Pre-Effective Amendment to Registration Statement for a Separate Account (Unit Investment Trust) — Form N-4
Filing Table of Contents
Document/Exhibit Description Pages Size
1: N-4 EL/A Preferred Life Variable Account C (Pvm4) 103± 504K
4: EX-99.B10 Independent Auditors' Consent 1 6K
5: EX-99.B13 Calculation of Performance Information 15± 106K
2: EX-99.B3 Principal Underwriter's Agreement 2± 11K
3: EX-99.B9 Opinion and Consent of Counsel 2± 8K
File Nos.333-19699
811-05716
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ( )
Pre-Effective Amendment No. 1 (X)
Post-Effective Amendment No. ( )
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 ( )
Amendment No. 20 (X)
(Check appropriate box or boxes.)
PREFERRED LIFE VARIABLE ACCOUNT C
---------------------------------
(Exact Name of Registrant)
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
---------------------------------------------
(Name of Depositor)
152 West 57th Street, 18th Floor, New York, New York 10019
---------------------------------------------------- ---------
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (212) 586-7733
Name and Address of Agent for Service
-------------------------------------
Eugene Long
Preferred Life Insurance Company of New York
152 West 57th Street, 18th Floor
New York, New York 10019
Copies to:
Judith A. Hasenauer
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Filing.
Calculation of Registration Fee under the Securities Act of 1933:
Registrant is registering an indefinite number of securities under the
Securities Act of 1933 pursuant to Investment Company Act Rule 24f-2.
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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.
CROSS REFERENCE SHEET
(Required by Rule 495)
[Download Table]
Item No. Location
PART A
Item 1. Cover Page. Cover Page
Item 2. Definitions. Index of Terms
Item 3. Synopsis or Highlights Profile
Item 4. Condensed Financial Information Not Applicable
Item 5. General Description of Registrant,
Depositor, and Portfolio Companies Preferred Life,
The Separate
Account, Investment
Options
Item 6. Deductions Expenses
Item 7. General Description of Variable
Annuity Contracts The Valuemark IV
Variable and Fixed
Annuity Contract
Item 8. Annuity Period Annuity Payments
(The Payout Phase)
Item 9. Death Benefit Death Benefit
Item 10. Purchases and Contract Value Purchase
Item 11. Redemptions. Access to Your
Money
Item 12. Taxes Taxes
Item 13. Legal Proceedings None
Item 14. Table of Contents of the Statement of
Additional Information Table of Contents of
the Statement of
Additional Information
PART B
Item 15. Cover Page Cover Page
Item 16. Table of Contents Table of Contents
Item 17. General Information and History Insurance Company
Item 18. Services Not Applicable
Item 19. Purchase of Securities Being Offered Not Applicable
Item 20. Underwriters Distributor
Item 21. Calculation of Performance Data Calculation of
Performance Data
Item 22. Annuity Payments Annuity Provisions
Item 23. Financial Statements Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item so numbered, in Part C to this Registration Statement.
PROFILE OF THE VALUEMARK IV VARIABLE ANNUITY CONTRACT
May __, 1997
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU SHOULD
CONSIDER AND KNOW BEFORE PURCHASING THE VALUEMARK IV VARIABLE ANNUITY CONTRACT
WITH A FIXED ACCOUNT OPTION. THE CONTRACT IS MORE FULLY DESCRIBED IN THE
PROSPECTUS WHICH ACCOMPANIES THIS PROFILE. PLEASE READ THE PROSPECTUS
CAREFULLY.
1. THE VALUEMARK IV VARIABLE ANNUITY CONTRACT. The variable annuity contract
with a fixed account option offered by Preferred Life is a contract between
you, the owner, and Preferred Life Insurance Company of New York (Preferred
Life), an insurance company. The Contract provides a means for investing on a
tax-deferred basis in 23 funds of the Franklin Valuemark Funds, a series fund,
and a fixed account option of Preferred Life. The Contract is
intended for retirement savings or other long-term investment purposes
and provides for a death benefit and guaranteed annuity income options.
The Contract has 24 investment options. There are 23 funds which are managed
by Franklin Advisers, Inc. and its Templeton and Franklin affiliates. A list
of the available funds is contained in Section 4. Depending upon market
conditions, you can make or lose money in the funds based on the fund's
investment performance. The funds are designed to offer a better return than
the fixed account option, however, this is not guaranteed.
The fixed account offers an interest rate that is guaranteed by Preferred
Life. The interest rate is set monthly and is guaranteed for 12 months. While
your money is in the fixed account, the interest your money will earn as well
as your principal is guaranteed by Preferred Life.
Preferred Life reserves the right to limit the number of funds which you may
invest in at any one time (now or in the future). Currently, you can put your
money in 10 investment options (which includes any of the 23 funds listed in
Section 4 and the Preferred Life fixed account).
Like all deferred annuity contracts, your Contract has two phases: the
accumulation phase and the payout phase. During the accumulation phase, your
earnings accumulate on a tax-deferred basis and are based on the investment
performance of the fund(s) you selected and/or the interest rate earned on the
money you have in the fixed account. During the accumulation phase, the
earnings are taxed as income only when you make a surrender. The payout phase
occurs when you begin receiving regular payments from your Contract. The
amount of the payments you may receive during the payout phase depends in part
upon the amount of money you are able to accumulate in your Contract during
the accumulation phase.
2. ANNUITY PAYMENTS (THE PAYOUT PHASE). You can receive monthly annuity
payments from your Contract by selecting one of the following annuity options
(all of these options assume you are the owner and the annuitant): (1)
payments for your life; (2) payments for your life, but if you die before
payments have been made for the guaranteed period you selected, payments will
continue for the remainder of the guaranteed period (5,10, 15 or 20 years);
(3) payments during the joint lifetime of you and the joint annuitant - when
either of you die, payments will continue as long as the survivor lives; (4)
payments during the joint lifetime of you and the joint annuitant, but if you
or the joint annuitant die before payments have been made for the guaranteed
period you selected, payments will continue for the remainder of the
guaranteed period (5, 10, 15 or 20 years); and (5) payments during your life
ending with the last payment due prior to your death with a guarantee that at
your death Preferred Life will make a refund to your beneficiary. Once you
begin receiving regular payments, you cannot change your annuity option or
surrender your Contract.
During the payout phase, you have the same investment choices you had during
the accumulation phase. You can choose to have payments based on the
performance of the funds (variable payout), the fixed account (fixed payout),
or both. If you choose to have any part of your payments based on fund
performance, the dollar amount of your annuity payments may go up or down,
depending on the investment performance.
3. PURCHASE. You can buy the Contract with $5,000 or more under most
circumstances. You can add $250 or more any time you like during the
accumulation phase. Contact your registered representative to help you fill
out the proper forms. You and the annuitant cannot be older than 85 years old
at the time you buy the Contract.
4. INVESTMENT OPTIONS. You may invest in the Preferred Life fixed account or
the following funds of Franklin Valuemark Funds:
FUND SEEKING STABILITY OF PRINCIPAL AND INCOME:
Money Market Fund
FUNDS SEEKING CURRENT INCOME:
High Income Fund
Templeton Global Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Funds - 2000, 2005 and 2010
FUNDS SEEKING GROWTH AND INCOME:
Growth and Income Fund
Income Securities Fund
Mutual Shares Securities Fund
Real Estate Securities Fund
Rising Dividends Fund
Templeton Global Asset Allocation Fund
Utility Equity Fund
FUNDS SEEKING CAPITAL GROWTH:
Capital Growth Fund
Mutual Discovery Securities Fund
Natural Resources Securities Fund (formerly, Precious Metals Fund)
Small Cap Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton International Equity Fund
Templeton International Smaller Companies Fund
Templeton Pacific Growth Fund
The funds are fully described in the attached prospectus for Franklin
Valuemark Funds. You can make or lose money based on the fund's performance.
5. EXPENSES. The Contract has insurance features and investment features,
and there are costs related to each.
The annual insurance charges total 1.49% of the average daily value of your
Contract allocated to the funds during the accumulation period (1.40% during
the payout phase). Each year Preferred Life also deducts a $30 contract
maintenance charge from your Contract. Preferred Life currently waives this
charge if the cumulative value of all your Valuemark IV Contracts (registered
with the same social security number) are at least $50,000. There are also
annual fund charges which vary depending upon the funds you select. In 1996,
these expenses ranged from .40% to 1.49% of the average daily value of the
funds.
You can transfer between accounts up to 12 times a year without charge. After
12 transfers, the charge is $25 or 2% of the amount transferred, whichever is
less. Market timing transfers may not be permitted.
If you make a surrender from the Contract, Preferred Life may assess a
contingent deferred sales charge (surrender charge). The amount of the charge
depends upon how long Preferred Life has had your payment. Each purchase
payment you add to your Contract has its own 7 year charge period. The charge
is:
Number of complete years from receipt 0 1 2 3 4 5 6 7 or more
Contingent deferred sales charge
(as a percentage of purchase payments) 6% 6% 6% 5% 4% 3% 2% 0%
Under certain circumstances, after the first year, Preferred Life will permit
you to access your money in the contract without deducting a contingent
deferred sales charge: 1) if you become terminally ill; or 2) if you become
disabled. Also, if you are unemployed for at least 90 consecutive days, you
can take up to 50% of your money out of the Contract without incurring a
contingent deferred sales charge.
The State of New York does not impose a premium tax on purchase payments for
annuities.
We have provided the following chart to help you understand the expenses in
your Contract. The column "Total Annual Expenses" shows the total of the $30
contract maintenance charge (which is represented as .10% below), the 1.49%
insurance charges and the total annual fund expenses for each fund. The next
two columns show you two examples of the expenses, in dollars, you would pay
under a Contract. The examples assume that you invested $1,000 in a Contract
which earns 5% annually and that you surrender your money: (1) at the end of
year 1, and (2) at the end of year 10. For year 1, the Total Annual Expenses
are assessed as well as the contingent deferred sales charge. For year 10, the
Total Annual Charges are assessed but no contingent deferred sales charge is
deducted. The premium tax is assumed to be 0% in both examples. These are just
examples. They do not represent past or future expenses or returns.
[Enlarge/Download Table]
EXAMPLES:
Total
Annual Total Total Expenses Expenses
Insurance Annual Fund Annual at end of at end of
Fund Charges Expenses Expenses 1 Year 10 Years
----------------------------------------- ---------- ------------ --------- ---------- ----------
Money Market 1.59% .53% 2.12% $ 82 $ 245
Growth and Income 1.59% .50% 2.09% $ 81 $ 242
Natural Resources Securities* 1.59% .65% 2.24% $ 83 $ 257
Real Estate Securities 1.59% .57% 2.16% $ 82 $ 249
Utility Equity 1.59% .50% 2.09% $ 81 $ 242
High Income 1.59% .54% 2.13% $ 82 $ 246
Templeton Global Income Securities 1.59% .61% 2.20% $ 82 $ 253
Income Securities 1.59% .50% 2.09% $ 81 $ 242
U.S. Government Securities 1.59% .51% 2.10% $ 81 $ 243
Zero Coupon 2000 1.59% .40% 1.99% $ 80 $ 231
Zero Coupon 2005 1.59% .40% 1.99% $ 80 $ 231
Zero Coupon 2010 1.59% .40% 1.99% $ 80 $ 231
Rising Dividends 1.59% .76% 2.35% $ 84 $ 268
Templeton International Equity 1.59% .89% 2.48% $ 85 $ 282
Templeton Pacific Growth 1.59% .99% 2.58% $ 86 $ 292
Templeton Global Growth 1.59% .93% 2.52% $ 86 $ 286
Templeton Developing Markets Equity 1.59% 1.49% 3.08% $ 91 $ 340
Templeton Global Asset Allocation 1.59% .86% 2.45% $ 85 $ 279
Small Cap 1.59% .77% 2.36% $ 84 $ 270
Templeton International Smaller Companies 1.59% 1.16% 2.75% $ 88 $ 308
Capital Growth 1.59% .77% 2.36% $ 84 $ 270
Mutual Discovery Securities 1.59% 1.05% 2.64% $ 87 $ 298
Mutual Shares Securities 1.59% .85% 2.44% $ 85 $ 278
<FN>
* Prior to May 1, 1997, the Natural Resources Securities Fund was known as the Precious Metals
Fund.
The expenses for the newly formed funds have been estimated. The expenses for
the Zero Coupon funds reflect current fee waiver arrangements. For more
detailed information, see the Fee Table in the prospectus for the Contract.
6. TAXES. Any earnings are not taxed until you take them out. In most cases,
if you take money out, earnings come out first and are taxed as income. If you
are younger than 59 1/2 when you take money out, you may be charged a 10%
federal tax penalty on the taxable amounts surrendered. Payments during the
payout phase are considered partly a return of your original investment. That
part of each payment is not taxable as income. If the Contract is
tax-qualified, the entire payment may be taxable.
7. ACCESS TO YOUR MONEY. You may make a surrender at any time during the
accumulation phase. Any partial surrender must be for at least $500. You may
request a surrender in writing or by electing the Systematic Withdrawal
Program or Minimum Distribution Program which are briefly described in Section
10 of this Profile. After the first year, you can make multiple surrenders up
to a total of 15% of the value of your Contract each year without charge from
Preferred Life. Surrenders in excess of that amount will be subject to a
contingent deferred sales charge. If you do not surrender the full 15% in any
one Contract year, you may not carry over the remaining percentage amount to
another year. Surrenders in excess of the 15% free withdrawal will be charged
a contingent deferred sales charge which declines from 6% to 0% depending upon
the number of complete years we have had your payment. After Preferred Life
has had a payment for 7 years, there is no charge for surrenders related to
that payment. Each purchase payment you add to your Contract has its own 7
year charge period. Of course, you may also have to pay income tax and a tax
penalty on any money you take out of the Contract.
8. PERFORMANCE OF THE FUNDS. The value of the Contract will vary up or down
depending upon the performance of the fund(s) you choose. From time to time,
Preferred Life may advertise total return figures based upon each fund's
performance. As of the date of this prospectus, the sale of the Contracts has
not begun. Therefore, no performance is presented here.
9. DEATH BENEFIT. If you die during the accumulation phase, the person you
have selected as your beneficiary will receive a death benefit. This death
benefit will be the greater of: 1) the current value of your Contract, less
any taxes, on the day all claim proofs and payment election forms are received
by Preferred Life at the Valuemark Service Center; or 2) (if applicable) the
guaranteed minimum death benefit, less any taxes, as of the day you die. The
guaranteed minimum death benefit as of the date of death is the greater of: A)
payments you have made, less any money you have taken out and charges paid on
the money you have taken out; or B) the highest value of the contract on each
contract anniversary prior to the owner's 76th birthday, increased by any
payments made since that anniversary, less any money taken out and charges
paid on the money you have taken out since that anniversary.
10. OTHER INFORMATION.
Free Look. If you cancel the Contract within 10 days after receiving it
(or whatever period is required in your state), we will send your money back
without assessing a contingent deferred sales charge. You will receive
whatever your Contract is worth on the day we receive your request. This may
be more or less than your original payment.
No Probate. In most cases, when you die, your beneficiary will receive
the death benefit without going through probate.
Purchasing Considerations. The Valuemark IV Variable Annuity Contract is
designed for people seeking long-term tax-deferred accumulation of assets,
generally for retirement or other long-term purposes. The tax-deferred
feature is most attractive to people in high federal and state tax brackets.
You should not buy this Contract if you are looking for a short-term
investment or if you cannot take the risk of getting back less money than you
put in.
Additional Features. The Contract offers additional features which you
might be interested in. These include:
Automatic Investment Plan - You can automatically add to your Contract on
a monthly or quarterly basis for as little as $100 by electronic transfer of
monies from your savings or checking account.
Dollar Cost Averaging Program - You can arrange to have a regular amount
of money automatically transferred from selected funds to other funds each
month, theoretically this can give you a lower average cost per unit over time
than a single one time purchase. However, there are no guarantees that this
will take place.
Flexible Rebalancing - Preferred Life will automatically readjust your
Contract value among the funds to maintain your specified allocation mix. This
can be done quarterly, semi-annually or annually.
Systematic Withdrawal Program - You can elect to receive monthly or
quarterly payments from Preferred Life while your Contract is in the
accumulation phase. Of course, you may have to pay contingent deferred sales
charges, tax penalties and taxes on the money you receive.
Minimum Distribution Program - You can arrange to have money sent to you
each month or quarter to meet certain required distribution requirements
imposed by the Internal Revenue Code.
These features may not be suitable for your particular situation.
11. INQUIRIES. If you have any questions about your Contract or need more
information, please contact us at:
Valuemark Service Center
300 Berwyn Park
P.O. Box 3031
Berwyn, PA 19312-0031
(800) 624-0197
THE VALUEMARK IV VARIABLE ANNUITY CONTRACT
ISSUED BY
PREFERRED LIFE VARIABLE ACCOUNT C
AND
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
This prospectus describes the Valuemark IV Variable Annuity Contract with a
Fixed Account option offered by Preferred Life Insurance Company of New York
(Preferred Life).
The annuity has 24 investment options - the 23 Funds of Franklin Valuemark
Funds which are listed below and a Fixed Account option of Preferred Life. You
can select up to 10 investment options (which includes any of the Funds listed
below and the Fixed Account).
FUND SEEKING STABILITY OF PRINCIPAL AND INCOME
Money Market Fund
FUNDS SEEKING CURRENT INCOME
High Income Fund
Templeton Global Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Funds - 2000, 2005 and 2010
FUNDS SEEKING GROWTH AND INCOME
Growth and Income Fund
Income Securities Fund
Mutual Shares Securities Fund
Real Estate Securities Fund
Rising Dividends Fund
Templeton Global Asset Allocation Fund
Utility Equity Fund
FUNDS SEEKING CAPITAL GROWTH
Capital Growth Fund
Mutual Discovery Securities Fund
Natural Resources Securities Fund (formerly, Precious Metals Fund)
Small Cap Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton International Equity Fund
Templeton International Smaller Companies Fund
Templeton Pacific Growth Fund
Please read this prospectus before investing and keep it for future reference.
It contains important information about the Valuemark IV Variable Annuity
Contract with a Fixed Account option.
To learn more about the annuity offered by this prospectus, you can obtain a
copy of the Statement of Additional Information (SAI) dated May __, 1997. The
SAI has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference into this prospectus. The Table of Contents of the
SAI is on Page __ of this prospectus. For a free copy of the SAI, call us at
(800) 342-3863 or write us at: 152 West 57th Street, 18th Floor, New York, New
York 10019.
INVESTMENT IN A VARIABLE ANNUITY CONTRACT IS SUBJECT TO INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THE CONTRACTS ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY FINANCIAL
INSTITUTION AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
May __, 1997
TABLE OF CONTENTS
PAGE
INDEX OF TERMS
FEE TABLE
1. THE VALUEMARK IV VARIABLE ANNUITY CONTRACT
Contract Owner
Joint Owner
Annuitant
Beneficiary
Assignment
2. ANNUITY PAYMENTS (THE PAYOUT PHASE)
Annuity Options
3. PURCHASE
Purchase Payments
Automatic Investment Plan
Allocation of Purchase Payments
Free Look
Accumulation Units
4. INVESTMENT OPTIONS
Transfers
Dollar Cost Averaging Program
Flexible Rebalancing
Voting Privileges
Substitution
5. EXPENSES
Insurance Charges
Mortality and Expense Risk Charge
Administrative Charge
Contract Maintenance Charge
Contingent Deferred Sales Charge
Waiver of Contingent Deferred Sales Charge Benefits
Reduction or Elimination of the Contingent Deferred Sales Charge
Transfer Fee
Income Taxes
Fund Expenses
6. TAXES
Annuity Contracts in General
Qualified and Non-Qualified Contracts
Surrenders - Non-Qualified Contracts
Surrenders - Qualified Contracts
Surrenders - Tax-Sheltered Annuities
Diversification
7. ACCESS TO YOUR MONEY
Systematic Withdrawal Program
Minimum Distribution Program
Suspension of Payments or Transfers
8. PERFORMANCE
9. DEATH BENEFIT
Upon Your Death
Death of Annuitant
10. OTHER INFORMATION
Preferred Life
The Separate Account
Distribution
Administration
Financial Statements
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
INDEX OF TERMS
This prospectus is written in plain English to make it as understandable for
you as possible. However, there are some technical terms used which are
capitalized in this prospectus. The page that is indicated below is where you
will find the definition for the word or term.
Page
Accumulation Phase
Accumulation Unit
Annuitant
Annuity Options
Annuity Payments.
Annuity Unit
Beneficiary
Contract
Contract Owner
Fixed Account
Funds
Income Date
Joint Owner
Non-Qualified
Payout Phase
Purchase Payment
Qualified
Tax Deferral
FEE TABLE
Contract Owner Transaction Fees
Contingent Deferred Sales Charge*
(as a percentage of purchase payments)
[Enlarge/Download Table]
Number of Complete Years From
Receipt of Purchase Payment Charge
---------------------------------------- -------
0 6%
1 6%
2 6%
3 5%
4 4%
5 3%
6 2%
7 years or more 0%
Transfer Fee** First 12 transfers in a Contract year
are free. Thereafter, the fee is $25
(or 2% of the amount transferred, if
less). Dollar Cost Averaging transfers
and Flexible Rebalancing transfers are
not counted.
