Dividend Growth 2,926 931 WRL T. Rowe Price Small Cap 4,835 2,647 WRL Salomon All Cap 10,992 4,340 WRL PBHG Mid Cap Growth 7,580 4,560 WRL Dreyfus Mid Cap 9,088 3,155 WRL Value Line Aggressive Growth 961 566 WRL Great Companies - America(SM) 46,491 3,534 WRL Great Companies - Technology(SM) 4,500 2,714 WRL Great Companies - Global(2) 3,394 773
PURCHASES PROCEEDS OF FROM SALES SUBACCOUNT SECURITIES OF SECURITIES - ---------- ------------ ------------- WRL Gabelli Global Growth $ 5,555 $ 577 WRL LKCM Capital Growth 1,448 1,169 WRL Conservative Asset Allocation 4,753 564 WRL Moderate Asset Allocation 11,134 311 WRL Moderately Aggressive Asset Allocation 15,464 221 WRL Aggressive Asset Allocation 7,151 163 WRL PIMCO Total Return 8,312 1,264 WRL Janus Balanced 3,027 615 WRL Transamerica Convertible Securities 378 59 WRL Transamerica Equity 2,919 132 WRL Transamerica Growth Opportunities 655 76 WRL Capital Guardian Value 338 96 WRL Transamerica U.S. Government Securities 226 11 WRL J.P. Morgan Enhanced Index 56 1 WRL Capital Guardian U.S. Equity 245 65 Fidelity VIP Growth Opportunities 1,253 417 Fidelity VIP Contrafund(R) 5,861 2,019 Fidelity VIP Equity - Income 4,169 887
45 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL TRANSAMERICA MONEY MARKET SUBACCOUNT ----------------------------------------------------- DECEMBER 31, ----------------------------------------------------- 2002 2001 2000 1999 1998 --------- -------- -------- -------- -------- Accumulation unit value, beginning of year.................. $ 18.95 $ 18.39 $ 17.49 $ 16.83 $ 16.13 --------- -------- -------- -------- -------- Income from operations: Net investment income (loss)............................ 0.11 0.56 0.90 0.66 0.70 Net realized and unrealized gain (loss) on investment... 0.00 0.00 0.00 0.00 0.00 --------- -------- -------- -------- -------- Net income (loss) from operations..................... 0.11 0.56 0.90 0.66 0.70 --------- -------- -------- -------- -------- Accumulation unit value, end of year........................ $ 19.06 $ 18.95 $ 18.39 $ 17.49 $ 16.83 ========= ======== ======== ======== ======== Total return................................................ 0.54 % 3.05 % 5.17 % 3.92 % 4.36 % Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 93,388 $ 82,417 $ 60,279 $ 56,070 $ 24,576 Ratio of net investment income (loss) to average net assets.................................................. 0.53 % 2.80 % 5.05 % 3.87 % 4.24 % Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
WRL AEGON BOND SUBACCOUNT ----------------------------------------------------- DECEMBER 31, ----------------------------------------------------- 2002 2001 2000 1999 1998 --------- -------- -------- -------- -------- Accumulation unit value, beginning of year.................. $ 25.91 $ 24.19 $ 22.01 $ 22.89 $ 21.12 --------- -------- -------- -------- -------- Income from operations: Net investment income (loss)............................ 0.82 (0.06) 1.04 1.13 1.01 Net realized and unrealized gain (loss) on investment... 1.51 1.78 1.14 (2.01) 0.76 --------- -------- -------- -------- -------- Net income (loss) from operations..................... 2.33 1.72 2.18 (0.88) 1.77 --------- -------- -------- -------- -------- Accumulation unit value, end of year........................ $ 28.24 $ 25.91 $ 24.19 $ 22.01 $ 22.89 ========= ======== ======== ======== ======== Total return................................................ 8.99 % 7.11 % 9.90 % (3.81)% 8.34 % Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 61,311 $ 44,709 $ 25,935 $ 27,129 $ 24,934 Ratio of net investment income (loss) to average net assets.................................................. 3.03 % (0.24)% 4.58 % 5.10 % 4.58 % Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
46 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL JANUS GROWTH SUBACCOUNT ------------------------------------------------------- DECEMBER 31, ------------------------------------------------------- 2002 2001 2000 1999 1998 --------- -------- -------- ---------- -------- Accumulation unit value, beginning of year................. $ 73.01 $ 102.61 $ 145.70 $ 92.07 $ 56.48 --------- -------- -------- ---------- -------- Income from operations: Net investment income (loss)........................... (0.53) (0.73) 16.41 25.03 0.13 Net realized and unrealized gain (loss) on investment........................................... (21.78) (28.87) (59.50) 28.60 35.46 --------- -------- -------- ---------- -------- Net income (loss) from operations.................... (22.31) (29.60) (43.09) 53.63 35.59 --------- -------- -------- ---------- -------- Accumulation unit value, end of year....................... $ 50.70 $ 73.01 $ 102.61 $ 145.70 $ 92.07 ========= ======== ======== ========== ======== Total return............................................... (30.55)% (28.85)% (29.58)% 58.25 % 63.01 % Ratios and supplemental data: Net assets at end of period (in thousands)............... $ 474,008 $699,663 $961,015 $1,353,957 $798,027 Ratio of net investment income (loss) to average net assets................................................. (0.90)% (0.90)% 11.75 % 22.67 % 0.19 % Ratio of expenses to average net assets.................. 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
WRL JANUS GLOBAL SUBACCOUNT ------------------------------------------------------- DECEMBER 31, ------------------------------------------------------- 2002 2001 2000 1999 1998 --------- -------- -------- ---------- -------- Accumulation unit value, beginning of year................. $ 24.31 $ 31.79 $ 38.91 $ 22.94 $ 17.80 --------- -------- -------- ---------- -------- Income from operations: Net investment income (loss)........................... 0.37 0.00 7.93 2.44 0.82 Net realized and unrealized gain (loss) on investment........................................... (6.86) (7.48) (15.05) 13.53 4.32 --------- -------- -------- ---------- -------- Net income (loss) from operations.................... (6.49) (7.48) (7.12) 15.97 5.14 --------- -------- -------- ---------- -------- Accumulation unit value, end of year....................... $ 17.82 $ 24.31 $ 31.79 $ 38.91 $ 22.94 ========= ======== ======== ========== ======== Total return............................................... (26.69)% (23.53)% (18.28)% 69.58 % 28.86 % Ratios and supplemental data: Net assets at end of period (in thousands)............... $ 218,765 $313,912 $410,109 $ 451,498 $233,256 Ratio of net investment income (loss) to average net assets................................................. 1.78 % 0.01 % 20.55 % 9.07 % 3.92 % Ratio of expenses to average net assets.................. 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
47 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL LKCM STRATEGIC TOTAL RETURN SUBACCOUNT ------------------------------------------------------------ DECEMBER 31, ------------------------------------------------------------ 2002 2001 2000 1999 1998 ---------- ---------- ---------- --------- --------- Accumulation unit value, beginning of year............. $ 21.10 $ 21.77 $ 22.82 $ 20.55 $ 18.91 ---------- ---------- ---------- --------- --------- Income from operations: Net investment income (loss)....................... 0.42 (0.09) 1.63 1.68 0.71 Net realized and unrealized gain (loss) on investment....................................... (2.81) (0.58) (2.68) 0.59 0.93 ---------- ---------- ---------- --------- --------- Net income (loss) from operations................ (2.39) (0.67) (1.05) 2.27 1.64 ---------- ---------- ---------- --------- --------- Accumulation unit value, end of year................... $ 18.71 $ 21.10 $ 21.77 $ 22.82 $ 20.55 ========== ========== ========== ========= ========= Total return........................................... (11.35)% (3.06)% (4.62)% 11.07 % 8.66 % Ratios and supplemental data: Net assets at end of period (in thousands)........... $ 79,810 $ 95,331 $ 98,466 $ 106,665 $ 98,926 Ratio of net investment income (loss) to average net assets............................................. 2.14 % (0.44)% 7.43 % 7.93 % 3.67 % Ratio of expenses to average net assets.............. 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
WRL VAN KAMPEN EMERGING GROWTH SUBACCOUNT ------------------------------------------------------------ DECEMBER 31, ------------------------------------------------------------ 2002 2001 2000 1999 1998 ---------- ---------- ---------- --------- --------- Accumulation unit value, beginning of year............. $ 37.54 $ 56.74 $ 64.99 $ 31.96 $ 23.48 ---------- ---------- ---------- --------- --------- Income from operations: Net investment income (loss)....................... (0.25) (0.35) 16.83 9.32 0.91 Net realized and unrealized gain (loss) on investment....................................... (12.38) (18.85) (25.08) 23.71 7.57 ---------- ---------- ---------- --------- --------- Net income (loss) from operations................ (12.63) (19.20) (8.25) 33.03 8.48 ---------- ---------- ---------- --------- --------- Accumulation unit value, end of year................... $ 24.91 $ 37.54 $ 56.74 $ 64.99 $ 31.96 ========== ========== ========== ========= ========= Total return........................................... (33.66)% (33.83)% (12.70)% 103.33 % 36.11 % Ratios and supplemental data: Net assets at end of period (in thousands)........... $ 250,959 $ 386,903 $ 580,202 $ 608,130 $ 262,665 Ratio of net investment income (loss) to average net assets............................................. (0.81)% (0.82)% 23.62 % 23.19 % 3.44 % Ratio of expenses to average net assets.............. 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
48 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL ALGER AGGRESSIVE GROWTH SUBACCOUNT ---------------------------------------------------------------- DECEMBER 31, ---------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------- ----------- ---------- ---------- ---------- Accumulation unit value, beginning of year......... $ 25.17 $ 30.40 $ 44.67 $ 26.67 $ 18.10 ----------- ----------- ---------- ---------- ---------- Income from operations: Net investment income (loss)................... (0.18) (0.23) 4.76 4.90 1.33 Net realized and unrealized gain (loss) on investment................................... (8.62) (5.00) (19.03) 13.10 7.24 ----------- ----------- ---------- ---------- ---------- Net income (loss) from operations............ (8.80) (5.23) (14.27) 18.00 8.57 ----------- ----------- ---------- ---------- ---------- Accumulation unit value, end of year............... $ 16.37 $ 25.17 $ 30.40 $ 44.67 $ 26.67 =========== =========== ========== ========== ========== Total return....................................... (34.98)% (17.20)% (31.94)% 67.52 % 47.36 % Ratios and supplemental data: Net assets at end of period (in thousands)....... $ 164,857 $ 248,752 $ 280,172 $ 354,178 $ 177,857 Ratio of net investment income (loss) to average net assets..................................... (0.90)% (0.90)% 11.65 % 15.54 % 6.20 % Ratio of expenses to average net assets.......... 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
WRL FEDERATED GROWTH & INCOME SUBACCOUNT ---------------------------------------------------------------- DECEMBER 31, ---------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------- ----------- ---------- ---------- ---------- Accumulation unit value, beginning of year......... $ 22.85 $ 19.93 $ 15.57 $ 16.44 $ 16.09 ----------- ----------- ---------- ---------- ---------- Income from operations: Net investment income (loss)................... 1.20 0.21 0.85 1.05 0.77 Net realized and unrealized gain (loss) on investment................................... (1.19) 2.71 3.51 (1.92) (0.42) ----------- ----------- ---------- ---------- ---------- Net income (loss) from operations............ 0.01 2.92 4.36 (0.87) 0.35 ----------- ----------- ---------- ---------- ---------- Accumulation unit value, end of year............... $ 22.86 $ 22.85 $ 19.93 $ 15.57 $ 16.44 =========== =========== ========== ========== ========== Total return....................................... 0.06 % 14.67 % 28.01 % (5.31)% 2.13 % Ratios and supplemental data: Net assets at end of period (in thousands)....... $ 79,210 $ 57,831 $ 26,883 $ 17,389 $ 16,047 Ratio of net investment income (loss) to average net assets..................................... 5.21 % 0.95 % 5.00 % 6.51 % 4.83 % Ratio of expenses to average net assets.......... 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
49 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL TRANSAMERICA VALUE BALANCED SUBACCOUNT -------------------------------------------------------- DECEMBER 31, -------------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- --------- -------- --------- Accumulation unit value, beginning of year.................. $ 18.47 $ 18.19 $ 15.66 $ 16.74 $ 15.60 --------- --------- --------- -------- --------- Income from operations: Net investment income (loss)............................ 0.47 0.10 1.20 0.41 1.58 Net realized and unrealized gain (loss) on investment... (3.17) 0.18 1.33 (1.49) (0.44) --------- --------- --------- -------- --------- Net income (loss) from operations..................... (2.70) 0.28 2.53 (1.08) 1.14 --------- --------- --------- -------- --------- Accumulation unit value, end of year........................ $ 15.77 $ 18.47 $ 18.19 $ 15.66 $ 16.74 ========= ========= ========= ======== ========= Total return................................................ (14.59)% 1.54 % 16.16 % (6.48)% 7.36 % Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 55,762 $ 41,934 $ 34,213 $ 33,317 $ 39,904 Ratio of net investment income (loss) to average net assets.................................................. 2.86 % 0.55 % 7.33 % 2.50 % 9.69 % Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
WRL PBHG/NWQ VALUE SELECT SUBACCOUNT -------------------------------------------------------- DECEMBER 31, -------------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- --------- -------- --------- Accumulation unit value, beginning of year.................. $ 15.64 $ 16.07 $ 14.08 $ 13.16 $ 13.94 --------- --------- --------- -------- --------- Income from operations: Net investment income (loss)............................ 0.19 (0.12) 0.23 0.20 0.95 Net realized and unrealized gain (loss) on investment... (2.53) (0.31) 1.76 0.72 (1.73) --------- --------- --------- -------- --------- Net income (loss) from operations..................... (2.34) (0.43) 1.99 0.92 (0.78) --------- --------- --------- -------- --------- Accumulation unit value, end of year........................ $ 13.30 $ 15.64 $ 16.07 $ 14.08 $ 13.16 ========= ========= ========= ======== ========= Total return................................................ (14.98)% (2.68)% 14.17 % 6.98 % (5.63)% Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 30,289 $ 32,890 $ 28,888 $ 26,678 $ 26,083 Ratio of net investment income (loss) to average net assets.................................................. 1.28 % (0.75)% 1.58 % 1.42 % 6.84 % Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
50 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL AMERICAN CENTURY INTERNATIONAL SUBACCOUNT ----------------------------------------------------------- DECEMBER 31, ----------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ---------- --------- --------- --------- Accumulation unit value, beginning of year............ $ 9.43 $ 12.43 $ 14.76 $ 11.92 $ 10.65 ---------- ---------- --------- --------- --------- Income from operations: Net investment income (loss)...................... (0.05) 0.25 2.00 0.62 (0.09) Net realized and unrealized gain (loss) on investment...................................... (2.01) (3.25) (4.33) 2.22 1.36 ---------- ---------- --------- --------- --------- Net income (loss) from operations............... (2.06) (3.00) (2.33) 2.84 1.27 ---------- ---------- --------- --------- --------- Accumulation unit value, end of year.................. $ 7.37 $ 9.43 $ 12.43 $ 14.76 $ 11.92 ========== ========== ========= ========= ========= Total return.......................................... (21.89)% (24.12)% (15.75)% 23.84 % 11.84 % Ratios and supplemental data: Net assets at end of period (in thousands).......... $ 7,974 $ 8,183 $ 7,944 $ 7,013 $ 5,827 Ratio of net investment income (loss) to average net assets............................................ (0.59)% 2.40 % 15.54 % 5.09 % (0.81)% Ratio of expenses to average net assets............. 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
WRL GE U.S. EQUITY SUBACCOUNT ----------------------------------------------------------- DECEMBER 31, ----------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ---------- --------- --------- --------- Accumulation unit value, beginning of year............ $ 15.97 $ 17.69 $ 17.99 $ 15.33 $ 12.59 ---------- ---------- --------- --------- --------- Income from operations: Net investment income (loss)...................... (0.06) (0.12) 0.68 1.38 0.73 Net realized and unrealized gain (loss) on investment...................................... (3.21) (1.60) (0.98) 1.28 2.01 ---------- ---------- --------- --------- --------- Net income (loss) from operations............... (3.27) (1.72) (0.30) 2.66 2.74 ---------- ---------- --------- --------- --------- Accumulation unit value, end of year.................. $ 12.70 $ 15.97 $ 17.69 $ 17.99 $ 15.33 ========== ========== ========= ========= ========= Total return.......................................... (20.52)% (9.69)% (1.67)% 17.35 % 21.78 % Ratios and supplemental data: Net assets at end of period (in thousands).......... $ 26,774 $ 31,020 $ 29,771 $ 26,416 $ 14,084 Ratio of net investment income (loss) to average net assets............................................ (0.44)% (0.72)% 3.81 % 8.27 % 5.30 % Ratio of expenses to average net assets............. 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
51 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL THIRD AVENUE VALUE SUBACCOUNT ----------------------------------------------------------- DECEMBER 31, ----------------------------------------------------------- 2002 2001 2000 1999 1998(1) ---------- ---------- --------- --------- --------- Accumulation unit value, beginning of year............ $ 14.96 $ 14.22 $ 10.59 $ 9.23 $ 10.00 ---------- ---------- --------- --------- --------- Income from operations: Net investment income (loss)...................... 0.13 (0.11) 0.60 0.19 (0.05) Net realized and unrealized gain (loss) on investment...................................... (2.02) 0.85 3.03 1.17 (0.72) ---------- ---------- --------- --------- --------- Net income (loss) from operations............... (1.89) 0.74 3.63 1.36 (0.77) ---------- ---------- --------- --------- --------- Accumulation unit value, end of year.................. $ 13.07 $ 14.96 $ 14.22 $ 10.59 $ 9.23 ========== ========== ========= ========= ========= Total return.......................................... (12.66)% 5.22 % 34.26 % 14.68 % (7.67)% Ratios and supplemental data: Net assets at end of period (in thousands).......... $ 37,656 $ 34,345 $ 16,735 $ 3,411 $ 2,807 Ratio of net investment income (loss) to average net assets............................................ 0.92 % (0.78)% 4.53 % 1.98 % (0.52)% Ratio of expenses to average net assets............. 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
WRL CLARION REAL ESTATE SECURITIES SUBACCOUNT ----------------------------------------------------------- DECEMBER 31, ----------------------------------------------------------- 2002 2001 2000 1999 1998(1) ---------- ---------- --------- --------- --------- Accumulation unit value, beginning of year............ $ 11.40 $ 10.36 $ 8.06 $ 8.46 $ 10.00 ---------- ---------- --------- --------- --------- Income from operations: Net investment income (loss)...................... 0.12 0.21 0.10 0.07 (0.05) Net realized and unrealized gain (loss) on investment...................................... 0.19 0.83 2.20 (0.47) (1.49) ---------- ---------- --------- --------- --------- Net income (loss) from operations............... 0.31 1.04 2.30 (0.40) (1.54) ---------- ---------- --------- --------- --------- Accumulation unit value, end of year.................. $ 11.71 $ 11.40 $ 10.36 $ 8.06 $ 8.46 ========== ========== ========= ========= ========= Total return.......................................... 2.67 % 10.06 % 28.46 % (4.63)% (15.44)% Ratios and supplemental data: Net assets at end of period (in thousands).......... $ 19,564 $ 7,899 $ 2,476 $ 627 $ 709 Ratio of net investment income (loss) to average net assets............................................ 0.99 % 1.92 % 1.07 % 0.95 % (0.90)% Ratio of expenses to average net assets............. 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
52 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL MARSICO GROWTH SUBACCOUNT ---------------------------------------------- DECEMBER 31, ---------------------------------------------- 2002 2001 2000 1999(1) --------- --------- --------- ---------- Accumulation unit value, beginning of year.................. $ 8.76 $ 10.29 $ 11.29 $ 10.00 --------- --------- --------- ---------- Income from operations: Net investment income (loss)............................ (0.06) (0.01) 0.06 (0.05) Net realized and unrealized gain (loss) on investment......................................... (2.27) (1.52) (1.06) 1.34 --------- --------- --------- ---------- Net income (loss) from operations..................... (2.33) (1.53) (1.00) 1.29 --------- --------- --------- ---------- Accumulation unit value, end of year........................ $ 6.43 $ 8.76 $ 10.29 $ 11.29 ========= ========= ========= ========== Total return................................................ (26.64)% (14.86)% (8.84)% 12.91 % Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 4,464 $ 3,750 $ 1,627 $ 977 Ratio of net investment income (loss) to average net assets...................................... (0.79)% (0.08)% 0.59 % (0.90)% Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 % 0.90 %
WRL MUNDER NET50 SUBACCOUNT ---------------------------------------------- JUNE 30, ---------------------------------------------- 2002 2001 2000 1999(1) --------- --------- --------- ---------- Accumulation unit value, beginning of year.................. $ 7.98 $ 10.80 $ 10.92 $ 10.00 --------- --------- --------- ---------- Income from operations: Net investment income (loss)............................ (0.05) (0.03) 0.22 0.76 Net realized and unrealized gain (loss) on investment......................................... (3.06) (2.79) (0.34) 0.16 --------- --------- --------- ---------- Net income (loss) from operations..................... (3.11) (2.82) (0.12) 0.92 --------- --------- --------- ---------- Accumulation unit value, end of year........................ $ 4.87 $ 7.98 $ 10.80 $ 10.92 ========= ========= ========= ========== Total return................................................ (38.97)% (26.09)% (1.15)% 9.23 % Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 2,439 $ 2,804 $ 862 $ 344 Ratio of net investment income (loss) to average net assets...................................... (0.90)% (0.29)% 2.00 % 15.66 % Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 % 0.90 %
53 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL T. ROWE PRICE DIVIDEND GROWTH SUBACCOUNT ---------------------------------------------- DECEMBER 31, ---------------------------------------------- 2002 2001 2000 1999(1) --------- --------- --------- ---------- Accumulation unit value, beginning of year.................. $ 9.48 $ 9.98 $ 9.16 $ 10.00 --------- --------- --------- ---------- Income from operations: Net investment income (loss)............................ (0.03) (0.08) (0.04) (0.04) Net realized and unrealized gain (loss) on investment......................................... (1.83) (0.42) 0.86 (0.80) --------- --------- --------- ---------- Net income (loss) from operations..................... (1.86) (0.50) 0.82 (0.84) --------- --------- --------- ---------- Accumulation unit value, end of year........................ $ 7.62 $ 9.48 $ 9.98 $ 9.16 ========= ========= ========= ========== Total return................................................ (19.54)% (5.02)% 8.89 % (8.37)% Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 4,594 $ 3,419 $ 985 $ 501 Ratio of net investment income (loss) to average net assets...................................... (0.38)% (0.90)% (0.42)% (0.90)% Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 % 0.90 %
WRL T. ROWE PRICE SMALL CAP SUBACCOUNT ---------------------------------------------- DECEMBER 31, ---------------------------------------------- 2002 2001 2000 1999(1) --------- --------- --------- ---------- Accumulation unit value, beginning of year.................. $ 9.99 $ 11.17 $ 12.31 $ 10.00 --------- --------- --------- ---------- Income from operations: Net investment income (loss)............................ (0.07) (0.09) 0.04 0.41 Net realized and unrealized gain (loss) on investment......................................... (2.72) (1.09) (1.18) 1.90 --------- --------- --------- ---------- Net income (loss) from operations..................... (2.79) (1.18) (1.14) 2.31 --------- --------- --------- ---------- Accumulation unit value, end of year........................ $ 7.20 $ 9.99 $ 11.17 $ 12.31 ========= ========= ========= ========== Total return................................................ (28.00)% (10.52)% (9.27)% 23.09 % Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 6,667 $ 6,832 $ 2,568 $ 925 Ratio of net investment income (loss) to average net assets...................................... (0.90)% (0.90)% 0.29 % 8.13 % Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 % 0.90 %
54 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL SALOMON ALL CAP SUBACCOUNT ---------------------------------------------- DECEMBER 31, ---------------------------------------------- 2002 2001 2000 1999(1) ---------- --------- --------- --------- Accumulation unit value, beginning of year.................. $ 12.70 $ 12.55 $ 10.70 $ 10.00 ---------- --------- --------- --------- Income from operations: Net investment income (loss)............................ 0.02 0.11 0.23 0.40 Net realized and unrealized gain (loss) on investment......................................... (3.25) 0.04 1.62 0.30 ---------- --------- --------- --------- Net income (loss) from operations..................... (3.23) 0.15 1.85 0.70 ---------- --------- --------- --------- Accumulation unit value, end of year........................ $ 9.47 $ 12.70 $ 12.55 $ 10.70 ========== ========= ========= ========= Total return................................................ (25.39)% 1.18 % 17.24 % 7.02 % Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 27,583 $ 30,526 $ 8,072 $ 383 Ratio of net investment income (loss) to average net assets...................................... 0.17 % 0.89 % 1.91 % 8.07 % Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 % 0.90 %
WRL PBHG MID CAP GROWTH SUBACCOUNT ---------------------------------------------- DECEMBER 31, ---------------------------------------------- 2002 2001 2000 1999(1) ---------- --------- --------- --------- Accumulation unit value, beginning of year.................. $ 8.61 $ 13.56 $ 15.98 $ 10.00 ---------- --------- --------- --------- Income from operations: Net investment income (loss)............................ (0.06) (0.09) 0.04 0.04 Net realized and unrealized gain (loss) on investment......................................... (2.44) (4.86) (2.46) 5.94 ---------- --------- --------- --------- Net income (loss) from operations..................... (2.50) (4.95) (2.42) 5.98 ---------- --------- --------- --------- Accumulation unit value, end of year........................ $ 6.11 $ 8.61 $ 13.56 $ 15.98 ========== ========= ========= ========= Total return................................................ (29.03)% (36.50)% (15.16)% 59.78 % Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 26,001 $ 32,867 $ 39,702 $ 5,065 Ratio of net investment income (loss) to average net assets...................................... (0.90)% (0.90)% 0.25 % 0.62 % Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 % 0.90 %
55 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL DREYFUS MID CAP SUBACCOUNT ----------------------------------------------- DECEMBER 31, ----------------------------------------------- 2002 2001 2000 1999(1) ---------- --------- ---------- --------- Accumulation unit value, beginning of year.................. $ 10.81 $ 11.35 $ 10.14 $ 10.00 ---------- --------- ---------- --------- Income from operations: Net investment income (loss)............................ (0.09) 0.05 0.23 (0.04) Net realized and unrealized gain (loss) on investment......................................... (1.37) (0.59) 0.98 0.18 ---------- --------- ---------- --------- Net income (loss) from operations..................... (1.46) (0.54) 1.21 0.14 ---------- --------- ---------- --------- Accumulation unit value, end of year........................ $ 9.35 $ 10.81 $ 11.35 $ 10.14 ========== ========= ========== ========= Total return................................................ (13.50)% (4.80)% 11.91 % 1.44 % Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 9,498 $ 5,325 $ 1,811 $ 337 Ratio of net investment income (loss) to average net assets...................................... (0.85)% 0.44 % 2.02 % (0.90)% Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 % 0.90 %
WRL VALUE LINE AGGRESSIVE GROWTH SUBACCOUNT ----------------------------------- DECEMBER 31, ----------------------------------- 2002 2001 2000(1) ---------- --------- ---------- Accumulation unit value, beginning of year.................. $ 7.97 $ 8.98 $ 10.00 ---------- --------- ---------- Income from operations: Net investment income (loss)............................ (0.06) (0.07) (0.06) Net realized and unrealized gain (loss) on investment... (1.83) (0.94) (0.96) ---------- --------- ---------- Net income (loss) from operations..................... (1.89) (1.01) (1.02) ---------- --------- ---------- Accumulation unit value, end of year........................ $ 6.08 $ 7.97 $ 8.98 ========== ========= ========== Total return................................................ (23.68)% (11.21)% (10.24)% Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 1,331 $ 1,283 $ 1,067 Ratio of net investment income (loss) to average net assets.................................................. (0.90)% (0.90)% (0.90)% Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 %
56 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL GREAT COMPANIES-AMERICA(SM) SUBACCOUNT ----------------------------------- DECEMBER 31, ----------------------------------- 2002 2001 2000(1) ---------- ---------- --------- Accumulation unit value, beginning of year.................. $ 9.84 $ 11.31 $ 10.00 ---------- ---------- --------- Income from operations: Net investment income (loss)............................ (0.05) (0.05) (0.06) Net realized and unrealized gain (loss) on investment... (2.05) (1.42) 1.37 ---------- ---------- --------- Net income (loss) from operations..................... (2.10) (1.47) 1.31 ---------- ---------- --------- Accumulation unit value, end of year........................ $ 7.74 $ 9.84 $ 11.31 ========== ========== ========= Total return................................................ (21.40)% (12.98)% 13.12 % Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 36,236 $ 16,607 $ 8,491 Ratio of net investment income (loss) to average net assets.................................................. (0.62)% (0.56)% (0.90)% Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 %
WRL GREAT COMPANIES-TECHNOLOGY(SM) SUBACCOUNT ----------------------------------- DECEMBER 31, ----------------------------------- 2002 2001 2000(1) ---------- ---------- --------- Accumulation unit value, beginning of year.................. $ 4.19 $ 6.70 $ 10.00 ---------- ---------- --------- Income from operations: Net investment income (loss)............................ (0.03) (0.04) (0.05) Net realized and unrealized gain (loss) on investment... (1.59) (2.47) (3.25) ---------- ---------- --------- Net income (loss) from operations..................... (1.62) (2.51) (3.30) ---------- ---------- --------- Accumulation unit value, end of year........................ $ 2.57 $ 4.19 $ 6.70 ========== ========== ========= Total return................................................ (38.67)% (37.51)% (33.01)% Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 5,195 $ 6,147 $ 2,788 Ratio of net investment income (loss) to average net assets.................................................. (0.90)% (0.90)% (0.90)% Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 %
57 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL GREAT COMPANIES-GLOBAL(2) SUBACCOUNT --------------------------------- DECEMBER 31, --------------------------------- 2002 2001 2000(1) --------- --------- --------- Accumulation unit value, beginning of year.................. $ 7.02 $ 8.52 $ 10.00 --------- --------- --------- Income from operations: Net investment income (loss)............................ (0.05) (0.06) (0.03) Net realized and unrealized gain (loss) on investment... (1.51) (1.44) (1.45) --------- --------- --------- Net income (loss) from operations..................... (1.56) (1.50) (1.48) --------- --------- --------- Accumulation unit value, end of year........................ $ 5.46 $ 7.02 $ 8.52 ========= ========= ========= Total return................................................ (22.21)% (17.58)% (14.84)% Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 4,084 $ 2,238 $ 494 Ratio of net investment income (loss) to average net assets.................................................. (0.85)% (0.90)% (0.90)% Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 %
WRL GABELLI GLOBAL GROWTH SUBACCOUNT --------------------------------- DECEMBER 31, --------------------------------- 2002 2001 2000(1) --------- --------- --------- Accumulation unit value, beginning of year.................. $ 8.08 $ 9.07 $ 10.00 --------- --------- --------- Income from operations: Net investment income (loss)............................ (0.04) (0.06) (0.03) Net realized and unrealized gain (loss) on investment... (1.34) (0.93) (0.90) --------- --------- --------- Net income (loss) from operations..................... (1.38) (0.99) (0.93) --------- --------- --------- Accumulation unit value, end of year........................ $ 6.70 $ 8.08 $ 9.07 ========= ========= ========= Total return................................................ (17.05)% (10.92)% (9.27)% Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 10,852 $ 7,590 $ 971 Ratio of net investment income (loss) to average net assets.................................................. (0.49)% (0.75)% (0.90)% Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 %
58 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL WRL WRL LKCM CONSERVATIVE MODERATE CAPITAL GROWTH ASSET ALLOCATION ASSET ALLOCATION SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------- ---------------- ---------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, ----------------------------------- ---------------- ---------------- 2002 2001(1) 2002(1) 2002(1) ---------------- ---------------- ---------------- ---------------- Accumulation unit value, beginning of year................................. $ 6.43 $ 10.00 $ 10.00 $ 10.00 ---------------- ---------------- ---------------- ---------------- Income from operations: Net investment income (loss)....... (0.04) 0.00 (0.05) (0.05) Net realized and unrealized gain (loss) on investment............. (3.53) (3.57) (0.91) (1.19) ---------------- ---------------- ---------------- ---------------- Net income (loss) from operations..................... (3.57) (3.57) (0.96) (1.24) ---------------- ---------------- ---------------- ---------------- Accumulation unit value, end of year... $ 2.86 $ 6.43 $ 9.04 $ 8.76 ================ ================ ================ ================ Total return (55.53)% (35.70)%........ (9.65)% (12.43)% Ratios and supplemental data: Net assets at end of period (in thousands)......................... $ 775 $ 1,157 $ 4,376 $ 10,778 Ratio of net investment income (loss) to average net assets.............. (0.90)% (0.07)% (0.90)% (0.90)% Ratio of expenses to average net assets............................. 0.90 % 0.90 % 0.90 % 0.90 % WRL MODERATELY AGGRESSIVE ASSET ALLOCATION SUBACCOUNT ---------------- DECEMBER 31, ---------------- 2002(1) ---------------- Accumulation unit value, beginning of year................................. $ 10.00 ---------------- Income from operations: Net investment income (loss)....... (0.05) Net realized and unrealized gain (loss) on investment............. (1.48) ---------------- Net income (loss) from operations..................... (1.53) ---------------- Accumulation unit value, end of year... $ 8.47 ================ Total return (15.31)% Ratios and supplemental data: Net assets at end of period (in thousands)......................... $ 15,054 Ratio of net investment income (loss) to average net assets.............. (0.90)% Ratio of expenses to average net assets............................. 0.90 %