Contract Maintenance Charge*** $30 per Contract per year
Separate Account Annual Expenses
(as a percentage of average
account value)
Mortality and Expense Risk Charge****
Administrative Charge 1.34%
.15%
-----
Total Separate Account Annual Expenses 1.49%
<FN>
* Each year after the first Contract year, you may make multiple partial surrenders of
up to a total of 15% of the value of your Contract and no contingent deferred sales charge
will be assessed. See Section 7 - Access to Your Money for additional options.
** The Contract provides that if more than three transfers have been made in a Contract
year, the Company reserves the right to deduct a transfer fee which will not exceed $25 or
2% of the amount transferred. Market timing transfers may not be permitted.
*** During the Accumulation Phase, the charge is waived if the value of your Contract is
at least $50,000. If you own more than one Valuemark IV Contract (registered with the same
social security number), we will determine the total value of all your Contracts. If the
total value of all your Contracts is at least $50,000, the charge is waived.
**** The Mortality and Expense Risk Charge is 1.25% during the Payout Phase.
FRANKLIN VALUEMARK FUNDS' ANNUAL EXPENSES
(as a percentage of Franklin Valuemark Funds' average net assets)
The Management and Fund Administration Fees for each Fund are based on a
percentage of that Fund's net assets under management. See the prospectus for
Franklin Valuemark Funds for more information.
The "Management and Fund Administration Fees" below are the amounts that were
paid to the Managers and Fund Administrators for the 1996 calendar year except
for Funds with fee waivers or newer Funds without a full year of operations as
of December 31, 1996.
[Enlarge/Download Table]
Management
and Fund Total
Administration Other Annual
Fund Fees (1) Expenses Expenses
-------------------------------------------------- --------------- --------- ---------
Money Market Fund (2) .51% .02% .53%
Growth and Income Fund .48% .02% .50%
Natural Resources Securities Fund (3) .60% .05% .65%
Real Estate Securities Fund .55% .02% .57%
Utility Equity Fund .47% .03% .50%
High Income Fund .52% .02% .54%
Templeton Global Income Securities Fund .56% .05% .61%
Income Securities Fund .47% .03% .50%
U.S. Government Securities Fund .49% .02% .51%
Zero Coupon Fund- 2000 (4) .38% .02% .40%
Zero Coupon Fund- 2005 (4) .38% .02% .40%
Zero Coupon Fund- 2010 (4) .38% .02% .40%
Rising Dividends Fund .75% .01% .76%
Templeton International Equity Fund .81% .08% .89%
Templeton Pacific Growth Fund .89% .10% .99%
Templeton Global Growth Fund .88% .05% .93%
Templeton Developing Markets Equity Fund 1.25% .24% 1.49%
Templeton Global Asset Allocation Fund .80% .06% .86%
Small Cap Fund .75% .02% .77%
Templeton International Smaller Companies Fund (5) 1.00% .16% 1.16%
Capital Growth Fund (5) .75% .02% .77%
Mutual Discovery Securities Fund (5) .95% .10% 1.05%
Mutual Shares Securities Fund (5) .75% .10% .85%
<FN>
1/ The Fund Administration Fee is a direct expense for the Templeton Global Asset
Allocation Fund, the Templeton International Smaller Companies Fund, the Mutual Discovery
Securities Fund and the Mutual Shares Securities Fund; other Funds pay for similar
services indirectly through the Management Fee. See the Franklin Valuemark Funds
prospectus for further information regarding these fees.
2/ Franklin Advisers, Inc. agreed to waive a portion of its Management Fee and to
pay certain expenses of the Money Market Fund during 1996. It is currently continuing
this arrangement in 1997. This arrangement may be terminated at any time. With this
reduction, the Fund's total annual expenses for 1996 were 0.43% of the average daily net
assets of the Fund.
3/ Prior to May 1, 1997, the Natural Resources Securities Fund was known as the
Precious Metals Fund.
4/ Although not obligated to, Franklin Advisers, Inc. has agreed to waive a portion
of its Management Fees and to pay certain expenses of the three Zero Coupon Funds through
at least December 31, 1997 so that the total expenses of the Zero Coupon Funds will not
exceed 0.40% of each Fund's net assets. Absent the management fee waivers, for the year
ended December 31, 1996, the Total Annual Expenses and Management and Fund Administration
Fees would have been as follows: Zero Coupon Fund-2000, .62% and .60%; Zero Coupon
Fund-2005, .65% and .63%; and Zero Coupon Fund-2010, .65% and .63%. There were no
expense reimbursements during 1996 for the Zero Coupon Funds.
5/ The Capital Growth and Templeton International Smaller Companies Funds began
operations on May 1, 1996 and the Mutual Shares Securities and Mutual Discovery
Securities Funds began operations on November 8, 1996. The expenses shown above for these
Funds are therefore estimated for 1997.
The purpose of this Fee Table is to help you understand the costs of investing
in the Contract. The Fee Table reflects expenses of the Separate Account as
well as the Funds. The examples below should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown. The $30 contract maintenance charge is included in the
Examples as a prorated charge of $1. Since the average Contract account size
is greater than $1,000, the contract maintenance charge is reduced
accordingly. Premium taxes are not reflected in the Tables. For additional
information, see Section 5 - Expenses and the Franklin Valuemark Funds
prospectus.
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on your money if you surrender your Contract at the end of each
time period:
[Enlarge/Download Table]
Fund 1 Year 2 Years 3 Years 10 Years
----------------------------------------------- ------- -------- -------- ---------
Money Market Fund $ 82 $ 117 $ 148 $ 245
Growth and Income Fund $ 81 $ 116 $ 146 $ 242
Natural Resources Securities Fund $ 83 $ 121 $ 154 $ 257
Real Estate Securities Fund $ 82 $ 119 $ 150 $ 249
Utility Equity Fund $ 81 $ 116 $ 146 $ 242
High Income Fund $ 82 $ 118 $ 148 $ 246
Templeton Global Income Securities Fund $ 82 $ 120 $ 152 $ 253
Income Securities Fund $ 81 $ 116 $ 146 $ 242
U.S. Government Securities Fund $ 81 $ 117 $ 147 $ 243
Zero Coupon Fund-2000# $ 80 $ 113 $ 141 $ 231
Zero Coupon Fund-2005# $ 80 $ 113 $ 141 $ 231
Zero Coupon Fund-2010# $ 80 $ 113 $ 141 $ 231
Rising Dividends Fund $ 84 $ 124 $ 159 $ 268
Templeton International Equity Fund $ 85 $ 128 $ 166 $ 282
Templeton Pacific Growth Fund $ 86 $ 131 $ 171 $ 292
Templeton Global Growth Fund $ 86 $ 129 $ 168 $ 286
Templeton Developing Markets Equity Fund $ 91 $ 146 $ 196 $ 340
Templeton Global Asset Allocation Fund $ 85 $ 127 $ 165 $ 279
Small Cap Fund $ 84 $ 125 $ 160 $ 270
Templeton International Smaller Companies Fund* $ 88 $ 136 $ 180 $ 308
Capital Growth Fund* $ 84 $ 125 $ 160 $ 270
Mutual Discovery Securities Fund* $ 87 $ 133 $ 174 $ 298
Mutual Shares Securities Fund* $ 85 $ 127 $ 164 $ 278
<FN>
* Estimated
# Calculated with waiver of fees
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on your money if your contract is not surrendered or is
annuitized:
[Enlarge/Download Table]
Fund 1 Year 2 Years 3 Years 10 Years
----------------------------------------------- ------- -------- -------- ---------
Money Market Fund $ 22 $ 66 $ 114 $ 245
Growth and Income Fund $ 21 $ 65 $ 112 $ 242
Natural Resources Securities Fund $ 23 $ 70 $ 120 $ 257
Real Estate Securities Fund $ 22 $ 68 $ 116 $ 249
Utility Equity Fund $ 21 $ 65 $ 112 $ 242
High Income Fund $ 22 $ 67 $ 114 $ 246
Templeton Global Income Securities Fund $ 22 $ 69 $ 118 $ 253
Income Securities Fund $ 21 $ 65 $ 112 $ 242
U.S. Government Securities Fund $ 21 $ 66 $ 113 $ 243
Zero Coupon Fund-2000# $ 20 $ 62 $ 107 $ 231
Zero Coupon Fund-2005# $ 20 $ 62 $ 107 $ 231
Zero Coupon Fund-2010# $ 20 $ 62 $ 107 $ 231
Rising Dividends Fund $ 24 $ 73 $ 125 $ 268
Templeton International Equity Fund $ 25 $ 77 $ 132 $ 282
Templeton Pacific Growth Fund $ 26 $ 80 $ 137 $ 292
Templeton Global Growth Fund $ 26 $ 78 $ 134 $ 286
Templeton Developing Markets Equity Fund $ 31 $ 95 $ 162 $ 340
Templeton Global Asset Allocation Fund $ 25 $ 76 $ 131 $ 279
Small Cap Fund $ 25 $ 74 $ 126 $ 270
Templeton International Smaller Companies Fund* $ 28 $ 85 $ 146 $ 308
Capital Growth Fund* $ 24 $ 74 $ 126 $ 270
Mutual Discovery Securities Fund* $ 27 $ 82 $ 140 $ 298
Mutual Shares Securities Fund* $ 25 $ 76 $ 130 $ 278
<FN>
* Estimated
# Calculated with waiver of fees
As of the date of this prospectus, no Contracts had been sold. Therefore,
Preferred Life has not provided Condensed Financial Information.
1. THE VALUEMARK IV VARIABLE ANNUITY CONTRACT
This prospectus describes a variable annuity contract with a Fixed Account
option offered by Preferred Life.
An annuity is a contract between you, the owner, and an insurance company (in
this case Preferred Life), where the insurance company promises to pay you (or
someone else you choose) an income, in the form of Annuity Payments, beginning
on a designated date that is at least two years in the future. Until you
decide to begin receiving Annuity Payments, your annuity is in the
Accumulation Phase. Once you begin receiving Annuity Payments, your Contract
switches to the Payout Phase. The Contract benefits from Tax Deferral.
Tax Deferral means that you are not taxed on earnings or appreciation on the
assets in your Contract until you take money out of your Contract.
The Contract is called a variable annuity because you can choose among 23
Funds and depending upon market conditions, you can make or lose money based
on the Fund's investment performance. The Funds are designed to offer a better
return than the Fixed Account option, however this is not guaranteed. If you
select the variable annuity portion of the Contract, the amount of money you
are able to accumulate in your Contract during the Accumulation Phase depends
in large part upon the investment performance of the Fund(s) you select. The
amount of the Annuity Payments you receive during the Payout Phase from the
variable annuity portion of the Contract also depends in large part upon the
investment performance of the Funds you select for the Payout Phase.
The Contract also contains a Fixed Account option. The Fixed Account Payout
option offers an interest rate that is guaranteed for all deposits made within
the twelve month period by Preferred Life. This interest rate is set monthly
and is guaranteed for 12 months. Preferred Life guarantees that the interest
credited to the Fixed Account will not be less than 3% per year. If you select
the Fixed Account, your money will be placed with the other general assets of
Preferred Life. If you select the Fixed Account, the amount of money you are
able to accumulate in your Contract during the Accumulation Phase depends upon
the total interest credited to your Contract.
We will not make any changes to your Contract without your permission except
as may be required by law.
CONTRACT OWNER . You as the Contract Owner, have all the rights under the
Contract. The Contract Owner is as designated at the time the contract is
issued, unless changed. You may change Contract Owners at any time. This may
be a taxable event. You should consult with your tax adviser before doing
this.
JOINT OWNER. The Contract can be owned by Joint Owners. Any Joint Owner must
be the spouse of the other Contract Owner. Upon the death of either
Joint Owner, the surviving spouse will be the designated Beneficiary. Any
other Beneficiary designation at the time the Contract was issued or as
may have been later changed will be treated as a contingent
Beneficiary unless otherwise indicated.
ANNUITANT . An Annuitant is the natural person on whose life we base Annuity
Payments. You name an Annuitant. You may change the Annuitant at any time
before the Income Date unless the Contract is owned by a non-individual (for
example, a corporation).
BENEFICIARY
The Beneficiary is the person(s) or entity you name to receive any death
benefit. The Beneficiary is named at the time the Contract is issued unless
changed at a later date. Unless an irrevocable Beneficiary has been named, you
can change the Beneficiary or contingent Beneficiary.
ASSIGNMENT
You can assign the Contract at any time during your lifetime. Preferred Life
will not be bound by the assignment until it receives the written notice of
the assignment. Preferred Life will not be liable for any payment or other
action we take in accordance with the Contract before we receive notice of the
assignment. Any assignment made after the death benefit has become payable
can only be done with our consent. AN ASSIGNMENT MAY BE A TAXABLE EVENT.
If the Contract is issued pursuant to a Qualified plan, there may be
limitations on your ability to assign the Contract.
2. ANNUITY PAYMENTS (THE PAYOUT PHASE)
You can receive regular monthly income payments under your Contract. You can
choose the month and year in which those payments begin. We call that date the
Income Date. Your Income Date must be the first day of a calendar month and
must be at least 2 years after you buy the Contract. You can also choose among
income plans. We call those Annuity Options.
We ask you to choose your Income Date when you purchase the Contract. You can
change it at any time before the Income Date with 30 days notice to us.
Annuity Payments must begin by the Annuitant's 90th birthday. You (or someone
you designate) will receive the Annuity Payments. You will receive tax
reporting on those payments.
If you do not choose an Annuity Option prior to the Income Date, we will
assume that you selected Option 2 which provides a life annuity with 10 years
of guaranteed payments.
You may elect to receive your Annuity Payments as a variable payout, a fixed
payout, or a combination of both. Under a fixed payout, all of the Annuity
Payments will be the same dollar amount (equal installments). Under a variable
payout, you have the same investment choices from the Funds that were
available during the Accumulation Phase. If you do not tell us otherwise, your
Annuity Payments will be based on the investment allocations that were in
place on the Income Date.
If you choose to have any portion of your Annuity Payments based on the
investment performance of the Funds, the dollar amount of your payment will
depend upon three things: 1) the value of your Contract in the Fund(s) on the
Income Date, 2) the 5% assumed investment rate used in the annuity table for
the Contract, and 3) the performance of the Fund(s) you selected. If the
actual performance exceeds the 5% assumed rate, your Annuity Payments will
increase. Similarly, if the actual rate is less than 5%, your Annuity Payments
will decrease.
ANNUITY OPTIONS
You can choose one of the following Annuity Options or any other Annuity
Option you want and that Preferred Life agrees to provide. After Annuity
Payments begin, you cannot change the Annuity Option.
OPTION 1. LIFE ANNUITY. Under this option, we will make monthly Annuity
Payments so long as the Annuitant is alive. After the Annuitant dies, we stop
making Annuity Payments.
OPTION 2. LIFE ANNUITY WITH 5, 10, 15 OR 20 YEAR PAYMENTS GUARANTEED. Under
this option, we will make monthly Annuity Payments so long as the Annuitant is
alive. However, if, when the Annuitant dies, we have made Annuity Payments for
less than the selected guaranteed period, we will continue to make Annuity
Payments to you for the rest of the guaranteed period. If you do not want to
receive Annuity Payments, you can ask us for a single lump sum.
OPTION 3. JOINT AND LAST SURVIVOR ANNUITY. Under this option, we will make
monthly Annuity Payments during the joint lifetime of the Annuitant and the
joint Annuitant. When the Annuitant dies, if the joint Annuitant is still
alive, we will continue to make Annuity Payments, so long as the joint
Annuitant continues to live. The amount of the Annuity Payments we will make
to the survivor can be equal to 100%, 75% or 50% of the amount that we would
have paid if they both were alive. The monthly Annuity Payments will end when
the last surviving Annuitant dies.
OPTION 4. JOINT AND LAST SURVIVOR ANNUITY WITH 5, 10, 15 OR 20 YEAR PAYMENTS
GUARANTEED. Under this option, we will make monthly Annuity Payments during
the joint lifetime of the Annuitant and the joint Annuitant. When the
Annuitant dies, if the joint Annuitant is still alive, we will continue to
make Annuity Payments, so long as the surviving Annuitant continues to live,
at 100% of the amount that would have been paid if they were both alive. If,
when the last death occurs, we have made Annuity Payments for less than the
selected guaranteed period, we will continue to make Annuity Payments to you
or any person you designate for rest of the guaranteed period. If you do not
want to receive Annuity Payments, you can ask us for a single lump sum.
OPTION 5. REFUND LIFE ANNUITY. Under this option, we will make monthly
Annuity Payments during the Annuitant's lifetime. The last Annuity Payment
will be made before the Annuitant dies with a guarantee that Preferred Life
will pay you a refund if the amount (units) annuitized has not been repaid.
3. PURCHASE
PURCHASE PAYMENTS
A Purchase Payment is the money you invest in the Contract. The minimum
payment Preferred Life will accept is $5,000 when the Contract is bought as a
Non-Qualified Contract. If you enroll in the automatic investment plan (which
is described below), your Purchase Payment can be $2,000. If you are buying
the Contract as part of an IRA (Individual Retirement Annuity), 401(k) or
other qualified plan, the minimum amount we will accept is $2,000. The maximum
we will accept without our prior approval is $1 million. You can make
additional Purchase Payments of $250 (or as low as $100 if you have selected
the automatic investment plan) or more to either type of Contract. Preferred
Life may, at its sole discretion, waive minimum payment requirements. At the
time you buy the Contract, you and the Annuitant cannot be older than 85 years
old.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan (AIP) is a program which allows you to make
additional Purchase Payments to your Contract on a monthly or quarterly basis
by electronic transfer of funds from your savings or checking account. You may
participate in this program by completing the appropriate form. We must
receive your form by the first of the month in order for AIP to begin that
same month. Investments will take place on the 20th of the month, or the next
business day. The minimum investment that can be made by AIP is $100. You may
stop AIP at any time you want. We need to be notified by the first of the
month in order to stop or change AIP that month. If AIP is used for a
Qualified Contract, you should consult your tax adviser for advice regarding
maximum contributions.
ALLOCATION OF PURCHASE PAYMENTS
When you purchase a Contract, we will allocate your Purchase Payment to the
Fixed Account and/or one or more of the Funds you have selected. We ask that
you allocate your money in either whole percentages or round dollars. You can
instruct us how to allocate additional Purchase Payments you make. If you do
not instruct us, we will allocate them in the same way as your previous
instructions to us. Preferred Life reserves the right to limit the number of
Funds that you may invest in at one time. Currently, you may invest in 10
investment options at one time (which includes any of the 23 Funds of Franklin
Valuemark Funds listed in Section 4 and the Preferred Life Fixed Account
option) . We may change this in the future. However, we will always
allow you to invest in at least five Funds.
Once we receive your Purchase Payment, the necessary information and federal
funds (federal funds means monies credited to a bank's account with its
regional federal reserve bank), we will issue your Contract and allocate your
first Purchase Payment within 2 business days. If you do not give us all of
the information we need, we will contact you to get it. If for some reason we
are unable to complete this process within 5 business days, we will either
send back your money or get your permission to keep it until we get all of the
necessary information. If you make additional Purchase Payments, we will
credit these amounts to your Contract within one business day. Our business
day closes when the New York Stock Exchange closes, which is usually at 4:00
p.m. Eastern time.
FREE LOOK
If you change your mind about owning the Contract, you can cancel it within 10
days after receiving it. Return of the Contract by mail is effective on being
postmarked, properly addressed and postage prepaid. When you cancel the
Contract within this time period, Preferred Life will not assess a contingent
deferred sales charge. You will receive back whatever your Contract is worth
on the day we receive your request. If you have purchased the Contract as an
IRA, we are required to give you back your Purchase Payment if you decide to
cancel your Contract within 10 days after receiving it. If that is the case,
we have the right to put your initial Purchase Payment in the Money Market
Fund for 15 days after we issue your Contract. At the end of that period, we
will re-allocate your money as you selected. Currently, however, we will
directly allocate your money to the Funds and/or the Fixed Account as you have
selected.
ACCUMULATION UNITS
The value of the portion of your Contract allocated to the Funds will go up or
down depending upon the investment performance of the Fund(s) you choose. The
value of your Contract will also depend on the expenses of the Contract. In
order to keep track of the value of your Contract, we use a measurement called
an Accumulation Unit (which is like a share of a mutual fund). During the
Payout Phase of the Contract we call it an Annuity Unit.
Every business day we determine the value of an Accumulation Unit by
multiplying the Accumulation Unit value for the previous period by a factor
for the current period. The factor is determined by:
1. dividing the value of a Fund share at the end of the current period
by the value of a Fund share for the previous period; and
2. multiplying it by one minus the daily amount of the insurance charges
and any charges for taxes.
The value of an Accumulation Unit may go up or down from day to day.
When you make a Purchase Payment, we credit your Contract with Accumulation
Units for any portion of your Purchase Payment allocated to a Fund. The number
of Accumulation Units credited is determined by dividing the amount of the
Purchase Payment allocated to a Fund by the value of the Accumulation Unit.
We calculate the value of an Accumulation Unit after the New York Stock
Exchange closes each day and then credit your Contract.
EXAMPLE:
On Wednesday we receive an additional Purchase Payment of $3,000 from you. You
have told us you want this to go to the Growth and Income Fund. When the New
York Stock Exchange closes on that Wednesday, we determine that the value of
an Accumulation Unit based on an investment in the Growth and Income Fund is
$12.50. We then divide $3,000 by $12.50 and credit your Contract on Wednesday
night with 240 Accumulation Units.
4. INVESTMENT OPTIONS
The Contract offers 23 Funds of Franklin Valuemark Funds and a Fixed Account
option of Preferred Life. Additional Funds may be available in the future.
YOU SHOULD READ THE FRANKLIN VALUEMARK FUNDS PROSPECTUS (WHICH IS ATTACHED TO
THIS PROSPECTUS) CAREFULLY BEFORE INVESTING.
Franklin Valuemark Funds is the mutual fund underlying your Contract. Each
Fund has its own investment objective. Franklin Advisers, Inc. serves as each
Fund's investment manager (except the Templeton Global Growth Fund, the
Templeton Developing Markets Equity Fund, the Templeton Global Asset
Allocation Fund, the Templeton International Smaller Companies Fund, the
Rising Dividends Fund, the Mutual Shares Securities Fund and the Mutual
Discovery Securities Fund). The investment manager for the Templeton Global
Growth and the Templeton Global Asset Allocation Funds is Templeton Global
Advisors Limited. The investment manager for the Templeton Developing Markets
Equity Fund is Templeton Asset Management Ltd. The investment manager for the
Templeton International Smaller Companies Fund is Templeton Investment
Counsel, Inc. The investment manager for the Rising Dividends Fund is Franklin
Advisory Services, Inc. The investment manager for the Mutual Shares
Securities and the Mutual Discovery Securities Funds is Franklin Mutual
Advisers, Inc. Certain managers have retained one or more subadvisers to help
them manage the Funds.
Franklin Valuemark Funds serves as the underlying mutual fund for variable
life insurance policies offered by an affiliate of Preferred Life and other
variable annuity contracts offered by Preferred Life and its affiliates.
Franklin Valuemark Funds does not believe that offering its shares in this
manner will be disadvantageous to you.
The following is a list of the Funds which are available under the Contract:
FUND SEEKING STABILITY OF PRINCIPAL AND INCOME:
Money Market Fund
FUNDS SEEKING CURRENT INCOME:
High Income Fund
Templeton Global Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Funds - 2000, 2005 and 2010
FUNDS SEEKING GROWTH AND INCOME:
Growth and Income Fund
Income Securities Fund
Mutual Shares Securities Fund
Real Estate Securities Fund
Rising Dividends Fund
Templeton Global Asset Allocation Fund
Utility Equity Fund
FUNDS SEEKING CAPITAL GROWTH:
Capital Growth Fund
Mutual Discovery Securities Fund
Natural Resources Securities Fund (formerly, Precious Metals Fund)
Small Cap Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton International Equity Fund
Templeton International Smaller Companies Fund
Templeton Pacific Growth Fund
TRANSFERS
You can transfer money among the 23 Funds and/or the Fixed Account. Preferred
Life currently allows you to make as many transfers as you want to each year.
Preferred Life may change this practice in the future. However, this product
is not designed for professional market timing organizations or other persons
using programmed, large frequent transfers. Such activity may be disruptive to
a Fund. We reserve the right to reject any specific Purchase Payment
allocation or transfer request from a professional market timer or registered
representative or to prohibit these types of transfers if we determine that
they could harm a Fund.
Your Contract provides that you can make 3 transfers every year without
charge. However, currently Preferred Life permits you to make 12 transfers
every year without charge. We measure a year from the anniversary of the day
we issued your Contract. You can make a transfer to or from the Fixed Account
and to or from any Fund. If you make more than 12 transfers in a year, there
is a transfer fee deducted. The fee is $25 per transfer or, if less, 2% of the
amount transferred. The following applies to any transfer:
1. The minimum amount which you can transfer is $1,000 or your entire
value in the Fund or Fixed Account. This requirement is waived if the transfer
is in connection with the Dollar Cost Averaging Program or Flexible
Rebalancing (which are described below).
2. We may not allow you to make transfers during the free look period.
3. Your request for a transfer must clearly state which Fund(s) or the
Fixed Account is involved in the transfer.
4. Your request for a transfer must clearly state how much the transfer
is for.
5. You cannot make any transfers within 7 calendar days prior to the date
your first Annuity Payment is due.
6. During the Payout Phase, you may not make a transfer from a Fixed
Annuity Option to a variable Annuity Option.
7. During the Payout Phase, you can make at least one transfer
from a variable Annuity Option to a Fixed Annuity Option.
Preferred Life has reserved the right to modify the transfer provisions
subject to the guarantees described above.
You can make transfers by telephone by properly completing the telephone
transfer forms provided by Preferred Life. We may allow you to authorize
someone else to make transfers by telephone on your behalf. If you own the
Contract with a Joint Owner, unless Preferred Life is instructed otherwise,
Preferred Life will accept instructions from either one of you. Preferred Life
will use reasonable procedures to confirm that instructions given us by
telephone are genuine. If we do not use such procedures, we may be liable for
any losses due to unauthorized or fraudulent instructions. Preferred Life tape
records all telephone instructions.
DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging Program allows you to systematically transfer a set
amount of money each month or quarter from any one Fund or the Fixed Account
to up to eight of the other Funds. By allocating amounts on a regularly
scheduled basis, as opposed to allocating the total amount at one particular
time, you may be less susceptible to the impact of market fluctuations. You
may only participate in this program during the Accumulation Phase.
You must participate in the program for at least six months (or two quarters)
and must transfer at least $500 each time (or $1,500 each quarter). Your
allocations can be in whole percentages or dollar amounts. The Fund(s) you
transfer from may not be the Fund(s) you transfer to in this program. You may
elect this program by properly completing the Dollar Cost Averaging forms
provided by Preferred Life.
All Dollar Cost Averaging transfers will be made on the 10th day of the month
unless that day is not a business day. If it is not, then the transfer will be
made the next business day.
Your participation in the program will end when any of the following occurs:
(1) the number of desired transfers have been made; (2) you do not have enough
money in the Fund(s) or Fixed Account to make the transfer (if less money is
available, that amount will be dollar cost averaged and the program will end);
(3) you request to terminate the program (your request must be received by us
by the first of the month to terminate that month); (4) the Contract is
terminated; or (5) we receive proof of the Contract Owner's death.
If you participate in the Dollar Cost Averaging Program, the transfers made
under the program are not taken into account in determining any transfer fee.
You may not participate in the Dollar Cost Averaging Program and Flexible
Rebalancing at the same time.
FLEXIBLE REBALANCING
Once your money has been invested, the performance of the Funds may cause your
chosen allocation to shift. Flexible Rebalancing is designed to help you
maintain your specified allocation mix among the different Funds. You can
direct us to readjust your Contract value on a quarterly, semi-annual or
annual basis to return to your original Fund allocations. Flexible Rebalancing
transfers will be made on the 20th day of the month unless that day is not a
business day. If it is not, then the transfer will be made on the previous
day. If you participate in Flexible Rebalancing, the transfers made under the
program are not taken into account in determining any transfer fee. The Fixed
Account is not permitted to be part of Flexible Rebalancing.
VOTING PRIVILEGES
Preferred Life is the legal owner of the Fund shares. However, when a Fund
solicits proxies in conjunction with a shareholder vote, Preferred Life will
obtain from you and other Contract Owners instructions as to how to vote those
shares. When we receive those instructions, we will vote all of the shares we
own in proportion to those instructions. This will also include any shares
that Preferred Life owns on its own behalf. Should Preferred Life determine
that it is no longer required to comply with the above, we will vote the
shares in our own right.
SUBSTITUTION
Preferred Life may be required to substitute one of the Funds you have
selected with another Fund. We would not do this without the prior approval of
the Securities and Exchange Commission. We will give you notice of our
intention to do this.
5. EXPENSES
There are charges and other expenses associated with the Contract that will
reduce your investment return. These charges and expenses are:
INSURANCE CHARGES
Each day, Preferred Life makes a deduction for its insurance charges.
Preferred Life does this as part of its calculation of the value of the
Accumulation Units and the Annuity Units. The insurance charge has two parts:
1) the mortality and expense risk charge and 2) the administrative charge.
MORTALITY AND EXPENSE RISK CHARGE . During the Accumulation Phase, this
charge is equal, on an annual basis, to 1.34% of the average daily value of
the contract invested in a Fund, after the deduction of expenses. During the
Payout Phase, the charge is equal, on an annual basis, to 1.25% of the average
daily value of the Contract invested in a Fund, after the deduction of
expenses. This charge compensates us for all the insurance benefits provided
by your Contract (for example, the guarantee of annuity rates, the death
benefits, certain expenses related to the contract, and for assuming the risk
(expense risk) that the current charges will be insufficient in the future to
cover the cost of administering the contract). The amount of the mortality and
expense risk charge is less during the Payout Phase because Preferred Life
does not pay a death benefit separate from benefits under the Annuity Option
if you die during the Payout Phase.
ADMINISTRATIVE CHARGE . This charge is equal, on an annual basis, to .15% of
the average daily value of the Contract invested in a Fund, after the
deduction of expenses. This charge, together with the contract maintenance
charge (which is explained below), is for all the expenses associated with the
administration of the Contract. Some of these expenses include: preparation of
the contract, confirmations, annual reports and statements, maintenance of
contract records, personnel costs, legal and accounting fees, filing fees, and
computer and systems costs.
CONTRACT MAINTENANCE CHARGE
Every year on the anniversary of the date when your Contract was issued,
Preferred Life deducts $30 from your Contract as a contract maintenance
charge. This charge is for administrative expenses (see above). This charge
can not be increased.
However, during the Accumulation Phase, if the value of your Contract is at
least $50,000 when the deduction for the charge is to be made, Preferred Life
will not deduct this charge. If you own more than one Valuemark IV Contract,
Preferred Life will determine the total value of all your Valuemark IV
Contracts. If the total value of all Contracts registered under the same
social security number is at least $50,000, Preferred Life will not assess the
contract maintenance charge. If the Contract is owned by a non-natural person
(e.g., a corporation), Preferred Life will look to the Annuitant to determine
if it will assess the charge.
If you make a complete surrender from your Contract, the contract maintenance
charge will also be deducted. During the Payout Phase, the charge will be
collected monthly out of each Annuity Payment.
CONTINGENT DEFERRED SALES CHARGE
Surrenders may be subject to a contingent deferred sales charge. During the
Accumulation Phase, you can make surrenders from your Contract. Preferred Life
keeps track of each Purchase Payment you make. The amount of the contingent
deferred sales charge depends upon how long Preferred Life has had your
payment. The charge is:
[Download Table]
Number of complete years from
receipt of purchase payment: 0 1 2 3 4 5 6 7 or more
Contingent Deferred Sales Charge: 6% 6% 6% 5% 4% 3% 2% 0%
However, after Preferred Life has had a Purchase Payment for 7 years, there is
no charge when you surrender that Purchase Payment. For purposes of the
contingent deferred sales charge, Preferred Life treats withdrawals as coming
from the oldest Purchase Payments first. Preferred Life does not assess the
contingent deferred sales charge on any payments paid out as Annuity Payments
or as death benefits.
NOTE: For tax purposes, surrenders are considered to have come from the last
money you put into the Contract. Thus, for tax purposes, earnings are
considered to come out first.
FREE SURRENDER AMOUNT - Each year after the first Contract year, you can make
multiple surrenders up to 15% of the value of your Contract and no contingent
deferred sales charge will be deducted from the 15% you take out. Surrenders
in excess of that free amount will be subject to the contingent deferred sales
charge. If you do not surrender the full 15% in any one Contract year, you may
not carry over the remaining percentage amount to another year.
You may also select to participate in the Systematic Withdrawal Program or the
Minimum Distribution Program which allow you to make surrenders without the
deduction of the contingent deferred sales charge under certain circumstances.
You cannot use these Programs and the 15% free withdrawal amount in the same
Contract year. See Section 7 - Access to Your Money for a description of the
Systematic Withdrawal Program and the Minimum Distribution Program.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE BENEFITS
Under certain circumstances, after the first year, Preferred Life will permit
you to take your money out of the Contract without deducting a contingent
deferred sales charge: 1) if you become terminally ill, which is defined as
life expectancy of 12 months or less (a full surrender of the Contract will be
required); or 2) if you become totally disabled for at least 90 days.
Also, after the first year, if you become unemployed for at least 90
consecutive days, you can take up to 50% of your money out of the Contract
without incurring a contingent deferred sales charge. This benefit is
available only once during the life of the contract and you may not use both
this benefit and the 15% free withdrawal amount in the same Contract year.
REDUCTION OR ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
Preferred Life will reduce or eliminate the amount of the contingent deferred
sales charge when the Contract is sold under circumstances which reduce its
sales expenses. Some examples are: if there is a large group of individuals
that will be purchasing the Contract or a prospective purchaser already had a
relationship with Preferred Life. Preferred Life will not deduct a contingent
deferred sales charge under a Contract issued to an officer, director or
employee of Preferred Life or any of its affiliates. Any circumstances
resulting in reduction or elimination of the contingent deferred sales charge
requires prior approval of Preferred Life.
TRANSFER FEE
You can make 12 free transfers every year. We measure a year from the day we
issue your Contract. If you make more than 12 transfers a year, we will deduct
a transfer fee of $25 or 2% of the amount that is transferred, whichever is
less, for each additional transfer.
If the transfer is part of the Dollar Cost Averaging Program or Flexible
Rebalancing, it will not count in determining the transfer fee.
INCOME TAXES
Preferred Life will deduct from the Contract for any income taxes which it may
incur because of the Contract. Currently, Preferred Life is not making any
such deductions.
FUND EXPENSES
There are deductions from the assets of the various Funds for operating
expenses (including management fees) which are described in the attached
prospectus for Franklin Valuemark Funds.
6. TAXES
NOTE: PREFERRED LIFE HAS PREPARED THE FOLLOWING INFORMATION ON TAXES AS A
GENERAL DISCUSSION OF THE SUBJECT. IT IS NOT INTENDED AS TAX ADVICE. YOU
SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT YOUR OWN CIRCUMSTANCES. PREFERRED
LIFE HAS INCLUDED ADDITIONAL INFORMATION REGARDING TAXES IN THE STATEMENT OF
ADDITIONAL INFORMATION.
ANNUITY CONTRACTS IN GENERAL
Annuity contracts are a means of setting aside money for future needs -
usually retirement. Congress recognized how important saving for retirement
was and provided special rules in the Internal Revenue Code (Code) for
annuities.
Basically, these rules provide that you will not be taxed on any earnings on
the money held in your annuity Contract until you take the money out. This is
referred to as Tax Deferral. There are different rules regarding how you will
be taxed depending upon how you take the money out and the type of Contract -
Qualified or Non-Qualified (see following sections).
You, as the Contract Owner, will not be taxed on increases in the value of
your Contract until a distribution occurs - either as a surrender or as
Annuity Payments. When you make a surrender you are taxed on the amount of the
surrender that is earnings. For Annuity Payments, different rules apply. A
portion of each Annuity Payment you receive will be treated as a partial
return of your Purchase Payments and will not be taxed. The remaining portion
of the Annuity Payment will be treated as ordinary income. How the Annuity
Payment is divided between taxable and non-taxable portions depends upon the
period over which the Annuity Payments are expected to be made. Annuity
payments received after you have received all of your Purchase Payments are
fully includible in income.
When a Non-Qualified Contract is owned by a non-natural person (e.g., a
corporation or certain other entities other than tax-qualified trusts), the
Contract will generally not be treated as an annuity for tax purposes. This
means that the Contract may not receive the benefits of Tax-Deferral. Income
may be taxed as ordinary income every year.
QUALIFIED AND NON-QUALIFIED CONTRACTS
If you purchase the Contract under a Qualified plan, your Contract is referred
to as a Qualified Contract. Examples of Qualified plans are: Individual
Retirement Annuities (IRAs), Tax-Sheltered Annuities (sometimes referred to as
403(b) contracts), H.R. 10 Plans (sometimes referred to as Keogh Plans), and
pension and profit-sharing plans, which include 401(k) plans.
If you do not purchase the Contract under a Qualified plan, your contract is
referred to as a Non-Qualified Contract.
SURRENDERS - NON-QUALIFIED CONTRACTS
If you make a surrender from your Contract, the Code treats such a surrender
as first coming from earnings and then from your Purchase Payments. In most
cases, such withdrawn earnings are includible in income.
The Code also provides that any amount received under an annuity contract
which is included in income may be subject to a tax penalty. The amount of the
penalty is equal to 10% of the amount that is includible in income. Some
surrenders will be exempt from the penalty. They include any amounts: (1) paid
on or after the taxpayer reaches age 59 1/2; (2) paid after you die; (3) paid
if the taxpayer becomes totally disabled (as that term is defined in the
Code); (4) paid in a series of substantially equal payments made annually (or
more frequently) for the life or life expectancy of the taxpayer; (5) paid
under an immediate annuity; or (6) which come from Purchase Payments made
prior to August 14, 1982.
SURRENDERS - QUALIFIED CONTRACTS
The above information describing the taxation of Non-Qualified Contracts does
not apply to Qualified Contracts. There are special rules that govern
Qualified Contracts. A more complete discussion of surrenders from Qualified
Contracts is contained in the Statement of Additional Information.
SURRENDERS - TAX-SHELTERED ANNUITIES
The Code limits the surrender of Purchase Payments made by owners from certain
Tax-Sheltered Annuities. Surrenders can only be made when a Contract Owner:
(1) reaches age 59-1/2; (2) leaves his/her job; (3) dies; (4) becomes disabled
(as that term is defined in the Code); or (5) in the case of hardship.
However, in the case of hardship, the Contract Owner can only withdraw the
Purchase Payments and not any earnings.
DIVERSIFICATION
The Code provides that the underlying investments for a variable annuity must
satisfy certain diversification requirements in order to be treated as an
annuity contract. Preferred Life believes that the Funds are being managed so
as to comply with the requirements.
Neither the Code nor the Internal Revenue Service Regulations issued to date
provide guidance as to the circumstances under which you, because of the
degree of control you exercise over the underlying investments, and not
Preferred Life would be considered the owner of the shares of the Funds. If
this occurs, it will result in the loss of the favorable tax treatment for the
Contract. It is unknown to what extent under federal tax law Contract Owners
are permitted to select Funds, to make transfers among the Funds or the number
and type of Funds owners may select from. If any guidance is provided which is
considered a new position, then the guidance would generally be applied
prospectively. However, if such guidance is considered not to be a new
position, it may be applied retroactively. This would mean that you, as the
owner of the contract, could be treated as the owner of the Funds.
Due to the uncertainty in this area, Preferred Life reserves the right to
modify the contract in an attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
You can have access to the money in your Contract: (1) by making a surrender
(either a partial or a total surrender); (2) by receiving Annuity Payments; or
(3) when a death benefit is paid to your Beneficiary. Surrenders can only be
made during the Accumulation Phase.
When you make a complete surrender you will receive the value of the Contract
on the day you made the surrender less any applicable contingent deferred
sales charge, less any premium tax and less any contract maintenance charge.
(See Section 5 - Expenses for a discussion of the charges.)
Any partial surrender must be for at least $500 and, unless you instruct
Preferred Life otherwise, will be made pro-rata from all the Funds and the
Fixed Account you selected. Preferred Life requires that after you make a
partial surrender the value of your Contract must be at least $2,000.
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY
SURRENDER YOU MAKE.
There are limits to the amount you can surrender from a Qualified plan
referred to as a 403(b) plan. For a more complete explanation see Section 6 -
Taxes and the discussion in the SAI.
SYSTEMATIC WITHDRAWAL PROGRAM
If the value of your Contract is at least $25,000, Preferred Life offers a
plan which provides automatic monthly or quarterly payments to you from your
Contract each year. The total systematic withdrawals which you can make each
year without Preferred Life deducting a contingent deferred sales charge is
limited to 15% of the value of your Contract determined on the business day
before we receive your request. You may surrender any amount you want under
this program if your payments are no longer subject to the contingent deferred
sales charge. You may not participate in this program if you own a
Non-Qualified Contract and are under age 59 1/2. If you make surrenders under
this plan, you may not also use the 15% free surrender amount that year. For a
discussion of the contingent deferred sales charge and the 15% free surrender
amount, see Section 5 - Expenses. All systematic withdrawals will be made on
the 9th day of the month unless that day is not a business day. If it is not,
then the surrender will be made the previous business day.
INCOME TAXES MAY APPLY TO SYSTEMATIC WITHDRAWALS.