WRL WRL WRL TRANSAMERICA AGGRESSIVE PIMCO JANUS CONVERTIBLE ASSET ALLOCATION TOTAL RETURN BALANCED SECURITIES SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------------- ---------------- ---------------- ---------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, ---------------- ---------------- ---------------- ---------------- 2002(1) 2002(1) 2002(1) 2002(1) ---------------- ---------------- ---------------- ---------------- Accumulation unit value, beginning of year................................. $ 10.00 $ 10.00 $ 10.00 $ 10.00 ---------------- ---------------- ---------------- Income from operations: Net investment income (loss)....... (0.05) (0.06) (0.05) (0.05) Net realized and unrealized gain (loss) on investment............. (1.83) 0.62 (0.52) (0.69) ---------------- ---------------- ---------------- Net income (loss) from operations..................... (1.88) 0.56 (0.57) (0.74) ---------------- ---------------- ---------------- Accumulation unit value, end of year... $ 8.12 $ 10.56 $ 9.43 $ 9.26 ================ ================ ================ Total return........................... (18.79)% 5.56 % (5.67)% (7.36)% Ratios and supplemental data: Net assets at end of period (in thousands)......................... $ 6,751 $ 7,376 $ 2,319 $ 311 Ratio of net investment income (loss) to average net assets.............. (0.90)% (0.90)% (0.90)% (0.90)% Ratio of expenses to average net assets............................. 0.90 % 0.90 % 0.90 % 0.90 %
59 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
WRL WRL WRL TRANSAMERICA CAPITAL TRANSAMERICA GROWTH GUARDIAN EQUITY OPPORTUNITIES VALUE SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ------------- ------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------- ------------- ------------ 2002(1) 2002(1) 2002(1) ------------- ------------- ------------ Accumulation unit value, beginning of year.................. $ 10.00 $ 10.00 $ 10.00 ------------- ------------- ------------ Income from operations: Net investment income (loss)............................ (0.05) (0.04) 0.39 Net realized and unrealized gain (loss) on investment......................................... (1.42) (2.04) (2.48) ------------- ------------- ------------ Net income (loss) from operations..................... (1.47) (2.08) (2.09) ------------- ------------- ------------ Accumulation unit value, end of year........................ $ 8.53 $ 7.92 $ 7.91 ============= ============= ============ Total return................................................ (14.69)% (20.84)% (20.90)% Ratios and supplemental data: Net assets at end of period (in thousands)................ $ 2,781 $ 552 $ 181 Ratio of net investment income (loss) to average net assets...................................... (0.90)% (0.90)% 7.69 % Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 %
WRL WRL WRL TRANSAMERICA J.P. MORGAN CAPITAL U.S. GOVERNMENT ENHANCED GUARDIAN SECURITIES INDEX U.S. EQUITY SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------- ------------- ------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, --------------- ------------- ------------ 2002(1) 2002(1) 2002(1) --------------- ------------- ------------ Accumulation unit value, beginning of year.................. $ 10.00 $ 10.00 $ 10.00 --------------- ------------- ------------ Income from operations: Net investment income (loss)............................ 0.00 (0.02) (0.01) Net realized and unrealized gain (loss) on investment... 0.47 (1.87) (1.95) --------------- ------------- ------------ Net income (loss) from operations..................... 0.47 (1.89) (1.96) --------------- ------------- ------------ Accumulation unit value, end of year........................ $ 10.47 $ 8.11 $ 8.04 =============== ============= ============ Total return................................................ 4.65 % (18.85)% (19.63)% Ratios and supplemental data: Net assets at end of year (in thousands).................. $ 221 $ 50 $ 144 Ratio of net investment income (loss) to average net assets.................................................. 0.07 % (0.32)% (0.15)% Ratio of expenses to average net assets................... 0.90 % 0.90 % 0.90 %
60 WRL SERIES LIFE ACCOUNT NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AT DECEMBER 31, 2002 NOTE 5 -- FINANCIAL HIGHLIGHTS (CONTINUED) FOR THE YEAR ENDED
FIDELITY VIP FIDELITY VIP GROWTH OPPORTUNITIES CONTRAFUND(R) SUBACCOUNT SUBACCOUNT ------------------------------------ ----------------------------------- DECEMBER 31, DECEMBER 31, ------------------------------------ ----------------------------------- 2002 2001 2000(1) 2002 2001 2000(1) ---------- ---------- ---------- ---------- ---------- --------- Accumulation unit value, beginning of year................................. $ 7.25 $ 8.56 $ 10.00 $ 8.14 $ 9.38 $ 10.00 ---------- ---------- ---------- ---------- ---------- --------- Income from operations: Net investment income (loss)....... (0.01) (0.05) (0.06) (0.03) (0.04) (0.06) Net realized and unrealized gain (loss) on investment............. (1.64) (1.26) (1.38) (0.82) (1.20) (0.56) ---------- ---------- ---------- ---------- ---------- --------- Net income (loss) from operations.................... (1.65) (1.31) (1.44) (0.85) (1.24) (0.62) ---------- ---------- ---------- ---------- ---------- --------- Accumulation unit value, end of year... $ 5.60 $ 7.25 $ 8.56 $ 7.29 $ 8.14 $ 9.38 ========== ========== ========== ========== ========== ========= Total return........................... (22.70)% (15.40)% (14.36)% (10.41)% (13.25)% (6.16)% Ratios and supplemental data: Net assets at end of period (in thousands)......................... $ 1,845 $ 1,397 $ 562 $ 6,552 $ 3,335 $ 1,030 Ratio of net investment income (loss) to average net assets.............. (0.17)% (0.65)% (0.90)% (0.43)% (0.45)% (0.90)% Ratio of expenses to average net assets............................. 0.90 % 0.90 % 0.90 % 0.90 % 0.90 % 0.90 %
FIDELITY VIP EQUITY-INCOME SUBACCOUNT ----------------------------------- DECEMBER 31, ----------------------------------- 2002 2001 2000(1) ---------- ---------- --------- Accumulation unit value, beginning of year.................................. $ 10.32 $ 10.99 $ 10.00 ---------- ---------- --------- Income from operations: Net investment income (loss)........ 0.04 (0.04) (0.06) Net realized and unrealized gain (loss) on investment.............. (1.88) (0.63) 1.05 ---------- ---------- --------- Net income (loss) from operations..................... (1.84) (0.67) 0.99 ---------- ---------- --------- Accumulation unit value, end of year.... $ 8.48 $ 10.32 $ 10.99 ========== ========== ========= Total return............................ (17.89)% (6.07)% 9.91 % Ratios and supplemental data: Net assets at end of period (in thousands).......................... $ 6,167 $ 4,161 $ 307 Ratio of net investment income (loss) to average net assets............... 0.46 % (0.35)% (0.90)% Ratio of expenses to average net assets.............................. 0.90 % 0.90 % 0.90 %
Per unit information has been computed using average units outstanding throughout each period. Total return is not annualized for periods of less than one year. The ratio of net investment income (loss) to average net assets is annualized for periods of less than one year. The expense ratio considers only the expenses borne directly by the Life Account and excludes expenses incurred directly by the underlying funds. 61 WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO BALANCE SHEET - STATUTORY BASIS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)(UNAUDITED) AS OF SEPTEMBER 30, 2002 ADMITTED ASSETS Cash and invested assets: Cash and short-term investments $ 310,682 Bonds 152,175 Common stock, at market 11,726 Mortgage loans on real estate 11,039 Home office properties, at cost less accumulated Depreciation 42,872 Policy loans 279,284 Other invested assets 19,012 ------------------ Total cash and invested assets 826,790 Federal and foreign income tax recoverable 20,368 Net deferred income tax asset 12,752 Premiums deferred and uncollected 2,213 Accrued investment income 2,039 Cash surrender value of life insurance policies 54,191 Receivable from affiliates 57,922 Other assets 5,698 Separate account assets 6,129,268 ------------------ Total admitted assets $ 7,111,241 ==================
62 LIABILITIES AND CAPITAL AND SURPLUS Liabilities: Aggregate reserves for policies and contracts: Life 419,647 Annuity 541,750 Policy and contract claim reserves 12,899 Liability for deposit-type contracts 13,197 Other policyholders' funds 61 Remittances and items not allocated 48,464 Federal and foreign income taxes payable 8,017 Transfers to separate account due or accrued (391,493) Asset valuation reserve 7,685 Interest maintenance reserve 4,860 Other liabilities 80,032 Separate account liabilities 6,125,526 ------------------ Total liabilities 6,870,645 Capital and surplus: Common stock, $1.00 par value, 3,000,000 shares authorized, 2,500,000 issued and outstanding 2,500 Paid-in surplus 150,107 Unassigned surplus 87,989 ------------------ Total capital and surplus 240,596 ------------------ Total liabilities and capital and surplus $ 7,111,241 ==================
63 WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO STATEMENT OF OPERATIONS - STATUTORY BASIS (DOLLARS IN THOUSANDS)(UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 Revenues: Premiums and other considerations, net of reinsurance Life $ 448,780 Annuity 681,397 Net investment income 35,997 Amortization of interest maintenance reserve 924 Commissions and expense allowances on reinsurance ceded 10,310 Income from fees associated with investment management, Administration and contract guarantees for separate accounts 64,322 Other income 56,620 --------- 1,298,350 Benefits and expenses: Benefits paid or provided for: Life 46,913 Surrender benefits 625,500 Other benefits 33,475 Increase in aggregate reserves for policies and contracts: Life 20,460 Annuity 205,163 --------- 931,511 Insurance expenses: Commissions 125,916 General insurance expenses 78,241 Taxes, licenses and fees 14,619 Transfer to separate accounts 188,735 Other 513 --------- 408,024 --------- 1,339,535 --------- Loss from operations before federal and foreign income tax benefit and net realized capital gains on Investments (41,185) Federal and foreign income tax benefit (31,438) ---------- Loss from operations before net realized capital gains on investments (9,747) Net realized capital gains on investments (net of related federal income taxes and amounts transferred to interest maintenance reserve) 38 ---------- Net loss $ (9,709) ==========
64 WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO STATEMENT OF CHANGES IN CAPITAL AND SURPLUS - STATUTORY BASIS (DOLLARS IN THOUSANDS)(UNAUDITED)
TOTAL UNASSIGNED CAPITAL COMMON PAID-IN SURPLUS AND STOCK SURPLUS (DEFICIT) SURPLUS ------------------------------------------------ Balance at January 1, 2002 $ 2,500 $ 50,107 $ 95,118 $ 47,725 Net loss 0 0 (9,709) (9,709) Change in net unrealized capital gains 0 0 3,054 3,054 Change in net deferred income tax 0 0 (753) (753) Change in non-admitted assets 0 0 5,797 5,797 Change in asset valuation reserve 0 0 (3,386) (3,386) Change in surplus in separate accounts 0 0 (1,271) (1,271) Surplus effect of reinsurance transaction 0 0 (889) (889) Tax benefits on stock options exercised 0 0 28 28 ------------------------------------------------ Balance at September 30, 2002 $ 2,500 $ 150,107 $ 87,989 $240,596 ================================================
65 WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO STATEMENT OF CASH FLOW - STATUTORY BASIS (DOLLARS IN THOUSANDS)(UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 OPERATING ACTIVITIES Premiums and other considerations, net of reinsurance $ 1,196,981 Net investment income 35,746 Life and accident and health claims (47,497) Surrender benefits and withdrawals for life contracts (625,539) Other benefits to policyholders (33,157) Commissions, other expenses and other taxes (219,642) Net transfers to separate accounts (13,891) Federal income taxes paid (15,668) ----------- Net cash provided by operating activities 277,333 INVESTING ACTIVITIES Proceeds from investments sold, matured or repaid: Bonds 394,292 Stocks 100 Mortgage loans on real estate 2,902 Real Estate 648 Policy Loans 5,894 Other Invested Assets 6 ----------- 403,842 Cost of investments acquired: Bonds (466,721) Stocks (100) Other invested assets (1,876) ----------- (468,697) ----------- Net cash used in investing activities (64,855) FINANCING ACTIVITIES Other cash provided: Deposits on deposit-type contracts and other liabilities without life or disability contingencies 1,000 Other sources 35,270 ----------- 36,270 Other cash applied: Withdrawals on deposit-type contracts and other liabilities without life or disability contingencies 1,045 Other applications 78,101 ----------- 79,146 ----------- Net cash used in financing activities (42,876) ----------- Increase in cash and short-term investments 169,602 Cash and short-term investments at beginning of year 141,080 ----------- Cash and short-term investments at end of period $ 310,682 ===========
66 WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO NOTES TO FINANCIAL STATEMENTS - STATUTORY BASIS (DOLLARS IN THOUSANDS)(UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 1. BASIS OF PRESENTATION The accompanying unaudited statutory basis financial statements have been prepared in accordance with statutory accounting principles for interim financial information and the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. For further information, refer to the accompanying statutory basis financial statements and notes thereto for the year ended December 31, 2001. 67 Report of Independent Auditors The Board of Directors Western Reserve Life Assurance Co. of Ohio We have audited the accompanying statutory-basis balance sheets of Western Reserve Life Assurance Co. of Ohio (an indirect wholly-owned subsidiary of AEGON N.V.) as of December 31, 2001 and 2000, and the related statutory-basis statements of operations, changes in capital and surplus, and cash flow for each of the three years in the period ended December 31, 2001. Our audits also included the statutory-basis financial statement schedules required by Regulation S-X, Article 7. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1 to the financial statements, the Company presents its financial statements in conformity with accounting practices prescribed or permitted by the Insurance Department of the State of Ohio, which practices differ from accounting principles generally accepted in the United States. The variances between such practices and accounting principles generally accepted in the United States also are described in Note 1. The effects on the financial statements of these variances are not reasonably determinable but are presumed to be material. In our opinion, because of the effects of the matter described in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with accounting principles generally accepted in the United States, the financial position of Western Reserve Life Assurance Co. of Ohio at December 31, 2001 and 2000, or the results of its operations or its cash flow for each of the three years in the period ended December 31, 2001. However, in our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Western Reserve Life Assurance Co. of Ohio at December 31, 2001 and 2000, and the results of its operations and its cash flow for each of the three years in the period ended December 31, 2001, in conformity with accounting practices prescribed or permitted by the Insurance Department of the State of Ohio. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic statutory-basis financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 2 to the financial statements, in 2001 Western Reserve Life Assurance Co. of Ohio changed various accounting policies to be in accordance with the revised NAIC Accounting Practices and Procedures Manual, as adopted by the Insurance Department of the State of Ohio. As discussed in Note 8 to the financial statements, in 2001 Western Reserve Life Assurance Co. of Ohio changed the method used to value universal life and variable universal life policies. /s/ERNST & YOUNG Des Moines, Iowa February 15, 2002 0110-0237837 68 Western Reserve Life Assurance Co. of Ohio Balance Sheets--Statutory Basis (Dollars in Thousands, Except per Share Amounts)
DECEMBER 31 2001 2000 ---- ---- ADMITTED ASSETS Cash and invested assets: Cash and short-term investments $ 141,080 $ 25,465 Bonds 78,489 92,652 Common stocks: Affiliated entities (cost: 2001--$543 and 2000--$243) 5,903 4,164 Other (cost: 2001 and 2000--$302) 472 352 Mortgage loans on real estate 13,821 14,041 Home office properties 43,520 33,571 Investment properties -- 10,808 Policy loans 285,178 284,335 Other invested assets 19,558 10,091 ----------- ------------ Total cash and invested assets 588,021 475,479 Net deferred income taxes 8,444 -- Federal and foreign income taxes recoverable -- 22,547 Premiums deferred and uncollected 1,237 908 Accrued investment income 1,463 1,475 Cash surrender value of life insurance policies 52,254 49,787 Other assets 7,563 5,905 Separate account assets 8,093,342 10,190,653 ----------- ------------ Total admitted assets $ 8,752,324 $ 10,746,754 =========== ============
See accompanying notes. 69
DECEMBER 31 2001 2000 ---- ---- LIABILITIES AND CAPITAL AND SURPLUS Liabilities: Aggregate reserves for policies and contracts: Life $ 399,187 $ 400,695 Annuity 336,587 288,370 Policy and contract claim reserves 14,358 13,474 Liability for deposit-type contracts 15,754 9,909 Other policyholders' funds 60 38 Remittances and items not allocated 14,493 21,192 Federal and foreign income taxes payable 26,150 -- Transfers to separate account due or accrued (493,930) (480,404) Asset valuation reserve 4,299 4,726 Interest maintenance reserve 4,861 5,934 Short-term note payable to affiliate -- 71,400 Payable to affiliate 645 17,406 Other liabilities 92,231 62,528 Separate account liabilities 8,089,904 10,185,342 ----------- ------------ Total liabilities 8,504,599 10,600,610 Capital and surplus: Common stock, $1.00 par value, 3,000,000 shares authorized and 2,500,000 shares issued and outstanding 2,500 2,500 Paid-in surplus 150,107 120,107 Unassigned surplus 95,118 23,537 ----------- ------------ Total capital and surplus 247,725 146,144 ----------- ------------ Total liabilities and capital and surplus $ 8,752,324 $ 10,746,754 =========== ============
See accompanying notes. 70 Western Reserve Life Assurance Co. of Ohio Statements of Operations--Statutory Basis (Dollars in Thousands)
YEAR ENDED DECEMBER 31 2001 2000 1999 ---- ---- ---- Revenues: Premiums and other considerations, net of reinsurance: Life $ 653,398 $ 741,937 $ 584,729 Annuity 625,117 1,554,430 1,104,525 Net investment income 44,424 47,867 39,589 Amortization of interest maintenance reserve 1,440 1,656 1,751 Commissions and expense allowances on reinsurance ceded (10,789) 1,648 4,178 Income from fees associated with investment management, administration and contract guarantees for separate accounts 108,673 149,086 104,775 Other income 16,386 58,531 44,366 ---------- ---------- ----------- 1,438,649 2,555,155 1,883,913 Benefits and expenses: Benefits paid or provided for: Life 56,155 58,813 35,591 Surrender benefits 800,264 888,060 689,535 Other benefits 57,032 47,855 32,201 Increase (decrease) in aggregate reserves for policies and contracts: Life 10,100 98,557 70,542 Annuity 48,217 (9,665) 3,446 Other - 67 (121) ---------- ---------- ----------- 971,768 1,083,687 831,194 Insurance expenses: Commissions 176,023 316,337 246,334 General insurance expenses 110,808 120,798 112,536 Taxes, licenses and fees 18,714 23,193 19,019 Net transfers to separate accounts 216,797 1,068,213 625,598 Other expenses 556 36 - ---------- ---------- ----------- 522,898 1,528,577 1,003,487 ---------- ---------- ----------- 1,494,666 2,612,264 1,834,681 ---------- ---------- ----------- Gain (loss) from operations before federal income tax expense (benefit) and net realized capital gains (losses) on investments (56,017) (57,109) 49,232 Federal income tax expense (benefit) 3,500 (17,470) 11,816 ---------- ---------- ----------- Gain (loss) from operations before net realized capital gains (losses) on investments (59,517) (39,639) 37,416 Net realized capital gains (losses) on investments (net of related federal income taxes and amounts transferred to interest maintenance reserve) 100 (856) (716) ---------- ---------- ----------- Net income (loss) $ (59,417) $ (40,495) $ 36,700 ========== ========== ===========
See accompanying notes. 71 Western Reserve Life Assurance Co. of Ohio Statements of Changes in Capital and Surplus--Statutory Basis (Dollars in Thousands)
TOTAL COMMON PAID-IN UNASSIGNED CAPITAL AND STOCK SURPLUS SURPLUS SURPLUS ----- ------- ------- ------- Balance at January 1, 1999 $ 1,500 $ 120,107 $ 21,973 $ 143,580 Net income -- -- 36,700 36,700 Change in net unrealized capital gains -- -- 1,421 1,421 Change in non-admitted assets -- -- 703 703 Change in asset valuation reserve -- -- (961) (961) Change in surplus in separate accounts -- -- 451 451 Transfer from unassigned surplus to common stock (stock dividend) 1,000 -- (1,000) -- Settlement of prior period tax returns -- -- 1,000 1,000 Tax benefits on stock options exercised -- -- 2,022 2,022 ------- --------- --------- ---------- Balance at December 31, 1999 2,500 120,107 62,309 184,916 Net loss -- -- (40,495) (40,495) Change in net unrealized capital gains -- -- 1,571 1,571 Change in non-admitted assets -- -- (1,359) (1,359) Change in asset valuation reserve -- -- (917) (917) Change in surplus in separate accounts -- -- (314) (314) Settlement of prior period tax returns -- -- 30 30 Tax benefits on stock options exercised -- -- 2,712 2,712 ------- --------- --------- ---------- Balance at December 31, 2000 2,500 120,107 23,537 146,144 Net loss -- -- (59,417) (59,417) Capital contribution -- 30,000 -- 30,000 Cumulative effect of change in accounting principles 12,312 12,312 Change in valuation basis -- -- 11,609 11,609 Change in net deferred income tax asset -- -- (11,733) (11,733) Surplus effect of reinsurance transaction -- -- 11,851 11,851 Change in net unrealized capital gains -- -- (1,281) (1,281) Change in non-admitted assets -- -- 9,076 9,076 Change in asset valuation reserve -- -- 427 427 Change in surplus in separate accounts -- -- 97,374 97,374 Tax benefits on stock options exercised -- -- 1,363 1,363 ------- --------- --------- ---------- Balance at December 31, 2001 $ 2,500 $ 150,107 $ 95,118 $ 247,725 ======= ========= ========= ==========
See accompanying notes. 72 Western Reserve Life Assurance Co. of Ohio Statements of Cash Flow--Statutory Basis (Dollars in Thousands)
YEAR ENDED DECEMBER 31 2001 2000 1999 ---- ---- ---- OPERATING ACTIVITIES Premiums and other considerations, net of reinsurance $ 1,295,480 $ 2,356,441 $ 1,738,870 Net investment income received 45,355 51,583 44,235 Life and accident and health claims paid (55,303) (55,030) (35,872) Surrender benefits and other fund withdrawals paid (800,321) (888,060) (689,535) Other benefits paid to policyholders (56,598) (43,721) (32,642) Commissions, other expenses and other taxes (315,087) (456,874) (382,372) Net transfers to separate accounts (27,317) (935,755) (628,762) Federal income taxes received (paid) 46,560 (8,236) (9,637) ----------- ------------ ----------- Net cash provided by operating activities 132,769 20,348 4,285 INVESTING ACTIVITIES Proceeds from investments sold, matured or repaid: Bonds 29,163 45,079 114,177 Mortgage loans on real estate 282 227 212 Other (170) 345 18 ----------- ------------ ----------- 29,275 45,651 114,407 Cost of investments acquired: Bonds (14,445) (18,005) (49,279) Common stocks (300) -- -- Mortgage loans on real estate -- (5,003) (1) Investment properties (13) (108) (286) Policy loans (843) (101,360) (69,993) Other invested assets (12,394) (11,203) -- Other -- -- (855) ----------- ------------ ----------- (27,995) (135,679) (120,414) ----------- ------------ ----------- Net cash provided by (used in) investing activities 1,280 (90,028) (6,007) FINANCING AND MISCELLANEOUS ACTIVITIES Other cash provided: Capital and surplus paid in 30,000 -- -- Borrowed money (71,400) 54,300 (27,100) Deposits and deposit-type contract funds and other liabilities without life or disability contingencies 23,298 -- -- Other sources 45,631 27,815 12,580 ----------- ------------ ----------- 27,529 82,115 (14,520)
73
YEAR ENDED DECEMBER 31 2001 2000 1999 ---- ---- ---- Other cash applied: Withdrawals on deposit-type contract funds and other liabilities without life or disability contingencies $ 17,990 $ -- $ -- Other applications 27,973 10,902 33,634 --------- --------- --------- 45,963 10,902 33,634 --------- --------- --------- Net cash provided by (used in) financing activities (18,434) 71,213 (48,154) --------- --------- --------- Increase (decrease) in cash and short-term investments 115,615 1,533 (49,876) Cash and short-term investments at beginning of year 25,465 23,932 73,808 --------- --------- --------- Cash and short-term investments at end of year $ 141,080 $ 25,465 $ 23,932 ========= ========= =========
See accompanying notes. 74 Western Reserve Life Assurance Co. of Ohio Notes to Financial Statements--Statutory Basis (Dollars in Thousands) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Western Reserve Life Assurance Co. of Ohio (the Company) is a stock life insurance company and is a wholly owned subsidiary of First AUSA Life Insurance Company which, in turn, is an indirect, wholly owned subsidiary of AEGON USA, Inc. (AEGON). AEGON is an indirect, wholly owned subsidiary of AEGON N.V., a holding company organized under the laws of The Netherlands. NATURE OF BUSINESS The Company operates predominantly in the variable universal life and variable annuity areas of the life insurance business. The Company is licensed in 49 states, District of Columbia, Puerto Rico and Guam. Sales of the Company's products are through financial planners, independent representatives, financial institutions and stockbrokers. The majority of the Company's new life insurance written and a substantial portion of new annuities written are done through an affiliated marketing organization. BASIS OF PRESENTATION The preparation of financial statements of insurance companies requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. The accompanying financial statements have been prepared in conformity with accounting practices prescribed or permitted by the Insurance Department of the State of Ohio, which practices differ from accounting principles generally accepted in the United States (GAAP). The more significant variances from GAAP are: Investments:Investments in bonds and mandatory redeemable preferred stocks are reported at amortized cost or market value based on their National Association of Insurance Commissioners (NAIC) rating; for GAAP, such fixed maturity investments would be designated at purchase as held-to-maturity, trading, or available-for-sale. Held-to-maturity fixed investments would be reported at amortized cost, and the remaining fixed maturity investments would be reported at fair value with unrealized holding gains and losses reported in operations for those designated as trading and as a separate component of shareholder's equity for those designated as available-for-sale. All single class and multi-class mortgage-backed/asset-backed securities (e.g., CMOs) are adjusted for the effects of changes in prepayment assumptions on the related accretion of discount or amortization of premium of such securities using either the retrospective or prospective methods. If it is determined that a decline in fair value is other than temporary, the cost basis of the security is written down to the undiscounted estimated future cash flows. Prior to April 1, 2001 under GAAP, changes in prepayment assumptions were accounted for in the same manner. Effective April 1, 2001 for GAAP purposes, all securities, purchased or retained, that represent beneficial interests in securitized assets (e.g., CMO, CBO, CDO, CLO, MBS and ABS securities), other than high credit quality securities, are adjusted using the prospective method when there is a change in estimated future cash flows. If it is determined that a decline in fair value is other than temporary, the cost basis of the security is written down to the discounted fair value. If high credit quality securities are adjusted, the retrospective method is used. Investment properties are reported net of related obligations rather than on a gross basis. Real estate owned and occupied by the Company is included in investments rather than reported as an operating asset as under GAAP, and investment income and operating expenses include rent for the Company's occupancy of those properties. Changes 75 between depreciated cost and admitted asset investment amounts are credited or charged directly to unassigned surplus rather than to income as would be required under GAAP. Valuation allowances, if necessary, are established for mortgage loans based on the difference between the net value of the collateral, determined as the fair value of the collateral less estimated costs to obtain and sell, and the recorded investment in the mortgage loan. Prior to January 1, 2001, valuation allowances were based on the difference between the unpaid loan balance and the estimated fair value of the underlying real estate. Under GAAP, such allowances are based on the present value of expected future cash flows discounted at the loan's effective interest rate or, if foreclosure is probable, on the estimated fair value of the collateral. The initial valuation allowance and subsequent changes in the allowance for mortgage loans as a result of a temporary impairment are charged or credited directly to unassigned surplus, rather than being included as a component of earnings as would be required under GAAP. Valuation Reserves: Under a formula prescribed by the NAIC, the Company defers the portion of realized capital gains and losses on sales of fixed income investments, principally bonds and mortgage loans, attributable to changes in the general level of interest rates and amortizes those deferrals over the remaining period to maturity of the bond or mortgage loan. That net deferral is reported as the "interest maintenance reserve" (IMR) in the accompanying balance sheets. Realized capital gains and losses are reported in income net of federal income tax and transfers to the IMR. Under GAAP, realized capital gains and losses would be reported in the income statement on a pretax basis in the period that the assets giving rise to the gains or losses are sold. The "asset valuation reserve" (AVR) provides a valuation allowance for invested assets. The AVR is determined by an NAIC prescribed formula with changes reflected directly in unassigned surplus; AVR is not recognized for GAAP. Subsidiaries: The accounts and operations of the Company's subsidiaries are not consolidated with the accounts and operations of the Company as would be required under GAAP. Policy Acquisition Costs:The costs of acquiring and renewing business are expensed when incurred. Under GAAP, acquisition costs related to traditional life insurance and certain long-duration accident and health insurance, to the extent recoverable from future policy revenues, would be deferred and amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves; for universal life insurance and investment products, to the extent recoverable from future gross profits, deferred policy acquisition costs are amortized generally in proportion to the present value of expected gross profits from surrender charges and investment, mortality, and expense margins. Nonadmitted Assets: Certain assets designated as "nonadmitted" are excluded from the accompanying balance sheets and are charged directly to unassigned surplus. Under GAAP, such assets are included in the balance sheets. Universal Life and Annuity Policies: Subsequent to January 1, 2001, revenues for universal life and annuity policies with mortality or morbidity risk, except for guaranteed interest and group annuity contracts, consist of the entire premium received and benefits incurred represent the total of death benefits paid and the change in policy reserves. Premiums received for annuity policies without mortality or morbidity risk and for guaranteed interest and group annuity contracts are recorded using deposit accounting, and credited directly to an appropriate policy reserve account, without recognizing premium income. Prior to January 1, 2001, all revenues for universal life and annuity policies consist of the entire premium received and benefits incurred represent the total of death benefits paid and the change in policy reserves. Under GAAP, premiums received in excess of policy charges would not be recognized as premium revenue and benefits would represent the excess of benefits paid over the policy account value and interest credited to the account values. Benefit Reserves: Certain policy reserves are calculated based on statutorily required interest and mortality assumptions rather than on estimated expected experience or actual account balances as would be required under GAAP. 76 Reinsurance :A liability for reinsurance balances would be provided for unsecured policy reserves ceded to reinsurers not authorized to assume such business. Changes to those amounts are credited or charged directly to unassigned surplus. Under GAAP, an allowance for amounts deemed uncollectible would be established through a charge to earnings. Policy and contract liabilities ceded to reinsurers have been reported as reductions of the related reserves rather than as assets as would be required under GAAP. Commissions allowed by reinsurers on business ceded are reported as income when received rather than being deferred and amortized with deferred policy acquisition costs as required under GAAP. Deferred Income Taxes:Effective January 1, 2001, deferred tax assets are limited to 1) the amount of federal income taxes paid in prior years that can be recovered through loss carrybacks for existing temporary differences that reverse by the end of the subsequent calendar year, plus 2) the lesser of the remaining gross deferred tax assets expected to be realized within one year of the balance sheet date or 10% of capital and surplus excluding any net deferred tax assets, EDP equipment and operating software and any net positive goodwill, plus 3) the amount of remaining gross deferred tax assets that can be offset against existing gross deferred tax liabilities. The remaining deferred tax assets are nonadmitted. Deferred taxes do not include amounts for state taxes. Prior to January 1, 2001, deferred federal income taxes were not provided for differences between the financial statement amounts and tax bases of assets and liabilities. Under GAAP, states taxes are included in the computation of deferred taxes, a deferred tax asset is recorded for the amount of gross deferred tax assets expected to be realized in future years, and a valuation allowance is established for deferred tax assets not expected to be realizable. Statements of Cash Flow:Cash, cash equivalents, and short-term investments in the statements of cash flow represent cash balances and investments with initial maturities of one year of less. Under GAAP, the corresponding caption of cash and cash equivalents include cash balances and investments with initial maturities of three months or less. The effects of these variances have not been determined by the Company, but are presumed to be material. INVESTMENTS Investments in bonds (except those to which the Securities Valuation Office of the NAIC has ascribed a value), mortgage loans on real estate and short-term investments are reported at cost adjusted for amortization of premiums and accrual of discounts. Amortization is computed using methods which result in a level yield over the expected life of the investment. The Company reviews its prepayment assumptions on mortgage and other asset-backed securities at regular intervals and adjusts amortization rates retrospectively when such assumptions are changed due to experience and/or expected future patterns. Common stocks of unaffiliated companies are carried at market, and the related unrealized capital gains/(losses) are reported in unassigned surplus. Common stocks of the Company's wholly owned affiliates are recorded at the GAAP basis equity in net assets. Home office and investment properties are reported at cost less allowances for depreciation. Depreciation is computed principally by the straight-line method. Policy loans are reported at unpaid principal. Other invested assets consist principally of investments in various joint ventures and are recorded at equity in underlying net assets. Other "admitted assets" are valued, principally at cost, as required or permitted by Ohio Insurance Laws. Realized capital gains and losses are determined on the basis of specific identification and are recorded net of related federal income taxes. The Asset Valuation Reserve (AVR) is established by the Company to provide for potential losses in the event of default by issuers of certain invested assets. These amounts are determined using a formula prescribed by the NAIC and are reported as a liability. The formula for the AVR provides for a corresponding adjustment for realized gains and losses. 