MINIMUM DISTRIBUTION PROGRAM
If you own a Contract that is an Individual Retirement Annuity (IRA), you may
select the Minimum Distribution Program. Under this program, Preferred Life
will make payments to you from your Contract that are designed to meet the
applicable minimum distribution requirements imposed by the Internal Revenue
Code for IRAs. If the value of your Contract is at least $25,000, Preferred
Life will make payments to you on a monthly or quarterly basis. The payments
will not be subject to the contingent deferred sales charge and will be
instead of the 15% free surrender amount.
SUSPENSION OF PAYMENTS OR TRANSFERS
Preferred Life may be required to suspend or postpone payments for surrenders
or transfers for any period when:
1. the New York Stock Exchange is closed (other than customary weekend
and holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of the Fund shares
is not reasonably practicable or Preferred Life cannot reasonably value the
Fund shares;
4. during any other period when the Securities and Exchange Commission,
by order, so permits for the protection of Contract Owners.
Preferred Life has reserved the right to defer payment for a surrender or
transfer from the Fixed Account for the period permitted by law but not for
more than six months.
8. PERFORMANCE
Preferred Life periodically advertises performance of the various Funds.
Preferred Life will calculate performance by determining the percentage change
in the value of an Accumulation Unit by dividing the increase (decrease) for
that unit by the value of the Accumulation Unit at the beginning of the
period. This performance number reflects the deduction of the insurance
charges. It does not reflect the deduction of any applicable contingent
deferred sale charge and contract maintenance charge. The deduction of any
applicable contract maintenance charge and contingent deferred sales charges
would reduce the percentage increase or make greater any percentage decrease.
Any advertisement will also include average annual total return figures which
reflect the deduction of the insurance charges, contract maintenance charge,
contingent deferred sales charges and the expenses of the Funds. Preferred
Life may also advertise cumulative total return information. Cumulative total
return is determined the same way except that the results are not annualized.
Certain Funds have been in existence for some time and have investment
performance history. However, the Contracts are new. In order to demonstrate
how the actual investment experience of the Funds may affect your Accumulation
Unit values, Preferred Life has prepared hypothetical performance information.
The performance is based on the historical performance of the Funds, modified
to reflect the charges and expenses of your Contract as if it had been in
existence for the time periods shown. The information is based upon the
historical experience of the Funds and does not represent past or predict
future performance.
Preferred Life may in the future also advertise yield information. If it does,
it will provide you with information regarding how yield is calculated. More
detailed information regarding how performance is calculated is found in the
SAI.
Any performance advertised will be based on historical data and does not
guarantee future results of the Funds.
9. DEATH BENEFIT
UPON YOUR DEATH
If you die during the Accumulation Phase, a death benefit is payable to your
Beneficiary (see below). No separate death benefit is paid during the
Payout Phase. If you have a Joint Owner, and the Joint Owner
dies, the surviving Owner will be considered the Beneficiary. Joint
Owners must be spouses.
The death benefit will be the greater of: 1) the current value of your
Contract, less any taxes on the day all claim proofs and payment election
forms are received by Preferred Life at the Valuemark Service Center; or 2)
(if applicable) as set forth in the enhanced death benefit endorsement to the
Contract, the guaranteed minimum death benefit, less any taxes, as of the day
you die. Certain Contract Owners will not receive an enhanced death benefit
endorsement. For these Contract Owners, the death benefit is as set forth in
Item No. 1 above. The guaranteed minimum death benefit is equal to the greater
of: A) the payments you have made, less any money you have taken out and any
charges paid on the money you have taken out; or B) the highest value of the
Contract on each Contract anniversary prior to an Owner's 76th birthday,
increased by any payments made since that anniversary, less any money taken
out and charges paid on the money you have taken out since that anniversary.
If you have a Joint Owner, the age of the oldest Owner will be used to
determine the guaranteed minimum death benefit. The guaranteed minimum death
benefit will be reduced by any amounts withdrawn after the date of death. If
the Contract is owned by a non-natural person, then all references to you mean
the Annuitant.
A Beneficiary may request that the death benefit be paid in one of the
following ways: (1) payment of the entire death benefit within 5 years of the
date of death; or (2) payment of the death benefit under an Annuity Option.
The death benefit payable under an Annuity Option must be paid over the
Beneficiary's lifetime or for a period not extending beyond the Beneficiary's
life expectancy. Payment must begin within one year of the date of death. If
the Beneficiary is the spouse of the Contract Owner, he/she can choose to
continue the Contract in his/her own name at the then current value, or if
greater, the death benefit value. If a lump sum payment is elected and all the
necessary requirements are met, the payment will be made within 7 days.
If you (or any Joint Owner) die during the Payout Phase and you are not the
Annuitant, any payments which are remaining under the Annuity Option selected
will continue at least as rapidly as they were being paid at your death. If
you die during the Payout Phase, the Beneficiary becomes the Contract Owner.
DEATH OF ANNUITANT
If the Annuitant, who is not a Contract Owner or Joint Owner, dies during the
Accumulation Phase, you can name a new Annuitant. If a new Annuitant is not
named within 30 days of the death of the Annuitant, you will become the
Annuitant. However, if the Contract Owner is a non-natural person (e.g., a
corporation), then the death of the Annuitant will be treated as the death of
the Contract Owner, and a new Annuitant may not be named.
If the Annuitant dies after Annuity Payments have begun, the remaining amounts
payable, if any, will be as provided for in the Annuity Option selected. The
remaining amounts payable will be paid to the Contract Owner at least as
rapidly as they were being paid at the Annuitant's death.
10. OTHER INFORMATION
PREFERRED LIFE
Preferred Life Insurance Company of New York (Preferred Life), 152 West 57th
Street, 18th Floor, New York, NY 10019, was organized under the laws of the
state of New York. Preferred Life offers annuities and group life, group
accident and health insurance and variable annuity products. Preferred Life is
licensed to do business in six states and the District of Columbia. Preferred
Life is a wholly-owned subsidiary of Allianz Life Insurance Company of North
America, which is a wholly-owned subsidiary of Allianz Versicherungs AG
Holding.
THE SEPARATE ACCOUNT
Preferred Life established a separate account, Preferred Life Variable Account
C (Separate Account), to hold the assets that underlie the Contracts. The
Board of Directors of Preferred Life adopted a resolution to establish the
Separate Account under New York insurance law on February 26, 1988. Preferred
Life has registered the Separate Account with the Securities and Exchange
Commission as a unit investment trust under the Investment Company Act of
1940. The Separate Account is divided into sub-accounts. Each sub-account
invests in a Fund.
The assets of the Separate Account are held in Preferred Life's name on behalf
of the Separate Account and legally belong to Preferred Life. However, those
assets that underlie the Contracts, are not chargeable with liabilities
arising out of any other business Preferred Life may conduct. All the income,
gains and losses (realized or unrealized) resulting from these assets are
credited to or charged against the contracts and not against any other
contracts Preferred Life may issue.
DISTRIBUTION
NALAC Financial Plans, LLC (NFP), 1750 Hennepin Avenue, Minneapolis, MN 55403,
acts as the distributor of the contracts. NFP is an affiliate of Preferred
Life.
Commissions will be paid to broker-dealers who sell the Contracts.
Broker-dealers will be paid commissions and expense reimbursements up to an
amount equal to 6.0% of Purchase Payments for promotional or distribution
expenses associated with marketing of the Contracts. The New York Insurance
Department now permits asset based compensation. Preferred Life may adopt an
asset based compensation program in addition to, or in lieu of, the present
compensation program. Commissions may be recovered from broker-dealers if a
full or partial surrender occurs within 12 months of a Purchase Payment.
ADMINISTRATION
Preferred Life has hired Delaware Valley Financial Services, Inc., 300 Berwyn
Park, Berwyn, Pennsylvania, to perform administrative services regarding the
contracts. The administrative services include issuance of the Contracts and
maintenance of Contract Owner's records.
FINANCIAL STATEMENTS
The financial statements of Preferred Life and the Separate Account have
been included in the Statement of Additional Information.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
Insurance Company
Experts
Legal Opinions
Distributor
Reduction or Elimination of the Contingent Deferred Sales Charge
Calculation of Performance Data
Annuity Provisions
Tax Status
Mortality and Expense Guarantee
Financial Statements
PART B
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PAYMENT
VARIABLE ANNUITY CONTRACTS
ISSUED BY
PREFERRED LIFE VARIABLE ACCOUNT C
AND
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
MAY __, 1997
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE INDIVIDUAL FLEXIBLE PAYMENT
VARIABLE ANNUITY CONTRACTS WHICH ARE REFERRED TO HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS, CALL OR WRITE
THE INSURANCE COMPANY AT: 152 West 57th Street, 18th Floor, New York, NY
10019.
THIS STATEMENT OF ADDITIONAL INFORMATION AND THE PROSPECTUS ARE DATED May
__, 1997, AND AS MAY BE AMENDED FROM TIME TO TIME.
TABLE OF CONTENTS
PAGE
INSURANCE COMPANY
EXPERTS
LEGAL OPINIONS
DISTRIBUTOR
REDUCTION OR ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
CALCULATION OF PERFORMANCE DATA
TAX STATUS
ANNUITY PROVISIONS
MORTALITY AND EXPENSE RISK GUARANTEE
FINANCIAL STATEMENTS
INSURANCE COMPANY
Information regarding Preferred Life Insurance Company of New York ("Insurance
Company") is contained in the Prospectus.
The Insurance Company is rated A+ (Superior, Group Rating) by A.M. BEST, an
independent analyst of the insurance industry. The financial strength of an
insurance company may be relevant insofar as the ability of a company to make
fixed annuity payments from its general account.
EXPERTS
The financial statements of Preferred Life Variable Account C and the
financial statements of the Insurance Company as of and for the year ended
December 31, 1996, included in this Statement of Additional Information have
been audited by KPMG Peat Marwick LLP, independent auditors, as indicated in
their reports included in this Statement of Additional Information and are
included herein in reliance upon such reports and upon the authority of said
firm as experts in accounting and auditing.
LEGAL OPINIONS
Legal matters in connection with the Contracts described herein are being
passed upon by the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut.
DISTRIBUTOR
NALAC Financial Plans, LLC, an affiliate of the Insurance Company, acts as the
distributor. The offering is on a continuous basis.
REDUCTION OR ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
The amount of the Contingent Deferred Sales Charge on the Contracts may be
reduced or eliminated when sales of the Contracts are made to individuals or
to a group of individuals in a manner that results in savings of sales
expenses. The entitlement to a reduction of the Contingent Deferred Sales
Charge will be determined by the Insurance Company after examination of the
following factors: 1) the size of the group; 2) the total amount of purchase
payments expected to be received from the group; 3) the nature of the group
for which the Contracts are purchased, and the persistency expected in that
group; 4) the purpose for which the Contracts are purchased and whether that
purpose makes it likely that expenses will be reduced; and 5) any other
circumstances which the Insurance Company believes to be relevant to
determining whether reduced sales or administrative expenses may be expected.
None of the reductions in charges for sales is contractually guaranteed.
The Contingent Deferred Sales Charge will be eliminated when the Contracts are
issued to an officer, director or employee of the Insurance Company or any of
its affiliates. In no event will any reduction or elimination of the
Contingent Deferred Sales Charge be permitted where the reduction or
elimination will be unfairly discriminatory to any person.
CALCULATION OF PERFORMANCE DATA
TOTAL RETURN
From time to time, the Insurance Company may advertise the performance data
for the Funds in sales literature, advertisements, personalized hypothetical
illustrations and Contract Owner communications. Such data will show the
percentage change in the value of an accumulation unit based on the
performance of a fund over a stated period of time, usually a calendar year,
which is determined by dividing the increase (or decrease) in value for that
unit by the accumulation unit value at the beginning of the period.
Any such performance data will also include average annual total return
figures for one, five and ten year (or since inception) time periods
indicated. Such total return figures will reflect the deduction of a 1.34%
Mortality and Expense Risk Charge, a .15% Administrative Charge, the operating
expenses of the underlying Fund and any applicable Contract Maintenance Charge
and Contingent Deferred Sales Charges. The Contingent Deferred Sales Charge
and Contract Maintenance Charge deductions are calculated assuming a Contract
is surrendered at the end of the reporting period.
The hypothetical value of a Contract purchased for the time periods described
will be determined by using the actual accumulation unit values for an initial
$1,000 purchase payment, and deducting any applicable Contract Maintenance
Charges and any applicable Contingent Deferred Sales Charge to arrive at the
ending hypothetical value. The average annual total return is then determined
by computing the fixed interest rate that a $1,000 purchase payment would have
to earn annually, compounded annually, to grow to the hypothetical value at
the end of the time periods described. The formula used in these calculations
is:
n
P (1 + T) = ERV
[Download Table]
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the time periods used at the end of such time
periods (or fractional portion thereof).
The Insurance Company may also advertise performance data which will be
calculated in the same manner as described above but which will not reflect
the deduction of the Contingent Deferred Sales Charge and the Contract
Maintenance Charge. The Insurance Company may also advertise cumulative and
average total return information over different periods of time. The Insurance
Company may also present performance information computed on a different
basis.
Cumulative total return is calculated in a similar manner, except
that the results are not annualized. Each calculation assumes that no
sales load is deducted from the initial $1,000 payment at the time it is
allocated to the Funds and assumes that the income earned by the
investment in the Fund is reinvested.
Contract Owners should note that investment results will fluctuate over time,
and any presentation of total return for any period should not be considered
as a representation of what an investment may earn or what a Contract Owner's
total return may be in any future period.
YIELD
THE MONEY MARKET FUND. The Insurance Company may advertise yield information
for the Money Market Fund. The Money Market Fund's current yield may vary each
day, depending upon, among other things, the average maturity of the
underlying Fund's investment securities and changes in interest rates,
operating expenses, the deduction of the Mortality and Expense Risk Charge,
the Administrative Charge and the Contract Maintenance Charge and, in certain
instances, the value of the underlying Fund's investment securities. The fact
that the Fund's current yield will fluctuate and that the principal is not
guaranteed should be taken into consideration when using the Fund's current
yield as a basis for comparison with savings accounts or other fixed- yield
investments. The yield at any particular time is not indicative of what the
yield may be at any other time.
The Money Market Fund's current yield is computed on a base period return of a
hypothetical Contract having a beginning balance of one accumulation unit for
a particular period of time (generally seven days). The return is determined
by dividing the net change (exclusive of any capital changes) in such
accumulation unit by its beginning value, and then multiplying it by 365/7 to
get the annualized current yield. The calculation of net change reflects the
value of additional shares purchased with the dividends paid by the Fund, and
the deduction of the Mortality and Expense Risk Charge, the Administrative
Charge and Contract Maintenance Charge. The effective yield reflects the
effects of compounding and represents an annualization of the current return
with all dividends reinvested.
(Effective yield = [(Base Period Return + 1)365/7]-1.)
The Insurance Company does not currently advertise any yield information for
the Money Market Fund.
OTHER FUNDS. The Insurance Company may also quote yield in sales literature,
advertisements, personalized hypothetical illustrations, and Contract Owner
communications for the other Funds. Each Fund (other than the Money Market
Fund) will publish standardized total return information with any quotation of
current yield.
The yield computation is determined by dividing the net investment income per
accumulation unit earned during the period (minus the deduction for the
Mortality and Expense Risk Charge, Administrative Charge and the Contract
Maintenance Charge) by the accumulation unit value on the last day of the
period and annualizing the resulting figure, according to the following
formula:
6
Yield = 2 [[(a-b) + 1] - 1]
_____
cd
[Download Table]
Where:
a = net investment income earned during the period by the Fund
attributable to shares owned by the Fund.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of accumulation units outstanding
during the period.
d = the maximum offering price per accumulation unit on the last
day of the period.
The above formula will be used in calculating quotations of yield, based on
specified 30-day periods (or one month) identified in the sales literature,
advertisement or communication. Yield calculations assume no sales load. The
Insurance Company does not currently advertise any yield information for any
Fund.
PERFORMANCE RANKING
Total return may be compared to relevant indices, including U. S. domestic and
international indices and data from Lipper Analytical Services, Inc., Standard
& Poor's Indices, or VARDS.
From time to time, evaluation of performance by independent sources may also
be used.
FRANKLIN VALUEMARK FUNDS - EXISTING FUNDS
The Funds of Franklin Valuemark Funds have been in existence for some time and
have investment performance history (except the Capital Growth, Templeton
International Smaller Companies, Mutual Shares Securities and Mutual Discovery
Securities Funds). In order to show how investment performance of the Funds
affects Accumulation Unit values, the following hypothetical performance
information was developed.
The chart below shows hypothetical Accumulation Unit performance which assumes
that the Accumulation Units were invested in each of the Funds for the same
periods. The performance figures in Column I represent hypothetical
performance figures for the Accumulation Units which reflect the deduction of
the mortality and expense risk charge, administrative charge, and the
operating expenses of the Funds. Column II represents hypothetical performance
figures for the Accumulation Units which reflect the mortality and expense
risk charge, administrative charge, the contract maintenance charge, the
operating expenses of the Funds and assumes that you make a withdrawal at the
end of the period (therefore the contingent deferred sales charge is
reflected). Past performance does not guarantee future results.
[Enlarge/Download Table]
Franklin Valuemark IV
Total Return for the periods ended December 31, 1996:
Column I Column II
---------------------------------------- ---------------------------------------
Inception One Three Five Since One Three Five Since
Fund Date Year Years Years Inception Year Years Years Inception
----------------------------------------------------------------------------------------------------------------------
Capital Growth 5/1/96 NA NA NA NA NA NA NA NA
Growth and Income 1/24/89 12.49% 12.43% 10.18% 8.67% 6.39% 10.97% 9.62% 8.58%
High Income 1/24/89 12.20% 8.43% 10.74% 8.59% 6.10% 6.87% 10.20% 8.50%
Income Securities 1/24/89 9.62% 6.88% 9.74% 10.16% 3.52% 5.26% 9.18% 10.07%
Money Market# 1/24/89 4.33% 3.60% 2.67% 3.72% -1.77% 1.89% 1.95% 3.63%
Mutual Discovery
Securities 11/8/96 NA NA NA NA NA NA NA NA
Mutual Shares
Securities 11/8/96 NA NA NA NA NA NA NA NA
Natural Resources
Securities* 1/24/89 2.45% -0.08% 6.25% 4.67% -3.65% -1.92% 5.62% 4.58%
Real Estate Securities 1/24/89 30.84% 15.38% 14.74% 11.36% 24.74% 13.99% 14.26% 11.28%
Rising Dividends 1/27/92 22.33% 13.90% NA 8.91% 16.23% 12.48% NA 8.32%
Small Cap 11/1/95 27.15% NA NA 24.37% 21.05% NA NA 19.98%
Templeton Developing
Markets Equity 3/15/94 19.78% NA NA 4.98% 13.68% NA NA 3.17%
Templeton Global
Asset Allocation 5/1/95 18.05% NA NA 14.26% 11.95% NA NA 11.33%
Templeton Global
Growth 3/15/94 19.48% NA NA 11.39% 13.38% NA NA 9.76%
Templeton Global
Income Securities 1/24/89 8.01% 4.54% 5.20% 6.64% 1.91% 2.85% 4.55% 6.56%
Templeton
International Equity 1/27/92 21.14% 9.47% NA 10.01% 15.04% 7.93% NA 9.44%
Templeton International
Smaller Companies 5/1/96 NA NA NA NA NA NA NA NA
Templeton Pacific Growth 1/27/92 9.45% 1.52% NA 8.37% 3.35% -0.27% NA 7.78%
U.S. Government
Securities 3/14/89 2.07% 4.15% 5.31% 6.65% -4.03% 2.46% 4.66% 6.57%
Utility Equity 1/24/89 5.57% 5.98% 6.79% 9.48% 0.53% 4.34% 6.17% 9.41%
Zero Coupon - 2000# 3/14/89 0.90% 3.29% 6.27% 8.08% -5.20% 1.57% 5.64% 8.01%
Zero Coupon - 2005# 3/14/89 -1.99% 4.27% 8.31% 9.55% -8.09% 2.58% 7.72% 9.47%
Zero Coupon - 2010# 3/14/89 -4.14% 5.76% 9.71% 10.22% -10.24% 4.12% 9.15% 10.14%
<FN>
*Prior to May 1, 1997, the Natural Resources Securities Fund was known as the Precious Metals Fund.
#Calculated with waiver of fees.
</FN>
TAX STATUS
NOTE: The following description is based upon the Insurance Company's
understanding of current federal income tax law applicable to annuities in
general. The Insurance Company cannot predict the probability that any changes
in such laws will be made. Purchasers are cautioned to seek competent tax
advice regarding the possibility of such changes. The Insurance Company does
not guarantee the tax status of the Contracts. Purchasers bear the complete
risk that the Contracts may not be treated as "annuity contracts" under
federal income tax laws. It should be further understood that the following
discussion is not exhaustive and that special rules not described herein may
be applicable in certain situations. Moreover, no attempt has been made to
consider any applicable state or other tax laws.
GENERAL
Section 72 of the Internal Revenue Code of 1986, as amended (the "Code")
governs taxation of annuities in general. A Contract Owner is not taxed on
increases in the value of a Contract until distribution occurs, either in the
form of a lump sum payment or as annuity payments under the Annuity Option
elected. For a lump sum payment received as a total surrender (total
redemption) or death benefit, the recipient is taxed on the portion of the
payment that exceeds the cost basis of the Contract. For Non-Qualified
Contracts, this cost basis is generally the purchase payments, while for
Qualified Contracts there may be no cost basis. The taxable portion of the
lump sum payment is taxed at ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includable in taxable income. The exclusion amount for payments
based on a fixed annuity option is determined by multiplying the payment by
the ratio that the cost basis of the Contract (adjusted for any period certain
or refund feature) bears to the expected return under the Contract. The
exclusion amount for payments based on a variable annuity option is determined
by dividing the cost basis of the Contract (adjusted for any period certain or
refund guarantee) by the number of years over which the annuity is expected to
be paid. Payments received after the investment in the Contract has been
recovered (i.e. when the total of the excludable amounts equal the investment
in the Contract) are fully taxable. The taxable portion is taxed at ordinary
income rates. For certain types of Qualified Plans there may be no cost basis
in the Contract within the meaning of Section 72 of the Code. Contract Owners,
Annuitants and Beneficiaries under the Contracts should seek competent
financial advice about the tax consequences of any distributions.
The Insurance Company is taxed as a life insurance company under the Code. For
federal income tax purposes, the Separate Account is not a separate entity
from the Insurance Company, and its operations form a part of the Insurance
Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not
adequately diversified in accordance with regulations prescribed by the United
States Treasury Department ("Treasury Department"). Disqualification of the
Contract as an annuity contract would result in imposition of federal income
tax to the Contract Owner with respect to earnings allocable to the Contract
prior to the receipt of payments under the Contract. The Code contains a safe
harbor provision which provides that annuity contracts such as the Contracts
meet the diversification requirements if, as of the end of each quarter, the
underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five percent (55%) of the total
assets consist of cash, cash items, U.S. government securities and securities
of other regulated investment companies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
1.817-5) which established diversification requirements for the investment
portfolios underlying variable contracts such as the Contracts. The
regulations amplify the diversification requirements for variable contracts
set forth in the Code and provide an alternative to the safe harbor provision
described above.
Under the regulations, an investment portfolio will be deemed adequately
diversified if: (1) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (2) no more than 70% of the
value of the total assets of the portfolio is represented by any two
investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate issuer."
The Insurance Company intends that all Funds of Franklin Valuemark Funds
underlying the Contracts will be managed by the Managers for Franklin
Valuemark Funds in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Contract Owner
control of the investments of the Separate Account will cause the Contract
Owner to be treated as the owner of the assets of the Separate Account,
thereby resulting in the loss of favorable tax treatment for the Contract. At
this time it cannot be determined whether additional guidance will be provided
and what standards may be contained in such guidance.
The amount of Contract Owner control which may be exercised under the Contract
is different in some respects from the situations addressed in published
rulings issued by the Internal Revenue Service in which it was held that the
policy owner was not the owner of the assets of the separate account. It is
unknown whether these differences, such as the Contract Owner's ability to
transfer among investment choices or the number and type of investment choices
available, would cause the Contract Owner to be considered as the owner of the
assets of the Separate Account resulting in the imposition of federal income
tax to the Contract Owner with respect to earnings allocable to the Contract
prior to receipt of payments under the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a
new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in the
Contract Owner being retroactively determined to be the owner of the assets of
the Separate Account.
Due to the uncertainty in this area, the Insurance Company reserves the right
to modify the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are
issued within a calendar year period to the same contract owner by one company
or its affiliates are treated as one annuity contract for purposes of
determining the tax consequences of any distribution. Such treatment may
result in adverse tax consequences, including more rapid taxation of the
distributed amounts from such combination of contracts. Contract Owners should
consult a tax adviser prior to purchasing more than one non-qualified annuity
contract in any calendar year period.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on purchase payments
for the Contracts will be taxed currently to the Contract Owner if the Owner
is a non-natural person, e.g., a corporation or certain other entities. Such
Contracts generally will not be treated as annuities for federal income tax
purposes. However, this treatment is not applied to Contracts held by a trust
or other entity as an agent for a natural person nor to Contracts held by
qualified plans. Purchasers should consult their own tax counsel or other tax
adviser before purchasing a Contract to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Contract Owners
should therefore consult competent tax advisers should they wish to assign or
pledge their Contracts.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross
income of the Contract Owner are subject to federal income tax withholding.
Generally, amounts are withheld from periodic payments at the same rate as
wages and at the rate of 10% from non-periodic payments. However, the Contract
Owner, in most cases, may elect not to have taxes withheld or to have
withholding done at a different rate.
Effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or Section 403(b) of the Code, which are not
directly rolled over to another eligible retirement plan or individual
retirement account or individual retirement annuity, are subject to a
mandatory 20% withholding for federal income tax. The 20% withholding
requirement generally does not apply to: a) a series of substantially equal
payments made at least annually for the life or life expectancy of the
participant or joint and last survivor expectancy of the participant and a
designated beneficiary, or for a specified period of 10 years or more; or b)
distributions which are required minimum distributions; or (c) the portion of
the distributions not includible in gross income (i.e. returns of after-tax
contributions). Participants should consult their own tax counsel or other tax
adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the contract value exceeds the aggregate
purchase payments made, any amount withdrawn will be treated as coming first
from the earnings and then, only after the income portion is exhausted, as
coming from the principal. Withdrawn earnings are includible in gross income.
It further provides that a ten percent (10%) penalty will apply to the income
portion of any distribution. However, the penalty is not imposed on amounts
received: (a) after the taxpayer reaches age 59 1/2; (b) after the death of
the Contract Owner; (c) if the taxpayer is totally disabled (for this purpose
disability is as defined in Section 72(m)(7) of the Code); (d) in a series of
substantially equal periodic payments made not less frequently than annually
for the life (or life expectancy) of the taxpayer or for the joint lives (or
joint life expectancies) of the taxpayer and his Beneficiary; (e) under an
immediate annuity; or (f) which are allocable to purchase payments made prior
to August 14, 1982.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified
Contracts. (See "Tax Treatment of Withdrawals - Qualified Contracts.")
QUALIFIED PLANS
The Contracts offered are designed to be suitable for use under various types
of Qualified Plans. Because of the minimum purchase payment requirements,
these Contracts may not be appropriate for some periodic payment retirement
plans. Taxation of participants in each Qualified Plan varies with the type of
plan and terms and conditions of each specific plan. Contract Owners,
Annuitants and Beneficiaries are cautioned that benefits under a Qualified
Plan may be subject to the terms and conditions of the plan regardless of the
terms and conditions of the Contracts issued pursuant to the plan. Some
retirement plans are subject to distribution and other requirements that are
not incorporated into the Insurance Company's administrative procedures.
Contract Owners, participants and Beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Contracts comply with applicable law. Following are general
descriptions of the types of Qualified Plans with which the Contracts may be
used. Such descriptions are not exhaustive and are for general informational
purposes only. The tax rules regarding Qualified Plans are very complex and
will have differing applications, depending on individual facts and
circumstances. Each purchaser should obtain competent tax advice prior to
purchasing a Contract issued under a Qualified Plan.
On July 6, 1983, the Supreme Court decided in ARIZONA GOVERNING COMMITTEE V.
NORRIS that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Insurance Company in
connection with Qualified Plans will utilize annuity tables which do not
differentiate on the basis of sex. Such annuity tables will also be available
for use in connection with certain non-qualified deferred compensation plans.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available and described
in this Statement of Additional Information. Generally, Contracts issued
pursuant to Qualified Plans are not transferable except upon surrender or
annuitization. Various penalty and excise taxes may apply to contributions or
distributions made in violation of applicable limitations. Furthermore,
certain withdrawal penalties and restrictions may apply to surrenders from
Qualified Contracts. (See "Tax Treatment of Withdrawals - Qualified
Contracts.")
a. H.R. 10 Plans
Section 401 of the Code permits self-employed individuals to establish
Qualified Plans for themselves and their employees, commonly referred to as
"H.R. 10" or "Keogh" plans. Contributions made to the Plan for the benefit of
the employees will not be included in the gross income of the employees until
distributed from the Plan. The tax consequences to participants may vary,
depending upon the particular Plan design. However, the Code places
limitations and restrictions on all Plans, including on such items as: amounts
of allowable contributions; form, manner and timing of distributions;
transferability of benefits; vesting and nonforfeitability of interests;
nondiscrimination in eligibility and participation; and the tax treatment of
distributions, withdrawals and surrenders. (See "Tax Treatment of Withdrawals
- Qualified Contracts.") Purchasers of Contracts for use with an H.R. 10 Plan
should obtain competent tax advice as to the tax treatment and suitability of
such an investment.
b. Tax-Sheltered Annuities
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities"
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includable in the gross income of the
employee until the employee receives distributions from the Contract. The
amount of contributions to the tax-sheltered annuity is limited to certain
maximums imposed by the Code. Furthermore, the Code sets forth additional
restrictions governing such items as transferability, distributions,
nondiscrimination and withdrawals. (See "Tax Treatment of Withdrawals
Qualified Contracts" and "Tax-Sheltered Annuities - Withdrawal Limitations.")
Employee loans are not allowed under these Contracts. Any employee should
obtain competent tax advice as to the tax treatment and suitability of such an
investment.
c. Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to
an IRA which may be deductible from the individual's gross income. These IRAs
are subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals - Qualified Contracts.")
Under certain conditions, distributions from other IRAs and other Qualified
Plans may be rolled over or transferred on a tax-deferred basis into an IRA.
Sales of Contracts for use with IRAs are subject to special requirements
imposed by the Code, including the requirement that certain informational
disclosure be given to persons desiring to establish an IRA. Purchasers of
Contracts to be qualified as Individual Retirement Annuities should obtain
competent tax advice as to the tax treatment and suitability of such an
investment.
d. Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 401(k) of the Code permit corporate employers to establish
various types of retirement plans for employees. These retirement plans may
permit the purchase of the Contracts to provide benefits under the Plan.
Contributions to the Plan for the benefit of employees will not be includable
in the gross income of the employee until distributed from the Plan. The tax
consequences to participants may vary, depending upon the particular Plan
design. However, the Code places limitations and restrictions on all Plans,
including on such items as: amount of allowable contributions; form, manner
and timing of distributions; transferability of benefits; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. Participant loans are not allowed under the Contracts purchased in
connection with these Plans. (See "Tax Treatment of Withdrawals Qualified
Contracts.") Purchasers of Contracts for use with Corporate Pension or Profit-
Sharing Plans should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS
In the case of a withdrawal under a Qualified Contract, a ratable portion of
the amount received is taxable, generally based on the ratio of the
individual's cost basis to the individual's total accrued benefit under the
retirement plan. Special tax rules may be available for certain distributions
from a Qualified Contract. Section 72(t) of the Code imposes a 10% penalty tax
on the taxable portion of any distribution from qualified retirement plans,
including Contracts issued and qualified under Code Sections 401 (H.R. 10 and
Corporate Pension and Profit-Sharing Plans), 403(b) (Tax-Sheltered Annuities)
and 408(b) (Individual Retirement Annuities). To the extent amounts are not
includible in gross income because they have been properly rolled over to an
IRA or to another eligible Qualified Plan, no tax penalty will be imposed. The
tax penalty will not apply to the following distributions: (a) if distribution
is made on or after the date on which the Contract Owner or Annuitant (as
applicable) reaches age 59 1/2; (b) distributions following the death or
disability of the Contract Owner or Annuitant (as applicable) (for this
purpose disability is as defined in Section 72(m)(7) of the Code); (c) after
separation from service, distributions that are part of substantially equal
periodic payments made not less frequently than annually for the life (or life
expectancy) of the Contract Owner or Annuitant (as applicable) or the joint
lives (or joint life expectancies) of such Contract Owner or Annuitant (as
applicable) and his designated beneficiary; (d) distributions to a Contract
Owner or Annuitant (as applicable) who has separated from service after he has
attained age 55; (e) distributions made to the Contract Owner or Annuitant (as
applicable) to the extent such distributions do not exceed the amount
allowable as a deduction under Code Section 213 to the Contract Owner or
Annuitant (as applicable) for amounts paid during the taxable year for medical
care; (f) distributions made to an alternate payee pursuant to a qualified
domestic relations order; and (g) distributions from an Individual Retirement
Annuity for the purchase of medical insurance (as described in Section
213(d)(1)(D) of the Code) for the Contract Owner or Annuitant (as applicable)
and his or her spouse and dependents if the Contract Owner or Annuitant (as
applicable) has received unemployment compensation for at least 12 weeks. This
exception will no longer apply after the Contract Owner or Annuitant (as
applicable) has been re-employed for at least 60 days. The exceptions stated
in items (d) and (f) above do not apply in the case of an Individual
Retirement Annuity. The exception stated in item (c) applies to an Individual
Retirement Annuity without the requirement that there be a separation from
service.
Generally, distributions from a Qualified Plan must commence no later than
April 1 of the calendar year following the later of: (a) the year in which the
employee attains age 70 1/2 or (b) the calendar year in which the employee
retires. The date set forth in (b) does not apply to an Individual Retirement
Annuity. Required distributions must be over a period not exceeding the life
expectancy of the individual or the joint lives or life expectancies of the
individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed.
TAX-SHELTERED ANNUITIES - WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b)(11) of
the Code) to circumstances only when the Contract Owner: (1) attains age 59 ;
(2) separates from service; (3) dies; (4) becomes disabled (within the meaning
of Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Contract Owner's
Contract Value which represents contributions by the Contract Owner and does
not include any investment results. The limitations on withdrawals became
effective on January 1, 1989 and apply only to salary reduction contributions
made after December 31, 1988, and to income attributable to such contributions
and to income attributable to amounts held as of December 31, 1988. The
limitations on withdrawals do not affect rollovers and transfers between
certain Qualified Plans. Contract Owners should consult their own tax counsel
or other tax adviser regarding any distributions.
ANNUITY PROVISIONS
FIXED ANNUITY PAYOUT
A fixed annuity is an annuity with payments which are guaranteed as to dollar
amount by the Insurance Company and do not vary with the investment experience
of a Fund. The Fixed Account value on the day immediately preceding the Income
Date will be used to determine the Fixed Annuity monthly payment. The monthly
Annuity Payment will be based upon the Contract Value at the time of
annuitization, the Annuity Option selected, the age of the annuitant and any
joint annuitant and the sex of the annuitant and joint annuitant where
allowed.
VARIABLE ANNUITY PAYOUT
A variable annuity is an annuity with payments which: (1) are not
predetermined as to dollar amount; and (2) will vary in amount with the net
investment results of the applicable Fund(s).
ANNUITY UNIT VALUE
On the Income Date, a fixed number of Annuity Units will be purchased as
follows:
The first Annuity Payment is equal to the Adjusted Contract Value, divided
first by $1,000 and then multiplied by the appropriate Annuity Payment amount
for each $1,000 of value for the Annuity Option selected. In each Fund the
fixed number of Annuity Units is determined by dividing the amount of the
initial Annuity Payment determined for each Fund by the Annuity Unit value on
the Income Date. Thereafter, the number of Annuity Units in each Fund remains
unchanged unless the Contract Owner elects to transfer between Funds. All
calculations will appropriately reflect the Annuity Payment frequency
selected.
On each subsequent Annuity Payment date, the total Annuity Payment is the sum
of the Annuity Payments for each Fund. The Annuity Payment in each Fund is
determined by multiplying the number of Annuity Units then allocated to such
Fund by the Annuity Unit value for that Fund.
On each subsequent Valuation Date, the value of an Annuity Unit is determined
in the following way:
First: The Net Investment Factor is determined as described in the Prospectus
under "Purchase - Accumulation Units."
Second: The value of an Annuity Unit for a Valuation Period is equal to:
a. the value of the Annuity Unit for the immediately preceding Valuation
Period.
b. multiplied by the Net Investment Factor for the current Valuation
Period;
c. divided by the Assumed Net Investment Factor (see below) for the
Valuation Period.
The Assumed Net Investment Factor is equal to one plus the Assumed Investment
Return which is used in determining the basis for the purchase of an Annuity,
adjusted to reflect the particular Valuation Period. The Assumed Investment
Return that the Insurance Company will use is 5%. However, the Insurance
Company may agree to use a different value.
MORTALITY AND EXPENSE RISK GUARANTEE
The Insurance Company guarantees that the dollar amount of each annuity
payment after the first annuity payment will not be affected by variations in
mortality and expense experience.
FINANCIAL STATEMENTS
The audited financial statements of the Insurance Company as of and for the
year ended December 31, 1996, included herein should be considered only as
bearing upon the ability of the Insurance Company to meet its obligations
under the Contracts. The audited financial statements of the Separate Account
as of and for the year ended December 31, 1996 are also included herein.
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
================================================================================
Independent Auditors' Report
The Board of Directors of Preferred Life Insurance Company of New York and
Contract Owners of Preferred Life Variable Account C:
We have audited the accompanying statements of assets and liabilities of the
sub-accounts of Preferred Life Variable Account C as of December 31, 1996, the
related statements of operations for the year then ended and the statements of
changes in net assets for each of the years in the two-years then ended. These
financial statements are the responsibility of the Variable 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Investment
securities held in custody for the benefit of the Variable Account were
confirmed to us by the Franklin Valuemark Funds. 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 assets and liabilities of the sub-accounts of
Preferred Life Variable Account C at December 31, 1996, the results of their
operations for the year then ended and the changes in their net assets for
each of the years in the two-years then ended, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 24, 1997
[Enlarge/Download Table]
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
===========================================================================================================================
Financial Statements
Statements of Assets and Liabilities
December 31, 1996
(In thousands except per unit data)
Money Growth and Precious High Real Estate U.S. Government
Market Income Metals Income Securities Securities
Fund Fund Fund Fund Fund Fund
------ ------- ------ ----- ------- ---------------
Investments at net asset value:
Franklin Valuemark Funds:
Money Market Fund, 32,512 shares, cost $32,512................ $32,512 - - - - -
Growth and Income Fund, 5,631 shares, cost $83,512............ - 98,827 - - - -
Precious Metals Fund, 573 shares, cost $8,470................. - - 8,191 - - -
High Income Fund, 2,961 shares, cost $38,665.................. - - - 41,925 - -
Real Estate Securities Fund, 918 shares, cost $14,703......... - - - - 20,338 -
U.S. Government Securities Fund, 7,438 shares, cost $99,440... - - - - - 100,191
------- ------- ----- ------ ------- -------
Total assets.............................................. 32,512 98,827 8,191 41,925 20,338 100,191
------- ------- ----- ------ ------- -------
Liabilities:
Accrued mortality and expense risk charges..................... 4 5 2 4 3 5
Accrued administrative charges................................. - 1 - - - 1
------- ------ ----- ------ ------ -------
Total liabilities......................................... 4 6 2 4 3 6
------- ------ ----- ------ ------ -------
Net assets................................................ $32,508 98,821 8,189 41,921 20,335 100,185
======= ====== ===== ====== ====== =======
Contract owners' equity (note 5)................................ $32,508 98,821 8,189 41,921 20,335 100,185
======= ====== ===== ====== ====== =======
Accumulation units outstanding................................. 2,433 5,070 566 2,164 859 6,017
======= ====== ====== ====== ====== =======
Accumulation unit value per unit............................... $13.359 19.490 14.467 19.375 23.668 16.650
======= ====== ====== ====== ====== =======
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
===========================================================================================================================
Financial Statements (cont.)
Statements of Assets and Liabilities (cont.)
December 31, 1996
(In thousands except per unit data)
Templeton
Utility Zero Zero Zero Global Income Income
Equity Coupon Coupon Coupon Securities Securities
Fund Fund - 2000 Fund - 2005 Fund - 2010 Fund Fund
------- ----------- ----------- ----------- ----------- ----------
Investments at net asset value:
Franklin Valuemark Funds:
Utility Equity Fund, 5,678 shares, cost $92,724.......... $103,231 - - - - -
Zero Coupon Fund - 2000, 1,652 shares, cost $23,884...... - 25,088 - - - -
Zero Coupon Fund - 2005, 537 shares, cost $8,057......... - - 8,780 - - -
Zero Coupon Fund - 2010, 460 shares, cost $6,894......... - - - 7,495 - -
Templeton Global Income Securities Fund, 1,668 shares,
cost $21,451............................................ - - - - 22,722 -
Income Securities Fund, 5,701 shares, cost $86,292....... - - - - - 98,115
-------- ------ ------ ------ ------ ------
Total assets......................................... 103,231 25,088 8,780 7,495 22,722 98,115
-------- ------ ------ ------ ------ ------
Liabilities:
Accrued mortality and expense risk charges................ 5 3 3 3 3 5
Accrued administrative charges............................ 1 - - - - 1
-------- ------ ------ ------ ------ ------
Total liabilities.................................... 6 3 3 3 3 6
-------- ------ ------ ------ ------ ------
Net assets........................................... $103,225 25,085 8,777 7,492 22,719 98,109
======== ====== ====== ====== ====== ======
Contract owners' equity (note 5)........................... $103,225 25,085 8,777 7,492 22,719 9
======== ====== ====== ====== ====== ======
Accumulation units outstanding............................ 4,998 1,358 428 348 1,354 4,519
======== ====== ====== ====== ====== ======
Accumulation unit value per unit.......................... $20.654 18.475 20.517 21.522 16.781 21.708
======== ====== ====== ====== ====== ======
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
===========================================================================================================================
Financial Statements (cont.)