77 Under a formula prescribed by the NAIC, the Company defers, in the Interest Maintenance Reserve (IMR), the portion of realized gains and losses on sales of fixed income investments, principally bonds and mortgage loans, attributable to changes in the general level of interest rates and amortizes those deferrals over the remaining period to maturity of the security. During 2001, 2000, and 1999, net realized capital gains (losses) of $367, $(276), and $(67), respectively, were credited to the IMR rather than being immediately recognized in the statements of operations. Amortization of these net gains aggregated $1,440, $1,656, and $1,751 for the years ended December 31, 2001, 2000, and 1999, respectively. Interest income is recognized on an accrual basis. The Company does not accrue income on bonds in default, mortgage loans on real estate in default and/or foreclosure or which are delinquent more than twelve months, or real estate where rent is in arrears for more than three months. Further, income is not accrued when collection is uncertain. No investment income due and accrued has been excluded for the years ended December 31, 2001, 2000, and 1999, with respect to such practices. PREMIUMS AND ANNUITY CONSIDERATIONS Life and accident and health premiums are recognized as revenue when due. Subsequent to January 1, 2001, premiums for annuity policies with mortality and morbidity risk, except for guaranteed interest and group annuity contracts, are also recognized as revenue when due. Premiums received for annuity policies without mortality or morbidity risk and for guaranteed interest and group annuity contracts are recorded using deposit accounting. Prior to January 1, 2001, life, annuity, accident, and health premiums were recognized as revenue when due. AGGREGATE RESERVES FOR POLICIES Life and annuity reserves are developed by actuarial methods and are determined based on published tables using statutorily specified interest rates and valuation methods that will provide, in the aggregate, reserves that are greater than or equal to the minimum required by law. Tabular interest, tabular less actual reserves released, and tabular cost have been determined by formula. Tabular interest on funds not involving life contingencies has also been determined by formula. The aggregate policy reserves for life insurance policies are based principally upon the 1941, 1958, and 1980 Commissioners' Standard Ordinary Mortality Tables. The reserves are calculated using interest rates ranging from 2.25 to 5.50 percent and are computed principally on the Net Level Premium Valuation and the Commissioners' Reserve Valuation Methods. Reserves for universal life policies are based on account balances adjusted for the Commissioners' Reserve Valuation Method. Deferred annuity reserves are calculated according to the Commissioners' Annuity Reserve Valuation Method including excess interest reserves to cover situations where the future interest guarantees plus the decrease in surrender charges are in excess of the maximum valuation rates of interest. Reserves for immediate annuities and supplementary contracts with life contingencies are equal to the present value of future payments assuming interest rates ranging from 4.00 to 11.25 percent and mortality rates, where appropriate, from a variety of tables. REINSURANCE Reinsurance premiums and benefits paid or provided are accounted for on bases consistent with those used in accounting policies for the original policies issued and the terms of the reinsurance contracts. 78 POLICY AND CONTRACT CLAIM RESERVES Claim reserves represent the estimated accrued liability for claims reported to the Company and claims incurred but not yet reported through the statement date. These reserves are estimated using either individual case-basis valuations or statistical analysis techniques. These estimates are subject to the effects of trends in claim severity and frequency. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes available. SEPARATE ACCOUNTS Assets held in trust for purchases of variable universal life and variable annuity contracts and the Company's corresponding obligation to the contract owners are shown separately in the balance sheets. The assets in the separate accounts are valued at market. Income and gains and losses with respect to the assets in the separate accounts accrue to the benefit of the policyholders and, accordingly, the operations of the separate accounts are not included in the accompanying financial statements. The separate accounts do not have any minimum guarantees and the investment risks associated with market value changes are borne entirely by the policyholders. The Company received variable contract premiums of $1,208,884, $2,336,299, and $1,675,642 in 2001, 2000, and 1999, respectively. All variable account contracts are subject to discretionary withdrawal by the policyholder at the market value of the underlying assets less the current surrender charge. Separate account contract holders have no claim against the assets of the general account. STOCK OPTION PLAN AEGON N.V. sponsors a stock option plan that includes eligible employees of the Company. Pursuant to the plan, the option price at the date of grant is equal to the market value of the stock. Under statutory accounting principles, the Company does not record any expense related to this plan. However, the Company is allowed to record a deduction in the consolidated tax return filed by the Company and certain affiliates. The tax benefit of this deduction has been credited directly to surplus. Reclassifications Certain reclassifications have been made to the 2000 and 1999 financial statements to conform to the 2001 presentation. 2. ACCOUNTING CHANGES The Company prepares its statutory financial statements in conformity with accounting practices prescribed or permitted by the State of Ohio. Effective January 1, 2001, the State of Ohio required that insurance companies domiciled in the State of Ohio prepare their statutory-basis financial statements in accordance with the NAIC Accounting Practices and Procedures Manual subject to any deviations prescribed or permitted by the State of Ohio insurance commissioner. Accounting changes adopted to conform to the provisions of the NAIC Accounting Practices and Procedures Manual are reported as changes in accounting principles. The cumulative effect of changes in accounting principles is reported as an adjustment to unassigned surplus in the period of the change in accounting principle. The cumulative effect is the difference between the amount of capital and surplus at the beginning of the year and the amount of capital and surplus that would have been reported at that date if the new accounting principles had been applied retroactively for all prior periods. As a result of these changes, the Company reported a change in accounting principle, as an adjustment that increased capital and surplus, of $12,312 as of January 1, 2001. This amount included the establishment of deferred tax assets of $12,696, offset by the release of mortgage loan origination fees of $25 and the establishment of a vacation accrual of $359. 3. FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the statutory-basis balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the 79 assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement of Financial Accounting Standards No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements and allows companies to forego the disclosures when those estimates can only be made at excessive cost. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and Short-Term Investments: The carrying amounts reported in the statutory-basis balance sheets for these instruments approximate their fair values. Investment Securities: Fair values for bonds are based on quoted market prices, where available. For bonds not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments. The fair values for common stocks of unaffiliated entities are based on quoted market prices. Mortgage Loans on Real Estate and Policy Loans: The fair values for mortgage loans on real estate are estimated utilizing discounted cash flow analyses, using interest rates reflective of current market conditions and the risk characteristics of the loans. The fair value of policy loans are assumed to equal their carrying value. Separate Account Assets: The fair value of separate account assets are based on quoted market prices. Investment Contracts: Fair values for the Company's liabilities under investment-type insurance contracts are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. Short-Term Note Payable to Affiliate: The carrying amounts reported in the statutory-basis balance sheets for these instruments approximate their fair values. Separate Account Annuity Liabilities: Separate account annuity liabilities approximate the market value of the separate account assets less a provision for the present value of future profits related to the underlying contracts. Fair values for the Company's insurance contracts other than investment contracts (including separate account universal life liabilities) are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. 80 The following sets forth a comparison of the fair values and carrying amounts of the Company's financial instruments subject to the provisions of Statement of Financial Accounting Standards No. 107:
DECEMBER 31 2001 2000 ---- ---- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------ ---------- ------ ---------- ADMITTED ASSETS Cash and short-term investments $ 141,080 $ 141,080 $ 25,465 $ 25,465 Bonds 78,489 80,722 92,652 93,766 Common stocks, other than affiliates 472 472 352 352 Mortgage loans on real estate 13,821 14,263 14,041 14,422 Policy loans 285,178 285,178 284,335 284,335 Separate account assets 8,093,342 8,093,342 10,190,653 10,190,653 LIABILITIES Investment contract liabilities 352,341 347,665 298,279 291,457 Short-term note payable to affiliate -- -- 71,400 71,400 Separate account annuity liabilities 5,792,373 5,709,486 7,305,380 7,142,011
4. INVESTMENTS
GROSS GROSS ESTIMATED CARRYING UNREALIZED UNREALIZED FAIR AMOUNT GAINS LOSSES FAIR VALUE ------ ----- ------ ---------- DECEMBER 31, 2001 Bonds: United States Government and agencies $ 4,363 $ 173 $ -- $ 4,536 State, municipal and other government 1,480 135 -- 1,615 Public utilities 12,048 306 -- 12,354 Industrial and miscellaneous 39,429 2,470 1,358 40,541 Mortgage and other asset-backed securities 21,169 507 -- 21,676 ----------- ----------- ------------ ----------- Total bonds $ 78,489 $ 3,591 $ 1,358 $ 80,722 =========== =========== ============ ===========
81
GROSS GROSS ESTIMATED CARRYING UNREALIZED UNREALIZED FAIR AMOUNT GAINS LOSSES FAIR VALUE ------ ----- ------ ---------- DECEMBER 31, 2001 Bonds: United States Government and agencies $ 4,580 $ 78 $ 15 $ 4,643 State, municipal and other government 1,478 85 -- 1,563 Public utilities 13,061 75 159 12,977 Industrial and miscellaneous 42,482 1,673 811 43,344 Mortgage and other asset-backed securities 31,051 416 228 31,239 ----------- ------------ ------------ ----------- Total bonds $ 92,652 $ 2,327 $ 1,213 $ 93,766 =========== ============ ============ ===========
The carrying amount and fair value of bonds at December 31, 2001 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
ESTIMATED CARRYING FAIR AMOUNT FAIR VALUE ------ ---------- Due in one year or less $ 7,305 $ 7,408 Due one through five years 28,415 29,555 Due five through ten years 15,628 16,649 Due after ten years 5,972 5,434 ----------- ----------- 57,320 59,046 Mortgage and other asset-backed securities 21,169 21,676 ----------- ----------- $ 78,489 $ 80,722 =========== ===========
A detail of net investment income is presented below:
YEAR ENDED DECEMBER 31, 2001 2000 1999 ---- ---- ---- Interest on bonds $ 7,050 $ 8,540 $ 12,094 Dividends from common stock of affiliated entities 18,495 26,453 18,555 Interest on mortgage loans 1,130 776 746 Rental income on investment properties 6,903 6,034 5,794 Interest on policy loans 17,746 14,372 9,303 Other investment income (51) 1 414 ----------- ------------ ----------- Gross investment income 51,273 56,176 46,906 Investment expenses (6,849) (8,309) (7,317) ----------- ------------ ----------- Net investment income $ 44,424 $ 47,867 $ 39,589 =========== ============ ===========
82 Proceeds from sales and maturities of debt securities and related gross realized gains and losses were as follows:
YEAR ENDED DECEMBER 31, 2001 2000 1999 ---- ---- ---- Proceeds $ 29,163 $ 45,079 $ 114,177 ========= ======== ========= Gross realized gains $ 637 $ 117 $ 1,762 Gross realized losses -- 480 1,709 --------- -------- --------- Net realized gains (losses) $ 637 $ (363) $ 53 ========= ======== =========
At December 31, 2001, bonds with an aggregate carrying value of $4,094 were on deposit with certain state regulatory authorities or were restrictively held in bank custodial accounts for benefit of such state regulatory authorities, as required by statute. Realized investment gains (losses) and changes in unrealized gains (losses) for investments are summarized below:
REALIZED -------- YEAR ENDED DECEMBER 31, 2001 2000 1999 ---- ---- ---- Bonds $ 637 $ (363) $ 53 Other invested assets -- (1,115) 18 --------- -------- --------- 637 (1,478) 71 Tax benefit (expense) (170) 346 (854) Transfer to interest maintenance reserve (367) 276 67 --------- -------- --------- Net realized gains (losses) $ 100 $ (856) $ (716) ========= ======== =========
CHANGES IN UNREALIZED --------------------- YEAR ENDED DECEMBER 31, 2001 2000 1999 ---- ---- ---- Other invested assets $ (2,926) $ -- $ -- Common stocks 1,559 2,002 1,426 Mortgage loans on real estate 86 (431) (5) --------- -------- --------- Change in unrealized $ (1,281) $ 1,571 $ 1,421 ========= ======== =========
Gross unrealized gains (losses) on common stocks were as follows:
UNREALIZED ---------- DECEMBER 31 2001 2000 --------------------- Unrealized gains $ 5,930 $ 4,040 Unrealized losses (400) (69) -------- -------- Net unrealized gains $ 5,530 $ 3,971 ======== ========
During 2001, the Company did not issue any mortgage loans. During 2000, the Company issued one mortgage loan with a lending rate of 7.97%. The percentage of the loan to the value of the security at the time of origination was 69%. The Company requires all mortgages to carry fire insurance equal to the value of the underlying property. During 2001, 2000, and 1999, no mortgage loans were foreclosed and transferred to real estate. During 2001 and 2000, the Company held a mortgage loan loss reserve in the asset valuation reserve of $135 and $-0-, respectively. 83 5. REINSURANCE The Company reinsures portions of certain insurance policies which exceed its established limits, thereby providing a greater diversification of risk and minimizing exposure on larger risks. The Company remains contingently liable with respect to any insurance ceded, and this would become an actual liability in the event that the assuming insurance company became unable to meet its obligations under the reinsurance treaty. Premiums earned reflect the following reinsurance ceded amounts for the year ended December 31:
YEAR ENDED DECEMBER 31, 2001 2000 1999 ---- ---- ---- Direct premiums $1,369,720 $ 2,385,134 $ 1,748,265 Reinsurance ceded (91,205) (88,767) (59,011) ---------- ----------- ----------- Net premiums earned $1,278,515 $ 2,296,367 $ 1,689,254 ========== =========== ===========
The Company received reinsurance recoveries in the amount of $12,337, $8,856, and $4,916 during 2001, 2000, and 1999, respectively. At December 31, 2001 and 2000, estimated amounts recoverable from reinsurers that have been deducted from policy and contract claim reserves totaled $6,065 and $2,337, respectively. The aggregate reserves for policies and contracts were reduced for reserve credits for reinsurance ceded at December 31, 2001 and 2000 of $63,758 and $5,128, respectively. During 2001, the Company entered into a reinsurance transaction with Transamerica International Re (Bermuda) Ltd., an affiliate of the Company. Under the terms of this transaction, the Company ceded the obligation for future guaranteed minimum death benefits included in certain of its variable annuity contracts. The difference between the initial premiums ceded of $37,176 and the reserve credit taken of $55,408 was credited directly to unassigned surplus on a net of tax basis. The Company holds collateral in the form of letters of credit of $70,000. 6. INCOME TAXES The Company's net deferred tax asset is comprised of the following components:
DECEMBER 31, JANUARY 1, 2001 2001 ---- ---- Gross deferred income tax assets $ 162,669 $ 82,191 Gross deferred income tax liabilities 95,916 3,705 Deferred income tax assets nonadmitted 58,309 65,790 ---------- --------- Net admitted deferred income tax asset $ 8,444 $ 12,696 ========== =========
Prior to 1984, as provided for under the Life insurance Company Tax Act of 1959, a portion of statutory income was not subject to current taxation but was accumulated for income tax purposes in a memorandum account referred to as the "policyholders' surplus account" (PSA). No federal income taxes have been provided for in the financial statements on income deferred in the PSA ($293 at December 31, 2001). To the extent that dividends are paid from the amount accumulated in the PSA, net earnings would be reduced by the amount of tax required to be paid. Should the entire amount in the PSA account become taxable, the tax thereon computed at the current rates would amount to approximately $103. 84 The main components of deferred tax amounts, as well as the net change for the year ended December 31, 2001, are as follow:
DECEMBER 31, JANUARY 1, NET 2001 2000 CHANGE ---- ---- ------ Deferred income tax assets: Section 807(f) adjustment $ 1,977 $ 2,360 $ (383) Pension expenses 2,422 1,850 572 Tax basis deferred acquisition costs 76,692 69,122 7,570 Reserves 74,569 2,316 72,253 Other 7,009 6,543 466 --------- --------- -------- Total deferred income tax assets $ 162,669 $ 82,191 $ 80,478 ========= ========= ======== Deferred income tax assets--nonadmitted $ 58,309 $ 65,790 $ (7,481) Deferred income tax liabilities: Section 807(f) adjustment--liabilities 91,560 427 91,133 Other 4,356 3,278 1,078 --------- --------- -------- Total deferred income tax liabilities $ 95,916 $ 3,705 $ 92,211 ========= ========= ========
Federal income tax expense (benefit) differs from the amount computed by applying the statutory federal income tax rate to gain from operations before federal income tax expense and net realized capital gains/losses on investments for the following reasons:
DECEMBER 31 2001 2000 1999 ---- ---- ---- Income tax expense (benefit) computed $ (19,606) $ (19,988) $ 17,231 at the federal statutory rate (35%) Deferred acquisition costs--tax basis 7,570 14,725 11,344 Amortization of IMR (504) (580) (613) Depreciation (6) (426) (727) Dividends received deduction (8,705) (12,805) (10,784) Low income housing credits (1,944) -- -- Prior year under (over) accrual 3,340 560 (3,167) Reinsurance transactions 4,148 -- -- Reserves 19,541 123 (2,272) Other (334) 921 804 --------- --------- --------- Federal income tax expense (benefit) $ 3,500 $ (17,470) $ 11,816 ========= ========= =========
For federal income tax purposes, the Company joins in a consolidated income tax return filing with its parent and other affiliated companies. Under the terms of a tax sharing agreement between the Company and it affiliates, the Company computes federal income tax expense as if it were filing a separate income tax return, except that tax credits and net operating loss carryforwards are determined in the basis of the consolidated group. Additionally, the alternative minimum tax is computed for the consolidated group and the resulting tax, if any, is allocated back to the separate companies on the basis of the separate companies' alternative minimum taxable income. In 2000, the Company received $30 in interest from the Internal Revenue Service related to the 1993 tax year. In 1999, the Company received $1,000 from its former parent, an unaffiliated company, for reimbursement of prior period tax payments made by the Company but owed by the former parent. Tax settlements for 2000 and 1999 were credited directly to unassigned surplus. The Company's federal income tax returns have been examined by the Internal Revenue Service and the statute is closed through 1995. An examination is underway for 1996 and 1997. 85 7. POLICY AND CONTRACT ATTRIBUTES A portion of the Company's policy reserves and other policyholders' funds relate to liabilities established on a variety of the Company's products, primarily separate accounts that are not subject to significant mortality or morbidity risk; however, there may be certain restrictions placed upon the amount of funds that can be withdrawn without penalty. The amount of reserves on these products, by withdrawal characteristics are summarized as follows:
DECEMBER 31 2001 2000 ---- ---- PERCENT 2000 PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL ------ -------- ------ -------- Subject to discretionary withdrawal with market value adjustment $ 11,429 0% $ 11,999 0% Subject to discretionary withdrawal at book value less surrender charge 102,240 2 72,456 1 Subject to discretionary withdrawal at market value 5,641,756 93 7,305,182 96 Subject to discretionary withdrawal at book value (minimal or no charges or adjustments) 294,012 5 210,648 3 Not subject to discretionary withdrawal 14,654 0 15,753 0 6,064,091 100% 7,616,038 100% === === Less reinsurance ceded 60,224 2,145 ----------- ----------- Total policy reserves on annuities and deposit fund liabilities $ 6,003,867 $ 7,613,893 =========== ===========
A reconciliation of the amounts transferred to and from the separate accounts is presented below:
YEAR ENDED DECEMBER 31 2001 2000 1999 ---- ---- ---- Transfers as reported in the summary of operations of the separate accounts statement: Transfers to separate accounts $ 1,208,884 $ 2,336,299 $ 1,675,642 Transfers from separate accounts 1,107,157 1,268,865 1,056,207 ------------ ------------ ----------- Net transfers to separate accounts 101,727 1,067,434 619,435 Change in valuation adjustment 98,321 -- -- Other 16,749 779 6,163 ------------ ------------ ----------- Transfers as reported in the summary of operations of the life, accident and health annual statement $ 216,797 $ 1,068,213 $ 625,598 ============ ============ ===========
At December 31, 2001, the Company had variable annuities with guaranteed living benefits as follows:
SUBJECTED AMOUNT OF BENEFIT AND TYPE OF RISK ACCOUNT VALUE RESERVE HELD ------------- ------------ Guaranteed Minimum Income Benefit $ 75,101 $ 19
Reserves on the Company's traditional life insurance products are computed using mean reserving methodologies. These methodologies result in the establishment of assets for the amount of the net valuation premiums that are anticipated to be received between the policy's paid-through date to the policy's next anniversary date. At December 31, 2001 and 2000, these assets (which are reported as premiums deferred and uncollected) and the amounts of the related gross premiums and loading, are as follows: 86
GROSS LOADING NET ----- ------- --- DECEMBER 31, 2001 Ordinary direct renewal business $ 1,439 $ 407 $ 1,032 Ordinary new business 200 (5) 205 ------- ------- ------- $ 1,639 $ 402 $ 1,237 ======= ======= ======= DECEMBER 31, 2000 Ordinary direct renewal business $ 991 $ 220 $ 771 Ordinary new business 133 (4) 137 ------- ------- ------- $ 1,124 $ 216 $ 908 ======= ======= =======
8. CONVERSION OF VALUATION SYSTEM During 2001, the Company converted to a new reserve valuation system for universal life and variable universal life policies. The new valuation system, which provides for more precise calculations, caused general account reserves to decrease by $11,609 and separate account reserves to decrease by $98,321. These amounts were credited directly to unassigned surplus. The decrease in separate account reserves is included in the change in surplus in separate accounts in the 2001 Statement of Changes in Capital and Surplus. 9. DIVIDEND RESTRICTIONS The Company is subject to limitations, imposed by the State of Ohio, on the payment of dividends to its parent company. Generally, dividends during any twelve month period may not be paid, without prior regulatory approval, in excess of the greater of (a) 10 percent of statutory surplus as of the preceding December 31, or (b) statutory gain from operations before net realized capital gains for the preceding year. Subject to the availability of unassigned surplus at the time of such dividend, the maximum payment which may be made in 2002, without the prior approval of insurance regulatory authorities, is $24,523. 10. CAPITAL AND SURPLUS During 1999, the Company's Board of Director's approved an amendment to the Company's Articles of Incorporation which increased the number of authorized capital shares to 3,000,000. The Board of Directors also authorized a stock dividend in the amount of $1,000, which was transferred from unassigned surplus. This amendment and stock dividend were in response to a change in California law which requires all life insurance companies that do business in the state to have capital stock of at least $2,500. Life/health insurance companies are subject to certain risk-based capital (RBC) requirements as specified by the NAIC. Under those requirements, the amount is to be determined based on the various risk factors related to it. At December 2001, the Company meets the RBC requirements. 11. SALES, TRANSFER, AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES During 2001, the Company sold $17,515 of agent balances without recourse to Money Services, Inc., an affiliated company. The Company did not realize a gain or loss as a result of the sale. 12. RETIREMENT AND COMPENSATION PLANS The Company's employees participate in a qualified benefit plan sponsored by AEGON. The Company has no legal obligation for the plan. The Company recognizes pension expense equal to its allocation from AEGON. The pension expense is allocated among the participating companies based on the Statement of Financial Accounting Standards No. 87 expense as a percent of salaries. The benefits are based on years of service and the employee's compensation during the highest five consecutive years of employment. Pension expense aggregated $1,634, $1,224, and $1,105 for the years ended December 31, 2001, 2000, and 1999, respectively. The plan is subject to the reporting and disclosure requirements of the Employee Retirement and Income Security Act of 1974. 87 The Company's employees also participate in a contributory defined contribution plan sponsored by AEGON which is qualified under Section 401(k) of the Internal Revenue Service Code. Employees of the Company who customarily work at least 1,000 hours during each calendar year and meet the other eligibility requirements are participants of the plan. Participants may elect to contribute up to fifteen percent of their salary to the plan. The Company will match an amount up to three percent of the participant's salary. Participants may direct all of their contributions and plan balances to be invested in a variety of investment options. The plan is subject to the reporting and disclosure requirements of the Employee Retirement and Income Security Act of 1974. Expense related to this plan was $1,100, $930, and $816 for the years ended December 31, 2001, 2000, and 1999, respectively. AEGON sponsors supplemental retirement plans to provide the Company's senior management with benefits in excess of normal pension benefits. The plans are noncontributory and benefits are based on years of service and the employee's compensation level. The plans are unfunded and nonqualified under the Internal Revenue Code. In addition, AEGON has established incentive deferred compensation plans for certain key employees of the Company. The Company's allocation of expense for these plans for each of the years ended December 31, 2001, 2000, and 1999 was negligible. AEGON also sponsors an employee stock option plan for individuals employed at least three years and a stock purchase plan for its producers, with the participating affiliated companies establishing their own eligibility criteria, producer contribution limits and company matching formula. These plans have been accrued for or funded as deemed appropriate by management of AEGON and the Company. In addition to pension benefits, the Company participates in plans sponsored by AEGON that provide postretirement medical, dental and life insurance benefits to employees meeting certain eligibility requirements. Portions of the medical and dental plans are contributory. The expenses of the postretirement plans calculated on the pay-as-you-go basis are charged to affiliates in accordance with an intercompany cost sharing arrangement. The Company expensed $233, $108, and $81 for the years ended December 31, 2001, 2000, and 1999, respectively. 13. RELATED PARTY TRANSACTIONS The Company shares certain officers, employees and general expenses with affiliated companies. The Company receives data processing, investment advisory and management, marketing and administration services from certain affiliates. During 2001, 2000, and 1999, the Company paid $16,904, $19,248, and $16,905, respectively, for such services, which approximates their costs to the affiliates. The Company provides office space, marketing and administrative services to certain affiliates. During 2001, 2000, and 1999, the Company received $6,752, $4,665, and $3,755, respectively, for such services, which approximates their cost. Payable to affiliates and intercompany borrowings bear interest at the thirty-day commercial paper rate. During 2001, 2000, and 1999, the Company paid net interest of $945, $2,262, and $1,997, respectively, to affiliates. The Company received capital contributions of $30,000 from its parent in 2001. At December 31, 2000, the Company had short-term note payables to an affiliate of $71,400. Interest on these notes approximated the thirty-day commercial paper rate at the time of issuance. In prior years, the Company purchased life insurance policies covering the lives of certain employees of the Company from an affiliate. At December 31, 2001 and 2000, the cash surrender value of these policies was $52,254 and $49,787, respectively. 88 14. COMMITMENTS AND CONTINGENCIES The Company is a party to legal proceedings incidental to its business. Although such litigation sometimes includes substantial demands for compensatory and punitive damages in addition to contract liability, it is management's opinion that damages arising from such demands will not be material to the Company's financial position. The Company is subject to insurance guaranty laws in the states in which it writes business. These laws provide for assessments against insurance companies for the benefit of policyholders and claimants in the event of insolvency of other insurance companies. Assessments are charged to operations when received by the Company except where right of offset against other taxes paid is allowed by law; amounts available for future offsets are recorded as an asset on the Company's balance sheet. The future obligation has been based on the most recent information available from the National Organization of Life and Health Insurance Guaranty Association. Potential future obligations for unknown insolvencies are not determinable by the Company and are not required to be accrued for financial reporting purposes. The Company has established a reserve of $3,425 and $3,438 and an offsetting premium tax benefit of $764 and $777 at December 31, 2001 and 2000, respectively, for its estimated share of future guaranty fund assessments related to several major insurer insolvencies. The guaranty fund expense (credit) was $13, $(9), and $(20) for the years ended December 31, 2001, 2000, and 1999, respectively. 89 Western Reserve Life Assurance Co. of Ohio Summary of Investments--Other Than Investments in Related Parties (Dollars in Thousands) December 31, 2001 SCHEDULE I
AMOUNT AT WHICH FAIR SHOWN IN THE TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEET - ------------------ ------ ----- ------------- FIXED MATURITIES Bonds: United States Government and government agencies and authorities $ 4,681 $ 4,868 $ 4,681 States, municipalities, and political subdivisions 3,380 3,620 3,380 Public utilities 12,048 12,354 12,048 All other corporate bonds 58,380 59,880 58,380 ---------- -------- -------- Total fixed maturities 78,489 80,722 78,489 EQUITY SECURITIES Common stocks (unaffiliated): Industrial, miscellaneous, and all other 302 472 472 ---------- -------- -------- Total equity securities 302 472 472 Mortgage loans on real estate 13,821 13,821 Real estate 43,520 43,520 Policy loans 285,178 285,178 Cash and short-term investments 141,080 141,080 Other invested assets 19,558 19,558 ---------- -------- Total investments $ 581,948 $582,118 ========== ========
(1) Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accruals of discounts. 90 Western Reserve Life Assurance Co. of Ohio Supplementary Insurance Information (Dollars in Thousands) SCHEDULE III
BENEFITS, CLAIMS, FUTURE POLICY POLICY AND NET LOSSES AND OTHER BENEFITS AND CONTRACT PREMIUM INVESTMENT SETTLEMENT OPERATING EXPENSES LIABILITIES REVENUE INCOME* EXPENSES EXPENSES* ---------- ----------- ------- --------- ---------- ---------- YEAR ENDED DECEMBER 31, 2001 Individual life $ 386,965 $ 14,219 $ 652,626 $ 14,014 $ 167,912 $ 216,211 Group life 12,222 135 772 731 1,226 535 Annuity 336,587 4 625,117 29,679 802,630 89,355 ---------- --------- ----------- -------- ----------- ---------- $ 735,774 $ 14,358 $ 1,278,515 $ 44,424 $ 971,768 $ 306,101 ========== ========= =========== ======== =========== ========== YEAR ENDED DECEMBER 31, 2000 Individual life $ 389,458 $ 13,349 $ 741,090 $ 13,430 $ 267,540 $ 310,243 Group life 11,237 100 847 936 1,413 580 Annuity 259,199 25 1,554,430 33,501 814,734 149,541 ---------- --------- ----------- -------- ----------- ---------- $ 659,894 $ 13,474 $ 2,296,367 $ 47,867 $ 1,083,687 $ 460,364 ========== ========= =========== ======== =========== ========== YEAR ENDED DECEMBER 31, 1999 Individual life $ 291,106 $ 9,152 $ 583,656 $ 10,754 $ 178,237 $ 261,284 Group life 11,032 100 1,073 706 1,437 599 Annuity 268,864 17 1,104,525 28,129 651,520 116,006 ---------- --------- ----------- -------- ----------- ---------- $ 571,002 $ 9,269 $ 1,689,254 $ 39,589 $ 831,194 $ 377,889 ========== ========= =========== ======== =========== ==========
* Allocations of net investment income and other operating expenses are based on a number of assumptions and estimates, and the results would change if different methods were applied. 91 Western Reserve Life Assurance Co. of Ohio Reinsurance (Dollars in Thousands) SCHEDULE IV
ASSUMED PERCENTAGE OF CEDED TO FROM AMOUNT GROSS OTHER OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET ------ --------- --------- ------ ------ YEAR ENDED DECEMBER 31, 2001 Life insurance in force $ 78,786,575 $ 17,837,374 $ -- $ 60,949,201 0.0% ============ ============= ========== ============= === Premiums: Individual life $ 684,987 $ 32,361 $ -- $ 652,626 0.0% Group life 1,030 258 -- 772 0.0 Annuity 683,703 58,586 -- 625,117 0.0 ------------ ------------- ---------- ------------- --- $ 1,369,720 $ 91,205 $ -- $ 1,278,515 0.0% ============ ============= ========== ============= === YEAR ENDED DECEMBER 31, 2000 Life insurance in force $ 76,903,969 $ 14,753,778 $ -- $ 62,150,191 0.0% ============ ============= ========== ============= === Premiums: Individual life $ 774,550 $ 33,460 $ -- $ 741,090 0.0% Group life 1,100 253 -- 847 0.0 Annuity 1,609,484 55,054 -- 1,554,430 0.0 ------------ ------------- ---------- ------------- --- $ 2,385,134 $ 88,767 $ -- $ 2,296,367 0.0% ============ ============= ========== ============= === YEAR ENDED DECEMBER 31, 1999 Life insurance in force $ 63,040,741 $ 11,297,250 $ -- $ 51,743,491 0.0% ============ ============= ========== ============= === Premiums: Individual life $ 604,628 $ 20,972 $ -- $ 583,656 0.0% Group life 1,383 310 -- 1,073 0.0 Annuity 1,142,254 37,729 -- 1,104,525 0.0 ------------ ------------- --------- ------------- --- $ 1,748,265 $ 59,011 $ -- $ 1,689,254 0.0% ============ ============= ========= ============= ===
92 PART C - OTHER INFORMATION Item 27. Exhibits (a) Resolution of the Board of Directors of Western Reserve establishing the separate account (1) (b) Not Applicable (c) Distribution of Policies (i) Master Service and Distribution Compliance Agreement (2) (ii) Amendment to Master Service and Distribution Compliance Agreement (3) (iii) Form of Broker/Dealer Supervisory and Service Agreement (3) (iv) Principal Underwriting Agreement (3) (v) First Amendment to Principal Underwriting Agreement (3) (d) Specimen Flexible Premium Variable Life Insurance Policy (6) (e) Application for Flexible Premium Variable Life Insurance Policy (4) (f) Depositor's Certification of Incorporation and By-Laws (i) Second Amended Articles of Incorporation of Western Reserve (2) (ii) Certificate of First Amendment to the Second Amended Articles of Incorporation of Western Reserve (5) (iii) Amended Code of Regulations (By-Laws) of Western Reserve (1) (g) Reinsurance Agreements (i) Reinsurance Treaty dated September 30, 2000 and Amendments Thereto (ii) Reinsurance Treaty dated July 1, 2002 and Amendments Thereto (h) Not Applicable (i) Not Applicable (j) Not Applicable (k) Opinion and Consent of Thomas E. Pierpan, Esq. as to Legality of Securities Being Registered (l) Opinion and Consent of Lorne Schinbein as to actuarial matters pertaining to the securities being registered (m) Not Applicable (n) Other Opinions: (i) Written Consent of Sutherland Asbill & Brennan LLP (ii) Written Consent of Ernst & Young LLP (o) Not Applicable (p) Not Applicable (q) Memorandum describing issuance, transfer and redemption procedures (r) Powers of Attorney (6) - ------------------------ (1) This exhibit was previously filed on Post-Effective Amendment No. 16 to Form S-6 Registration Statement dated April 21, 1998 File No. 33-31140) and is incorporated herein by reference. (2) This exhibit was previously filed on Post-Effective Amendment No. 11 to Form N-4 Registration Statement dated April 20, 1998 (File No. 33-49556) and is incorporated herein by reference. (3) This exhibit was previously filed on Post-Effective Amendment No. 4 to Form S-6 Registration Statement dated April 21, 1999 (File No. 333-23359) and is incorporated herein by reference. (4) This exhibit was previously filed on the Initial Registration Statement to Form S-6 dated April 5, 2001 (File No. 333-58322) and is incorporated herein by reference. (5) This exhibit was previously filed on Post-Effective Amendment No. 5 to Form S-6 Registration Statement dated April 19, 2000 (File No. 333-23359) and is incorporated herein by reference. (6) This exhibit was previously filed on the Initial Registration Statement to Form N-6 Registration Statement dated November 4, 2002 (File No. 333-100993) and is incorporated herein by reference. C-1 Item 28. Directors and Officers of the Depositor
Name Principal Business Address Position and Offices with Depositor ---- -------------------------- ----------------------------------- Michael W. Kirby (1) Director, Chairman of the Board and Chief Executive Officer Jerome C. Vahl (1) Director and President Brenda K. Clancy (1) Director and Vice President Paul Reaburn (1) Director and Vice President Kevin Bachmann (2) Director and Vice President Alan M. Yaeger (2) Executive Vice President, Actuary and Chief Financial Officer William H. Geiger (2) Senior Vice President, Corporate Counsel and Group Vice President - Compliance and Secretary Allan J. Hamilton (2) Vice President, Treasurer and Controller
- -------------------- (1) 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001 (2) 570 Carillon Parkway, St. Petersburg, Florida 33716 Item 29. Persons Controlled by or Under Common Control with the Depositor or Registrant VERENIGING AEGON - Netherlands Membership Association AEGON N.V. (Netherlands) (32.47%) AEGON Nederland N.V. (Netherlands) (100%) AEGON Nevak Holding B.V. (Netherlands) (100%) AEGON Derivatives N.V. (Netherlands) (100%) Transamerica Corporation and subsidiaries (DE) (100%) AEGON DMS Holding B.V. (Netherlands) (100%) Canadian Premier Holdings Ltd (Canada) (100%) Canadian Premier Life Insurance Company (Canada) (100%) Legacy General Insurance Company (Canada) (100%) Cornerstone International Holdings Ltd (UK) (100%) Cornerstone International Marketing Ltd (UK) (100%) Stonebridge International Insurance Ltd (UK) (100%) Transamerica Direct Marketing Korea Ltd (Korea) (100%) Transamerica Direct Marketing Japan K.K. (Japan) (100%) Transamerica Direct Marketing Asia Pacific Pty Ltd (Australia) (100%) Transamerica Insurance Marketing Asis Pacific Pty Ltd (Australia) (100%) Transamerica Direct Marketing Australia Pty Ltd (Australia) (100%) AEGON INTERNATIONAL N.V. (Netherlands) (100%) The AEGON Trust - voting trust - (Advisory Board: - Donald J. Shepard, Joseph B. M. Streppel, Dennis Hersch) (DE) (100%) AEGON U.S. Holding Corporation (DE) (100%) CORPA Reinsurance Company (NY) (100%) AEGON Management Company (IN) (100%) Short Hills Management Company (NJ) (100%) AEGON U.S. Corporation (IA) (76.05%) Commonwealth General Corporation and subsidiaries (DE) (100%) AEGON USA, Inc. (IA) (100%) RCC North America LLC (DE) (100%) Transamerica Holding Company, L.L.C.(DE) (100%) Veterans Life Insurance Company (IL) (100%) Peoples Benefit Services, Inc. (PA) (100%) Veterans Life Insurance Agency, Inc. (MD) (100%) Transamerica Life Insurance Company (IA) (100%) Professional Life & Annuity Insurance Company (AZ) (100%) AEGON Financial Services Group, Inc. (MN) (100%) AEGON Assignment Corporation of Kentucky (KY) (100%) C-2 AEGON Assignment Corporation (IL) (100%) Transamerica Financial Institutions, Inc. (MN) (100%) AEGON Funding Corp. (DE) (100%) AEGON USA Investment Management LLC (IA) (100%) First AUSA Life Insurance Company - insurance holding co. (MD) (100%) AUSA Life Insurance Company, Inc. - insurance (NY) (100%) United Financial Services, Inc. (MD) (100%) Monumental General Casualty Company (MD) (100%) Bankers Financial Life Insurance Company (AZ) (100%) The Whitestone Corporation (MD) (100%) Cadet Holding Corp. (IA) (100%) Monumental General Life Insurance Co. of Puerto Rico (PR) (51%) Iowa Fidelity Life Insurance Company (AZ) (100%) Southwest Equity Life Insurance Company (AZ) (100%) Life Investors Insurance Company of America - insurance (IA) (100%) Life Investors Alliance LLC (DE) (100%) Western Reserve Life Assurance Co. of Ohio - insurance (OH) (100%) WRL Insurance Agency, Inc. (CA) (100%) WRL Insurance Agency of Alabama, Inc. (AL) (100%) WRL Insurance Agency of Massachusetts, Inc. (MA) (100%) WRL Insurance Agency of Nevada, Inc. (NV) (100% WRL Insurance Agency of Wyoming, Inc. (WY) (100%) WRL Insurance Agency of Texas (TX) (100%) AEGON Equity Group, Inc. (FL) (100%) AEGON/Transamerica Fund Services, Inc. - transfer agent (FL) (100%) AEGON/Transamerica Fund Advisers, Inc. - investment adviser (FL) (77%) World Financial Group Insurance Agency, Inc. (CA) (100%) World Financial Group Insurance Agency of Alabama, Inc. (AL) (100%) World Financial Group Insurance Agency of Hawaii, Inc. (HI) (100%) World Financial Group Insurance Agency of Massachusetts, Inc. (MA) (100%) World Financial Group Insurance Agency of Puerto Rico, Inc. (PR) (100%) World Financial Group Insurance Agency of New Mexico (NM) (100%) World Financial Group Insurance Agency of Wyoming, Inc. (WY) (100%) WFG Property & Casualty Insurance Agency, Inc. (GA) (100%) WFG Property & Casualty Insurance Agency of Alabama, Inc. (AL) (100%) WFG Property & Casualty Insurance Agency of California, Inc. (CA) (100%) WFG Property & Casualty Insurance Agency of Mississippi, Inc. (MS) (100%) WFG Property & Casualty Insurance Agency of Nevada, Inc. (NV) (100%) WFG Property & Casualty Insurance Agency of Wyoming, Inc. (WY) (100%) WFG Property & Casualty Insurance Agency of Texas, Inc. (TX) (100%) AUSA Holding Company - holding company (MD) (100%) AEGON USA Investment Management, Inc. - investment adviser (IA) (100%) AEGON USA Securities, Inc. - broker-dealer (IA) (100%) Transamerica Capital, Inc. (CA) (100%) Universal Benefits Corporation - third party administrator (IA) (100%) Investors Warranty of America, Inc. - provider of automobile extended maintenance contracts (IA) (100%) Massachusetts Fidelity Trust Company - trust company (IA) (100%) Roundit, Inc. (MD) (50%) Long, Miller & Associates LLC (CA) (33-1/3%) Diversified Investment Advisors, Inc. - investment adviser (DE) (100%) Diversified Investors Securities Corp. - broker-dealer (DE) (100%) George Beram & Company, Inc. (MA) (100%) Creditor Resources, Inc. - credit insurance (MI) (100%) Premier Solutions Group, Inc. (MD) (100%) CRC Creditor Resources Canadian Dealer Network Inc. - insurance agency (Canada) 100%) Money Services, Inc. - financial counseling for employees and agents of affiliated companies (DE) (100%) ORBA Insurance Services, Inc. (CA) (40.15%) ADB Corporation LLC (DE) (100%) C-3 AEGON USA Travel and Conference Services LLC - travel services (IA) (100%) Great Companies, L.L.C. (IA) (30%) Zahorik Company, Inc. - broker-dealer (CA) (100%) ZCI, Inc. (AL) (100%) Zahorik Texas, Inc. (TX) (100%) Monumental General Insurance Group, Inc. - holding company (MD) (100%) Monumental General Mass Marketing, Inc. - marketing (MD) (100%) Trip Mate Insurance Agency, Inc. (KS) (100%) Monumental General Administrators, Inc. (MD) (100%) National Association Management and Consultant Services, Inc. (MD) (100%) AEGON Asset Management Services, Inc. (DE) (100%) World Group Securities, Inc. (DE) (100%) World Financial Group, Inc. (DE) (100%) InterSecurities, Inc. - broker-dealer (DE) (100%) World Financial Group Insurance Agency of Ohio, Inc. (OH) (100%) AEGON/Transamerica Fund Advisers, Inc. - investment adviser (FL) (23%) AEGON USA Realty Advisors Inc. - real estate investment services (IA) (100%) RCC Properties Limited Partnership (IA) (100%) QSC Holding, Inc. (DE) (100%) Realty Information Systems, Inc. - information systems for real estate investment management (IA) (100%) AEGON USA Real Estate Services, Inc. (DE) (100%) Real Estate Alternatives Portfolio 1 LLC (DE) (100%) Item 30. Indemnification Provisions exist under the Ohio General Corporation Law, the Second Amended Articles of Incorporation of Western Reserve and the Amended Code of Regulations of Western Reserve whereby Western Reserve may indemnify certain persons against certain payments incurred by such persons. The following excerpts contain the substance of these provisions. Ohio General Corporation Law SECTION 1701.13 AUTHORITY OF CORPORATION. (E)(1) A corporation may indemnify or agree to indemnify any person who was or is a party or is threatened to be made a party, to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, or agent of another corporation (including a subsidiary of this corporation), domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendre or its equivalent, shall not, of itself create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. (2) A corporation may indemnify or agree to indemnify any person who was or is a party, or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he C-4 reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any of the following: (a) Any claim, issue, or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless, and only to the extent that the court of common pleas, or the court in which such action or suit was brought determines upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court of common pleas or such other court shall deem proper; (b) Any action or suit in which the only liability asserted against a director is pursuant to section 1701.95 of the Revised Code. (3) To the extent that a director, trustee, officer, employee, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in divisions (E)(1) and (2) of this section, or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by him in connection therewith. (4) Any indemnification under divisions (E)(1) and (2) of this section, unless ordered by a court, shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in divisions (E)(1) and (2) of this section. Such determination shall be made as follows: (a) By a majority vote of a quorum consisting of directors of the indemnifying corporation who were not and are not parties to or threatened with any such action, suit, or proceeding; (b) If the quorum described in division (E)(4)(a) of this section is not obtainable or if a majority vote of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the corporation, or any person to be indemnified within the past five years; (c) By the shareholders; (d) By the court of common pleas or the court in which such action, suit, or proceeding was brought. Any determination made by the disinterested directors under division (E)(4)(a) or by independent legal counsel under division (E)(4)(b) of this section shall be promptly communicated to the person who threatened or brought the action or suit by or in the right of the corporation under division (E)(2) of this section, and within ten days after receipt of such notification, such person shall have the right to petition the court of common pleas or the court in which such action or suit was brought to review the reasonableness of such determination. (5) (a) Unless at the time of a director's act or omission that is the subject of an action, suit or proceeding referred to in divisions (E)(1) and (2) of this section, the articles or the regulations of a corporation state by specific reference to this division that the provisions of this division do not apply to the corporation and unless the only liability asserted against a director in an action, suit, or proceeding referred to in divisions (E)(1) and (2) of this section is pursuant to section 1701.95 of the Revised Code, expenses, including attorney's fees, incurred by a director in defending the action, suit, or proceeding shall be paid by the corporation as they are incurred, in advance of the final disposition of the action, suit, or proceeding upon receipt of an undertaking by or on behalf of the director in which he agrees to do both of the following: (i) Repay such amount if it is proved by clear and convincing evidence in a court of competent jurisdiction that his action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the corporation or undertaken with reckless disregard for the best interests of the corporation; (ii) Reasonably cooperate with the corporation concerning the action, suit, or proceeding. C-5 (b) Expenses, including attorneys' fees incurred by a director, trustee, officer, employee, or agent in defending any action, suit, or proceeding referred to in divisions (E)(1) and (2) of this section, may be paid by the corporation as they are incurred, in advance of the final disposition of the action, suit, or proceeding as authorized by the directors in the specific case upon receipt of an undertaking by or on behalf of the director, trustee, officer, employee, or agent to repay such amount, if it ultimately is determined that he is entitled to be indemnified by the corporation. (6) The indemnification authorized by this section shall not be exclusive of, and shall be in addition to, any other rights granted to those seeking indemnification under the articles or the regulations or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. (7) A corporation may purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit, or self-insurance on behalf of or for any person who is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this section. Insurance may be purchased from or maintained with a person in which the corporation has a financial interest. (8) The authority of a corporation to indemnify persons pursuant to divisions (E)(1) and (2) of this section does not limit the payment of expenses as they are incurred, indemnification, insurance, or other protection that may be provided pursuant to divisions (E)(5), (6), and (7) of this section. Divisions (E)(1) and (2) of this section do not create any obligation to repay or return payments made by the corporation pursuant to divisions (E)(5), (6), or (7). (9) As used in this division, references to "corporation" include all constituent corporations in a consolidation or merger and the new or surviving corporation, so that any person who is or was a director, officer, employee, or agent of such a constituent corporation, or is or was serving at the request of such constituent corporation as a director, trustee, officer, employee or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise, shall stand in the same position under this section with respect to the new or surviving corporation as he would if he had served the new or surviving corporation in the same capacity. Second Amended Articles of Incorporation of Western Reserve ARTICLE EIGHTH EIGHTH: (1) The corporation may indemnify or agree to indemnify any person who was or is a party or is threatened to be made a party, to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, or agent of another corporation (including a subsidiary of this corporation), domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendre or its equivalent, shall not, of itself create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. C-6 (2) The corporation may indemnify or agree to indemnify any person who was or is a party, or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, or agent of another corporation (including a subsidiary of this corporation), domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless, and only to the extent that the court of common pleas, or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court of common pleas or such other court shall deem proper. (3) To the extent that a director, trustee, officer, employee, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in sections (1) and (2) of this article, or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by him in connection therewith. (4) Any indemnification under sections (1) and (2) of this article, unless ordered by a court, shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in sections (1) and (2) of this article. Such determination shall be made (a) by a majority vote of a quorum consisting of directors of the indemnifying corporation who were not and are not parties to or threatened with any such action, suit, or proceeding, or (b) if such a quorum is not obtainable or if a majority vote of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the corporation, or any person to be indemnified within the past five years, or (c) by the shareholders, or (d) by the court of common pleas or the court in which such action, suit, or proceeding was brought. Any determination made by the disinterested directors under section (4)(a) or by independent legal counsel under section (4)(b) of this article shall be promptly communicated to the person who threatened or brought the action or suit by or in the right of the corporation under section (2) of this article, and within ten days after receipt of such notification, such person shall have the right to petition the court of common pleas or the court in which such action or suit was brought to review the reasonableness of such determination. (5) Expenses, including attorneys' fees incurred in defending any action, suit, or proceeding referred to in sections (1) and (2) of this article, may be paid by the corporation in advance of the final disposition of such action, suit, or proceeding as authorized by the directors in the specific case upon receipt of a written undertaking by or on behalf of the director, trustee, officer, employee, or agent to repay such amount, unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as authorized in this article. If a majority vote of a quorum of disinterested directors so directs by resolution, said written undertaking need not be submitted to the corporation. Such a determination that a written undertaking need not be submitted to the corporation shall in no way affect the entitlement of indemnification as authorized by this article. (6) The indemnification provided by this article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under the articles or the regulations or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. (7) The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, or agent of another corporation (including a subsidiary of this corporation), domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise against any liability C-7 asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this section. (8) As used in this section, references to "the corporation" include all constituent corporations in a consolidation or merger and the new or surviving corporation, so that any person who is or was a director, officer, employee, or agent of such a constituent corporation, or is or was serving at the request of such constituent corporation as a director, trustee, officer, employee or agent of another corporation (including a subsidiary of this corporation), domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise shall stand in the same position under this article with respect to the new or surviving corporation as he would if he had served the new or surviving corporation in the same capacity. (9) The foregoing provisions of this article do not apply to any proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in such person's capacity as such, even though such person may also be an agent of this corporation. The corporation may indemnify such named fiduciaries of its employee benefit plans against all costs and expenses, judgments, fines, settlements or other amounts actually and reasonably incurred by or imposed upon said named fiduciary in connection with or arising out of any claim, demand, action, suit or proceeding in which the named fiduciary may be made a party by reason of being or having been a named fiduciary, to the same extent it indemnifies an agent of the corporation. To the extent that the corporation does not have the direct legal power to indemnify, the corporation may contract with the named fiduciaries of its employee benefit plans to indemnify them to the same extent as noted above. The corporation may purchase and maintain insurance on behalf of such named fiduciary covering any liability to the same extent that it contracts to indemnify. Amended Code of Regulations of Western Reserve ARTICLE V Indemnification of Directors and Officers Each Director, officer and member of a committee of this Corporation, and any person who may have served at the request of this Corporation as a Director, officer or member of a committee of any other corporation in which this Corporation owns shares of capital stock or of which this Corporation is a creditor (and his heirs, executors and administrators) shall be indemnified by the Corporation against all expenses, costs, judgments, decrees, fines or penalties as provided by, and to the extent allowed by, Article Eighth of the Corporation's Articles of Incorporation, as amended. Rule 484 Undertaking Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of Western Reserve pursuant to the foregoing provisions or otherwise, Western Reserve has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Western Reserve of expenses incurred or paid by a director, officer or controlling person of Western Reserve 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, Western Reserve 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 of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Item 31. Principal Underwriter (a) AFSG Securities Corporation ("AFSG") is the principal underwriter for the Policies. AFSG currently serves as principal underwriter for the Retirement Builder Variable Annuity Account, Separate Account VA A, Separate Account VA B, Separate Account VA C, Separate Account VA D, Separate Account VA E, Separate Account VA F, Separate Account VA I, Separate account VA J, Separate Account VA L, Separate Account VL A, Legacy Builder Variable Life Separate Account, Separate Account VA K, and Separate Account VA P of Transamerica Life Insurance Company; the Separate C-8 Account and VA BNY, Separate Account C, AUSA Series Life Account, AUSA Series Annuity Account and AUSA Series Annuity Account B of AUSA Life Insurance Company, Inc.; the Separate Account I, Separate Account II, and Separate Account V of Peoples Benefit Life Insurance Company; the WRL Series Life Account, WRL Series Annuity Account, WRL Series Annuity Account B and WRL Series Life Corporate Account of Western Reserve Life Assurance Co. of Ohio; Separate Account VA-2L, Separate Account VA G, Separate Account VA H, Transamerica Occidental Life Separate Account VUL-3, Transamerica Occidental Life Separate Account VUL-4, Transamerica Occidental Life Separate Account VUL-5, and Transamerica Occidental Life Separate Account VUL-6 of Transamerica Occidental Life Insurance Company; Separate Account VA-2LNY of Transamerica Life Insurance Company of New York; and Separate Account VA-8 of Transamerica Life Insurance and Annuity Company. (b) Directors and Officers of AFSG
PRINCIPAL --------- NAME BUSINESS ADDRESS POSITION AND OFFICES WITH UNDERWRITER - ---- ------------------ ------------------------------------- Larry N. Norman (1) Director and President Anne M. Spaes (1) Director and Vice President Lisa A. Wachendorf (1) Director, Vice President and Chief Compliance Officer John K. Carter (2) Vice President William G. Cummings (2) Vice President, Treasurer and Controller Thomas R. Moriarty (2) Vice President Christopher G. Roetzer (2) Vice President Michael V. Williams (2) Vice President Frank A. Camp (1) Secretary Priscilla I. Hechler (2) Assistant Vice President and Assistant Secretary Linda Gilmer (1) Assistant Treasurer Darin D. Smith (1) Vice President and Assistant Secretary Teresa L. Stolba (1) Assistant Compliance Officer Emily M. Bates (3) Assistant Treasurer Clifton W. Flenniken, III (4) Assistant Treasurer
- ------------------------- (1) 4333 Edgewood Road, N.E., Cedar Rapids, IA 52499-0001 (2) 570 Carillon Parkway, St. Petersburg, FL 33716-1202 (3) 400 West Market Street, Louisville, Kentucky 40202 (4) 1111 North Charles Street, Baltimore, Maryland 21201 C-9 (c) Compensation to Principal Underwriter from Registrant
- ------------------------------------------------------------------------------------------------------ NET UNDERWRITING NAME OF PRINCIPAL DISCOUNTS AND COMPENSATION BROKERAGE UNDERWRITER COMMISSIONS ON REDEMPTION COMMISSIONS COMMISSIONS - ------------------------------------------------------------------------------------------------------ AFSG Securities Corporation 0 0 $ 56,595,212 (1) 0 ----------------------------------------------------------------------- 0 0 $ 113,821,344 (2) 0 - ------------------------------------------------------------------------------------------------------
(1) fiscal year 2001 (2) fiscal year 2000 Item 32. Location of Accounts and Records All accounts, books, or other documents required to be maintained by Section 31(a) of the 1940 Act and the rules promulgated thereunder are maintained by the Registrant through Western Reserve, 570 Carillon Parkway, St. Petersburg, Florida 33716. Item 33. Management Services Not Applicable Item 34. Undertakings Western Reserve hereby represents that the fees and charges deducted under the WRL Freedom Elite Advisor Policies, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by Western Reserve. Registrant promises to file a post-effective amendment to the 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 life policies may be accepted. Registrant furthermore agrees to include either as part of any application to purchase a Policy offered by the prospectus, a space that an applicant can check to request a Statement of Additional Information, or a post card or similar written communication affixed to or included in the prospectus that the applicant can remove to send for a Statement of Additional Information. Registrant agrees to deliver any Statement of Additional Information and any financial statements required to be made available under this Form N-6 promptly upon written or oral request. C-10 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Pre-Effective Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, duly authorized, in the City of St. Petersburg, State of Florida, on this 30th day of January, 2003. WRL SERIES LIFE ACCOUNT (Registrant) By: /s/ Michael W. Kirby */ ----------------------- Michael W. Kirby, Chairman of the Board and Chief Executive Officer of Western Reserve Life Assurance Co. of Ohio WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO (Depositor) By: /s/ Michael W. Kirby */ ---------------------- Michael W. Kirby, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective Amendment No. 1 to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated:
Signature Title Date - --------- ----- ---- /s/ Michael W. Kirby Chairman of the Board January 30, 2003 - -------------------- and Chief Executive Officer Michael W. Kirby */ /s/ Jerome C. Vahl Director and President January 30, 2003 - ------------------ Jerome C. Vahl */ /s/ Brenda K. Clancy Director and Vice President January 30, 2003 - --------------------- Brenda K. Clancy */ /s/ Paul Reaburn Director and Vice President January 30, 2003 - ------------------ Paul Reaburn */ /s/ Kevin Bachmann Director and Vice President January 30, 2003 - ------------------ Kevin Bachmann /s/ Allan J. Hamilton Vice President, Treasurer January 30, 2003 - --------------------- and Controller Allan J. Hamilton /s/ Alan M. Yaeger Executive Vice President, January 30, 2003 - ---------------------- Alan M. Yaeger Actuary and Chief Financial Officer
*/ /s/ Priscilla I. Hechler ------------------------ Signed by Priscilla I. Hechler As Attorney in Fact EXHIBIT INDEX
EXHIBIT DESCRIPTION NO. OF EXHIBIT - ------- ----------- 27(g) Reinsurance Agreements - Reinsurance Treaty dated September 30, 2000 and Amendments Thereto and Reinsurance Treaty dated July 1, 2001 and Amendments Thereto 27(k) Opinion and Consent of Thomas E. Pierpan, Esq. As to Legality of Securities Being Registered 27(l) Opinion and Consent of Lorne Schinbein as to actuarial matters pertaining to the securities being registered 27(n)(i) Written Consent of Sutherland Asbill & Brennan LLP 27(n)(ii) Written Consent of Ernst & Young LLP 27(q) Memorandum describing issuance, transfer and redemption procedures
EX-99.A4 3 g80413exv99wa4.txt REINSURANCE AGREEMENTS EXHIBIT 99.A4 Exhibit 27(g) Reinsurance Agreements Reinsurance Treaty dated September 30, 2000 and Amendments Thereto And Reinsurance Treaty dated July 1, 2002 and Amendments Thereto AUTOMATIC POOL REINSURANCE AGREEMENT referred to in this Document as the "Agreement" EFFECTIVE SEPTEMBER 30, 2000 among WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO TRANSAMERICA LIFE INSURANCE COMPANY referred to in this Agreement as the "Ceding Company" and EMPLOYERS REASSURANCE CORPORATION GENERAL & COLOGNE LIFE RE OF AMERICA THE LINCOLN NATIONAL LIFE INSURANCE COMPANY TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY collectively referred to in this Agreement as the "Pool Reinsurers" TABLE OF CONTENTS Article I Scope of the Agreement Page 1 Parties to the Agreement Effective Date of the Agreement Scope of the Agreement Duration of the Agreement Definitions Article II Reinsurance Coverage Page 2 Automatic Reinsurance Facultative Reinsurance Facultative Reinsurance Outside This Agreement Basis of Reinsurance Article III Procedures Page 4 Article IV Liability Page 6 Article V Reinsurance Rates and Payments Page 7 Tax Reimbursement Experience Refund Article VI Changes to the Reinsurance Page 9 Errors and Oversights Misstatement of Age or Sex Changes to the Underlying Policy Reductions, Terminations and Reinstatements Article VII Recapture Page 11 Article VIII Claims Page 13 Article IX Arbitration Page 16 Article X Insolvency Page 18 Article XI Inspection of Records Page 19 Article XII Offset Page 19 Article XIII Execution of the Agreement Page 20
EXHIBITS Exhibit A Reinsurance Coverage Underwriting Guidelines Retention Limits Automatic Acceptance Limits Exclusions to Automatic Reinsurance Coverage, including Jumbo Limits Exhibit B Administration and Reporting Forms Exhibit C Rates and Allowances Net Amount at Risk Calculation Exhibit D Conditional Receipt Exhibit E Illustration of Reinsurance Ceded Exhibit F Total Policy Liability Statement
ARTICLE I - SCOPE OF THE AGREEMENT 1. PARTIES TO THE AGREEMENT The Ceding Company and the Pool Reinsurers mutually agree to transact reinsurance business according to the terms of this Agreement. This Agreement is for indemnity reinsurance and the Ceding Company and the Pool Reinsurers are the only parties to the Agreement. There will be no right or legal relationship whatsoever between the Pool Reinsurers and any other person having an interest of any kind in policies reinsured under this Agreement. 2. EFFECTIVE DATE OF THE AGREEMENT This Agreement will go into effect at 12:01 A.M., September 30, 2000 and will cover policies shown in Exhibit A issued and after that date. 3. SCOPE OF THE AGREEMENT The text of this Agreement and all Exhibits, Schedules and Amendments are considered to be the entire agreement. There are no other understandings or agreements regarding the policies reinsured other than as expressed in this Agreement. Either the Ceding Company or any of the Pool Reinsurers may make changes or additions to this Agreement, but they will not be considered to be in effect unless they are made by means of a written amendment which has been signed by all parties. The Retention Limits and Binding Limits of the Ceding Company as shown in Exhibit A are based only on the amounts of insurance administered by the administrative office of Aegon USA in St Petersburg, Florida and/or by any third party administrator administering insurance on behalf of this administrative office. 4. DURATION OF THE AGREEMENT The duration of this Agreement will be unlimited. However, any of the Pool Reinsurers may terminate their participation in the Agreement for new reinsurance at any time by giving the Ceding Company ninety (90) days prior written notice. The Ceding Company may terminate the entire Pool or the participation of any Pool Reinsurer by giving ninety (90) days prior written notice. Reinsurance will continue to be placed during the ninety-day period. The Ceding Company has the right, upon termination of any Pool Reinsurer under this Agreement, to re-allocate the quota share percentages among the remaining Pool Reinsurers upon Pool Reinsurers consent, or to name a new Pool Reinsurer to the Agreement. Existing reinsurance will not be affected by the termination of this Agreement or by the termination of the participation of any of the Pool Reinsurers for new reinsurance. Existing reinsurance will remain in force until the termination or expiry of the underlying policy on which reinsurance is based, as long as the Ceding Company complies with this Agreement and continues to pay reinsurance premiums as shown in Article V (Reinsurance Rates and Payment). The Pool Reinsurers will accept liability for any claims or premium refunds which are not reported to them within ninety (90) days following the termination or expiry of the last cession reinsured under this Agreement, provided that the Ceding Company has taken prompt and reasonable action to identify those claims. 5. DEFINITIONS ULTIMATE NET AMOUNT AT RISK: Largest value in column (S), Actual Reinsurance, of Exhibit E. INITIAL SPECIFIED AMOUNT: Amount shown on the Policy Schedule page of the life insurance contract. QUOTA SHARE PERCENTAGE: Reinsurer's percentage of risk on Automatic Reinsurance and Special Pool Facultative Reinsurance. PARTICIPATION PERCENTAGE: Percentage that the facultative reinsurer agrees to reinsure on Regular Facultative Reinsurance. ARTICLE II - REINSURANCE COVERAGE 1. AUTOMATIC REINSURANCE The Pool Reinsurers will automatically accept reinsurance of life benefits for individually underwritten ordinary life policies on the lives of permanent residents of the United States or United States Territories in accordance with the provisions and limitations shown in Exhibit A. The Pool Reinsurers will also automatically accept reinsurance of riders and supplementary benefits written with the covered life benefits, but only to the extent that the riders and supplementary benefits are specifically shown in Exhibit A, Part I. The Ceding Company has the right to modify its retention limits shown in Exhibit A, Part II at any time. If the retention limits are reduced, the Ceding Company will notify the Pool Reinsurers in writing before reinsurance can be ceded on the basis of the reduced retention limits. The Pool Reinsurers have the right to amend the Automatic Acceptance Limits shown in Exhibit A, Part III if the Ceding Company modifies its retention limits. The Pool Reinsurers also have the right to modify the Automatic Acceptance Limits if the Ceding Company elects to participate in another arrangement or arrangements to secure additional automatic binding capacity. However, the Pool Reinsurers must exercise their option to amend the Automatic Acceptance Limits within ninety (90) days of notification of the change in retention limits or the placement of additional automatic binding capacity. 2. FACULTATIVE REINSURANCE Applications for reinsurance of amounts in excess of the Automatic Acceptance Limits, and any risks which the Ceding Company does not care to cede automatically or may not be so ceded under the terms of this Agreement, may be submitted to the Lead Facultative Reinsurer specified in Exhibit A for facultative consideration either as the Lead Facultative Reinsurer for the Pool Reinsurers or as an independent reinsurer, as described in Article III. Procedures below. If the Ceding Company determines to replace the Lead Facultative Reinsurer, it will be necessary to appoint a replacement Lead Facultative Reinsurer and such replacement will be appointed by the Ceding Company. The Ceding Company will notify all Pool Reinsurers thirty (30) days prior to the assignment of the new Lead Facultative Reinsurer. 3. FACULTATIVE REINSURANCE OUTSIDE THIS AGREEMENT The Ceding Company retains the right to reinsure facultatively with any reinsurer who is not a Pool Reinsurer. In such case, the risk shall not be covered under this Agreement. The Ceding Company will attempt to place business facultatively outside this Agreement only after having failed to obtain desired facultative reinsurance from among the Pool Reinsurers. 