Statements of Assets and Liabilities (cont.)
December 31, 1996
(In thousands except per unit data)
Templeton Templeton Templeton Templeton Templeton
Pacific Rising International Developing Global Global Asset
Growth Dividends Equity Markets Equity Growth Allocation
Fund Fund Fund Fund Fund Fund
------- -------- ----------- -------------- -------- -----------
Investments at net asset value:
Franklin Valuemark Funds:
Templeton Pacific Growth Fund, 1,772 shares, cost $24,758. $26,152 - - - - -
Rising Dividends Fund, 3,373 shares, cost $37,522......... - 51,938 - - - -
Templeton International Equity Fund, 4,555 shares,
cost $59,120............................................. - - 70,367 - - -
Templeton Developing Markets Equity Fund, 1,033 shares,
cost $10,766............................................. - - - 11,973 - -
Templeton Global Growth Fund, 2,109 shares, cost $24,277.. - - - - 29,106 -
Templeton Global Asset Allocation Fund, 299 shares,
cost $3,359.............................................. - - - - - 3,762
------- ------ ------ ------ ------ ------
Total assets.......................................... 26,152 51,938 70,367 11,973 29,106 3,762
------- ------ ------ ------ ------ ------
Liabilities:
Accrued mortality and expense risk charges................. 4 4 4 3 3 3
Accrued administrative charges............................. - - 1 - - -
------- ------ ------ ------ ------ ------
Total liabilities..................................... 4 4 5 3 3 3
------- ------ ------ ------ ------ ------
Net assets............................................ $26,148 51,934 70,362 11,970 29,103 3,759
======= ====== ====== ====== ====== ======
Contract owners' equity (note 5)............................ $26,148 51,934 70,362 11,970 29,103 3,759
======= ====== ====== ====== ====== ======
Accumulation units outstanding............................. 1,751 3,394 4,375 1,042 2,146 300
======= ====== ====== ====== ====== ======
Accumulation unit value per unit........................... $14.932 15.303 16.081 11.487 13.560 12.514
======= ====== ====== ====== ====== ======
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
===========================================================================================================================
Financial Statements (cont.)
Statements of Assets and Liabilities (cont.)
December 31, 1996
(In thousands except per unit data)
Templeton
International Mutual Mutual
Capital Smaller Discovery Shares Total
Small Cap Growth Companies Securities Securities All
Fund Fund Fund Fund Fund Funds
--------- ------- ----------- ---------- --------- -------
Investments at net asset value:
Franklin Valuemark Funds:
Small Cap Fund, 407 shares, cost $5,158........................... $5,372 - - - -
Capital Growth Fund, 223 shares, cost $2,448...................... - 2,532 - - -
Templeton International Smaller Companies Fund, 64 shares,
cost $677........................................................ - - 725 - -
Mutual Discovery Securities Fund, 27 shares, cost $275............ - - - 278 -
Mutual Shares Securities Fund, 43 shares, cost $434............... - - - - 442
------- ------ ------ ------ ------
Total assets.................................................. 5,372 2,532 725 278 442 770,062
------- ------ ------ ------ ------ -------
Liabilities:
Accrued mortality and expense risk charges......................... 3 3 3 - - 75
Accrued administrative charges..................................... - - - - - 5
------- ------ ------ ------ ------ -------
Total liabilities............................................. 3 3 3 - - 80
------- ------ ------ ------ ------ -------
Net assets.................................................... $5,369 2,529 722 278 442 769,982
======= ====== ====== ====== ====== =======
Contract owners' equity (note 5).................................... $5,369 2,529 722 278 442 769,982
======= ====== ====== ====== ====== =======
Accumulation units outstanding..................................... 416 225 65 27 43 43,898
======= ====== ====== ====== ====== =======
Accumulation unit value per unit................................... $12.913 11.254 11.145 10.180 10.330
======= ====== ====== ====== ======
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
===========================================================================================================================
Financial Statements (cont.)
Statements of Operations
For the year ended December 31, 1996
(In thousands)
Money Growth and Precious High Real Estate U.S. Government
Market Income Metals Income Securities Securities
Fund Fund Fund Fund Fund Fund
------ ---------- ------- ------ ----------- --------------
Investment income:
Dividends reinvested in fund shares.......................... $ 1,621 2,058 114 2,915 652 5,488
------- ------ ----- ------ ----- ------
Expenses:
Mortality and expense risk charges........................... 407 1,112 113 464 205 1,040
Administrative charges....................................... 49 133 14 56 25 125
------- ------ ----- ------ ----- ------
Total expenses.......................................... 456 1,245 127 520 230 1,165
------- ------ ----- ------ ----- ------
Investment income (loss), net........................... 1,165 813 (13) 2,395 422 4,323
Realized gains (losses) and unrealized appreciation
(depreciation) on investments:
Realized capital gain distributions on mutual funds......... - 7,289 105 155 - -
------- ------ ----- ------ ----- ------
Realized gains (losses) on sales of investments:
Proceeds from sales........................................ 45,742 12,271 5,134 16,229 2,671 14,379
Cost of investments sold................................... (45,742) (10,552) (4,733) (15,052) (2,196) (14,419)
------- ------ ----- ------ ----- ------
Total realized gains (losses) on sales of
investments, net....................................... - 1,719 401 1,177 475 (40)
------- ------ ----- ------ ----- ------
Realized gains (losses) on investments, net............. - 9,008 506 1,332 475 (40)
Net change in unrealized appreciation (depreciation) on
investments................................................ - 960 (480) 754 3,748 (2,399)
------- ------ ----- ------ ----- ------
Total realized gains (losses) and unrealized
appreciation (depreciation) on investments, net........ - 9,968 26 2,086 4,223 (2,439)
------- ------ ----- ------ ----- ------
Net increase (decrease) in net assets from operations......... $ 1,165 10,781 13 4,481 4,645 1,884
======= ====== ===== ====== ===== ======
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
===========================================================================================================================
Financial Statements (cont.)
Statements of Operations (cont.)
For the year ended December 31, 1996
(In thousands)
Templeton Investment
Utility Zero Zero Zero Global Income Grade
Equity Coupon Coupon Coupon Securities Intermediate
Fund Fund-2000 Fund-2005 Fund-2010 Fund Bond Fund
------ --------- --------- --------- ------------- ------------
Investment income:
Dividends reinvested in fund shares........................ $ 5,502 1,407 465 397 1,696 819
------ ------- ------- ------ ------- -------
Expenses:
Mortality and expense risk charges......................... 1,371 320 112 95 284 162
Administrative charges..................................... 164 38 13 11 34 19
------ ------- ------- ------ ------- -------
Total expenses........................................ 1,535 358 125 106 318 181
------ ------- ------- ------ ------- -------
Investment income (loss), net......................... 3,967 1,049 340 291 1,378 638
Realized gains (losses) and unrealized appreciation
(depreciation) on investments:
Realized capital gain distributions on mutual funds....... - 14 - 108 - -
------ ------- ------- ------ ------- -------
Realized gains (losses) on sales of investments:
Proceeds from sales...................................... 21,660 3,492 1,880 2,947 3,972 17,097
Cost of investments sold................................. (20,008) (3,337) (1,747) (2,761) (3,865) (16,737)
------ ------- ------- ------ ------- -------
Total realized gains (losses) on sales of
investments, net..................................... 1,652 155 133 186 107 360
------ ------- ------- ------ ------- -------
Realized gains (losses) on investments, net........... 1,652 169 133 294 107 360
Net change in unrealized appreciation (depreciation) on
investments.............................................. (4) (990) (672) (957) 271 (737)
------ ------- ------- ------ ------- -------
Total realized gains (losses) and unrealized
appreciation (depreciation) on investments, net...... 1,648 (821) (539) (663) 378 (377)
------ ------- ------- ------ ------- -------
Net increase (decrease) in net assets from operations....... $ 5,615 228 (199) (372) 1,756 261
====== ======= ======= ====== ======= =======
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
===========================================================================================================================
Financial Statements (cont.)
Statements of Operations (cont.)
For the year ended December 31, 1996
(In thousands)
Templeton Templeton Templeton
Income Adjustable U.S. Pacific Rising International Developing
Securities Government Growth Dividends Equity Markets Equity
Fund Fund Fund Fund Fund Fund
---------- ------------- --------- --------- ------------ --------------
Investment income:
Dividends reinvested in fund shares...................... $ 4,813 1,013 799 912 1,626 92
------ -------- ------- ------ ------- -------
Expenses:
Mortality and expense risk charges....................... 1,186 144 345 566 796 129
Administrative charges................................... 142 17 41 68 96 15
------ -------- ------- ------ ------- -------
Total expenses...................................... 1,328 161 386 634 892 144
------ -------- ------- ------ ------- -------
Investment income (loss), net....................... 3,485 852 413 278 734 (52)
Realized gains (losses) and unrealized appreciation
(depreciation) on investments:
Realized capital gain distributions on mutual funds..... 800 - 463 - 1,990 170
------ -------- ------- ------ ------- -------
Realized gains (losses) on sales of investments:
Proceeds from sales.................................... 10,171 17,081 12,517 4,769 9,752 2,310
Cost of investments sold............................... (9,284) (17,814) (11,609) (3,837) (8,796) (2,183)
------ -------- ------- ------ ------- -------
Total realized gains (losses) on sales of
investments, net................................... 887 (733) 908 932 956 127
------ -------- ------- ------ ------- -------
Realized gains (losses) on investments, net......... 1,687 (733) 1,371 932 2,946 297
Net change in unrealized appreciation (depreciation) on
investments............................................ 3,616 356 605 8,111 8,342 1,405
------ -------- ------- ------ ------- -------
Total realized gains (losses) and unrealized
appreciation (depreciation) on investments, net.... 5,303 (377) 1,976 9,043 11,288 1,702
------ -------- ------- ------ ------- -------
Net increase (decrease) in net assets from operations..... $ 8,788 475 2,389 9,321 12,022 1,650
====== ======== ======= ====== ======= =======
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
===========================================================================================================================
Financial Statements (cont.)
Statements of Operations (cont.)
For the year ended December 31, 1996
(In thousands)
Templeton
Templeton Templeton International Mutual Mutual
Global Global Asset Small Capital Smaller Discovery Shares Total
Growth Allocation Cap Growth Companies Securities Securities All
Fund Fund Fund Fund Fund Fund Fund Funds
------- ------------ ----- -------- -------- ---------- ---------- -------
Investment income:
Dividends reinvested in fund shares............ $ 365 1 - - - - - 32,755
------ ---- ------ ----- ------ --- --- -------
Expenses:
Mortality and expense risk charges............. 288 27 19 7 3 - - 9,195
Administrative charges......................... 35 3 2 1 - - - 1,101
------ ---- ------ ----- ------ --- --- -------
Total expenses............................ 323 30 21 8 3 - - 10,296
------ ---- ------ ----- ------ --- --- -------
Investment income (loss), net............. 42 (29) (21) (8) (3) - - 22,459
Realized gains (losses) and unrealized
appreciation (depreciation) on investments:
Realized capital gain distributions on mutual
funds........................................ 365 2 - - - - - 11,461
------ ---- ------ ---- ------ --- --- -------
Realized gains (losses) on sales of investments:
Proceeds from sales.......................... 1,137 229 6,080 460 93 - - 212,073
Cost of investments sold..................... (1,007) (213) (5,985) (440) (91) - - (202,408)
------ ---- ------ ----- ------ --- --- -------
Total realized gains (losses) on sales of
investments, net......................... 130 16 95 20 2 - - 9,665
------ ---- ------ ----- ------ --- --- -------
Realized gains (losses) on investments, net 495 18 95 20 2 - - 21,126
Net change in unrealized appreciation
(depreciation) on investments............... 3,541 398 215 84 48 3 8 26,226
------ ---- ------ ----- ------ --- --- -------
Total realized gains (losses) and
unrealized appreciation (depreciation) on
investments, net........................ 4,036 416 310 104 50 3 8 47,352
------- ---- ------ ----- ------ --- --- -------
Net increase (decrease) in net assets from
operations..................................... $4,078 387 289 96 47 3 8 69,811
======= ==== ====== ===== ====== === === =======
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
===========================================================================================================================
Financial Statements (cont.)
Statements of Changes in Net Assets
For the years ended December 31, 1996 and 1995
(In thousands)
Growth and Precious Real Estate
Money Market Fund Income Fund Metals Fund High Income Fund Securities Fund
----------------- ------------ ----------- ---------------- ---------------
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Increase (decrease) in net assets:
Operations:
Investment income (loss), net............ $ 1,165 1,272 813 (131) (13) 1 2,395 1,556 422 258
Realized gains (losses) on
investments, net........................ - - 9,008 2,371 506 194 1,332 184 475 186
Net change in unrealized appreciation
(depreciation) on investments........... - - 960 13,509 (480) (159) 754 3,050 3,748 1,571
------ ------ ------ ------ ----- ----- ------ ------ ------ ------
Net increase (decrease) in net assets
from operations..................... 1,165 1,272 10,781 15,749 13 36 4,481 4,790 4,645 2,015
------ ------ ------ ------ ----- ----- ------ ------ ------ ------
Contract transactions (note 5):
Purchase payments........................ 14,336 10,218 15,819 9,814 1,159 519 5,922 5,160 1,633 855
Transfers between funds.................. (3,631) (4,384) 6,402 9,626 669 (1,029) 1,603 4,955 1,434 (1,207)
Surrenders and terminations.............. (7,844) (9,094) (9,128) (5,346) (915)(1,297) (5,831) (3,966) (1,728) (1,337)
Rescissions.............................. (83) (157) (264) (240) (13) (10) (53) (140) (21) (3)
Other transactions (note 2).............. (6) (14) (29) 21 (2) 9 (9) 26 28 (14)
------ ------ ------ ------ ----- ----- ------ ------ ------ ------
Net increase (decrease) in net assets
resulting from contract
transactions........................ 2,772 (3,431) 12,800 13,875 898 (1,808) 1,632 6,035 1,346 (1,706)
------ ------ ------ ------ ----- ----- ------ ------ ------ ------
Increase (decrease) in net assets.......... 3,937 (2,159) 23,581 29,624 911 (1,772) 6,113 10,825 5,991 309
Net assets at beginning of year............ 28,571 30,730 75,240 45,616 7,278 9,050 35,808 24,983 14,344 14,035
------ ------ ------ ------ ----- ----- ------ ------ ------ ------
Net assets at end of year.................. $32,508 28,571 98,821 75,240 8,189 7,278 41,921 35,808 20,335 14,344
====== ====== ====== ====== ===== ===== ====== ====== ====== ======
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
===========================================================================================================================
Financial Statements (cont.)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1996 and 1995
(In thousands)
U.S. Government Zero Coupon Zero Coupon Zero Coupon
Securities Fund Utility Equity Fund Fund-1995 Fund-2000 Fund-2005
--------------- ------------------- ----------- ----------- -----------
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
------- ------ ------ ------ ---- ---- ---- ---- ---- ----
Increase (decrease) in net assets:
Operations:
Investment income (loss), net............ $ 4,323 4,337 3,967 4,316 - 252 1,049 703 340 222
Realized gains (losses) on
investments, net........................ (40) 267 1,652 56 - (190) 169 127 133 93
Net change in unrealized appreciation
(depreciation) on investments........... (2,399) 8,141 (4) 22,858 - 189 (990) 2,954 (672) 1,761
------- ------ ------- ------- --- ----- ------ ------ ----- -----
Net increase (decrease) in net
assets from operations.............. 1,884 12,745 5,615 27,230 - 251 228 3,784 (199) 2,076
------- ------ ------- ------- --- ----- ------ ------ ----- -----
Contract transactions (note 5):
Purchase payments........................ 7,463 6,927 5,199 5,661 - 98 2,220 4,576 1,208 1,474
Transfers between funds.................. 19,458 192 (9,257) 13 - (4,137) (1,036) 1,668 (671) 234
Surrenders and terminations.............. (11,371) (10,634) (14,003) (12,439) - (1,151) (2,141) (1,821)(1,026) (674)
Rescissions.............................. (165) (103) (61) (78) - - (85) (85) (64) (57)
Other transactions (note 2).............. (19) 60 (11) (59) - (3) (10) (10) (2) (5)
------- ------ ------- ------- --- ----- ------ ------ ----- -----
Net increase (decrease) in net
assets resulting from contract
transactions........................ 15,366 (3,558) (18,133) (6,902) - (5,193) (1,052) 4,328 (555) 972
------- ------ ------- ------- --- ----- ------ ------ ----- -----
Increase (decrease) in net assets.......... 17,250 9,187 (12,518) 20,328 - (4,942) (824) 8,112 (754) 3,048
Net assets at beginning of year............ 82,935 73,748 115,743 95,415 - 4,942 25,909 17,797 9,531 6,483
------- ------ ------- ------- --- ----- ------ ------ ----- -----
Net assets at end of year.................. $100,185 82,935 103,225 115,743 - - 25,085 25,909 8,777 9,531
======= ====== ======= ======= === ===== ====== ====== ===== =====
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
===========================================================================================================================
Financial Statements (cont.)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1996 and 1995
(In thousands)
Templeton Investment Grade Adjustable U.S.
Zero Coupon Global Income Intermediate Income Government
Fund - 2010 Securities Fund Bond Fund Securities Fund Fund
------------ --------------- ---------------- --------------- ---------------
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
------ ----- ------ ------ ------ ----- ------ ------ ------ ------
Increase (decrease) in net assets:
Operations:
Investment income (loss), net........... $ 291 104 1,378 532 638 408 3,485 3,335 852 834
Realized gains (losses) on
investments, net....................... 294 136 107 (1) 360 113 1,687 728 (733) 30
Net change in unrealized appreciation
(depreciation) on investments.......... (957) 1,835 271 2,221 (737) 742 3,616 10,992 356 408
------ ----- ------ ------ ------ ------ ------ ------ ------ ------
Net increase (decrease) in net
assets from operations............. (372) 2,075 1,756 2,752 261 1,263 8,788 15,055 475 1,272
------ ----- ------ ------ ------ ------ ------ ------ ------ ------
Contract transactions (note 5):
Purchase payments....................... 1,097 1,373 1,712 1,801 939 1,410 10,882 9,139 1,552 3,443
Transfers between funds................. (935) 1,450 (928) (2,122) (15,408) (567) (1,355) 3,107 (15,809) (6,777)
Surrenders and terminations............. (595) (546) (2,722) (2,408) (1,630) (1,685) (10,309) (9,000) (1,613) (1,984)
Rescissions............................. (27) (37) (1) (56) (14) (109) (259) (300) (53) (109)
Other transactions (note 2)............. (5) 6 50 (3) 40 30 (1) (26) 25 6
------ ----- ------ ------ ------ ------ ------ ------ ------ -----
Net increase (decrease) in net
assets resulting from contract
transactions....................... (465) 2,246 (1,889) (2,788) (16,073) (921) (1,042) 2,920 (15,898) (5,421)
------ ----- ------ ------ ------ ------ ------ ------ ------ -----
Increase (decrease) in net assets......... (837) 4,321 (133) (36) (15,812) 342 7,746 17,975 (15,423) (4,149)
Net assets at beginning of year........... 8,329 4,008 22,852 22,888 15,812 15,470 90,363 72,388 15,423 19,572
------ ----- ------ ------ ------ ------ ------ ------ ------ ------
Net assets at end of year................. $7,492 8,329 22,719 22,852 - 15,812 98,109 90,363 - 15,423
====== ===== ====== ====== ====== ====== ====== ====== ====== ======
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
===========================================================================================================================
Financial Statements (cont.)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1996 and 1995
(In thousands)
Templeton
Templeton Developing Templeton
Templeton Pacific Rising International Markets Global
Growth Fund Dividends Fund Equity Fund Equity Fund Growth Fund
----------------- -------------- ------------- ----------- -----------
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ------ ----- ------ ------
Increase (decrease) in net assets:
Operations:
Investment income (loss), net............ $ 413 122 278 234 734 137 (52) (67) 42 (108)
Realized gains (losses) on
investments, net........................ 1,371 178 932 172 2,946 1,571 297 (82) 495 40
Net change in unrealized appreciation
(depreciation) on investments........... 605 1,218 8,111 7,803 8,342 2,706 1,405 195 3,541 1,297
------ ------ ------ ------ ------ ------ ------ ----- ------ ------
Net increase (decrease) in net
assets from operations.............. 2,389 1,518 9,321 8,209 12,022 4,414 1,650 46 4,078 1,229
------ ------ ------ ------ ------ ------ ------ ----- ------ ------
Contract transactions (note 5):
Purchase payments........................ 2,063 2,320 5,191 3,197 6,974 6,496 2,224 1,669 6,947 4,462
Transfers between funds.................. 439 (3,819) 2,038 2,459 3,648 (1,789) 1,512 275 3,817 1,693
Surrenders and terminations.............. (3,400) (2,341) (4,321) (2,693) (6,296) (4,550) (633) (335) (1,698) (719)
Rescissions.............................. (20) (28) (78) (85) (18) (162) (32) - (114) (13)
Other transactions (note 2).............. (17) 7 13 (2) 14 1 (6) 11 13 8
------ ------ ------ ------ ------ ------ ------ ----- ------ ------
Net increase (decrease) in net
assets resulting from contract
transactions........................ (935) (3,861) 2,843 2,876 4,322 (4) 3,065 1,620 8,965 5,431
------ ------ ------ ------ ------ ------ ------ ----- ------ ------
Increase (decrease) in net assets.......... 1,454 (2,343) 12,164 11,085 16,344 4,410 4,715 1,666 13,043 6,660
Net assets at beginning of year............ 24,694 27,037 39,770 28,685 54,018 49,608 7,255 5,589 16,060 9,400
------ ------ ------ ------ ------ ------ ------ ----- ------ ------
Net assets at end of year.................. $26,148 24,694 51,934 39,770 70,362 54,018 11,970 7,255 29,103 16,060
====== ====== ====== ====== ====== ====== ====== ===== ====== ======
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
===========================================================================================================================
Financial Statements (cont.)