4. BASIS OF REINSURANCE Life reinsurance under this Agreement will be on the Monthly Renewable Term plan for the net amount at risk on the portion of the original policy that is reinsured into the Pool. The net amount at risk for any policy period will be calculated according to Exhibit C (Reinsurance Rates and Allowances), Part I. Riders or supplementary benefits ceded with life benefits will be reinsured as shown in Exhibit C. Any differences in the net amount at risk calculation for these benefits will be shown in Exhibit C. 5. UNDERWRITING GUIDELINES The Pool Reinsurers intend to approve the policy's Ultimate Net Amount at Risk based on the agreed upon percentages of the insured's net worth as described in Exhibit A. The Pool Reinsurers reserve the right to use these percentages as a guideline only and are not bound to the percentages under any circumstance. ARTICLE III - PROCEDURES 1. AUTOMATIC REINSURANCE Individual notification for the placement of automatic reinsurance will not be necessary. Subject to Article V (Reinsurance Rates and Payment) and Exhibit B (Reinsurance Reporting Forms and Reinsurance Administration), new business or changes to existing reinsurance will be shown on the Ceding Company's periodic billing report. 2. FACULTATIVE REINSURANCE INSIDE THIS AGREEMENT SPECIAL POOL FACULTATIVE REINSURANCE. If a case is submitted to the Lead Facultative Reinsurer for the Pool Reinsurers for facultative consideration, the Lead Facultative Reinsurer can authorize the Ceding Company to cede to the Pool Reinsurers the excess, if any, over the Ceding Company's regular retention for the risk amounts described in Exhibit A,V. The Lead Facultative Reinsurer can authorize the Ceding Company to cede to the Pool Reinsurers their respective Quota Share Percentage shown in Exhibit A. Submissions cannot be made to the Lead Facultative Reinsurer on cases submitted facultatively to other reinsurers, including other Pool Reinsurers, nor when the amount applied for and in force with all companies exceeds the Jumbo Coverage Limit as identified in Exhibit A,VI.2. When submitting a case to the Lead Facultative Reinsurer, the Ceding Company will indicate whether it is asking the Lead Facultative Reinsurer to act as Lead Facultative Reinsurer for the Pool Reinsurers or as an independent reinsurer. The Ceding Company will submit to the Lead Facultative Reinsurer copies of the original application, the complete underwriting file and all other information the Ceding Company may have pertaining to the insurability of the risk. The Lead Facultative Reinsurer shall promptly communicate an offer of reinsurance on the risk to the Ceding Company. The Lead Facultative Reinsurer's evaluation of the case will be used to issue the case and to bind all Pool Reinsurers. When a policy is placed in force on which reinsurance is to be ceded to the Pool Reinsurers, the Ceding Company will notify the Pool Reinsurers that the reinsurance has been effected by including an entry on the Ceding Company's next periodic billing report. REGULAR FACULTATIVE REINSURANCE. If the amount of reinsurance required is in excess of the Ceding Company's regular retention or if the case is being or has been submitted to other reinsurers for facultative consideration, the Special Pool Facultative Reinsurance coverage does not apply. Such cases may be submitted to the Lead Facultative Reinsurer for its own account independent of the Pool Reinsurers. On such cases, if the Lead Facultative Reinsurer makes an offer to reinsure the risk, the Ceding Company must accept the offer during the lifetime of the proposed insured, but not later than one hundred twenty days after the offer is made, to effect the reinsurance. The Company's acceptance of the Lead Facultative Reinsurer's offer will be documented by a dated notation in the Ceding Company's underwriting file and subsequent formal notice to the Lead Facultative Reinsurer. 3. REFERENCE MATERIALS Upon request and subject to availability, the Ceding Company will use its best efforts to obtain reference materials which may be required by the Pool Reinsurers for proper administration of reinsurance under this Agreement. ARTICLE IV - LIABILITY 1. AUTOMATIC REINSURANCE Subject to the provisions of Article VI, Section 4 and Article VII, the liability of the Pool Reinsurers for reinsurance placed automatically under this Agreement will begin and end simultaneously with that of the Ceding Company for the underlying policy on which reinsurance is based. 2. FACULTATIVE REINSURANCE The liability of the Pool Reinsurers (when the Lead Facultative Reinsurer is acting on behalf of the Pool Reinsurers) shall commence simultaneously with that of the Ceding Company provided the Ceding Company has accepted, during the lifetime of the insured and within one hundred twenty (120) days of the offer, a facultative offer made by the Lead Facultative Reinsurer on that life. The liability of a Pool Reinsurer acting as an independent reinsurer shall commence simultaneously with that of the Ceding Company provided the Ceding Company has accepted, during the lifetime of the insured and within one hundred twenty (120) days of the offer, a facultative offer made by the Pool Reinsurer on that life. 3. CONDITIONAL RECEIPT LIABILITY The Pool Reinsurers will be liable for losses under the terms of a Conditional Receipt or Temporary Insurance Receipt to the extent that the Ceding Company is liable. 4. CONTINUATION OF LIABILITY Continuation of the Pool Reinsurers' liability is conditioned on the Ceding Company's payment of reinsurance premiums as shown in Article V (Reinsurance Rates and Payment) and is subject to Article VI (Changes to the Reinsurance) and Article VII (Recapture). 5. ADJUSTABLE TERM INSURANCE RIDER (ATIR) LIABILITY The maximum liability for the Adjustable Term Insurance Rider on policies that have the ATIR attached to them is the Target Death Benefit Schedule provided to the Pool Reinsurers and is limited to their quota share percentage of the maximum Target Death Benefit. An illustration similar to that shown in Exhibit E will be provided to the Pool Reinsurers to illustrate the maximum ceded amount. All Pool Reinsurers will execute a Total Policy Liability Statement. At the time this Agreement is executed by the Pool Reinsurers, a copy of each Pool Reinsurers' Total Liability Statement will be attached to and made a part of this Agreement and labeled Exhibit F. ARTICLE V - REINSURANCE RATES AND PAYMENTS 1. REINSURANCE RATES The rates that the Ceding Company will pay to the Pool Reinsurers for reinsurance covered under this Agreement are shown in Exhibit C. The reinsurance rate payable for any cession for any accounting period will be calculated on the basis of the net amount at risk reinsured as of that period. For reasons relating to deficiency reserve requirements by the various state insurance departments, the rates shown in Exhibit C cannot be guaranteed for more than one year. While all parties anticipate that reinsurance rates shown in Exhibit C will continue to be charged, it may become necessary to charge a guaranteed rate that is the greater of the rate from Exhibit C or the corresponding statutory net premium rate based on the required statutory valuation mortality table at 4.5% interest for the applicable mortality rating. If the original policy is issued with interim insurance, the Ceding Company will pay the Pool Reinsurers a reinsurance rate for the interim period that is the same percentage of the first year premium that the interim period bears to twelve (12) months. The rate that the Ceding Company pays the Pool Reinsurers for the first policy year after the interim period will be calculated on the basis of the full annual reinsurance rate. The age basis for all products is Age Nearest Birthday except for the Private Placement VUL which is Age Last Birthday. Procedures and details of reinsurance rate calculation for any benefits or riders ceded under this Agreement are shown in Exhibit C. All financial transactions under this Agreement will be in United States dollars, unless the parties mutually agree to use other currencies. Specifications of the currencies and details of currency conversion procedures will be shown in Exhibit C, if necessary. 2. PAYMENTS The Ceding Company will be responsible for administration of the periodic reporting of its statements of account and payment of balances due to the Pool Reinsurers as shown in Exhibit B. Within thirty (30) days after the close of each reporting period, the Ceding Company will send each Pool Reinsurer a statement of account for that period along with payment of the full balance due. If the statement of account shows a balance due the Ceding Company, each Pool Reinsurer will remit the appropriate amount within thirty (30) days of receipt of the statement of account. In order to eliminate reporting of trivial amounts, the Ceding Company will send statements of account to the Pool Reinsurers monthly, but will only send payment when the total balance due equals or exceeds $100.00. The Ceding Company's timely payment of reinsurance premiums is a condition precedent to the continued liability of the Pool Reinsurers. If the Ceding Company has not paid the balance due to the Pool Reinsurers by the thirty-first (31st) day following the close of the reporting period, the Pool Reinsurers have the right to give thirty (30) days' written notice of their intention to terminate the reinsurance on which the balance is due and unpaid. At the end of this thirty (30) day period, the liability of the Pool Reinsurers will automatically terminate for all reinsurance on which balances remain due and unpaid, including reinsurance on which balances became due and unpaid during and after the thirty-day notice period. Even though reinsurance has been terminated, the Ceding Company will continue to be liable for the payment of unpaid balances along with interest charges equivalent to the 30 Day Treasury Bill rate as published in the Money Rate Section or any successor section of The Wall Street Journal on the first business day following the date the premiums are deemed delinquent. Reinsurance terminated for non-payment of balances due may be reinstated at any time within sixty (60) days of the date of termination, by the Ceding Company's payment of all balances due and interest charged in full to the Pool Reinsurers. However, the Pool Reinsurers will have no liability for claims incurred between the termination date and the reinstatement date. 3. TAX REIMBURSEMENTS Details of any reimbursement of premium taxes that the Ceding Company pays on behalf of reinsurance payments to the Pool Reinsurers are shown in Exhibit C, Section VIII. (Premium Taxes). The parties mutually agree to the following pursuant to Section 1.848-2 (g) (8) of the Income Tax Regulation issued December 29, 1992 under Section 848 of the Internal Revenue Code of 1986, as amended. This election will be effective for all taxable years for which this Agreement remains in effect. The terms used in this Section are defined in Regulation Section 1.848-2 in effect as of December 29, 1992. The term "net consideration" will refer to either net consideration as defined in Section 1.848-2 (f) or "gross premium and other consideration" as defined in Section 1.848-3 (b), as appropriate. a) The party with the net positive consideration for this Agreement for each taxable year will capitalize specified policy acquisition expenses with respect to this Agreement without regard to the General Deductions Limitation of IRC Section 848(c)(1). b) The parties mutually agree to exchange information pertaining to the amount of net consideration under this Agreement by May 1 of each year to ensure consistency. The parties also mutually agree to exchange information otherwise required by the Internal Revenue Service. Any disputes regarding the information provided by the parties will be resolved no later than June 1 of each year. 4. EXPERIENCE REFUND Details of any Experience Refund payable to the Ceding Company will be shown in Exhibit C. Section XI. (Experience Refund). ARTICLE VI - CHANGES TO THE REINSURANCE 1. ERRORS AND OVERSIGHTS Unintentional clerical errors, omissions or misunderstandings in the administration of the Agreement by the Ceding Company or any Pool Reinsurer shall not invalidate the reinsurance hereunder provided the error, omission or misunderstanding is corrected promptly after discovery. All parties shall be restored, to the extent possible, to the position they would have occupied had the error, omission or misunderstanding not occurred, but the liability of any Pool Reinsurer under this Agreement shall in no event exceed the limits specified herein. 2. MISSTATEMENT OF AGE OR SEX If the misstatement of the age or sex of a reinsured life causes an increase or reduction in the amount of insurance in the underlying policy, all parties will share in the change in proportion to their original liabilities at the time the policy was issued. 3. CHANGES TO THE UNDERLYING POLICY a) All changes. If any change is made to the underlying policy, the reinsurance will change accordingly. The Ceding Company will notify the Pool Reinsurers of the change and the appropriate premium adjustment on its periodic statement of account. b) Increases resulting from contractual provisions and policies, including policies in corridor, with increasing net amounts at risk will not be considered new business and will continue to be reinsured under this Agreement, subject to five (5) times the initial specified amount. Such increases will be reinsured on a point in scale basis utilizing the attained age reinsurance premiums. c) Increases in the death benefit of policies that are not currently reinsured, but on which we have kept our full retention, will also be reinsured on a point in scale basis utilizing the attained age reinsurance premiums, and will also be subject to five (5) times the Initial Specified Amount. d) All other increases are subject to approval of the Pool Reinsurers. Ceding Company will provide all Pool Reinsurers copies of all documents relating to the change in coverage. 4. REDUCTIONS, TERMINATIONS AND REINSTATEMENTS If any part of the underlying policy on a life reinsured under this Agreement is reduced or terminated, the amount reinsured will also be reduced or terminated to the extent that the Ceding Company will continue to maintain its appropriate retention limit as shown in Exhibit A for the issue age and table rating of the insured. The Ceding Company will not be required to assume amounts in excess of the retention limit that was in force when the affected policy was issued. Reductions or terminations to any one policy will neither affect nor change the Ceding Company's retention on existing policies covering the same insured life. The amount of the reduction will be applied on a proportional basis to each Pool Reinsurer's net amount at risk at the same proportion that the Pool Reinsurer's initial amount of reinsurance bore to the total initial amount reinsured. If a policy reinsured under this Agreement is lapsed or terminated, the reinsurance coverage will also terminate. If a policy reinsured automatically lapses and is reinstated in accordance with the Ceding Company's standard rules and procedures, reinsurance for the amount at risk effective at the time of the lapse will be reinstated automatically at the date of reinstatement of the policy. Otherwise, the Pool Reinsurer that bound the reinsurance initially must approve the reinstatement for facultative consideration. If the Pool Reinsurer assumes the risk, then the Ceding Company will reinstate the policy. The Ceding Company will provide the Pool Reinsurers with copies of reinstatement papers only upon request. The Ceding Company will notify the Pool Reinsurers of the reinstatement on its periodic statement of account, and it will pay all reinsurance payments due from the date of reinstatement to the date of the current statement of account, including a proportionate share of any interest collected. Thereafter, reinsurance payments will be in accordance with Article V. (Reinsurance Rates and Payments). ARTICLE VII - RECAPTURE 1. BASIS OF RECAPTURE If the Ceding Company increases its retention limits shown in Exhibit A, III. it may make a corresponding reduction in eligible reinsurance cessions. Policies are eligible for recapture if: a) the Ceding Company has maintained the maximum retention limit for the age and mortality rating of the insured when the underlying policy was issued. Policies on which the Ceding Company retained a reduced retention or no retention will not be eligible for recapture; and b) the policy has been in force under this Agreement for the Recapture Period shown in Exhibit C, Section IX. The recapture period will always be measured from the original policy issue date. 2. METHOD OF RECAPTURE The Ceding Company will give the Pool Reinsurers written notice of its intention to recapture within ninety (90) days of the effective date of the retention increase. If the Ceding Company elects to recapture at a later date, it will give the Pool Reinsurers additional written notice before beginning the recapture. When the Ceding Company has given the Pool Reinsurers written notice of intent to recapture, and the date that the recapture will begin: a) All eligible policies will be recaptured; b) Reinsurance will be reduced on the next anniversary date of each eligible policy; c) Reinsurance on each eligible policy will be reduced by an amount that will increase the Ceding Company's retention to the then current limit set forth in Exhibit A, as amended. d) If there is reinsurance in force in other reinsurers on any one insured life, the reduction of the reinsurance in force under this Agreement will be in the same proportion that the amount reinsured with the Pool Reinsurers bears to the total reinsurance coverage on the life, if the other reinsurance is eligible for recapture at the same time; e) If at the time of recapture the insured is disabled and premiums are being waived under any type of Disability Benefit Rider, only the life benefit will be recaptured. The reinsured portion of the Disability Benefit Rider will remain in force until the policy is returned to premium-paying status, at which time it will be eligible for recapture. If the Ceding Company omits or overlooks the recapture of any eligible policy or policies, the acceptance of reinsurance payments by the Pool Reinsurers after the date the recapture would have taken place will not cause the Pool Reinsurers to be liable for the amount of the risk that would have been recaptured. The Pool Reinsurers will be liable only for a refund of reinsurance payments received, without interest. If the Ceding Company's retention increase is due to its purchase by or purchase of another company, or its merger, assumption or any other affiliation with another company, no immediate recapture will be allowed. However, the Ceding Company may recapture eligible policies once the Recapture Period set out in Exhibit C, Section IX. has expired. ARTICLE VIII - CLAIMS 1. NOTICE OF CLAIM Subject to the provisions of Section 2 of this Article, the Ceding Company will notify the Pool Reinsurers promptly when it receives notice that a claim has been incurred on a policy reinsured under this Agreement, and it will also forward copies of the death certificate and the claimant's statement as each document becomes available. The Ceding Company will send copies of additional information on the claim, including copies of the application and underwriting papers, upon the request of any of the Pool Reinsurers. 2. SETTLEMENT OF CLAIMS For non-contestable claims on policies with face amounts of $1,500,000 or less, including compromises, the Pool Reinsurers will accept the good faith decision of the Ceding Company. The Ceding Company will consult with the Pool Reinsurers whenever the claim is incurred during the contestable period of the policy. However, the consultation will not impair the Ceding Company's freedom to determine the proper action on the claim and the settlement made by the Ceding Company will still be binding upon the Pool Reinsurers. For claims on policies with face amounts in excess of $1,500,000, the Lead Claim Reinsurer specified in Exhibit A will review the claim papers on behalf of the other Pool Reinsurers. The Ceding Company will consult with the Lead Claim Reinsurer before the Ceding Company makes any admission or acknowledgment of the validity of the claim. The action taken by the Lead Claim Reinsurer will be binding on the other Pool Reinsurers. Once the Pool Reinsurers have received the proofs cited in Section 1 of this Article, and upon evidence of the Ceding Company's settlement with the claimant, they will discharge their net reinsurance liability by paying one lump sum to the Ceding Company. The Pool Reinsurers will also reimburse the Ceding Company for any unearned premiums. The Ceding Company will consult with the Pool Reinsurers before conceding any liability or making any settlement with the claimant whenever the claim is incurred during the contestable period of the policy. However, the consultation will not impair the Ceding Company's freedom to determine the proper action on the claim and the settlement made by the Ceding Company will still be binding upon the Pool Reinsurers. Claim settlements will be administered in good faith, according to the standard procedures the Ceding Company applies to all claims, whether reinsured or not. 3. CONTESTED CLAIMS The Ceding Company will immediately notify the Pool Reinsurers if it intends to contest, compromise or litigate a claim involving reinsurance and will give each Pool Reinsurer an opportunity to review the claim papers. If any Pool Reinsurer prefers not to participate in the contest, compromise or claim litigation, that Pool Reinsurer will notify the Ceding Company of its decision within fifteen (15) days of its receipt of the claim papers, and that Pool Reinsurer will immediately pay the full amount of reinsurance due to the Ceding Company. Once the Pool Reinsurer has paid its reinsurance liability, it will not be liable for legal and/or investigative expenses, it will have no further liability for expenses associated with the contest, compromise or litigation and it will not share in any subsequent increase or reduction of the policy face amount. When the Pool Reinsurers agree to participate in a contest, compromise or claim litigation involving reinsurance, the Ceding Company will give each participating Pool Reinsurer prompt notice of the beginning of any legal proceedings involving the contested policy. The Ceding Company will promptly furnish the participating Pool Reinsurers with copies of all documents pertaining to a lawsuit or notice of intent to file a lawsuit by any of the claimants or parties to the policy. The participating Pool Reinsurers will share in the payment of legal or investigative expenses relating to a contested claim in the same proportion as their Net Amount at Risk bears to the Ceding Company's Net Amount at Risk. The participating Pool Reinsurers will not reimburse expenses associated with non-reinsured policies. If the contest, compromise or litigation results in a reduction in the liability of the contested policy, the participating Pool Reinsurers will share in the reduction in the same proportion that the amount reinsured with each Pool Reinsurer bore to the amount payable under the terms of the policy on the date of death of the insured. If the contest, compromise or litigation results in a dismissal of the claim and a return of the premium to the claimant and/or to the beneficiary(ies), the participating Pool Reinsurers will refund all premiums that the Ceding Company has paid to them. 4. CLAIM EXPENSES The Pool Reinsurers that have elected to participate in a contest, compromise or claim litigation will pay their proportionate share of the following expenses arising out of the settlement or litigation of a claim, providing that the expenses are reasonable: a) investigative expenses; b) outside legal counsel fees; c) penalties and interest imposed automatically by statute and rising solely out of a judgment rendered against the issuing company in a suit for policy benefits, so long as such penalties and interests do not compensate the Ceding Company for new elements of extra-contractual damages. d) interest paid to the claimant on death benefit proceeds according to the practices of the Ceding Company and either at the same rate as used by the Ceding Company, or at the rate prescribed by state law. The Pool Reinsurers' share of claim expenses will be in the same proportion that their liability bears to the liability of the Ceding Company. The Ceding Company will be responsible for payment of the following claim expenses, which are not considered items of "net reinsurance liability" as referenced in Section 2. of this Article: a) routine administrative expenses for the home office or elsewhere, including the salaries of the Ceding Company's employees; b) expenses incurred in connection with any dispute or contest arising out of a conflict in claims of entitlement to policy proceeds or benefits which the Ceding Company admits are payable. 5. EXTRA CONTRACTUAL DAMAGES The Pool Reinsurers will not be held liable for nor will they pay any extra contractual damages, including but not limited to consequential, compensatory, exemplary or punitive damages which are awarded against the Ceding Company or which may be paid voluntarily, in settlement of a dispute or claim where damages were awarded as the result of any direct or indirect act, omission or course of conduct undertaken by the Ceding Company, its agents or representatives, in connection with any aspect of the policies reinsured under this Agreement. Special circumstances may arise in which the Pool Reinsurers should participate to the extent permitted by law in certain assessed damages. These circumstances are difficult to describe or define in advance but could include those situations in which the Pool Reinsurers were an active party in the act, omission or course of conduct which ultimately resulted in the assessment of the damages. The extent of the participation of any of the Pool Reinsurers is dependent upon a good-faith assessment of the relative culpability in each case; but all factors being equal, the division of any such assessment would generally be in the same proportion of the net liability accepted by each party. ARTICLE IX - ARBITRATION 1. BASIS FOR ARBITRATION The parties to this Agreement mutually understand and agree that its wording and interpretation is based on the usual customs and practices of the insurance and reinsurance industry. While all parties mutually agree to act in good faith in dealings with each other, it is understood and recognized that situations may arise in which an agreement cannot be reached. In the event that any dispute cannot be resolved to the mutual satisfaction of the parties involved, the dispute will first be subject to good-faith negotiation as described below in an attempt to resolve the dispute without the need to institute formal arbitration proceedings. 2. NEGOTIATION Within ten (10) days after one of the parties to this Agreement has given the other the first written notification of the specific dispute, each party will appoint a designated officer to attempt to resolve the dispute. The officers will meet at a mutually agreeable location as early as possible and as often as necessary, in order to gather and furnish the other with all appropriate and relevant information concerning the dispute. The officers will discuss the problem and will negotiate in good faith without the necessity of any formal arbitration proceedings. During the negotiation process, all reasonable requests made by one officer to the other for information will be honored. The specific format for such discussions will be decided by the designated officers. If the officers cannot resolve the dispute within thirty (30) days of their first meeting, the parties agree that they will submit the dispute to formal arbitration. However, the parties may agree in writing to extend the negotiation period for an additional thirty (30) days. 3. ARBITRATION PROCEEDINGS No later than fifteen (15) days after the final negotiation meeting, the officers taking part in the negotiation will give the concerned parties written confirmation that they are unable to resolve the dispute and that they recommend establishment of formal arbitration. An arbitration panel consisting of three (3) past or present officers of life insurance or life reinsurance companies not affiliated with any of the parties to this Agreement in any way will settle the dispute. Each party will appoint one (1) arbitrator and the two (2) will select a third. If the two (2) arbitrators cannot agree on the choice of a third, the choice will be made by the Chairman of the American Arbitration Association. The arbitration proceedings will be conducted according to the Commercial Arbitration Rules of the American Arbitration Association which are in effect at the time the arbitration begins. The arbitration will take place at a site decided upon by the arbitrators unless the involved parties mutually agree otherwise. Within sixty (60) days after the arbitration proceedings have been concluded, the arbitrators will issue a written decision on the dispute and a statement of any award to be paid as a result. The decision will be based on the terms and conditions of this Agreement as well as the usual customs and practices of the insurance and reinsurance industry, rather than on strict interpretation of the law. The decision will be final and binding on the parties involved and there will be no further appeal, except that either party may petition any court having jurisdiction regarding the award rendered by the arbitrators. The parties involved in the arbitration may agree to extend any of the negotiation or arbitration periods shown in this Article. Unless otherwise decided by the arbitrators, the parties involved in the arbitration will share equally in all expenses resulting from the arbitration, including the fees and expenses of the arbitrators, except that each party will be responsible for its own attorneys' fees. ARTICLE X - INSOLVENCY 1. If the Ceding Company is judged insolvent, the Pool Reinsurers will pay all reinsurance under this Agreement directly to the Ceding Company, its liquidator, receiver or statutory successor on the basis of the Ceding Company's liability under the policy or policies reinsured without decrease because of the insolvency of the Ceding Company. It is understood, however, that in the event of the insolvency of the Ceding Company, its liquidator, receiver or statutory successor will give the Pool Reinsurers written notice of a pending claim on a policy reinsured within a reasonable time after the claim is filed in the insolvency proceedings. While the claim is pending, the Pool Reinsurers may investigate and interpose at their own expense in the proceedings where the claim is to be adjudicated, any defense which they may deem available to the Ceding Company, its liquidator, receiver or statutory successor. It is further understood that the expense incurred by the Pool Reinsurers will be chargeable, subject to court approval, against the Ceding Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Ceding Company solely as a result of the defense undertaken by the Ceding Company. Where two (2) or more Pool Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to the claim, the expenses will be apportioned in accordance with the terms of the Agreement as though the Ceding Company had incurred the expense. 2. If any of the Pool Reinsurers are judged insolvent, they will be considered in default under this Agreement. Amounts due to the insolvent Pool Reinsurer(s) will be paid directly to their liquidator, receiver or statutory successor without diminution because of insolvency of the Pool Reinsurer(s). 3. For the purpose of this Agreement, the Ceding Company or any of the Pool Reinsurers will be deemed insolvent under the following circumstances: a) When a cease and desist order or injunction has been issued by the commissioner or a court in that party's state or jurisdiction or domicile, ordering the party to cease and desist from transacting, soliciting or writing any new business of any kind and is reasonably expected to result in conservatorship, rehabilitation, receivership or liquidation; or b) When a court order is issued voluntarily or involuntarily placing a party into conservatorship, rehabilitation, receivership or liquidation, or appointing a conservator, rehabilitator, receiver or liquidator to take over the business of the party; or c) When a party files or consents to the filing of a petition in bankruptcy, seeks reorganization or an arrangement with creditors or takes advantage of any bankruptcy, dissolution, liquidation or similar law or statute. ARTICLE XI - INSPECTION OF RECORDS 1. INSPECTION OF RECORDS Any party to this Agreement will have the right at any reasonable time to inspect the papers, records, books, files or other documents relating directly or indirectly to the reinsurance coverage under this Agreement. ARTICLE XII - OFFSET 1. The Ceding Company and any of the Pool Reinsurers will have, and may exercise at any time, the right to offset mutually agreed-to balances due one party from the other against mutually agreed-to balances due the other party. The right of offset is limited to balances due under this Agreement. Subject to state regulations, the right of offset will not be affected nor diminished because of the insolvency of the parties to this Agreement. ARTICLE XIII - EXECUTION OF THE AGREEMENT In witness whereof, the parties hereto have caused this Agreement to be executed in duplicate at the dates and places shown below, by their respective officers duly authorized to do so. WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO By: _________________________________ Attest: __________________________ Title: ______________________________ Title: ___________________________ Date: _______________________________ Date: ____________________________ TRANSAMERICA LIFE INSURANCE COMPANY By: _________________________________ Attest: __________________________ Title: ______________________________ Title: ___________________________ Date: _______________________________ Date: ____________________________ EMPLOYERS REASSURANCE CORPORATION By: _________________________________ Attest: __________________________ Title: ______________________________ Title: ___________________________ Date: _______________________________ Date: ____________________________ THE LINCOLN NATIONAL LIFE INSURANCE COMPANY By: _________________________________ Attest: __________________________ Title: ______________________________ Title: ___________________________ Date: _______________________________ Date: ____________________________ GENERAL & COLOGNE LIFE RE OF AMERICA By: _________________________________ Attest: __________________________ Title: ______________________________ Title: ___________________________ Date: _______________________________ Date: ____________________________ TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY By: _________________________________ Attest: __________________________ Title: ______________________________ Title: ___________________________ Date: _______________________________ Date: ____________________________ AMENDMENT NO. 1 AUTOMATIC POOL REINSURANCE AGREEMENT BETWEEN WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO TRANSAMERICA LIFE INSURANCE COMPANY AND EMPLOYERS REASSURANCE CORPORATION GENERAL & COLOGNE LIFE RE OF AMERICA TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY THE LINCOLN NATIONAL LIFE INSURANCE Except as hereinafter specified, all terms and conditions of the Automatic and Facultative Reinsurance Agreement effective the 30th day of September, 2000, amendments and addenda attached thereto, shall apply, and this Amendment is to be attached to and made a part of the aforesaid Agreement. It is mutually agreed that: Effective July 1, 2001, EXHIBIT A, Retention Schedule of Western Reserve Life, is revised as attached. IN WITNESS WHEREOF, the Company and the Reinsurer have caused their names to be subscribed and duly attested hereunder by their respective Authorized Officers: WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ TRANSAMERICA LIFE INSURANCE COMPANY BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ EMPLOYERS REASSURANCE CORPORATION BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ GENERAL & COLOGNE LIFE RE OF AMERICA BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ THE LINCOLN NATIONAL LIFE INSURANCE BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ AMENDMENT NO. 2 AUTOMATIC POOL REINSURANCE AGREEMENT BETWEEN WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO TRANSAMERICA LIFE INSURANCE COMPANY AND EMPLOYERS REASSURANCE CORPORATION GENERAL & COLOGNE LIFE RE OF AMERICA TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY THE LINCOLN NATIONAL LIFE INSURANCE Except as hereinafter specified, all terms and conditions of the Automatic and Facultative Reinsurance Agreement effective the 30th day of September, 2000, amendments and addenda attached thereto, shall apply, and this Amendment is to be attached to and made a part of the aforesaid Agreement. It is mutually agreed that: Effective July 1, 2001, EXHIBIT A, AUTOMATIC ACCEPTANCE LIMITS and EXCLUSION TO AUTOMATIC REINSURANCE COVERAGE, "Jumbo Coverage Limits" are revised as attached. IN WITNESS WHEREOF, the Ceding Company and the Pool Reinsurer have caused their names to be subscribed and duly attested hereunder by their respective Authorized Officers: WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ TRANSAMERICA LIFE INSURANCE COMPANY BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ EMPLOYERS REASSURANCE CORPORATION BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ GENERAL & COLOGNE LIFE RE OF AMERICA BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ THE LINCOLN NATIONAL LIFE INSURANCE BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ AMENDMENT NO. 3 AUTOMATIC POOL REINSURANCE AGREEMENT BETWEEN WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO TRANSAMERICA LIFE INSURANCE COMPANY AND EMPLOYERS REASSURANCE CORPORATION GENERAL & COLOGNE LIFE RE OF AMERICA TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY THE LINCOLN NATIONAL LIFE INSURANCE SCOR LIFE U.S. REINSURANCE COMPANY Except as hereinafter specified, all terms and conditions of the Automatic and Facultative Reinsurance Agreement effective the 30th day of September, 2000, amendments and addenda attached thereto, shall apply, and this Amendment is to be attached to and made a part of the aforesaid Agreement. It is mutually agreed that: Effective August 1, 2001, EXHIBIT A, I. REINSURANCE COVERAGE is revised as attached. IN WITNESS WHEREOF, the Company and the Reinsurer have caused their names to be subscribed and duly attested hereunder by their respective Authorized Officers: WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ TRANSAMERICA LIFE INSURANCE COMPANY BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ EMPLOYERS REASSURANCE CORPORATION BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ GENERAL & COLOGNE LIFE RE OF AMERICA BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ THE LINCOLN NATIONAL LIFE INSURANCE BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ SCOR RE LIFE U.S. REINSURANCE COMPANY BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ AMENDMENT NO. 4 AUTOMATIC POOL REINSURANCE AGREEMENT BETWEEN WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO AND ERC LIFE REINSURANCE CORPORATION GENERAL & COLOGNE LIFE RE OF AMERICA SWISS RE LIFE & HEALTH AMERICA, INC. BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA SCOR LIFE U.S. RE INSURANCE COMPANY Effective January 1, 2003, provisions of this Agreement are extended to cover reinsurance on the WRL Freedom Elite Advisor and WRL Freedom Elite Builder Associates and their riders sold through Western Reserve Life Assurance Co. of Ohio All other provisions of the Agreement not in conflict with the provisions of this Amendment will continue unchanged. IN WITNESS THEREOF, the parties hereto have caused their names to be subscribed and duly attested hereunder by their respective Authorized Officers: WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO BY: _________________________________ ATTEST: _________________________ TITLE: VP & MANAGING ACTUARY TITLE: VP & MANAGING ACTUARY DATE: DATE: ERC LIFE REINSURANCE CORPORATION BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ GENERAL & COLOGNE LIFE RE OF AMERICA BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ SWISS RE LIFE & HEALTH AMERICA, INC. BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ SCOR LIFE U.S. RE INSURANCE COMPANY BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ AMENDMENT NO. 5 AUTOMATIC POOL REINSURANCE AGREEMENT BETWEEN WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO AND ERC LIFE REINSURANCE CORPORATION GENERAL & COLOGNE LIFE RE OF AMERICA TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY THE LINCOLN NATIONAL LIFE INSURANCE SCOR LIFE U.S. REINSURANCE COMPANY Except as hereinafter specified, all terms and conditions of the Automatic and Facultative Reinsurance Agreement effective the 30th day of September, 2000, amendments and addenda attached thereto, shall apply, and this Amendment is to be attached to and made a part of the aforesaid Agreement. It is mutually agreed that: Effective July 1, 2002, EXHIBIT A, UNDERWRITING GUIDELINES, are revised as attached. Article I, Section 5, "Definitions", is revised as attached. Article III, Section 2, "Regular Facultative Reinsurance" subsection, is revised as attached. Article IV, Section 5, "Adjustable Term Insurance Rider (ATIR) Liability, is revised as attached. Article VIII - Claims, 2. Settlement of Claims, is also revised as attached. IN WITNESS WHEREOF, the Ceding Company and the Pool Reinsurer have caused their names to be subscribed and duly attested hereunder by their respective Authorized Officers: WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO BY: _________________________________ ATTEST: __________________________ TITLE: VP & MANAGING ACTUARY TITLE: VP & MANAGING ACTUARY DATE: SEPTEMBER 11, 2002 DATE: SEPTEMBER 11, 2002 EMPLOYERS REASSURANCE CORPORATION BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ GENERAL & COLOGNE LIFE RE OF AMERICA BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ THE LINCOLN NATIONAL LIFE INSURANCE BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ SCOR RE LIFE U.S. REINSURANCE COMPANY BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ AUTOMATIC POOL REINSURANCE AGREEMENT referred to in this Document as the "Agreement" EFFECTIVE JULY 1, 2001 among WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO referred to in this Agreement as the "Ceding Company" and EMPLOYERS REASSURANCE CORPORATION GENERAL & COLOGNE LIFE RE OF AMERICA THE LINCOLN NATIONAL LIFE INSURANCE COMPANY SWISS RE LIFE & HEALTH AMERICA, INC. collectively referred to in this Agreement as the "Pool Reinsurers" TABLE OF CONTENTS Article I Scope of the Agreement Page 1 Parties to the Agreement Effective Date of the Agreement Scope of the Agreement Duration of the Agreement Article II Reinsurance Coverage Page 2 Automatic Reinsurance Facultative Reinsurance Basis of Reinsurance Article III Procedures Page 4 Article IV Liability Page 6 Article V Reinsurance Rates and Payments Page 6 Tax Reimbursement Experience Refund Article VI Changes to the Reinsurance Page 9 Errors and Oversights Misstatement of Age or Sex Changes to the Underlying Policy Reductions, Terminations and Reinstatements Article VII Recapture Page 11 Article VIII Claims Page 12 Article IX Arbitration Page 16 Article X Insolvency Page 18 Article XI Inspection of Records Page 19 Article XII Offset Page 19 Article XIII Execution of the Agreement Page 20
EXHIBITS Exhibit A Reinsurance Coverage Retention Limits Automatic Acceptance Limits Exclusions to Automatic Reinsurance Coverage, including Jumbo Limits Exhibit B Administration and Reporting Forms Exhibit C Rates and Allowances Net Amount at Risk Calculation Exhibit D Conditional Receipt
ARTICLE I - SCOPE OF THE AGREEMENT 1. PARTIES TO THE AGREEMENT The Ceding Company and the Pool Reinsurers mutually agree to transact reinsurance business according to the terms of this Agreement. This Agreement is for indemnity reinsurance and the Ceding Company and the Pool Reinsurers are the only parties to the Agreement. There will be no right or legal relationship whatsoever between the Pool Reinsurers and any other person having an interest of any kind in policies reinsured under this Agreement. 2. FORM OF REINSURANCE The form of reinsurance shall be First Dollar Quota Share. 3. EFFECTIVE DATE OF THE AGREEMENT This Agreement will go into effect at 12:01 A.M., July 1, 2001 and will cover policies shown in Exhibit A with an issue date of July 1, 2001 and thereafter. 4. SCOPE OF THE AGREEMENT The text of this Agreement and all Exhibits, Schedules and Amendments are considered to be the entire agreement. There are no other understandings or agreements regarding the policies reinsured other than as expressed in this Agreement. Either the Ceding Company or any of the Pool Reinsurers may make changes or additions to this Agreement, but they will not be considered to be in effect unless they are made by means of a written amendment which has been signed by all parties. The Retention Limits and Binding Limits of the Ceding Company as shown in Exhibit A are based only on the amounts of insurance administered by the administrative office of Aegon USA in St Petersburg, Florida and/or by any third party administrator administering insurance on behalf of this administrative office. 5. DURATION OF THE AGREEMENT The duration of this Agreement will be unlimited. However, any of the Pool Reinsurers may terminate their participation in the Agreement for new reinsurance at any time by giving the Ceding Company ninety (90) days prior written notice. The Ceding Company may terminate the entire Pool or the participation of any Pool Reinsurer by giving ninety (90) days prior written notice. Reinsurance will continue to be placed during the ninety-day period. The Ceding Company has the right, upon termination of any Pool Reinsurer under this Agreement, to re-allocate the Pool Reinsurer Percentages among the remaining Pool Reinsurers upon Pool Reinsurers consent, or to name a new Pool Reinsurer to the Agreement. Existing reinsurance will not be affected by the termination of this Agreement or by the termination of the participation of any of the Pool Reinsurers for new reinsurance. Existing reinsurance will remain in force until the termination or expiry of the underlying policy on which reinsurance is based, as long as the Ceding Company complies with this Agreement and continues to pay reinsurance premiums as shown in Article V (Reinsurance Rates and Payment). The Pool Reinsurers will accept liability for any claims or premium refunds which are not reported to them within ninety (90) days following the termination or expiry of the last cession reinsured under this Agreement, provided that the Ceding Company has taken prompt and reasonable action to identify those claims. 6. DEFINITIONS INITIAL SPECIFIED AMOUNT: AMOUNT shown on the Policy Schedule page of the life insurance contract. POOL REINSURER PERCENTAGE: Reinsurer's percentage of risk on Automatic Reinsurance and Special Pool Facultative Reinsurance. PARTICIPATION PERCENTAGE: PERCENTAGE that the facultative reinsurer agrees to reinsure on Regular Facultative Reinsurance. ARTICLE II - REINSURANCE COVERAGE 1. AUTOMATIC REINSURANCE The Pool Reinsurers will automatically accept reinsurance of life benefits for individually underwritten ordinary life policies on the lives of permanent residents of the United States or United States Territories in accordance with the provisions and limitations shown in Exhibit A. The Pool Reinsurers will also automatically accept reinsurance of riders and supplementary benefits written with the covered life benefits, but only to the extent that the riders and supplementary benefits are specifically shown in Exhibit A, Part I. The Ceding Company has the right to modify its retention limits shown in Exhibit A, Part II at any time. If the retention limits are reduced, the Ceding Company will notify the Pool Reinsurers in writing before reinsurance can be ceded on the basis of the reduced retention limits. The Pool Reinsurers have the right to amend the Automatic Acceptance Limits shown in Exhibit A, Part III if the Ceding Company modifies its retention limits. The Pool Reinsurers also have the right to modify the Automatic Acceptance Limits if the Ceding Company elects to participate in another arrangement or arrangements to secure additional automatic binding capacity. However, the Pool Reinsurers must exercise their option to amend the Automatic Acceptance Limits within ninety (90) days of notification of the change in retention limits or the placement of additional automatic binding capacity. 2. FACULTATIVE REINSURANCE Applications for reinsurance of amounts in excess of the Automatic Acceptance Limits, and any risks which the Ceding Company does not care to cede automatically or may not be so ceded under the terms of this Agreement, may be submitted to the Lead Facultative Reinsurer specified in Exhibit A for facultative consideration either as the Lead Facultative Reinsurer for the Pool Reinsurers or as an independent reinsurer, as described in Article III. Procedures below. If the Ceding Company determines to replace the Lead Facultative Reinsurer, it will be necessary to appoint a replacement Lead Facultative Reinsurer and such replacement will be appointed by the Ceding Company. The Ceding Company will notify all Pool Reinsurers thirty (30) days prior to the assignment of the new Lead Facultative Reinsurer. 3. FACULTATIVE REINSURANCE OUTSIDE THIS AGREEMENT The Ceding Company retains the right to reinsure facultatively with any reinsurer who is not a Pool Reinsurer. In such case, the risk shall not be covered under this Agreement. The Ceding Company will attempt to place business facultatively outside this Agreement only after having failed to obtain desired facultative reinsurance from among the Pool Reinsurers. 4. BASIS OF REINSURANCE Life reinsurance under this Agreement will be on the Monthly Renewable Term plan for the net amount at risk on the portion of the original policy that is reinsured into the Pool. The net amount at risk for any policy period will be calculated according to Exhibit C (Reinsurance Rates and Allowances), Part I. Riders or supplementary benefits ceded with life benefits will be reinsured as shown in Exhibit C. Any differences in the net amount at risk calculation for these benefits will be shown in Exhibit C. ARTICLE III - PROCEDURES 1. AUTOMATIC REINSURANCE Individual notification for the placement of automatic reinsurance will not be necessary. Subject to Article V (Reinsurance Rates and Payment) and Exhibit B (Reinsurance Reporting Forms and Reinsurance Administration), new business or changes to existing reinsurance will be shown on the Ceding Company's periodic billing report. 2. FACULTATIVE REINSURANCE INSIDE THIS AGREEMENT SPECIAL POOL FACULTATIVE REINSURANCE. If a case is submitted to the Lead Facultative Reinsurer for the Pool Reinsurers for facultative consideration, the Lead Facultative Reinsurer can authorize the Ceding Company to cede to the Pool Reinsurers the excess, if any, over the Ceding Company's regular retention for the risk amounts described in Exhibit A, IV. The Lead Facultative Reinsurer can authorize the Ceding Company to cede to the Pool Reinsurers their respective Pool Reinsurer Percentage shown in Exhibit A. Submissions cannot be made to the Lead Facultative Reinsurer on cases submitted facultatively to other reinsurers, including other Pool Reinsurers, nor when the amount applied for and in force with all companies exceeds the Jumbo Coverage Limit as identified in Exhibit A, V.2. When submitting a case to the Lead Facultative Reinsurer, the Ceding Company will indicate whether it is asking the Lead Facultative Reinsurer to act as Lead Facultative Reinsurer for the Pool Reinsurers or as an independent reinsurer. The Ceding Company will submit to the Lead Facultative Reinsurer copies of the original application, the complete underwriting file and all other information the Ceding Company may have pertaining to the insurability of the risk. The Lead Facultative Reinsurer shall promptly communicate an offer of reinsurance on the risk to the Ceding Company. The Lead Facultative Reinsurer's evaluation of the case will be used to issue the case and to bind all Pool Reinsurers. When a policy is placed in force on which reinsurance is to be ceded to the Pool Reinsurers, the Ceding Company will notify the Pool Reinsurers that the reinsurance has been effected by including an entry on the Ceding Company's next periodic billing report. REGULAR FACULTATIVE REINSURANCE. If the amount of reinsurance required is in excess of the Ceding Company's regular retention or if the case is being or has been submitted to other reinsurers for facultative consideration, the Special Pool Facultative Reinsurance coverage does not apply. Such cases may be submitted to the Lead Facultative Reinsurer for its own account independent of the Pool Reinsurers. On such cases, if the Lead Facultative Reinsurer makes an offer to reinsure the risk, the Ceding Company must accept the offer during the lifetime of the proposed insured, but not later than one hundred twenty days after the offer is made, to effect the reinsurance. The Company's acceptance of the Lead Facultative Reinsurer's offer will be documented by a dated notation in the Ceding Company's underwriting file and subsequent formal notice to the Lead Facultative Reinsurer. 3. REFERENCE MATERIALS Upon request and subject to availability, the Ceding Company will use its best efforts to obtain reference materials which may be required by the Pool Reinsurers for proper administration of reinsurance under this Agreement. ARTICLE IV - LIABILITY 1. AUTOMATIC REINSURANCE Subject to the provisions of Article VI, Section 4 and Article VII, the liability of the Pool Reinsurers for reinsurance placed automatically under this Agreement will begin and end simultaneously with that of the Ceding Company for the underlying policy on which reinsurance is based. 2. FACULTATIVE REINSURANCE The liability of the Pool Reinsurers (when the Lead Facultative Reinsurer is acting on behalf of the Pool Reinsurers) shall commence simultaneously with that of the Ceding Company provided the Ceding Company has accepted, during the lifetime of the insured and within one hundred twenty (120) days of the offer, a facultative offer made by the Lead Facultative Reinsurer on that life. The liability of a Pool Reinsurer acting as an independent reinsurer shall commence simultaneously with that of the Ceding Company provided the Ceding Company has accepted, during the lifetime of the insured and within one hundred twenty (120) days of the offer, a facultative offer made by the Pool Reinsurer on that life. 3. CONDITIONAL RECEIPT LIABILITY The Pool Reinsurers will be liable for losses under the terms of a Conditional Receipt or Temporary Insurance Receipt to the extent that the Ceding Company is liable. 4. CONTINUATION OF LIABILITY Continuation of the Pool Reinsurers' liability is conditioned on the Ceding Company's payment of reinsurance premiums as shown in Article V (Reinsurance Rates and Payment) and is subject to Article VI (Changes to the Reinsurance) and Article VII (Recapture). ARTICLE V - REINSURANCE RATES AND PAYMENTS 1. REINSURANCE RATES The rates that the Ceding Company will pay to the Pool Reinsurers for reinsurance covered under this Agreement are shown in Exhibit C. The reinsurance rate payable for any cession for any accounting period will be calculated on the basis of the net amount at risk reinsured as of that period. For reasons relating to deficiency reserve requirements by the various state insurance departments, the rates shown in Exhibit C cannot be guaranteed for more than one year. While all parties anticipate that reinsurance rates shown in Exhibit C will continue to be charged, it may become necessary to charge a guaranteed rate that is the greater of the rate from Exhibit C or the corresponding statutory net premium rate based on the required statutory valuation mortality table at 4.5% interest for the applicable mortality rating. If the original policy is issued with interim insurance, the Ceding Company will pay the Pool Reinsurers a reinsurance rate for the interim period that is the same percentage of the first year premium that the interim period bears to twelve (12) months. The rate that the Ceding Company pays the Pool Reinsurers for the first policy year after the interim period will be calculated on the basis of the full annual reinsurance rate. All financial transactions under this Agreement will be in United States dollars, unless the parties mutually agree to use other currencies. Specifications of the currencies and details of currency conversion procedures will be shown in Exhibit C, if necessary. 2. PAYMENTS The Ceding Company will be responsible for administration of the periodic reporting of its statements of account and payment of balances due to the Pool Reinsurers as shown in Exhibit B. Within thirty (30) days after the close of each reporting period, the Ceding Company will send each Pool Reinsurer a statement of account for that period along with payment of the full balance due. If the statement of account shows a balance due the Ceding Company, each Pool Reinsurer will remit the appropriate amount within thirty (30) days of receipt of the statement of account. In order to eliminate reporting of trivial amounts, the Ceding Company will send statements of account to the Pool Reinsurers monthly, but will only send payment when the total balance due equals or exceeds $100.00. The Ceding Company's timely payment of reinsurance premiums is a condition precedent to the continued liability of the Pool Reinsurers. If the Ceding Company has not paid the balance due to the Pool Reinsurers by the thirty-first (31st) day following the close of the reporting period, the Pool Reinsurers have the right to give thirty (30) days' written notice of their intention to terminate the reinsurance on which the balance is due and unpaid. At the end of this thirty (30) day period, the liability of the Pool Reinsurers will automatically terminate for all reinsurance on which balances remain due and unpaid, including reinsurance on which balances became due and unpaid during and after the thirty-day notice period. Even though reinsurance has been terminated, the Ceding Company will continue to be liable for the payment of unpaid balances along with interest charges equivalent to the 30 Day Treasury Bill rate as published in the Money Rate Section or any successor section of The Wall Street Journal on the first business day following the date the premiums are deemed delinquent. Reinsurance terminated for non-payment of balances due may be reinstated at any time within sixty (60) days of the date of termination, by the Ceding Company's payment of all balances due and interest charged in full to the Pool Reinsurers. However, the Pool Reinsurers will have no liability for claims incurred between the termination date and the reinstatement date. 3. TAX REIMBURSEMENTS Details of any reimbursement of premium taxes that the Ceding Company pays on behalf of reinsurance payments to the Pool Reinsurers are shown in Exhibit C, Section VIII. (Premium Taxes). The parties mutually agree to the following pursuant to Section 1.848-2 (g) (8) of the Income Tax Regulation issued December 29, 1992 under Section 848 of the Internal Revenue Code of 1986, as amended. This election will be effective for all taxable years for which this Agreement remains in effect. The terms used in this Section are defined in Regulation Section 1.848-2 in effect as of December 29, 1992. The term "net consideration" will refer to either net consideration as defined in Section 1.848-2 (f) or "gross premium and other consideration" as defined in Section 1.848-3 (b), as appropriate. a) The party with the net positive consideration for this Agreement for each taxable year will capitalize specified policy acquisition expenses with respect to this Agreement without regard to the General Deductions Limitation of IRC Section 848 (c) (1). b) The parties mutually agree to exchange information pertaining to the amount of net consideration under this Agreement by May 1 of each year to ensure consistency. The parties also mutually agree to exchange information otherwise required by the Internal Revenue Service. Any disputes regarding the information provided by the parties will be resolved no later than June 1 of each year. 4. EXPERIENCE REFUND Details of any Experience Refund payable to the Ceding Company will be shown in Exhibit C. Section XI. (Experience Refund). ARTICLE VI - CHANGES TO THE REINSURANCE 1. ERRORS AND OVERSIGHTS Unintentional clerical errors, omissions or misunderstandings in the administration of the Agreement by the Ceding Company or any Pool Reinsurer shall not invalidate the reinsurance hereunder provided the error, omission or misunderstanding is corrected promptly after discovery. All parties shall be restored, to the extent possible, to the position they would have occupied had the error, omission or misunderstanding not occurred, but the liability of any Pool Reinsurer under this Agreement shall in no event exceed the limits specified herein. 2. MISSTATEMENT OF AGE OR SEX If the misstatement of the age or sex of a reinsured life causes an increase or reduction in the amount of insurance in the underlying policy, all parties will share in the change in proportion to their original liabilities at the time the policy was issued. 3. CHANGES TO THE UNDERLYING POLICY a) All changes. If any change is made to the underlying policy, the reinsurance will change accordingly. The Ceding Company will notify the Pool Reinsurers of the change and the appropriate premium adjustment on its periodic statement of account. b) Increases resulting from contractual provisions and policies, including policies in corridor, with increasing net amounts at risk will not be considered new business and will continue to be reinsured under this Agreement. Such increases will be reinsured on a point in scale basis utilizing the attained age reinsurance premiums. c) Increases in the death benefit of policies that are not currently reinsured, but on which we have kept our full retention, will also be reinsured on a point in scale basis utilizing the attained age reinsurance premiums. d) All other increases up to the Automatic Binding Limit do not require the Pool Reinsurers' approval. Increases that would result in the total Net Amount of Risk exceeding the Automatic Binding Limits at the attained age of the insured are subject to the approval of any Pool Reinsurer prior to such Pool Reinsurer being bound. The Ceding Company will provide the Pool Reinsurer copies of all documents relating to the change in coverage. 4. REDUCTIONS, TERMINATIONS AND REINSTATEMENTS If any part of the underlying policy on a life reinsured under this Agreement is reduced or terminated, the amount reinsured will also be reduced or terminated to the extent that the Ceding Company will continue to maintain its appropriate retention limit as shown in Exhibit A for the issue age and table rating of the insured. The Ceding Company will not be required to assume amounts in excess of the retention limit that was in force when the affected policy was issued. Reductions or terminations to any one policy will neither affect nor change the Ceding Company's retention on existing policies covering the same insured life. The amount of the reduction will be applied on a proportional basis to each Pool Reinsurer's net amount at risk at the same proportion that the Pool Reinsurer's initial amount of reinsurance bore to the total initial amount reinsured. If a policy reinsured under this Agreement is lapsed or terminated, the reinsurance coverage will also terminate. If a policy reinsured automatically lapses and is reinstated in accordance with the Ceding Company's standard rules and procedures, reinsurance for the amount at risk effective at the time of the lapse will be reinstated automatically at the date of reinstatement of the policy. Otherwise, the Pool Reinsurer that bound the reinsurance initially must approve the reinstatement for facultative consideration. If the Pool Reinsurer assumes the risk, then the Ceding Company will reinstate the policy. The Ceding Company will provide the Pool Reinsurers with copies of reinstatement papers only upon request. The Ceding Company will notify the Pool Reinsurers of the reinstatement on its periodic statement of account, and it will pay all reinsurance payments due from the date of reinstatement to the date of the current statement of account, including a proportionate share of any interest collected. Thereafter, reinsurance payments will be in accordance with Article V. (Reinsurance Rates and Payments). ARTICLE VII - RECAPTURE 1. BASIS OF RECAPTURE If the Ceding Company increases its retention limits shown in Exhibit A, II. it may make a corresponding reduction in eligible reinsurance cessions. Policies are eligible for recapture if: a) the Ceding Company has maintained the maximum retention limit for the age and mortality rating of the insured when the underlying policy was issued. Policies on which the Ceding Company retained a reduced retention or no retention will not be eligible for recapture; and b) the policy has been in force under this Agreement for the Recapture Period shown in Exhibit C, Section IX. The recapture period will always be measured from the original policy issue date. 2. METHOD OF RECAPTURE The Ceding Company will give the Pool Reinsurers written notice of its intention to recapture within ninety (90) days of the effective date of the retention increase. If the Ceding Company elects to recapture at a later date, it will give the Pool Reinsurers additional written notice before beginning the recapture. When the Ceding Company has given the Pool Reinsurers written notice of intent to recapture, and the date that the recapture will begin: a) All eligible policies will be recaptured; b) Reinsurance will be reduced on the next anniversary date of each eligible policy; c) Reinsurance on each eligible policy will be reduced by an amount that will increase the Ceding Company's retention to the then current limit set forth in Exhibit A, as amended. d) If there is reinsurance in force in other reinsurers on any one insured life, the reduction of the reinsurance in force under this Agreement will be in the same proportion that the amount reinsured with the Pool Reinsurers bears to the total reinsurance coverage on the life, if the other reinsurance is eligible for recapture at the same time; e) If at the time of recapture the insured is disabled and premiums are being waived under any type of Disability Benefit Rider, only the life benefit will be recaptured. The reinsured portion of the Disability Benefit Rider will remain in force until the policy is returned to premium-paying status, at which time it will be eligible for recapture. If the Ceding Company omits or overlooks the recapture of any eligible policy or policies, the acceptance of reinsurance payments by the Pool Reinsurers after the date the recapture would have taken place will not cause the Pool Reinsurers to be liable for the amount of the risk that would have been recaptured. The Pool Reinsurers will be liable only for a refund of reinsurance payments received, without interest. If the Ceding Company's retention increase is due to its purchase by or purchase of another company, or its merger, assumption or any other affiliation with another company, no immediate recapture will be allowed. However, the Ceding Company may recapture eligible policies once the Recapture Period set out in Exhibit C, Section IX. has expired. ARTICLE VIII - CLAIMS 1. NOTICE OF CLAIM Subject to the provisions of Section 2 of this Article, the Ceding Company will report the claims on a bulk basis for policies with face amounts less than $1,750,000. The Ceding Company will notify the Pool Reinsurers promptly when it receives notice that a claim with a face amount of $1,750,000 or greater has been incurred on a policy reinsured under this Agreement, and it will also forward copies of the death certificate and the claimant's statement as each document becomes available. The Ceding Company will send copies of additional information on the claim, including copies of the application and underwriting papers, upon the request of any of the Pool Reinsurers. 2. SETTLEMENT OF CLAIMS For non-contestable claims on policies with face amounts of $1,750,000 or less, including compromises, the Pool Reinsurers will accept the good faith decision of the Ceding Company. The Ceding Company will consult with the Pool Reinsurers whenever the claim is incurred during the contestable period of the policy. However, the consultation will not impair the Ceding Company's freedom to determine the proper action on the claim and the settlement made by the Ceding Company will still be binding upon the Pool Reinsurers. For claims on policies with face amounts in excess of $1,750,000, the Lead Claim Reinsurer specified in Exhibit A will review the claim papers on behalf of the other Pool Reinsurers. The Ceding Company will consult with the Lead Claim Reinsurer before the Ceding Company makes any admission or acknowledgment of the validity of the claim. The action taken by the Lead Claim Reinsurer will be binding on the other Pool Reinsurers. Once the Pool Reinsurers have received the proofs cited in Section 1 of this Article, and upon evidence of the Ceding Company's settlement with the claimant, they will discharge their net reinsurance liability by paying one lump sum to the Ceding Company. The Pool Reinsurers will also reimburse the Ceding Company for any unearned premiums. The Ceding Company will consult with the Pool Reinsurers before conceding any liability or making any settlement with the claimant whenever the claim is incurred during the contestable period of the policy. However, the consultation will not impair the Ceding Company's freedom to determine the proper action on the claim and the settlement made by the Ceding Company will still be binding upon the Pool Reinsurers. Claim settlements will be administered in good faith, according to the standard procedures the Ceding Company applies to all claims, whether reinsured or not. 3. CONTESTED CLAIMS The Ceding Company will immediately notify the Pool Reinsurers if it intends to contest, compromise or litigate a claim involving reinsurance and will give each Pool Reinsurer an opportunity to review the claim papers. If any Pool Reinsurer prefers not to participate in the contest, compromise or claim litigation, that Pool Reinsurer will notify the Ceding Company of its decision within fifteen (15) days of its receipt of the claim papers, and that Pool Reinsurer will immediately pay the full amount of reinsurance due to the Ceding Company. Once the Pool Reinsurer has paid its reinsurance liability, it will not be liable for legal and/or investigative expenses, it will have no further liability for expenses associated with the contest, compromise or litigation and it will not share in any subsequent increase or reduction of the policy face amount. When the Pool Reinsurers agree to participate in a contest, compromise or claim litigation involving reinsurance, the Ceding Company will give each participating Pool Reinsurer prompt notice of the beginning of any legal proceedings involving the contested policy. The Ceding Company will promptly furnish the participating Pool Reinsurers with copies of all documents pertaining to a lawsuit or notice of intent to file a lawsuit by any of the claimants or parties to the policy. The participating Pool Reinsurers will share in the payment of legal or investigative expenses relating to a contested claim in the same proportion as their Net Amount at Risk bears to the Ceding Company's Net Amount at Risk. The participating Pool Reinsurers will not reimburse expenses associated with non-reinsured policies. If the contest, compromise or litigation results in a reduction in the liability of the contested policy, the participating Pool Reinsurers will share in the reduction in the same proportion that the amount reinsured with each Pool Reinsurer bore to the amount payable under the terms of the policy on the date of death of the insured. If the contest, compromise or litigation results in a dismissal of the claim and a return of the premium to the claimant and/or to the beneficiary(ies), the participating Pool Reinsurers will refund all premiums that the Ceding Company has paid to them. 4. CLAIM EXPENSES The Pool Reinsurers that have elected to participate in a contest, compromise or claim litigation will pay their proportionate share of the following expenses arising out of the settlement or litigation of a claim, providing that the expenses are reasonable: a) investigative expenses; b) outside legal counsel fees; c) penalties and interest imposed automatically by statute and rising solely out of a judgment rendered against the issuing company in a suit for policy benefits, so long as such penalties and interests do not compensate the Ceding Company for new elements of extra-contractual damages. d) interest paid to the claimant on death benefit proceeds according to the practices of the Ceding Company and either at the same rate as used by the Ceding Company, or at the rate prescribed by state law. The Pool Reinsurers' share of claim expenses will be in the same proportion that their liability bears to the liability of the Ceding Company. The Ceding Company will be responsible for payment of the following claim expenses, which are not considered items of "net reinsurance liability" as referenced in Section 2. of this Article: a) routine administrative expenses for the home office or elsewhere, including the salaries of the Ceding Company's employees; b) expenses incurred in connection with any dispute or contest arising out of a conflict in claims of entitlement to policy proceeds or benefits which the Ceding Company admits are payable. 5. EXTRA CONTRACTUAL DAMAGES The Pool Reinsurers will not be held liable for nor will they pay any extra contractual damages, including but not limited to consequential, compensatory, exemplary or punitive damages which are awarded against the Ceding Company or which may be paid voluntarily, in settlement of a dispute or claim where damages were awarded as the result of any direct or indirect act, omission or course of conduct undertaken by the Ceding Company, its agents or representatives, in connection with any aspect of the policies reinsured under this Agreement. Special circumstances may arise in which the Pool Reinsurers should participate to the extent permitted by law in certain assessed damages. These circumstances are difficult to describe or define in advance but could include those situations in which the Pool Reinsurers were an active party in the act, omission or course of conduct which ultimately resulted in the assessment of the damages. The extent of the participation of any of the Pool Reinsurers is dependent upon a good-faith assessment of the relative culpability in each case; but all factors being equal, the division of any such assessment would generally be in the same proportion of the net liability accepted by each party. ARTICLE IX - ARBITRATION 1. BASIS FOR ARBITRATION The parties to this Agreement mutually understand and agree that its wording and interpretation is based on the usual customs and practices of the insurance and reinsurance industry. While all parties mutually agree to act in good faith in dealings with each other, it is understood and recognized that situations may arise in which an agreement cannot be reached. In the event that any dispute cannot be resolved to the mutual satisfaction of the parties involved, the dispute will first be subject to good-faith negotiation as described below in an attempt to resolve the dispute without the need to institute formal arbitration proceedings. 2. NEGOTIATION Within ten (10) days after one of the parties to this Agreement has given the other the first written notification of the specific dispute, each party will appoint a designated officer to attempt to resolve the dispute. The officers will meet at a mutually agreeable location as early as possible and as often as necessary, in order to gather and furnish the other with all appropriate and relevant information concerning the dispute. The officers will discuss the problem and will negotiate in good faith without the necessity of any formal arbitration proceedings. During the negotiation process, all reasonable requests made by one officer to the other for information will be honored. The specific format for such discussions will be decided by the designated officers. If the officers cannot resolve the dispute within thirty (30) days of their first meeting, the parties agree that they will submit the dispute to formal arbitration. However, the parties may agree in writing to extend the negotiation period for an additional thirty (30) days. 3. ARBITRATION PROCEEDINGS No later than fifteen (15) days after the final negotiation meeting, the officers taking part in the negotiation will give the concerned parties written confirmation that they are unable to resolve the dispute and that they recommend establishment of formal arbitration. An arbitration panel consisting of three (3) past or present officers of life insurance or life reinsurance companies not affiliated with any of the parties to this Agreement in any way will settle the dispute. Each party will appoint one (1) arbitrator and the two (2) will select a third. If the two (2) arbitrators cannot agree on the choice of a third, the choice will be made by the Chairman of the American Arbitration Association. The arbitration proceedings will be conducted according to the Commercial Arbitration Rules of the American Arbitration Association which are in effect at the time the arbitration begins. The arbitration will take place at a site decided upon by the arbitrators unless the involved parties mutually agree otherwise. Within sixty (60) days after the arbitration proceedings have been concluded, the arbitrators will issue a written decision on the dispute and a statement of any award to be paid as a result. The decision will be based on the terms and conditions of this Agreement as well as the usual customs and practices of the insurance and reinsurance industry, rather than on strict interpretation of the law. The decision will be final and binding on the parties involved and there will be no further appeal, except that either party may petition any court having jurisdiction regarding the award rendered by the arbitrators. The parties involved in the arbitration may agree to extend any of the negotiation or arbitration periods shown in this Article. Unless otherwise decided by the arbitrators, the parties involved in the arbitration will share equally in all expenses resulting from the arbitration, including the fees and expenses of the arbitrators, except that each party will be responsible for its own attorneys' fees. ARTICLE X - INSOLVENCY 1. If the Ceding Company is judged insolvent, the Pool Reinsurers will pay all reinsurance under this Agreement directly to the Ceding Company, its liquidator, receiver or statutory successor on the basis of the Ceding Company's liability under the policy or policies reinsured without decrease because of the insolvency of the Ceding Company. It is understood, however, that in the event of the insolvency of the Ceding Company, its liquidator, receiver or statutory successor will give the Pool Reinsurers written notice of a pending claim on a policy reinsured within a reasonable time after the claim is filed in the insolvency proceedings. While the claim is pending, the Pool Reinsurers may investigate and interpose at their own expense in the proceedings where the claim is to be adjudicated, any defense which they may deem available to the Ceding Company, its liquidator, receiver or statutory successor. It is further understood that the expense incurred by the Pool Reinsurers will be chargeable, subject to court approval, against the Ceding Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Ceding Company solely as a result of the defense undertaken by the Ceding Company. Where two (2) or more Pool Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to the claim, the expenses will be apportioned in accordance with the terms of the Agreement as though the Ceding Company had incurred the expense. 2. If any of the Pool Reinsurers are judged insolvent, they will be considered in default under this Agreement. Amounts due to the insolvent Pool Reinsurer(s) will be paid directly to their liquidator, receiver or statutory successor without diminution because of insolvency of the Pool Reinsurer(s). 3. For the purpose of this Agreement, the Ceding Company or any of the Pool Reinsurers will be deemed insolvent under the following circumstances: a) When a cease and desist order or injunction has been issued by the commissioner or a court in that party's state or jurisdiction or domicile, ordering the party to cease and desist from transacting, soliciting or writing any new business of any kind and is reasonably expected to result in conservatorship, rehabilitation, receivership or liquidation; or b) When a court order is issued voluntarily or involuntarily placing a party into conservatorship, rehabilitation, receivership or liquidation, or appointing a conservator, rehabilitator, receiver or liquidator to take over the business of the party; or c) When a party files or consents to the filing of a petition in bankruptcy, seeks reorganization or an arrangement with creditors or takes advantage of any bankruptcy, dissolution, liquidation or similar law or statute. ARTICLE XI - INSPECTION OF RECORDS 1. INSPECTION OF RECORDS Any party to this Agreement will have the right at any reasonable time to inspect the papers, records, books, files or other documents relating directly or indirectly to the reinsurance coverage under this Agreement. ARTICLE XII - OFFSET 1. The Ceding Company and any of the Pool Reinsurers will have, and may exercise at any time, the right to offset mutually agreed-to balances due one party from the other against mutually agreed-to balances due the other party. The right of offset is limited to balances due under this Agreement. Subject to state regulations, the right of offset will not be affected nor diminished because of the insolvency of the parties to this Agreement. ARTICLE XIII - EXECUTION OF THE AGREEMENT In witness whereof, the parties hereto have caused this Agreement to be executed in duplicate at the dates and places shown below, by their respective officers duly authorized to do so. WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO By: _________________________________ Attest: __________________________ Title: ______________________________ Title: ___________________________ Date: _______________________________ Date: ____________________________ EMPLOYERS REASSURANCE CORPORATION By: _________________________________ Attest: __________________________ Title: ______________________________ Title: ___________________________ Date: _______________________________ Date: ____________________________ THE LINCOLN NATIONAL LIFE INSURANCE COMPANY By: _________________________________ Attest: __________________________ Title: ______________________________ Title: ___________________________ Date: _______________________________ Date: ____________________________ GENERAL & COLOGNE LIFE RE OF AMERICA By: _________________________________ Attest: __________________________ Title: ______________________________ Title: ___________________________ Date: _______________________________ Date: ____________________________ SWISS RE LIFE & HEALTH AMERICA, INC. By: _________________________________ Attest: __________________________ Title: ______________________________ Title: ___________________________ Date: _______________________________ Date: ____________________________ AMENDMENT NO. 1 AUTOMATIC POOL REINSURANCE AGREEMENT BETWEEN WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO AND EMPLOYERS REASSURANCE CORPORATION GENERAL & COLOGNE LIFE RE OF AMERICA THE LINCOLN NATIONAL LIFE INSURANCE COMPANY SWISS RE LIFE & HEALTH AMERICA, INC. Except as hereinafter specified, all terms and conditions of the Automatic Pool Reinsurance Agreement ("Agreement") effective the 1st day of July, 2001 shall apply, and this Amendment is to be attached to and made part of the Agreement. In accordance with the provisions of Article I, Duration of Agreement, The Lincoln National Life Insurance Co. is hereby cancelled for and as to the submission of new business effective April 1, 2002. By mutual consent, both Western Reserve Life Assurance Co. of Ohio and The Lincoln National Life Insurance Co. waive the ninety-day notice clause. Reinsurance in force and active on April 1, 2002 with The Lincoln National Life Insurance Co. shall continue to be covered under the provisions of the Agreement until termination or natural expiry of the underlying policies, subject to the payment of reinsurance premiums as set forth in Article V. All terms and conditions of the Agreement not in conflict with the terms and conditions of this Amendment will continue unchanged. This Amendment is signed in duplicate at the dates and places indicated with an effective date of April 1, 2002. WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO BY: ________________________________ ATTEST: _________________________ TITLE: VP & MANAGING ACTUARY TITLE: VP & MANAGING ACTUARY DATE: APRIL 15, 2002 DATE: APRIL 15, 2002 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ AMENDMENT NO. 2 AUTOMATIC POOL REINSURANCE AGREEMENT BETWEEN WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO AND EMPLOYERS REASSURANCE CORPORATION GENERAL & COLOGNE LIFE RE OF AMERICA SWISS RE LIFE & HEALTH AMERICA, INC. BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA SCOR LIFE U.S. RE INSURANCE COMPANY Except as hereinafter specified, all terms and conditions of the Automatic Pool Reinsurance Agreement ("Agreement") effective the 1st day of July, 2001 shall apply, and this Amendment is to be attached to and made part of the Agreement. Exhibit A and Exhibit C are hereby amended as attached. All terms and conditions of this Agreement not in conflict with the terms and conditions of this Amendment will continue unchanged. This Amendment is signed in duplicate at the dates and places indicated with an effective date of April 1, 2002. WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO BY: _________________________________ ATTEST: __________________________ TITLE: VP & MANAGING ACTUARY TITLE: VP & MANAGING ACTUARY DATE: APRIL 15, 2002 DATE: APRIL 15, 2002 BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ SCOR LIFE U.S. RE INSURANCE COMPANY BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ AMENDMENT NO. 3 AUTOMATIC POOL REINSURANCE AGREEMENT BETWEEN WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO AND ERC LIFE REINSURANCE CORPORATION GENERAL & COLOGNE LIFE RE OF AMERICA SWISS RE LIFE & HEALTH AMERICA, INC. BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA SCOR LIFE U.S. RE INSURANCE COMPANY Except as hereinafter specified, all terms and conditions of the Automatic Pool Reinsurance Agreement ("Agreement") effective the 1st day of July, 2001 shall apply, and this Amendment is to be attached to and made part of the Agreement. Effective July 1, 2002, it is agreed that the following sentence is added to Exhibit C, Section II, Rates for Life Reinsurance: On Joint Life business, the Single Life rates will be combined according to the Frasier method. All other provisions of the Reinsurance Agreement will continue unchanged. This Amendment is signed in duplicate at the dates and places indicated with an effective date of July 1, 2002 WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO BY: _________________________________ ATTEST: __________________________ TITLE: VP & MANAGING ACTUARY TITLE: VP & MANAGING ACTUARY DATE: SEPTEMBER 13, 2002 DATE: SEPTEMBER 13, 2002 ERC LIFE REINSURANCE CORPORATION BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ GENERAL & COLOGNE LIFE RE OF AMERICA BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ SWISS RE LIFE & HEALTH AMERICA, INC. BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ SCOR LIFE U.S. RE INSURANCE COMPANY BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ AMENDMENT NO. 4 AUTOMATIC POOL REINSURANCE AGREEMENT BETWEEN WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO AND ERC LIFE REINSURANCE CORPORATION GENERAL & COLOGNE LIFE RE OF AMERICA SWISS RE LIFE & HEALTH AMERICA, INC. BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA SCOR LIFE U.S. RE INSURANCE COMPANY Effective January 1, 2003, provisions of this Agreement are extended to cover reinsurance on the WRL Freedom Elite Advisor and WRL Freedom Elite Builder Associates and their riders sold through Western Reserve Life Assurance Co. of Ohio All other provisions of the Agreement not in conflict with the provisions of this Amendment will continue unchanged. IN WITNESS THEREOF, the parties hereto have caused their names to be subscribed and duly attested hereunder by their respective Authorized Officers: WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO BY: _________________________________ ATTEST: __________________________ TITLE: VP & MANAGING ACTUARY TITLE: VP & MANAGING ACTUARY DATE: DATE: ERC LIFE REINSURANCE CORPORATION BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ GENERAL & COLOGNE LIFE RE OF AMERICA BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ SWISS RE LIFE & HEALTH AMERICA, INC. BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ SCOR LIFE U.S. RE INSURANCE COMPANY BY: _________________________________ ATTEST: __________________________ TITLE: ______________________________ TITLE: ___________________________ DATE: _______________________________ DATE: ____________________________ EX-99.2 4 g80413exv99w2.txt OPINION & CONSENT OF THOMAS E. PIERPAN EXHIBIT 99.2 Exhibit 27(k) Opinion and Consent of Thomas E. Pierpan, Esq. as to Legality of Securities Being Registered WRL LETTERHEAD January 31, 2003 Board of Directors Western Reserve Life Assurance Co. of Ohio WRL Series Life Account 570 Carillon Parkway St. Petersburg Florida 33716 Gentlemen: In my capacity as Senior Vice President, Assistant Secretary and General Counsel of Western Reserve Life Assurance Co. of Ohio ("Western Reserve"), I have participated in the preparation and review of Pre-Effective Amendment No. 1 to the Registration Statement on Form N-6 filed with the Securities and Exchange Commission (Reg. No. 333-100993) under the Securities Act of 1933 for the registration of flexible premium variable life insurance policies (the "Policies") to be issued with respect to the WRL Series Life Account (the "Account"). The Account was established on July 16, 1985, by the Board of Directors of Western Reserve as a separate account for assets applicable to the Policies, pursuant to the provisions of the Ohio Insurance Law. I am of the following opinion: 1. Western Reserve has been duly organized under the laws of Ohio and is a validly existing corporation. 2. The Account has been duly created and is validly existing as a separate account pursuant to Ohio Insurance Law. 3. Section 3907.15 of the Ohio Revised Code provides that the portion of the assets of the Account equal to the reserves and other liabilities for variable benefits under the Policies is not chargeable with liabilities arising out of any other business Western Reserve may conduct. Assets allocated to the Fixed Account under the Policies, however, are part of Western Reserve's general account and are subject to Western Reserve's general liabilities from business operations. 4. The Policies, when issued as contemplated by the Registration Statement, will be legal and binding obligations of Western Reserve in accordance with their terms. In arriving at the foregoing opinion, I have made such examination of law and examined such records and other documents as I judged to be necessary or appropriate. I hereby consent to the filing of this opinion as an exhibit to the Registration Statement. I further hereby consent to reference to my name under the caption "Legal Matters" in the Statement of Additional Information incorporated by reference in Pre-Effective Amendment No. 1 to the Registration Statement on Form N-6 (File No. 333-100993) for the WRL Series Life Account filed by Western Reserve with the Securities and Exchange Commission. Very truly yours, /s/ Thomas E. Pierpan Thomas E. Pierpan Senior Vice President, Assistant Secretary and General Counsel EX-99.C6 5 g80413exv99wc6.txt OPINION & CONSENT OF LORNE SCHINBEIN EXHIBIT 99.C6 Exhibit 27(l) Opinion and Consent of Lorne Schinbein As to actuarial matters pertaining to the securities being registered WRL LETTERHEAD January 31, 2003 Western Reserve Life Assurance Co. of Ohio 570 Carillon Parkway St. Petersburg, FL 33716 RE: WRL Series Life Account WRL Freedom Elite Advisor File Nos. 333-100993/811-4420 Gentlemen: This opinion is furnished in connection with the filing by Western Reserve Life Assurance Co, of Ohio of Pre-Effective Amendment No. 1 (the "Amendment") to the Registration Statement on form N-6 for the WRL Freedom Elite Advisor, a flexible premium variable life insurance policy ("Policy"). It is my opinion that the Prospectus, including the Fee Tables, and the Statement of Additional Information contained in the Amendment accurately describe the Policy. The forms of the Policy were prepared under my direction, and I am familiar with the Registration Statement and Exhibits thereof. I hereby consent to use of this opinion as an exhibit to the Amendment and to the reference to my name under the heading "Experts" in the Statement of Additional Information. Very truly yours, /s/ Lorne Schinbein Lorne Schinbein Vice President and Managing Actuary EX-23 6 g80413exv23.txt CONSENT OF SUTHERLAND ASBILL EXHIBIT 23 Exhibit 27(n)(i) Consent of Sutherland Asbill & Brennan LLP S.A.B. Letterhead January 31, 2003 Board of Directors Western Reserve Life Assurance Co. of Ohio WRL Series Life Account 570 Carillon Parkway St. Petersburg, Florida 33716 RE: WRL Series Life Account WRL Freedom Elite Advisor File Nos. 333-100993/811-4420 Gentlemen: We hereby consent to the use of our name under the caption "Legal Matters" in the Statement of Additional Information for the WRL Freedom Elite Advisor contained in Pre-Effective Amendment No. 1 to the Registration Statement on Form N-6 (File No. 333-100993/811-4420) of the WRL Series Life Account filed by Western Reserve Life Assurance Co. of Ohio with the Securities and Exchange Commission. In giving this consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933. Very truly yours, SUTHERLAND ASBILL & BRENNAN LLP By: /s/ Mary Jane Wilson-Bilik -------------------------- Mary Jane Wilson-Bilik EX-99.C1 7 g80413exv99wc1.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 99.C 1 Exhibit 27(n)(ii) Consent of Ernst & Young LLP CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Statement of Additional Information and to the use of our reports (1) dated February 15, 2002, with respect to the statutory-basis financial statements and schedules of Western Reserve Life Assurance Co. of Ohio, and (2) dated January 31, 2003, with respect to the financial statements of the WRL Series Life Account, included in Pre-Effective Amendment No. 1 to the Registration Statement (Form N-6 No. 333-100993) and related Prospectus of WRL Series Life Account. ERNST & YOUNG LLP Des Moines, Iowa January 31, 2003 EX-99.ITR 8 g80413exv99witr.txt MEMORANDUM EXHIBIT 99.ITR Exhibit 27(q) Memorandum describing issuance, transfer and redemption procedures DESCRIPTION OF ISSUANCE, TRANSFER AND REDEMPTION PROCEDURES FOR WRL FREEDOM ELITE ADVISOR(SM) INDIVIDUAL FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES ISSUED BY WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO This document sets forth the administrative procedures, as required by Rule 6e-3(T)(b)(12)(iii), that will be followed by Western Reserve Life Assurance Co. of Ohio (the "Company") in connection with the issuance of WRL Freedom Elite Advisor, its individual flexible premium variable life insurance policy ("Policy" or "Policies") and acceptance of payments thereunder, the transfer of assets held thereunder, and the redemption by owners of the Policy ("owners") of their interests in those Policies. Terms used herein have the same definitions as in the prospectus for the Policy that is included in the current registration statement on Form N-6 for the Policy (File No. 333-100993/811-4420) as filed with the Securities and Exchange Commission ("SEC"). TABLE OF CONTENTS I. Procedures Relating to Purchase and Issuance of the Policies and Acceptance of Premiums................. 1 A. Offer of the Policies, Application, Initial Premium, and Issuance.................................... 1 B. Additional Premiums.................................................................................. 5 C. Crediting Premiums................................................................................... 6 D. Planned Periodic Payments............................................................................ 7 E. No Lapse Period; Premiums During a Grace Period and Premiums Upon Reinstatement...................... 8 F. Allocations of Initial Premium Among the Fixed Account and the Subaccounts........................... 10 G. Loan Repayments and Interest Payments................................................................ 12 H. Refund of Excess Premiums for Modified Endowment Contracts........................................... 13 II. Transfers............................................................................................... 13 A. Transfers Among the Subaccounts and the Fixed Account................................................ 13 B. Dollar Cost Averaging................................................................................ 15 C. Asset Rebalancing.................................................................................... 16 D. Third Party Asset Allocation Services................................................................ 17 E. Transfer Errors...................................................................................... 17 III. "Redemption" Procedures................................................................................. 17 A. "Free-Look" Right.................................................................................... 17 B. Surrenders........................................................................................... 18 C. Cash Withdrawals..................................................................................... 19 D. Lapses............................................................................................... 20 E. Premium Expense Charge, Monthly Deduction, and Mortality and Expense Risk Charge..................... 20 F. Death Benefits....................................................................................... 22 G. Policy Loans......................................................................................... 25 H. Payments by the Company.............................................................................. 27 I. Conversion Rights.................................................................................... 28 J. Redemption Errors.................................................................................... 28 K. Misstatement of Age or Gender........................................................................ 28 L. Incontestability..................................................................................... 28 M. Limited Death Benefit................................................................................ 29
I. PROCEDURES RELATING TO PURCHASE AND ISSUANCE OF THE POLICIES AND ACCEPTANCE OF PREMIUMS A. OFFER OF THE POLICIES, APPLICATION, INITIAL PREMIUM, AND ISSUANCE OFFER OF THE POLICIES. The Policies are offered and issued pursuant to underwriting standards in accordance with state insurance laws for an initial premium determined by the owner, who also has the flexibility to determine the frequency and the amount of premiums to be paid under the Policy. However, before the Policy is issued, the Company may require the owner to pay a premium at least equal to a minimum monthly guarantee premium set forth in the Policy. Insurance is based on the principle of pooling and distribution of mortality risks, which assumes that each owner pays an initial premium commensurate with the insured's mortality risk as actuarially determined utilizing factors such as age, gender, and rate class of the insured. Uniform premiums for all insureds would discriminate unfairly in favor of those insureds representing greater risk. Although there is no uniform premium for all insureds, there is a uniform premium for all insureds of the same rate class, age, and gender and same specified amount of life insurance. APPLICATION. Persons wishing to purchase a Policy must complete an application and submit it to the Company through any licensed life insurance agent appointed as an agent of the Company, who is also a registered representative of a broker-dealer having a selling agreement with the principal underwriter for the Policy. The application must specify the name of the insured(s) and provide certain required information about the insured. The application is generally accompanied by an initial premium, and designates premium allocation percentages and the death benefit option selected, and names the beneficiary. The initial premium is determined by the owner, although, before the Policy is issued, the Company may require the owner to pay a premium at least equal to a 1 minimum monthly guarantee premium set forth in the Policy. Additional premium payments must be at least $50 ($1,000 if by wire). The owner selects the specified amount for a Policy based on the premium to be paid and other characteristics of the proposed insured, such as age, gender and rate class. The current minimum specified amount required for a Policy when issued is $250,000 for issue ages 0-49. The minimum specified amount decreases to $100,000 for issue ages 50-85. The Company will not issue a Policy if the insured is over age 85. RECEIPT OF APPLICATION AND UNDERWRITING. Upon receipt of the initial premium and a completed application in good order from an applicant, the Company will follow underwriting procedures for life insurance designed to determine whether the proposed insured is insurable. This process may involve such verification procedures as medical examinations and may require that further information be provided about the proposed insured before a determination can be made. The underwriting process determines the rate class to which the insured is assigned if the application is accepted. The Policy uses mortality tables that distinguish between men and women; as a result, the Policy pays different benefits to men and women of the same age. Montana prohibits our use of actuarial tables that distinguish between males and females to determine premiums and policy benefits for policies issued on the lives of its residents. The Company currently places insureds in the following standard rate classes: - ultimate select (preferred) non-tobacco use; - select (non-preferred), non-tobacco use; - ultimate standard (preferred) tobacco use; - standard (non-preferred) tobacco use; and - juvenile (under age 18). 2 The Company also places insureds in various sub-standard rate classes, which involve a higher mortality risk and higher charges. The Company generally charges higher rates for insureds who use tobacco. The Company charges lower cost of insurance rates to insureds who are in an "ultimate" class. An ultimate class is only available if, because of the specified amount the owner has chosen, the Company's underwriting guidelines require the insured to take a blood test. The Company reserves the right to reject an application for any reason permitted by law. If an application is rejected, any premium received will be returned promptly, without interest. The insured must be insurable and acceptable to the Company under its underwriting rules on the later of the date of the application or the date the insured completes all required medical tests and examinations. ISSUANCE OF POLICY. If (1) the Company's underwriting process is complete; (2) the application has been approved; (3) an initial premium of sufficient amount has been received; and (4) the insured is alive and in the same condition of health as described in the application when the Policy is delivered to the owner, then full life insurance coverage goes into effect, the Policy is issued, and the Company begins to make the monthly deductions. This is the Policy date. The Policy date is shown on the schedule page of the Policy, and the Company measures Policy months, years, and anniversaries from the Policy date. The Policy date is generally the record date, which is the date the Company records the Policy on the books as an in force Policy, unless the Policy is backdated. BACKDATING. If the owner requests, the Company may backdate a Policy by assigning a Policy date earlier than the date the Policy is issued. However, in no event will a Policy be backdated earlier than the earliest date allowed by state law or by the Company's underwriting rules. A backdating request must be in writing and, if approved, will amend the application. Cost of insurance charges are based in part on the age of the insured on 3 the Policy date or on the date of any increase in specified amount. Generally, cost of insurance charges are lower at a younger age. The Company will deduct the monthly deduction, including cost of insurance charges, for the period that the Policy is backdated. INITIAL PREMIUM AND CONDITIONAL COVERAGE. If an applicant pays the full initial premium listed in the conditional receipt attached to the application, and the Company delivers the conditional receipt to the applicant, the insured will have conditional insurance coverage under the terms of the conditional receipt. Conditional coverage becomes effective on the later of: - the date of the application; or - the date the insured completes all of the medical tests and examinations; or - the date of issue, if any, requested on the application. The amount of conditional coverage is the lesser of the specified amount applied for or $300,000, reduced by all amounts payable under all life insurance applications that the insured has in force or pending with the Company. The conditional receipt does not provide benefits for disability and accidental death benefits, nor if any proposed insured commits suicide. If a proposed insured commits suicide, the Company's liability will be limited to return of the first premium paid with the application. Conditional insurance coverage is void if the check or draft provided to pay the initial premium is not honored when the Company first presents it for payment. The conditional receipt is void if: - it is not signed by an authorized agent of Western Reserve; - the application contains any fraud or material misrepresentation; or - on the date of the conditional receipt, the proposed insured is under 15 days of age or over 85 years of age. 4 Conditional coverage automatically terminates on the earliest of: - the date the Company determines the insured has satisfied underwriting requirements and the insurance applied for takes effect (the Policy date); - 60 days from the date the application was completed; - the date the Company determines that any person proposed for insurance in the application is not insurable; - the date the Company modifies the plan, amount, riders, and/or the premium rate class shown in the application, or any supplemental agreements; or - the date the Company mails notice of the ending of coverage and refunds the first premium to the applicant at the address shown on the application. TAX-FREE EXCHANGES (1035 EXCHANGES). The Company will accept part or all of the initial premium from one or more contracts insuring the same insured that qualify for a tax-free exchange under Section 1035 of the Internal Revenue Code (the "Code"). Subject to underwriting requirements, the owner may make one additional cash payment within three business days of receipt of the proceeds from the 1035 Exchange before the Company finalizes the Policy's specified amount. B. ADDITIONAL PREMIUMS ADDITIONAL PREMIUMS PERMITTED. The owner generally has flexibility to determine the frequency and the amount of the premiums to be paid under the Policy. Premium payments must be at least $50 ($1,000 if by wire). The Company may return premiums less than $50. The Company will not allow the owner to make additional premium payments if it would cause the total premiums paid to exceed the current maximum premium limitations which qualify the Policy as life insurance according to federal tax laws and regulations. If the owner makes a premium payment that would cause the total premiums to be greater than the maximum premium limitations, the Company will return 5 any excess portion of the premium payment. The Company will not permit any additional premium payments until they are allowed by the maximum premium limitations. The Company also reserves the right to refund a premium if such premium would increase the death benefit by more than the amount of the premium. An owner may pay premiums by any method the Company deems acceptable. The Company will also accept premium payments by wire transfer. The Company will treat any payment made as a premium payment unless it is clearly marked as a loan repayment. C. CREDITING PREMIUMS INITIAL PREMIUM. Depending on the laws of the state governing the Policy (usually the state where the insured lives), the Company will allocate the initial net premium on the record date either to the reallocation account (which is the portion of the fixed account where the Company holds the premium(s) until the reallocation date) or to the fixed account and the subaccounts selected on the Policy application. If the laws of the state governing the Policy do not require a refund of full premium, then the Company will allocate the initial net premium(s), minus monthly deductions, to the accounts selected. If the applicant's state requires the Company to return the initial premium in the event the free-look period is exercised, then the Company will allocate the net premium to the reallocation account until the reallocation date. On the first valuation date on or after the reallocation date (which is the record date, plus the number of days in the applicable state's free-look period, plus five days), the Company will reallocate all cash value held in the reallocation account to the fixed account and subaccounts selected on the application. If the owner selected dollar cost averaging on the application, on the reallocation date the Company will allocate the Policy's cash value either to the fixed 6 account, the money market subaccount, or the bond subaccount (depending on which subaccount the owner selected on the application). While held in the reallocation account, net premium(s) will be credited with interest at the current fixed account rate and reduced by any monthly deductions due. On any day that the Company credits premiums or transfers cash value to a subaccount, the Company will convert the dollar amount of the net premium (or transfer) into subaccount units at the unit value for that subaccount, determined at the end of that valuation date. The Company will credit amounts to the subaccounts only on a valuation date, that is, on a date the New York Stock Exchange ("NYSE") is open for trading. D. PLANNED PERIODIC PAYMENTS The owner determines a planned periodic payment schedule which allows the owner to pay level premiums at fixed intervals over a specified period of time. The owner is not required to pay premiums according to this schedule. The owner may change the amount, frequency, and the time period over which the owner makes planned periodic payments. Even if the owner makes planned periodic payments on schedule, the Policy may still lapse. The duration of the Policy depends on the Policy's net surrender value. If the net surrender value is not high enough to pay the monthly deduction when due (and the no lapse period has expired) then the Policy will lapse (unless the owner makes the payment the Company specifies during the 61-day grace period). 