Statements of Changes in Net Assets (cont.)
For the years ended December 31, 1996 and 1995
(In thousands)
Templeton
Templeton International Mutual Mutual
Global Asset Capital Smaller Discovery Shares
Allocation Small Growth Companies Securities Securities
Fund Cap Fund Fund Fund Fund Fund Total All Funds
----------- -------- ------- ----------- ---------- ---------- ---------------
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- --- ---- ---- ----
Increase (decrease) in net assets:
Operations:
Investment income (loss), net...... $ (29) 6 (21) - (8) - (3) - - - - - 22,459 18,323
Realized gains (losses) on
investments, net.................. 18 - 95 - 20 - 2 - - - - - 21,126 6,173
Net change in unrealized
appreciation (depreciation) on
investments....................... 398 4 215 - 84 - 48 - 3 - 8 - 26,226 83,295
----- --- ----- --- ----- --- --- --- --- --- --- --- ------- -------
Net increase (decrease) in net
assets from operations....... 387 10 289 - 96 - 47 - 3 - 8 - 69,811 107,791
----- --- ----- --- ----- --- --- --- --- --- --- --- ------- -------
Contract transactions (note 5):
Purchase payments.................. 1,950 210 1,263 - 788 - 229 - 18 - 50 - 98,838 80,822
Transfers between funds............ 1,240 159 3,907 - 1,776 - 446 - 257 - 384 - - -
Surrenders and terminations........ (162) - (74) - (128) - - - - - - - (87,568) (74,020)
Rescissions........................ (35) - (15) - (3) - - - - - - - (1,478) (1,772)
Other transactions (note 2)........ - - (1) - - - - - - - - - 65 49
----- --- ----- --- ----- --- --- --- --- --- --- --- ------- -------
Net increase (decrease) in net
assets resulting from contract
transactions.................. 2,993 369 5,080 - 2,433 - 675 - 275 - 434 - 9,857 5,079
----- --- ----- --- ----- --- --- --- --- --- --- --- ------- -------
Increase (decrease) in net assets... 3,380 379 5,369 - 2,529 - 722 - 278 - 442 - 79,668 112,870
Net assets at beginning of year...... 379 - - - - - - - - - - - 690,314 577,444
----- --- ----- --- ----- --- --- --- --- --- --- --- ------- -------
Net assets at end of year........... $3,759 379 5,369 - 2,529 - 722 - 278 - 442 - 769,982 690,314
===== === ===== === ===== === === === === === === === ======= =======
<FN>
See accompanying notes to financial statements.
</FN>
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
================================================================================
Notes to Financial Statements
December 31, 1996
1. Organization
Preferred Life Variable Account C (Variable Account) is a segregated investment
account of Preferred Life Insurance Company of New York (Preferred Life) and is
registered with the Securities and Exchange Commission as a unit investment
trust pursuant to the provisions of the Investment Company Act of 1940 (as
amended). The Variable Account was established by Preferred Life on February 26,
1988 and commenced operations September 6, 1991. Accordingly, it is an
accounting entity wherein all segregated account transactions are reflected.
The Variable Account's assets are the property of Preferred Life and are held
for the benefit of the owners and other persons entitled to payments under
variable annuity contracts issued through the Variable Account and underwritten
by Preferred Life. The assets of the Variable Account, equal to the reserves and
other liabilities of the Variable Account, are not chargeable with liabilities
that arise from any other business which Preferred Life may conduct.
The Variable Account's sub-accounts may invest, at net asset values, in one or
more of the funds of the Franklin Valuemark Funds (FVF), managed by Franklin
Advisers, Inc. or other of its affiliated adviser entities, in accordance with
the selection made by the contract owner.
Certain officers and trustees of the FVF are also officers and/or directors of
Franklin Advisers, Inc. and/or Preferred Life.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investments
Investments of the Variable Account are valued daily at market value using net
asset values provided by Franklin Advisers, Inc.
Realized investment gains include gains on the sale of fund shares as determined
by the average cost method. Dividend distributions received from the FVF are
reinvested in additional shares of the FVF and are recorded as income to the
Variable Account on the ex-dividend date.
The Templeton Global Asset Allocation Fund was added as an available investment
option on August 4, 1995. The Zero Coupon - 1995 Fund matured and was closed on
December 15, 1995. The Small Cap Fund, Capital Growth Fund and Templeton
International Smaller Companies Fund were added as available investment
options on June 10, 1996. The Mutual Discovery Securities Fund and Mutual Shares
Securities Fund were added as available investment options on December 2, 1996.
The Investment Grade Intermediate Bond Fund and Adjustable U.S. Government Fund
were closed on October 25, 1996 when shares of the U.S. Government Securities
Fund were substituted for all shares of both funds.
On May 1, 1995, the Equity Growth Fund name was changed to Growth and Income
Fund. The Global Income Fund name was changed to Templeton Global Income
Securities Fund on May 1, 1996.
Expenses
Asset Based Expenses
A mortality and expense risk charge is deducted from the Variable Account on a
daily basis equal, on an annual basis, to 1.25% of the daily net assets of the
Variable Account.
An administrative charge is deducted from the Variable Account on a daily basis
equal, on an annual basis, to 0.15% of the daily net assets of the Variable
Account.
Contract Based Expenses
A contract maintenance charge is paid by the contract owner annually from each
contract by liquidating contract units at the end of the contract year and at
the time of full surrender. The amount of the charge is $30 each year. Contract
maintenance charges deducted during the years ended December 31, 1996 and 1995
were $468,180 and $475,980, respectively. These contract charges are reflected
in the Statements of Changes in Net Assets as other transactions.
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
================================================================================
Notes to Financial Statements (cont.)
December 31, 1996
2. Significant Accounting Policies (cont.)
Contract Based Expenses (cont.)
A contingent deferred sales charge is deducted from the contract value at the
time of a surrender. This charge applies only to a surrender of purchase
payments received within five years of the date of surrender. For this purpose,
purchase payments are allocated on a first-in, first-out basis. The amount of
the contingent deferred sales charge is calculated by: (a) allocating purchase
payments to the amount surrendered; and (b) multiplying each allocated purchase
payment that has been held under the contract for the period shown below by the
charge shown below:
[Download Table]
Years Since Payment Charge
------------------- ------
0-1 5%
1-2 5%
2-3 4%
3-4 3%
4-5 1.5%
5+ 0%
and (c) adding the products of each multiplication in (b) above.
A contract owner may, not more frequently than once annually on a cumulative
basis, make a surrender each contract year of fifteen percent (15%) of
purchase payments paid less any prior surrenders without incurring a contingent
deferred sales charge. For a partial surrender, the contingent deferred sales
charge will be deducted from the remaining contract value, if sufficient;
otherwise it will be deducted from the amount surrendered. Total contingent
deferred sales charges paid by the contract owners for the years ended December
31, 1996 and 1995 were $1,012,666 and $1,304,496, respectively.
Currently, twelve transfers are permitted each contract year. Thereafter, the
fee is $25 per transfer, or 2% of the amount transferred, if less. Currently,
transfers associated with the dollar cost averaging program are not counted.
Total transfer charges for the years ended December 31, 1996 and 1995 were
$11,086 and $9,505, respectively.
Premium taxes or other taxes payable to a state or other governmental entity
will be charged against the contract values. Preferred Life may, at its sole
discretion, pay taxes when due and deduct that amount from the contract value
at a later date. Payment at an earlier date does not waive any right Preferred
Life may have to deduct such amounts at a later date.
On certain contracts, a systematic withdrawal plan is available which allows an
owner to withdraw up to 9% of purchase payments less prior surrenders annually,
paid quarterly, without incurring a contingent deferred sales charge. The
exercise of the systematic withdrawal plan in any contract year replaces the 15%
penalty free privilege for that year.
A rescission is defined as a contract that is returned to the company and
canceled within the free-look period, generally within 10 days.
3. Investment Transactions
The sub-account purchases of fund shares, including reinvestment of dividend
distributions, were as follows during the year ended December 31, 1996 (in
thousands):
[Download Table]
Money Market Fund................................. $49,638
Growth and Income Fund............................ 33,090
Precious Metals Fund.............................. 6,115
High Income Fund.................................. 20,371
Real Estate Securities Fund....................... 4,423
U.S. Government Securities Fund................... 33,976
Utility Equity Fund............................... 7,363
Zero Coupon Fund - 2000........................... 3,474
Zero Coupon Fund - 2005........................... 1,655
Zero Coupon Fund - 2010........................... 2,872
Templeton Global Income Securities Fund........... 3,437
Investment Grade Intermediate Bond Fund........... 1,645
Income Securities Fund............................ 13,313
Adjustable U.S. Government Fund................... 2,012
Templeton Pacific Growth Fund..................... 12,431
Rising Dividends Fund............................. 7,847
Templeton International Equity Fund............... 16,740
Templeton Developing Markets Equity Fund.......... 5,486
Templeton Global Growth Fund...................... 10,491
Templeton Global Asset Allocation Fund............ 3,196
Small Cap Fund.................................... 11,143
Capital Growth Fund............................... 2,888
Templeton International Smaller Companies Fund.... 769
Mutual Discovery Securities Fund.................. 275
Mutual Shares Securities Fund..................... 434
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
================================================================================
Notes to Financial Statements (cont.)
December 31, 1996
4. Federal Income Taxes
Operations of the Variable Account form a part of, and are taxed with,
operations of Preferred Life, which is taxed as a life insurance company under
the Internal Revenue Code.
Preferred Life does not expect to incur any federal income taxes in the
operation of the Variable Account. If, in the future, Preferred Life determines
that the Variable Account may incur federal income taxes, it may then assess a
charge against the Variable Account for such taxes.
5. Contract Transactions - Unit Activity (In thousands)
Transactions in units for each fund for the years ended December 31, 1996 and
1995 were as follows:
[Enlarge/Download Table]
Growth U.S. Zero Zero
Money and Precious High Real Estate Government Utility Coupon Coupon
Market Income Metals Income Securities Securities Equity Fund - Fund -
Fund Fund Fund Fund Fund Fund Fund 1995 2000
----- ---- ---- ------ ---------- ------ ----- ---- ----
Accumulation units outstanding at December 31, 1994.... 2,487 3,452 647 1,710 900 5,331 6,317 344 1,158
Contract transactions:
Purchase payments..................................... 809 638 38 314 53 450 333 7 273
Transfers between funds............................... (344) 626 (75) 305 (76) 12 4 (273) 98
Surrenders and terminations........................... (721) (355) (94) (247) (82) (701) (730) (78) (107)
Rescissions........................................... (12) (16) (1) (9) - (7) (5) - (5)
Other transactions.................................... (1) 1 1 2 (1) 4 (3) - (1)
----- ----- ---- ----- ----- ----- ----- ----- -----
Net increase (decrease) in accumulation units
resulting from contract transactions............ (269) 894 (131) 365 (106) (242) (401) (344) 258
----- ----- ---- ----- ----- ----- ----- ----- -----
Accumulation units outstanding at December 31, 1995.... 2,218 4,346 516 2,075 794 5,089 5,916 - 1,416
===== ===== ==== ===== ===== ===== ===== ===== =====
Contract transactions:
Purchase payments..................................... 1,093 882 73 329 83 462 265 - 123
Transfers between funds............................... (274) 360 37 84 68 1,177 (471) - (56)
Surrenders and terminations........................... (597) (501) (59) (321) (87) (700) (708) - (119)
Rescissions........................................... (6) (15) (1) (3) (1) (10) (3) - (5)
Other transactions.................................... (1) (2) - - 2 (1) (1) - (1)
----- ----- ---- ----- ----- ----- ----- ----- -----
Net increase (decrease) in accumulation units
resulting from contract transactions............ 215 724 50 89 65 928 (918) - (58)
----- ----- ---- ----- ----- ----- ----- ----- -----
Accumulation units outstanding at December 31, 1996.... 2,433 5,070 566 2,164 859 6,017 4,998 - 1,358
===== ===== ==== ===== ===== ===== ===== ===== =====
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
================================================================================
Notes to Financial Statements (cont.)
December 31, 1996
5. Contract Transactions - Unit Activity (In thousands) (cont.)
[Enlarge/Download Table]
Templeton
Zero Zero Global Investment Adjustable Templeton Templeton
Coupon Coupon Income Grade Income U.S. Pacific Rising International
Fund - Fund - Securities Intermediate Securities Government Growth Dividends Equity
2005 2010 Fund Bond Fund Fund Fund Fund Fund Fund
----- ----- ---------- ----------- ---------- ----------- ------- -------- -----------
Accumulation units outstanding at
December 31, 1994.................... 403 252 1,667 1,085 4,416 1,767 2,112 2,936 4,079
Contract transactions:
Purchase payments.................... 79 73 124 94 502 296 180 284 509
Transfers between funds.............. 14 76 (148) (38) 168 (591) (298) 215 (146)
Surrenders and terminations.......... (37) (27) (167) (114) (501) (172) (181) (246) (356)
Rescissions.......................... (3) (2) (4) (7) (17) (9) (2) (7) (13)
Other transactions................... - - - 2 (1) - - - -
----- ------ ------- ------- ------- ------- ------- ------ -------
Net increase (decrease) in
accumulation units resulting
from contract transactions..... 53 120 (195) (63) 151 (476) (301) 246 (6)
----- ----- ------- ------- ------- ------- ------- ------ -------
Accumulation units outstanding at
December 31, 1995.................... 456 372 1,472 1,022 4,567 1,291 1,811 3,182 4,073
===== ===== ======= ======= ======= ======= ======= ====== =======
Contract transactions:
Purchase payments.................... 61 54 109 61 537 128 140 388 479
Transfers between funds.............. (34) (47) (58) (980) (69) (1,284) 32 147 251
Surrenders and terminations.......... (52) (29) (172) (105) (503) (133) (230) (318) (428)
Rescissions.......................... (3) (1) - (1) (13) (4) (1) (6) (1)
Other transactions................... - (1) 3 3 - 2 (1) 1 1
----- ----- ------- ------- ------- ------- ------- ------ ------
Net increase (decrease) in
accumulation units resulting
from contract transactions..... (28) (24) (118) (1,022) (48) (1,291) (60) 212 302
----- ------ ------- ------- ------- ------- ------- ------ ------
Accumulation units outstanding at
December 31, 1996.................... 428 348 1,354 - 4,519 - 1,751 3,394 4,375
===== ===== ======= ======= ======= ======= ======= ====== ======
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
================================================================================
Notes to Financial Statements (cont.)
December 31, 1996
5. Contract Transactions - Unit Activity (In thousands) (cont.)
[Enlarge/Download Table]
Templeton
Templeton Templeton Templeton International Mutual Mutual
Developing Global Global Asset Small Capital Smaller Discovery Shares Total
Markets Equity Growth Allocation Cap Growth Companies Securities Securities All
Fund Fund Fund Fund Fund Fund Fund Fund Funds
------------ --------- ------------ ----- ------ ----------- --------- -------- -----
Accumulation units outstanding at
December 31, 1994...................... 591 922 - - - - - - 42,576
Contract transactions:
Purchase payments...................... 176 410 21 - - - - - 5,663
Transfers between funds................ 24 152 15 - - - - - (280)
Surrenders and terminations............ (35) (67) - - - - - - (5,018)
Rescissions............................ - (1) - - - - - - (120)
Other transactions..................... 1 1 - - - - - - 5
------- ------- ----- ----- ---- ------ ------ ------ ------
Net increase (decrease) in
accumulation units resulting
from contract transactions....... 166 495 36 - - - - - 250
------- ------- ----- ----- ---- ------ ------ ------ ------
Accumulation units outstanding at
December 31, 1995...................... 757 1,417 36 - - - - - 42,826
======= ======= ===== ===== ==== ====== ====== ====== ======
Contract transactions:
Purchase payments...................... 206 564 172 103 71 22 2 5 6,412
Transfers between funds................ 140 310 109 320 165 43 25 38 33
Surrenders and terminations............ (58) (136) (14) (6) (11) - - - (5,287)
Rescissions............................ (3) (10) (3) (1) - - - - (91)
Other transactions..................... - 1 - - - - - - 5
------- ------- ----- ----- ---- ------ ------- ------ ------
Net increase (decrease) in
accumulation units resulting
from contract transactions....... 285 729 264 416 225 65 27 43 1,072
------- ------- ----- ----- ---- ------ ------- ------ ------
Accumulation units outstanding at
December 31, 1996...................... 1,042 2,146 300 416 225 65 27 43 43,898
======= ======= ===== ===== ==== ====== ======= ====== ======
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
================================================================================
Notes to Financial Statements (cont.)
December 31, 1996
6. Unit Values
A summary of accumulation unit values and accumulation units outstanding for
variable annuity contracts and the expense ratios, including expenses of the
underlying funds, for each of the five years in the period ended December 31,
1996 follows.
[Enlarge/Download Table]
Accumulation Ratio of Expenses
Units Outstanding Accumulation Net Assets to Average
(in thousands) Unit Value (in thousands) Net Assets*
----------------- ------------ -------------- ----------
Money Market Fund
December 31,
1996........................................................... 2,433 $13.359 $ 32,508 1.83%
1995........................................................... 2,218 12.883 28,571 1.80
1994........................................................... 2,487 12.354 30,730 1.86
1993........................................................... 627 12.066 7,566 2.06
1992........................................................... 301 11.932 3,587 2.09
Growth and Income Fund
December 31,
1996........................................................... 5,070 19.490 98,821 1.90
1995........................................................... 4,347 17.310 75,240 1.92
1994........................................................... 3,452 13.215 45,616 1.94
1993........................................................... 2,402 13.677 32,857 1.98
1992........................................................... 1,227 12.574 15,424 2.02
Precious Metals Fund
December 31,
1996........................................................... 566 14.467 8,189 2.05
1995........................................................... 516 14.109 7,278 2.06
1994........................................................... 647 13.979 9,050 2.08
1993........................................................... 391 14.464 5,656 2.08
1992........................................................... 30 9.424 279 2.09
High Income Fund
December 31,
1996........................................................... 2,164 19.375 41,921 1.94
1995........................................................... 2,076 17.252 35,808 1.96
1994........................................................... 1,710 14.608 24,984 2.00
1993........................................................... 1,135 15.155 17,207 2.04
1992........................................................... 266 13.278 3,532 2.08
Real Estate Securities Fund
December 31,
1996........................................................... 859 23.668 20,335 1.97
1995........................................................... 794 18.073 14,344 1.99
1994........................................................... 900 15.594 14,035 2.02
1993........................................................... 437 15.369 6,712 2.07
1992........................................................... 77 13.095 1,012 2.09
U.S. Government Securities Fund
December 31,
1996........................................................... 6,017 16.650 100,185 1.91
1995........................................................... 5,089 16.298 82,935 1.92
1994........................................................... 5,331 13.835 73,747 1.93
1993........................................................... 6,108 14.698 89,774 1.94
1992........................................................... 2,266 13.586 30,781 1.99
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
================================================================================
Notes to Financial Statements (cont.)