7 E. NO LAPSE PERIOD; PREMIUMS DURING A GRACE PERIOD AND PREMIUMS UPON REINSTATEMENT The full initial premium is the only premium the owner is required to pay under the Policy. However, the owner greatly increases the risk of lapse if the owner does not regularly pay premiums at least as large as the current minimum monthly guarantee premium. Until the no lapse date shown on the Policy schedule page, the Company guarantees that the Policy will not lapse, so long as on any Monthiversary the owner has paid total premiums (MINUS any cash withdrawals and MINUS any outstanding loan amount) that equal or exceed the sum of the minimum monthly guarantee premiums in effect for each month from the Policy date up to and including the current month. If the owner takes a cash withdrawal, or takes out a loan, or if the owner decreases the specified amount, the owner may need to pay additional premiums in order to keep the no lapse guarantee in place. The no lapse period will end immediately if the owner does not pay sufficient minimum monthly guarantee premiums. The initial minimum monthly guarantee premium is shown on the Policy's schedule page, and depends on a number of factors, including the age, gender, and rate class of the proposed insured, and the specified amount requested. The minimum monthly guarantee premium will change if the owner changes death benefit options, decreases the specified amount or adds, increases, or decreases a rider. If the minimum monthly guarantee premium changes, the Company will notify the owner of the change and its effective date. The no lapse date is: - For Policies issued to insureds ages 0-60, the no lapse date is determined by either the number of years to attained age 65 or the 20th Policy anniversary, whichever is earlier. 8 - For Policies issued to insureds ages 61-85, the 5th Policy anniversary. After the no lapse period ends, paying the current minimum monthly guarantee premium each month will not necessarily keep the Policy in force. The owner may need to pay additional premiums to keep the Policy in force. If the net surrender value is less than the amount of the monthly deduction due on any Monthiversary and the no lapse period is no longer in effect, then the Policy will be in default and a grace period will begin. The grace period will end 61 days after the date on which the Company sends a grace period notice stating the amount required to be paid and the final date by which the Company must receive the payment. The notice will be sent to the owner's last known address and to any assignee of record. The Policy does not lapse, and the insurance coverage continues, until the expiration of this grace period. If the grace period ends and the no lapse period is no longer in effect, all coverage under the Policy will terminate without value. The Company will reinstate the Policy for five years after the lapse (and prior to the maturity date, which generally is the Policy anniversary nearest the insured's 100th birthday) if: - the owner submits a reinstatement application; - the insured meets the Company's insurability requirements; and - the owner makes a net premium payment large enough to cover three monthly deductions. The Company will not reinstate any indebtedness. The cash value of the loan reserve on the reinstatement date will be zero. The net surrender value on the reinstatement date will equal the net premiums paid at reinstatement, MINUS one monthly deduction. The reinstatement date will be the Monthiversary on or following the day the Company approves the reinstatement application. 9 F. ALLOCATIONS OF INITIAL PREMIUM AMONG THE FIXED ACCOUNT AND THE SUBACCOUNTS THE SEPARATE ACCOUNT. The separate account currently consists of several subaccounts, the assets of which are used to purchase shares of a designated corresponding investment portfolio of the fund. The fund is registered under the Investment Company Act of 1940, as amended, as an open-ended management investment company. Additional subaccounts may be added from time to time to invest in other portfolios of the fund or any other investment company. When an owner allocates an amount to a subaccount (either by premium allocation, transfer of cash value or repayment of a Policy loan), the Policy is credited with units in that subaccount. The number of units is determined by dividing the amount allocated, transferred or repaid to the subaccount by the subaccount's unit value for the valuation date when the allocation or transfer request or repayment is received at the Company's administrative office. A subaccount's unit value is determined for each valuation period by multiplying the value of a unit for a subaccount for the prior valuation period by the net investment factor for the subaccount for the current valuation period. The unit value for each subaccount was arbitrarily set at $10 at the time the subaccount commenced operations. The net investment factor is an index used to measure the investment performance of a subaccount from one valuation period to the next. THE FIXED ACCOUNT. Owners also may allocate premiums to the fixed account, which guarantees principal and a minimum fixed rate of interest. Money allocated or transferred to the fixed account will earn interest at a current interest rate in effect at that time. The interest rate will equal at least 3%. ALLOCATIONS OF PREMIUMS AMONG THE SEPARATE ACCOUNT AND THE FIXED ACCOUNT. Premiums are allocated to the subaccounts and the fixed account in accordance with the following procedures. 10 In the application for the Policy, the owner will specify the percentage of each net premium to be allocated to each subaccount of the separate account and/or the fixed account. The percentage of each net premium that may be allocated to any subaccount or the fixed account must be a whole number, and the sum of the allocation percentages must be 100%. If the owner selects dollar cost averaging, then the owner must have at least $5,000 in each subaccount from which the Company will make transfers and the owner must transfer a total of $100 monthly. If the owner selects asset rebalancing, the cash value of the Policy (or initial premium if a new Policy) must be at least $5,000. Unless otherwise required by state law, the Company may restrict allocations to the fixed account if the fixed account value following the allocation would exceed $100,000. Allocation percentages may be changed at any time by the owner submitting a written notice or telephone instructions to the Company's administrative office. The change will be effective at the end of the valuation date on which the Company receives the change. Upon instructions from the owner, the registered agent of record for the Policy may also change allocation instructions for the owner. The minimum amount that can be allocated to a particular subaccount is 1% of each net premium payment. The Company reserves the right to limit the number of premium allocation changes or to charge $25 for each change in excess of one per Policy year quarter. 11 G. LOAN REPAYMENTS AND INTEREST PAYMENTS REPAYING LOAN AMOUNT. The owner may repay all or part of the loan amount at any time while the Policy is in force. The loan amount is equal to the sum of all outstanding Policy loans including both principal plus any accrued interest. Loan repayments must be sent to the Company's administrative office and will be credited as of the date received. If the death benefit becomes payable while a Policy loan is outstanding, the loan amount will be deducted in calculating the death benefit. ALLOCATION FOR REPAYMENT OF POLICY LOANS. At each Policy anniversary, the Company will compare the outstanding loan amount to the amount in the loan reserve. The Company will also make this comparison any time the owner repays all or part of the loan, or makes a request to borrow an additional amount. At such time, if the outstanding loan amount exceeds the amount in the loan reserve, the Company will withdraw the difference from the subaccounts and the fixed account and transfer it to the loan reserve, in the same manner as when a loan is made. If the amount in the loan reserve exceeds the outstanding loan amount, the Company will withdraw the difference from the loan reserve and transfer it to the subaccounts and the fixed account in the same manner as current premiums are allocated. No charge will be imposed for these transfers, and these transfers are not treated as transfers in calculating the transfer charge. The Company reserves the right to require a transfer to the fixed account if the loans were originally transferred from the fixed account. INTEREST ON LOAN RESERVE. The amount in the loan reserve will be credited with interest at a minimum guaranteed annual effective rate of 3%. See "Policy Loans" below. Any interest earned that is in excess of the outstanding loan amount will be transferred on the Policy anniversary to the subaccounts and the fixed account in accordance with the instructions for premium allocations then in effect. 12 H. REFUND OF EXCESS PREMIUMS FOR MODIFIED ENDOWMENT CONTRACTS At the time a Policy is issued, the Company will notify the owner as to whether the Policy is classified as a modified endowment contract ("MEC") based on the initial premium received. If the Policy is not a MEC at issue, the owner will be notified of the maximum amount of additional premiums the owner can pay without causing the Policy to be classified as a MEC. At the time a premium is credited which would cause the Policy to become a MEC, the Company will immediately notify the owner and the agent. At that time, the owner will need to notify the Company if he or she wants the Policy to continue as a MEC. Unless the owner notifies the Company that he or she does want the Policy to continue as a MEC, the Company will refund the dollar amount of the excess premium that caused the Policy to become a MEC. II. TRANSFERS A. TRANSFERS AMONG THE SUBACCOUNTS AND THE FIXED ACCOUNT The owner may transfer cash value between and among the subaccounts of the separate account and, subject to certain special rules, to and from the fixed account. In any Policy year, the owner currently may make an unlimited number of "non-substantive" transfers among the subaccounts. The Company deducts a transfer charge of $25 from the amount transferred for the 13th and each additional transfer in a Policy year. The Company guarantees that it will not increase this charge. For purposes of the transfer charge, all transfer requests made in one day are considered one transfer, regardless of the number of subaccounts affected by the transfer, and transfers resulting from loans, conversion rights, reallocation of cash value immediately after the reallocation date, and transfers from the fixed account are not treated as transfers. Dollar 13 cost averaging and asset rebalancing transfers are treated as transfers for purposes of the transfer charge. Any unused "free" transfers do not carry over to the next year. There is no minimum amount that must be transferred. There is no minimum amount that must remain in a subaccount following a transfer. However, unless otherwise required by state law, transfers to the fixed account may be restricted if the fixed account value following the transfer would exceed $100,000. Transfers from the fixed account are limited to one per Policy year (unless the owner has selected dollar cost averaging) and requests for such transfers (which may be required to be in writing) must be received by the Company during the 30-day period following the end of each Policy year. The maximum amount that may be transferred from the fixed account to the subaccounts in any Policy year is limited to the greater of: 25% of the amount in the fixed account on the date of the transfer; or the amount transferred from the fixed account in the immediately prior Policy year. The Policy, as applied for and issued, will automatically receive telephone transfer privileges unless the owner provides other instructions. The telephone transfer privileges allow the owner to give authority to the registered representative or agent of record for the Policy to make telephone transfers and to change the allocation of future payments among the subaccounts and the fixed account on the owner's behalf according to the owner's instructions. The Company will require the owner to provide certain information for identification purposes when making a transfer request by telephone, and may require written confirmation of the request. The Company reserves the right to modify, restrict, suspend, prohibit, or eliminate the transfer privileges (including telephone transfer privileges) at any time and for any reason. The Company will limit transfer activity to two substantive transfers (at least 30 days apart) from each portfolio (except the money market portfolio) during any 12-month 14 period. "Substantive" means either a dollar amount large enough to have a negative impact on a portfolio's operations or a series of movements between portfolios. The Company reserves the right to reject any premium payment or transfer request from any person if the payment or transfer or series of transfers would have a negative impact on a portfolio's operations or if a portfolio would reject the purchase order. B. DOLLAR COST AVERAGING The dollar cost averaging program permits an owner to transfer systematically on a monthly basis a set dollar amount from the fixed account or the portfolios investing in the money market and the bond subaccounts to a subaccount chosen by the owner. Transfers will be made monthly as of the end of the valuation date after the first Monthiversary after the reallocation date. An owner may elect to participate in the dollar cost averaging program at any time by sending the Company a completed dollar cost averaging request form. The Company will make the first transfer in the month after receipt of this form at the Company's administrative office, provided that the form is received by the 25th day of the month. To participate in the dollar cost averaging program, an owner must have at least $5,000 in each account from which the Company will make transfers and total monthly transfers must be at least $100. Also, each month, an owner may not transfer more than one-tenth of the amount that was in the fixed account at the beginning of dollar cost averaging. There is no charge for using the dollar cost averaging program. However, each transfer under this program counts towards the 12 free transfers permitted each year. The Company reserves the right to modify, suspend, or discontinue offering the dollar cost averaging program at any time and for any reason. Dollar cost averaging is not available while an owner is participating in the asset rebalancing program or in any asset allocation services provided by a third party. 15 C. ASSET REBALANCING An owner may instruct the Company to rebalance automatically (on a quarterly, semi-annual or annual basis) the Policy's cash value to maintain the percentage allocation specified in the owner's currently effective premium allocation schedule. An owner may elect to participate in the asset rebalancing program at any time by sending a completed allocation request form to the Company's administrative office before the maturity date. The initial rebalancing will occur on the next quarterly, semi-annual or annual anniversary after receipt of this form. The Company will credit the amounts transferred at the unit value next determined on the dates the transfers are made. If a day on which rebalancing would ordinarily occur falls on a day on which the NYSE is closed, rebalancing will occur on the next day the NYSE is open. To participate in the asset rebalancing program, the Policy must have a cash value of at least $5,000 or make a $5,000 initial premium payment. The allocation percentages must be in whole numbers. Subsequent changes to the allocation percentages may be made quarterly by written or telephone instructions to the Company's administrative office. Once elected, asset rebalancing remains in effect until the owner instructs the Company to discontinue asset rebalancing. There is no charge for using the asset rebalancing program. However, each reallocation made under this program counts towards the 12 free transfers permitted each year. The Company reserves the right to discontinue offering the asset rebalancing program at any time and for any reason. If an owner terminates participation in the program, the Company restricts the owner's right to re-enter the program to once each Policy year. Asset rebalancing is not available while an owner is participating in the dollar cost averaging program or in any asset allocation services provided by a third party. Asset rebalancing will cease if the owner makes any transfer to or from any subaccount other than under a scheduled rebalancing. 16 D. THIRD PARTY ASSET ALLOCATION SERVICES The Company may provide administrative or other support services to independent third parties that have been authorized by owners to conduct transfers on their behalf or to recommend how subaccount values should be allocated. There is currently no charge for these administrative and support services. The Company reserves the right to discontinue providing administrative and support services at any time and for any reason. E. TRANSFER ERRORS In accordance with industry practice, the Company will establish procedures to address and to correct errors in amounts transferred among the subaccounts and the fixed account, except for de minimus amounts. The Company will correct non de minimus errors it makes and will assume any risk associated with the error. Owners will not be penalized in any way for errors made by the Company. The Company will take any gain resulting from the error. III. "REDEMPTION" PROCEDURES A. "FREE-LOOK" RIGHT The Policy provides for an initial free-look right during which an owner may cancel the Policy by returning it to the Company's administrative office, to one of the Company's branch offices or to the agent who sold the Policy. The free-look period expires 10 days after the owner receives the Policy. The free-look period may be longer in some states. Upon returning the Policy to the Company or to an authorized agent for forwarding to the Company's administrative office, the Policy will be deemed void from the beginning. Within seven days after the Company's administrative office receives the cancellation request and the Policy, the Company will pay a refund. In most states, the refund will be: 17 - any charges and taxes deducted from premiums; PLUS - any monthly deductions or other charges deducted from amounts allocated to the subaccounts and the fixed account; PLUS - the cash value in the subaccounts and the fixed account on the date the Company (or its agent) receives the returned Policy at the Company's administrative office. Some states may require the Company to refund all of the premiums paid for the Policy. B. SURRENDERS REQUESTS FOR NET SURRENDER VALUE. If the insured is alive and the Policy is in force, the owner may surrender the Policy at any time for its net surrender value. The net surrender value on any valuation date is the cash value minus any outstanding loan amount. The net surrender value will be determined by the Company on the valuation date the Company's administrative office receives all required documents, including a satisfactory written request containing the owner's original signature. The signature of the owner's spouse may be required. This written request must be made prior to the Policy's maturity date. The Company will cancel the Policy as of the date the written request is received at the Company's administrative office and the Company will ordinarily pay the net surrender value in a lump sum within seven days following receipt of the written request and all other required documents. The Policy cannot be reinstated after it is surrendered. EXTRAORDINARY EXPENSES. When the Company incurs extraordinary expenses, such as overnight mail expenses or wire service fees, for expediting delivery of the surrender payment, the Company will deduct that charge from the payment. The Company charges $20 for an overnight delivery ($30 for Saturday delivery) and $25 for wire service. 18 C. CASH WITHDRAWALS WHEN WITHDRAWALS ARE PERMITTED. After the first Policy year, the owner may withdraw a portion of the cash value, subject to the following conditions: - The owner must make a cash withdrawal request in writing, and the request must contain the owner's original signature. The signature of the owner's spouse may be required. - Only one cash withdrawal is allowed during a Policy year. - The Company may limit the withdrawal amount to at least $500 and the remaining net surrender value following a withdrawal may not be less than $500. - A cash withdrawal will not be permitted if it will reduce the specified amount below the minimum specified amount set forth in the Policy. - The owner may specify the subaccount(s) and the fixed account from which the withdrawal will be taken. If the owner does not specify an account, the Company will deduct the Policy's value in the subaccounts and the fixed account in accordance with the owner's current premium allocation instructions. - The Company generally will pay a cash withdrawal request within seven days following the valuation date on which the withdrawal request is received. - The Company will deduct a processing fee equal to $25 or 2% of the amount withdrawn, whichever is less, and will pay the owner the balance. The Company guarantees that this charge will not increase. EFFECT OF WITHDRAWAL ON DEATH BENEFIT. A cash withdrawal will reduce the cash value by the amount of the cash withdrawal and will reduce the death benefit by at least the amount of the cash withdrawal. If death benefit Option A is in effect, a cash withdrawal will reduce the specified amount by an amount equal to the amount of the cash withdrawal. 19 EXTRAORDINARY EXPENSES. When the Company incurs extraordinary expenses, such as overnight mail expenses or wire service fees, for expediting delivery of the partial withdrawal payment, the Company will deduct that charge from the payment. The Company charges $20 for an overnight delivery ($30 for Saturday delivery) and $25 for wire service. D. LAPSES If the no lapse period is not in effect and if a sufficient premium has not been received by the 61st day after the date of the grace period notice, the Policy will lapse without value and no amount will be payable to the owner unless the Policy is reinstated within five years after the lapse and prior to the maturity date. E. PREMIUM EXPENSE CHARGE, MONTHLY DEDUCTION, AND MORTALITY AND EXPENSE RISK CHARGE PREMIUM EXPENSE CHARGE. The Company deducts a premium expense charge from premiums before allocating such premiums to the subaccounts and fixed account selected by the owner. This charge is equal to: - 10.0% of cumulative premiums paid in each Policy year up to the premium expense level and 3.0% of premiums in excess of the premium expense level during the first ten Policy years; - 3.0% of premiums thereafter. The premium expense level is the amount of premium used to determine the charge applied to premium payments, and varies depending on the primary insured's gender, issue age, and underwriting class. MONTHLY DEDUCTION. A monthly deduction will be deducted pro rata from the Policy's cash value in each subaccount and the fixed account on the Policy date and on each 20 Monthiversary (i.e., deductions will be withdrawn from each subaccount and the fixed account in proportion to the value each bears to the total cash value on the Monthiversary). The monthly deduction is a charge compensating the Company for the services and benefits provided, costs and expenses incurred, and risks assumed by the Company in connection with the Policy. The monthly deduction is equal to: - the monthly Policy charge; PLUS - the monthly cost of insurance charge for the Policy; PLUS - the monthly charge for any benefits provided by riders attached to the Policy. - MONTHLY POLICY CHARGE. The monthly Policy charge currently equals $7.00 each Policy month. The Company guarantees that this charge will never be more than $10.00 per month. The Company may waive this charge at issue on additional policies (not on the original Policy) purchased naming the same owner and insured. - COST OF INSURANCE CHARGE. The cost of insurance charge is calculated monthly. The cost of insurance charge varies each month and is determined as follows: - the death benefit on the Monthiversary; DIVIDED BY - 1.0024663 (this factor reduces the net amount at risk, for purposes of computing the cost of insurance, by taking into account assumed monthly earnings at an annual rate of 3%); MINUS - the cash value on the Monthiversary; MULTIPLIED BY - the appropriate monthly cost of insurance rate. Cost of insurance rates vary depending on the insured's attained age, gender, rate class, and plan of insurance. These rates will never be greater than the guaranteed amounts stated in the Policy which are based on the Commissioners 1980 Standard 21 Ordinary Mortality Tables (1980 C.S.O. Tables) and the insured's attained age, gender, and rate class. Cost of insurance rates for Policies that are issued on a simplified or expedited basis would not cause healthy individuals to pay higher cost of insurance rates than they would pay under substantially similar Policies that the Company offers using standard underwriting criteria. - OPTIONAL INSURANCE RIDERS. The monthly deduction will include charges for any optional insurance benefits added to the Policy by rider. MORTALITY AND EXPENSE RISK CHARGE. Each valuation date, the Company deducts a daily charge from the cash value in each subaccount in an amount equal to the Policy's cash value in each subaccount multiplied by the daily pro rata portion of the annual mortality and expense risk charge rate of 0.90% (equal to 0.90% of the average daily net assets in each subaccount). The Company intends to reduce this charge to 0.75% after the 15th Policy year (although this is not guaranteed). F. DEATH BENEFITS DEATH BENEFIT PROCEEDS. As long as the Policy is in force, the Company will pay the death benefit upon receipt at the Company's administrative office of satisfactory proof of the insured's death. The Company may require return of the Policy. The death benefit proceeds equal: - the death benefit (described below); MINUS - any past due monthly deductions if the insured dies during the grace period; MINUS - any outstanding Policy loans; PLUS - any additional insurance in force provided by rider. The Company will pay the death benefit proceeds to the primary beneficiary(ies), if living, or to a contingent beneficiary. If each beneficiary dies before the insured and 22 there is no contingent beneficiary, the Company will pay the death benefit proceeds to the owner or the owner's estate. The Company will pay the death benefit proceeds in a lump sum or under a settlement option. The election may be made by the owner during his or her lifetime, or, if no election is in effect at his or her death, by the beneficiary. An option in effect at death may not be changed to another form of benefit after death. If no election is made, the Company will pay the death benefit proceeds in a lump sum. If all or part of the death benefit proceeds will be paid to the beneficiary in one sum, the Company will pay interest on this sum as required by applicable state law from the date the Company receives due proof of the insured's death to the date the Company makes payment. Generally payment will be made within seven days after the valuation date on which the Company has received at the Company's administrative office all materials necessary to constitute due proof of death. If a settlement option is elected, the death benefit will be applied to the option within seven days after the valuation date by which the Company received due proof of death and payments will begin under that option when provided by the option. DEATH BENEFIT. The death benefit is determined at the end of the valuation period in which the insured dies. One of the three death benefit options offered under the Policy must be selected on the application. If the owner does not select a death benefit option on the application, Option A will be selected and the Company will ask the owner to confirm the selection of Option A in writing or choose another option. The three death benefits are: OPTION A equals the greater of: 1) the current specified amount; OR 2) a specified percentage, called the limitation percentage, MULTIPLIED BY the cash value on the insured's date of death; OR 23 3) the amount required for the Policy to qualify as a life insurance contract under Section 7702 of the Internal Revenue Code. OPTION B equals the greater of: 1) the current specified amount, PLUS the cash value on the insured's date of death; OR 2) the limitation percentage, MULTIPLIED BY the cash value on the insured's date of death; OR 3) the amount required for the Policy to qualify as a life insurance contract under Section 7702 of the Internal Revenue Code. OPTION C equals the greater of: 1) death benefit option A; OR 2) the current specified amount, MULTIPLIED BY an age-based "factor" equal to the lesser of: - 1.0 OR - 0.04 TIMES (95 MINUS insured's attained age at death) (the "factor" will never be less than zero); PLUS the cash value on the insured's date of death; OR 3) the amount required for the Policy to qualify as a life insurance contact under Section 7702 of the Internal Revenue Code. The Company guarantees that, regardless of the death benefit option selected, so long as the Policy does not lapse, the death benefit will never be less than the specified amount on the insured's date of death. CHANGE IN DEATH BENEFIT OPTION. After the third Policy year, the owner may change the death benefit option once each Policy year if the specified amount was not changed that year. The Company will notify the owner of the new specified amount. The request to change the death benefit option must be in writing. The effective date of the change will be the Monthiversary on or following the date when the Company receives the request at 24 its administrative office. The owner may not make a change that would decrease the specified amount below the minimum specified amount listed on the Policy schedule page. CHANGE IN SPECIFIED AMOUNT. After the Policy has been in force for three years, the owner may change the specified amount once each Policy year if the death benefit option has not been changed that year. The new minimum monthly guarantee premium is effective on the date of the change. - DECREASE IN SPECIFIED AMOUNT. The request to decrease the specified amount must be in writing. The specified amount cannot be decreased lower than the minimum specified amount as shown on the Policy schedule page, nor can it be decreased if the specified amount would disqualify the Policy as life insurance under the Code. The Company may limit the amount of the decrease to no more than 20% of the specified amount. A decrease in specified amount will take effect on the Monthiversary on or after the Company receives the written request. SUPPLEMENTAL DEATH BENEFITS. Supplemental death and other benefits may be added to the Policy by purchasing one or more riders as described in the current prospectus for the Policy. G. POLICY LOANS POLICY LOANS. After the first Policy year and so long as the Policy is in force, the owner may obtain a Policy loan from the Company at any time by submitting a written, faxed, or telephone request to the Company's administrative office. The signature of the owner's spouse may be required. The Company may permit loans prior to the first anniversary for Policies issued pursuant to 1035 Exchanges. The minimum loan amount may be $500 and the maximum loan amount is 90% of the Policy's cash value, less any already outstanding loan amount, at the time of the loan. Policy loans will be processed 25 as of the valuation date the request is received and loan proceeds generally will be sent to the owner within seven days thereafter. The Policy, as applied for and issued, will automatically permit the owner to request a loan by telephone, unless the owner provides other instructions. The Company will require the owner to provide certain information for identification purposes when making a loan request by telephone, and may require written confirmation of the request. The Company may reject the request if the loan amount exceeds $50,000 or if the address of record has been changed within the past 10 days. The Company will also accept fax instructions or requests from the owner regarding loans. COLLATERAL FOR POLICY LOANS. When a Policy loan is made, an amount equal to the requested loan is transferred from the cash value in the subaccounts or fixed account to the loan reserve. This withdrawal is made based on the owner's current premium allocation instructions, unless the owner specifies a different allocation when requesting the loan. INTEREST ON POLICY LOANS. The Company currently charges interest on any outstanding Policy loan at a current effective annual interest rate of 3.75% (4% maximum guaranteed) payable in arrears on each Policy anniversary. The Company may declare various loan interest rates, and may apply different rates to different parts of the loan. Loan interest that is unpaid when due will be added to the loan amount on each Policy anniversary and will bear interest at the same rate. An amount equal to the unpaid amount of interest is transferred to the loan reserve from each subaccount and the fixed account based on the owner's current premium allocation instructions, unless the owner directs otherwise. After the 10th Policy year, the owner may borrow at preferred loan rates an amount equal to the cash value MINUS total premiums paid (reduced by any cash withdrawals) and MINUS any outstanding loan amount. The preferred loan rate is currently 3% and is not 26 guaranteed. The Company will credit the amount in the loan reserve with interest at an effective annual rate of 3%. EFFECT ON DEATH BENEFIT. If the death benefit becomes payable while a Policy loan is outstanding, the loan amount plus interest owed will be deducted in calculating the death benefit. If at any time the sum of outstanding loans, plus any interest owed, is more than the net surrender value of the Policy, the Company will send the owner, and any assignee of record, notice of the default and the owner will have a 61-day grace period to submit a sufficient payment to avoid lapse. H. PAYMENTS BY THE COMPANY Payments of cash withdrawals, surrenders, settlement options, or death benefits proceeds ordinarily will be made within seven days of the valuation date on which the Company receives the request and all required documentation at the Company's administrative office. The Company may postpone the payment of any such transactions for any of the following reasons: - the NYSE is closed for trading other than for customary holiday or the weekend closings, or trading on the NYSE is otherwise restricted, or an emergency exists, as determined by the SEC; - when the SEC by order permits a delay for the protection of owners; or - if the payment is attributable to a check that has not cleared. The Company may defer, for up to six months after the date the Company receives the request, the payment of any proceeds from the fixed account for a transfer, cash withdrawal, death benefit proceeds, or surrender request. 27 I. CONVERSION RIGHTS The owner has the right to transfer all of the subaccount value to the fixed account. If this transfer is made during the first 24 Policy months, there is no transfer charge and the transfer is not counted for purposes of determining whether a transfer charge applies. The owner must make this request in writing. J. REDEMPTION ERRORS In accordance with industry practice, the Company will establish procedures to address and to correct errors in amounts redeemed from the subaccounts and the fixed account, except for de minimus amounts. The Company will assume the risk of any non de minimus errors caused by the Company. K. MISSTATEMENT OF AGE OR GENDER If the insured's age or gender has been misstated in the application or any other supplemental application, then the death benefit under the Policy will be adjusted based on what the cost of insurance charge for the most recent monthly deduction would have purchased based on the insured's correct age and gender. L. INCONTESTABILITY Except for fraud, the Policy limits the Company's right to contest the Policy, for reasons of material misstatements contained in the application (or any supplemental application), after it has been in force during the insured's lifetime for two years from the Policy date or, if reinstated, for two years from the reinstatement date. 28 M. LIMITED DEATH BENEFIT The Policy limits the death benefit if the insured dies by suicide, while sane or insane, within two years after the Policy date or the effective date of a reinstatement. The Company's liability is limited to an amount equal to the premiums paid, less any outstanding loan amount, and less any cash withdrawals. 29 -----END PRIVACY-ENHANCED MESSAGE-----