December 31, 1996
6. Unit Values (cont.)
[Enlarge/Download Table]
Accumulation Ratio of Expenses
Units Outstanding Accumulation Net Assets to Average
(in thousands) Unit Value (in thousands) Net Assets*
----------------- ------------ -------------- -----------
Utility Equity Fund
December 31,
1996........................................................... 4,998 $20.654 $103,225 1.90%
1995........................................................... 5,916 19.555 115,743 1.90
1994........................................................... 6,317 15.104 95,415 1.92
1993........................................................... 7,479 17.319 129,527 1.91
1992........................................................... 2,519 15.889 40,022 1.95
Zero Coupon Fund - 1995
December 31,
1995 1......................................................... 269 15.200 4,082 1.80+
1994........................................................... 344 14.380 4,942 1.80
1993........................................................... 270 14.480 3,906 1.76
1992........................................................... 171 13.665 2,343 1.65
Zero Coupon Fund - 2000
December 31,
1996........................................................... 1,358 18.475 25,085 1.80
1995........................................................... 1,416 18.294 25,910 1.80
1994........................................................... 1,158 15.373 17,797 1.80
1993........................................................... 795 16.717 13,297 1.77
1992........................................................... 397 14.595 5,789 1.65
Zero Coupon Fund - 2005
December 31,
1996........................................................... 428 20.517 8,777 1.80
1995........................................................... 456 20.914 9,531 1.80
1994........................................................... 403 16.096 6,483 1.80
1993........................................................... 341 18.050 6,159 1.77
1992........................................................... 108 14.975 1,622 1.65
Zero Coupon Fund - 2010
December 31,
1996........................................................... 348 21.522 7,492 1.80
1995........................................................... 371 22.431 8,329 1.80
1994........................................................... 252 15.930 4,008 1.80
1993........................................................... 193 18.144 3,502 1.65
1992........................................................... 60 14.670 885 1.65
Templeton Global Income Securities Fund
December 31,
1996........................................................... 1,354 16.781 22,719 2.01
1995........................................................... 1,472 15.522 22,851 2.04
1994........................................................... 1,667 13.726 22,888 2.11
1993........................................................... 1,045 14.650 15,302 2.13
1992........................................................... 406 12.733 5,164 2.07
Investment Grade Intermediate Bond Fund
December 31,
1996 2......................................................... 891 15.740 14,032 2.00+
1995........................................................... 1,023 15.463 15,812 2.01
1994........................................................... 1,085 14.257 15,470 2.03
1993........................................................... 893 14.389 12,850 2.06
1992........................................................... 352 13.442 4,725 2.08
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
================================================================================
Notes to Financial Statements (cont.)
December 31, 1996
6. Unit Values (cont.)
[Enlarge/Download Table]
Accumulation Ratio of Expenses
Units Outstanding Accumulation Net Assets to Average
(in thousands) Unit Value (in thousands) Net Assets*
----------------- ------------ -------------- -----------
Income Securities Fund
December 31,
1996........................................................... 4,519 $21.708 $ 98,109 1.90%
1995........................................................... 4,567 19.785 90,364 1.91
1994........................................................... 4,416 16.392 72,389 1.94
1993........................................................... 2,634 17.734 46,707 1.96
1992........................................................... 668 15.163 10,128 2.07
Adjustable U.S. Government Fund
December 31,
1996 2......................................................... 912 12.389 11,298 1.99+
1995........................................................... 1,290 11.951 15,423 1.99
1994........................................................... 1,767 11.077 19,571 1.97
1993........................................................... 1,971 11.254 22,179 1.98
1992........................................................... 1,453 11.020 16,007 2.00
Templeton Pacific Growth Fund
December 31,
1996........................................................... 1,751 14.932 26,148 2.39
1995........................................................... 1,812 13.630 24,693 2.41
1994........................................................... 2,112 12.802 27,037 2.47
1993........................................................... 915 14.233 13,023 2.54
1992 3......................................................... 58 9.761 568 2.71+
Rising Dividends Fund
December 31,
1996........................................................... 3,394 15.303 51,934 2.16
1995........................................................... 3,182 12.498 39,770 2.18
1994........................................................... 2,936 9.769 28,685 2.20
1993........................................................... 2,772 10.327 28,623 2.19
1992 3......................................................... 617 10.848 6,696 2.07+
Templeton International Equity Fund
December 31,
1996........................................................... 4,375 16.081 70,362 2.29
1995........................................................... 4,073 13.263 54,018 2.32
1994........................................................... 4,079 12.161 49,607 2.39
1993........................................................... 1,346 12.226 16,451 2.52
1992 3......................................................... 88 9.642 849 3.17+
Templeton Developing Markets Equity Fund
December 31,
1996........................................................... 1,042 11.487 11,970 2.89
1995........................................................... 757 9.582 7,254 2.81
1994 4......................................................... 591 9.454 5,589 2.93+
Templeton Global Growth Fund
December 31,
1996........................................................... 2,146 13.560 29,103 2.33
1995........................................................... 1,416 11.339 16,061 2.37
1994 4......................................................... 922 10.201 9,400 2.54+
Templeton Global Asset Allocation Fund
December 31,
1996........................................................... 300 12.514 3,759 2.26
1995 5......................................................... 36 10.591 379 2.30+
PREFERRED LIFE VARIABLE ACCOUNT C
OF PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
================================================================================
Notes to Financial Statements (cont.)
December 31, 1996
6. Unit Values (cont.)
[Enlarge/Download Table]
Accumulation Ratio of Expenses
Units Outstanding Accumulation Net Assets to Average
(in thousands) Unit Value (in thousands) Net Assets*
----------------- ------------ -------------- ----------
Small Cap Fund
December 31,
1996 6......................................................... 416 $12.913 $ 5,369 2.17+%
Capital Growth Fund
December 31,
1996 6......................................................... 225 11.254 2,529 2.17+
Templeton International Smaller Companies Fund
December 31,
1996 6......................................................... 65 11.145 722 2.18+
Mutual Discovery Securities Fund
December 31,
1996 7......................................................... 27 10.180 278 2.77+
Mutual Shares Securities Fund
December 31,
1996 7......................................................... 43 10.330 442 2.40+
<FN>
*For the year ended December 31, including the effect of the expenses of the
underlying funds.
+Annualized.
1Period from January 1, 1995 to December 15, 1995 (fund closure).
2Period from January 1, 1996 to October 25, 1996 (fund closure).
3Period from March 10, 1992 (fund commencement) to December 31, 1992.
4Period from April 25, 1994 (fund commencement) to December 31, 1994.
5Period from August 4, 1995 (fund commencement) to December 31, 1995.
6Period from June 10, 1996 (fund commencement) to December 31, 1996.
7Period from December 2, 1996 (fund commencement) to December 31, 1996.
</FN>
PREFERRED LIFE INSURANCE COMPANY
OF NEW YORK
Financial Statements
December 31, 1996 and 1995
KPMG Peat Marwick LLP
4200 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Preferred Life Insurance Company of New York:
We have audited the accompanying balance sheets of Preferred Life Insurance
Company of New York (a wholly owned subsidiary of Allianz Life Insurance Company
of North America) as of December 31, 1996 and 1995, and the related statements
of income, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Preferred Life Insurance
Company of New York as of December 31, 1996 and 1995, and the results of its
operations, changes in stockholder's equity and cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
In 1994, as discussed in note 1 to the financial statements, the Company adopted
the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities.
KPMG Peat Marwick LLP
February 4, 1997
[Enlarge/Download Table]
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Balance Sheets
December 31, 1996 and 1995
(in thousands except share data)
Assets 1996 1995
--------------------------------------------------------------------------------------------------------------
Investments:
Fixed maturities, at market $ 20,412 15,128
Certificates of deposit and short-term securities 2,389 800
--------------------------------------------------------------------------------------------------------------
Total investments 22,801 15,928
Cash 4,976 3,233
Receivables 4,046 4,820
Reinsurance receivable:
Recoverable on future policy benefit reserves 162 161
Recoverable on unpaid claims 9,674 11,515
Receivable on paid claims 1,393 1,522
Prepaid insurance premiums 429 431
Deferred acquisition costs 38,245 38,586
Accrued investment income 295 228
Other assets 111 959
--------------------------------------------------------------------------------------------------------------
Assets, exclusive of separate account assets 82,132 77,383
Separate account assets 769,981 690,262
--------------------------------------------------------------------------------------------------------------
Total assets $852,113 767,645
==============================================================================================================
Liabilities and Stockholder's Equity
--------------------------------------------------------------------------------------------------------------
Liabilities:
Future life policy benefit reserves $ 1,219 594
Future annuity benefit reserves 325 6
Policy and contract claims 25,119 26,167
Unearned premiums 1,887 2,330
Other policyholder funds 679 691
Reinsurance payable 2,133 1,252
Deferred income taxes 8,740 6,510
Accrued expenses and other liabilities 2,462 3,985
Commissions due and accrued 822 824
Payable to parent 1,102 663
--------------------------------------------------------------------------------------------------------------
Liabilities, exclusive of separate account liabilities 44,488 43,022
Separate account liabilities 769,981 690,262
--------------------------------------------------------------------------------------------------------------
Total liabilities 814,469 733,284
Stockholder's equity:
Common stock, $10 par value; 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 15,500 15,500
Net unrealized (loss) gain on investments,
net of deferred federal income taxes (34) 274
Retained earnings 20,178 16,587
--------------------------------------------------------------------------------------------------------------
Total stockholder's equity 37,644 34,361
Commitments and contingencies (notes 6 and 11)
--------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $852,113 767,645
==============================================================================================================
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Statements of Income
Years Ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
------------------------------------------------------------------------------------------------------------------------
Revenue:
Life insurance premiums $ 9,174 10,291 10,465
Annuity considerations 11,725 10,679 8,781
Accident and health premiums 22,105 22,406 24,586
------------------------------------------------------------------------------------------------------------------------
Total premiums and considerations 43,004 43,376 43,832
Premiums ceded 11,574 13,462 16,341
------------------------------------------------------------------------------------------------------------------------
Net premiums and considerations 31,430 29,914 27,491
Investment income, net 1,220 605 371
Realized investment losses, net (62) (13) (113)
------------------------------------------------------------------------------------------------------------------------
Total revenue 32,588 30,506 27,749
------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Life insurance benefits 5,971 8,202 10,577
Annuity benefits 202 (100) 357
Accident and health insurance benefits 13,406 14,743 15,455
------------------------------------------------------------------------------------------------------------------------
Total benefits 19,579 22,845 26,389
Benefit recoveries 6,614 9,116 11,999
------------------------------------------------------------------------------------------------------------------------
Net benefits 12,965 13,729 14,390
Commissions and other agent compensation 8,596 7,278 12,974
General and administrative expenses 3,576 3,132 3,079
Taxes, licenses and fees 688 479 943
Change in deferred acquisition costs, net 341 (1,009) (8,090)
------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 26,166 23,609 23,296
------------------------------------------------------------------------------------------------------------------------
Income from operations before
income taxes 6,422 6,897 4,453
------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit):
Current 435 (109) 154
Deferred 2,396 1,612 1,099
------------------------------------------------------------------------------------------------------------------------
Total income tax expense 2,831 1,503 1,253
------------------------------------------------------------------------------------------------------------------------
Net income $ 3,591 5,394 3,200
========================================================================================================================
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Statements of Stockholder's Equity
Years Ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
------------------------------------------------------------------------------------------------------------------------
Common stock:
Balance at beginning and end of year $ 2,000 2,000 2,000
------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of year 15,500 15,500 9,000
Additional contribution from parent 0 0 6,500
------------------------------------------------------------------------------------------------------------------------
Balance at end of year 15,500 15,500 15,500
------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on investments:
Balance at beginning of year 274 (268) 0
Cumulative effect of the implementation of SFAS
No. 115, net of deferred federal income taxes 0 0 82
Net unrealized gain (loss) during the year,
net of deferred federal income taxes (308) 542 (350)
------------------------------------------------------------------------------------------------------------------------
Balance at end of year (34) 274 (268)
------------------------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year 16,587 11,193 7,993
Net income 3,591 5,394 3,200
------------------------------------------------------------------------------------------------------------------------
Balance at end of year 20,178 16,587 11,193
------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity $ 37,644 34,361 28,425
========================================================================================================================
<FN>
See accompanying notes to financial statements.
</FN>
[Enlarge/Download Table]
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Statements of Cash Flow
Years Ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
------------------------------------------------------------------------------------------------------------------------
Cash flows used in operating activities:
Net income $ 3,591 5,394 3,200
------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash used in
operating activities:
Realized losses on investments 62 13 113
Deferred federal income tax expense 2,396 1,612 1,099
Change in:
Receivables and other assets 3,526 62 (2,320)
Deferred acquisition costs 341 (1,009) (8,090)
Future policy benefit reserves 944 (182) 238
Policy and contract claims (1,048) (1,145) 5,296
Unearned premiums (443) 45 196
Other policyholder funds (12) (194) 410
Reinsurance payable 881 (806) (884)
Accrued expenses and other liabilities (1,523) (158) 1,968
Commissions due and accrued (2) (56) (1,024)
Due to parent 439 97 573
Depreciation and amortization (46) (185) (63)
Other, net 0 0 (46)
------------------------------------------------------------------------------------------------------------------------
Total adjustments 5,515 (1,906) (2,534)
------------------------------------------------------------------------------------------------------------------------
Net cash from (used in) operating activities 9,106 3,488 666
------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) investing activities:
Purchase of fixed maturities, at market (8,525) (15,328) 0
Sale of fixed maturities, at market 2,654 4,522 3,428
Other investments, net (1,492) 2,589 (3,133)
------------------------------------------------------------------------------------------------------------------------
Net cash from (used in) investing activities (7,363) (8,217) 295
------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) financing activities:
Capital contribution from parent 0 0 6,500
Net change in bank overdraft 0 0 (1,240)
------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 0 0 5,260
------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,743 (4,729) 6,221
Cash at beginning of year 3,233 7,962 1,741
------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 4,976 3,233 7,962
========================================================================================================================
<FN>
See accompanying notes to financial statements.
</FN>
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(in thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Preferred Life Insurance Company of New York (the Company) is a wholly owned
subsidiary of Allianz Life Insurance Company of North America (Allianz Life)
which, in turn, is a wholly-owned subsidiary of Allianz of America, Inc. (AZOA),
a majority-owned subsidiary of Allianz A.G. Holding, a Federal Republic of
Germany company.
The Company is a life insurance company licensed to sell group life and accident
and health and individual variable annuity policies in six states and the
District of Columbia. Based on 1996 gross premium volume, 7%, 17% and 76% of the
Company's business is life, accident and health and annuity, respectively. The
Company's primary distribution channels are through strategic alliances with
third party marketing organizations. The Company has a significant relationship
with a mutual fund company and its broker/dealer network for marketing its
variable annuity products.
Following is a summary of the significant accounting policies reflected in the
accompanying financial statements.
BASIS OF PRESENTATION
The financial statements have been prepared in accordance with generally
accepted accounting principles (GAAP) which vary in certain respects from
accounting rules prescribed or permitted by state insurance regulatory
authorities. Certain amounts as previously reported have been reclassified to be
consistent with the current year's presentation.
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions that affect reported assets
and liabilities including reporting or disclosure of contingent assets and
liabilities as of the balance sheet date and the reported amounts of revenues
and expenses during the reporting period. Actual results could vary
significantly from management's estimates.
RECOGNITION OF TRADITIONAL LIFE, GROUP LIFE AND GROUP ACCIDENT AND HEALTH
REVENUE
Traditional life products include products with guaranteed premiums and benefits
and consist solely of policies converted from group life business.
Premiums on traditional life and group life products are recognized as income
when due. Group accident and health premiums are recognized as earned on a pro
rata basis over the risk coverage periods. Benefits and expenses are matched
with earned premiums so that profits are recognized over the premium paying
periods of the contracts. This matching is accomplished by establishing
provisions for future policy benefits and policy and contract claims, and
deferring and amortizing related policy acquisition costs.
RECOGNITION OF VARIABLE ANNUITY REVENUE
Variable annuity contracts do not have significant mortality or morbidity risks
and are accounted for in a manner consistent with interest bearing financial
instruments. Accordingly, premium receipts are reported as deposits to the
contractholder's account, while revenues consist of amounts assessed against
contractholders including surrender charges and earned administrative service
fees. Benefits consist of claims and benefits incurred in excess of the
contractholder's balance.
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(in thousands)
DEFERRED ACQUISITION COSTS
Acquisition costs, consisting of commissions and other costs, which vary with
and are primarily related to production of new business, are deferred. For
variable annuity contracts, acquisition costs are amortized in relation to the
present value of expected gross profits from investment margins and expense
charges. Acquisition costs for group life and group accident and health products
are deferred and amortized over the lives of the policies in the same manner as
premiums are earned. Deferred acquisition costs amortized during 1996, 1995 and
1994 were $6,541, $4,517 and $3,739, respectively.
FUTURE POLICY BENEFIT RESERVES
Future policy benefits on life insurance products are computed by net level
premium methods and the commissioners reserve valuation method based upon
estimated future investment yield and mortality, commensurate with the Company's
experience.
Future policy benefit reserves for variable annuity products are carried at
accumulated contract values. Any additional reserves for any death benefits
which may exceed the accumulated contract values are carried at an amount
greater than or equal to a one year term cost.
POLICY AND CONTRACT CLAIMS
Policy and contract claims represent an estimate of claims and claim adjustment
expenses that have been reported but not yet paid and incurred but not yet
reported as of December 31.
INVESTMENTS
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities which addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. Those investments are classified in one of three
categories. Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as "held-to-maturity securities" and reported
at amortized cost. Debt and equity securities bought and held principally for
the purpose of selling them in the near term are classified as "trading
securities" and reported at fair value, with unrealized gains and losses
included in earnings. Debt and equity securities not classified as either
"held-to-maturity securities" or "trading securities" are classified as
"available-for-sale securities" and reported at fair value, with unrealized
gains and losses reported as a separate component of stockholders' equity, net
of deferred income taxes. SFAS No. 115 did not permit retroactive application of
its provisions. The Company classified all of its debt and equity investment
portfolio as "available-for-sale securities" at January 1, 1994.
Realized gains and losses are computed based on the specific identification
method.
Short term investments, which include certificate of deposits, are carried at
amortized cost which approximates market.
As of December 31, 1996 and 1995, investments with a carrying value of $1,596
and $1,665, respectively, were pledged to the New York Superintendent of
Insurance as required by statutory regulation.
The fair values of invested assets are deemed by management to approximate their
estimated market values. Changes in market conditions subsequent to December 31
may cause estimates of fair values to differ from the amounts presented herein.
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(in thousands)
REINSURANCE
Insurance liabilities are reported before the effects of reinsurance. Amounts
paid or deemed to have been paid for claims covered by reinsurance contracts are
recorded as reinsurance receivables. Estimated reinsurance receivables are
recognized in a manner consistent with the liabilities related to the underlying
reinsured contracts.
SEPARATE ACCOUNTS
Separate accounts represent funds for which investment income and investment
gains and losses accrue directly to the contractholders. Each account has
specific investment objectives and the assets are carried at market value. The
assets of each account are legally segregated and are not subject to claims
which arise out of any other business of the Company.
Fair values of separate account assets were determined using the market value of
the investments held in segregated fund accounts. Fair values of separate
account liabilities were determined using the cash surrender values of the
contractholders' accounts.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
RECEIVABLES
Receivable balances approximate estimated fair values. This is based on
pertinent information available to management as of year end including the
financial condition and credit worthiness of the parties underlying the
receivables. Changes in market conditions subsequent to year end may cause
estimates of fair values to differ from the amounts presented herein.
ACCOUNTING CHANGES
In 1996, the Company adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
No. 121 also addresses the accounting for long-lived assets that are expected to
be disposed of by a company. No adjustments were made to the financial
statements upon adoption of this pronouncement.
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(in thousands)
(2) INVESTMENTS
[Enlarge/Download Table]
Investments at December 31, 1996 consist of:
Amount
Amortized Estimated shown on
cost fair balance
or cost value sheet
----------------------------------------------------------------------------------------
Fixed maturities:
U.S. Government $ 19,571 19,506 19,506
Mortgage backed securities 894 906 906
----------------------------------------------------------------------------------------
Total fixed maturities 20,465 20,412 20,412
========================================================================================
Other investments:
Short-term securities 2,389 XXXXXXX 2,389
----------------------------------------------------------------------------------------
Total other investments 2,389 XXXXXXX 2,389
----------------------------------------------------------------------------------------
Total investments $ 22,854 XXXXXXX 22,801
========================================================================================
[Enlarge/Download Table]
At December 31, 1996 and 1995, the amortized cost, gross unrealized gains, gross
unrealized losses and estimated fair values of fixed maturities are as follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------------------------------------------------------------------------
1996:
U.S. Government $ 19,571 66 131 19,506
Mortgage backed securities 894 12 0 906
----------------------------------------------------------------------------------------------------------------
Total fixed maturities $ 20,465 78 131 20,412
================================================================================================================
1995:
U.S. Government $ 13,749 380 0 14,129
Mortgage backed securities 957 42 0 999
----------------------------------------------------------------------------------------------------------------
Total fixed maturities $ 14,706 422 0 15,128
================================================================================================================
The changes in unrealized gains (losses) from fixed maturities were $(475), $835
and $(540) for the years ended December 31, 1996, 1995 and 1994, respectively.
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(in thousands)
The amortized cost and estimated fair value of fixed maturities at December 31,
1996, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
[Enlarge/Download Table]
Amortized Estimated
cost fair value
-------------------------------------------------------------------------------------------
Due after one year through five years $ 6,077 6,011
Due after five years through ten years 13,494 13,495
Mortgage backed securities 894 906
-------------------------------------------------------------------------------------------
Totals $ 20,465 20,412
===========================================================================================
Proceeds from sales of investments in available-for-sale securities during 1996,
1995 and 1994 were $2,654, $4,522 and $3,428, respectively. Gross gains of $0,
$64 and $110 and gross losses of $62, $77 and $209 were realized on sales of
available-for-sale securities in 1996, 1995 and 1994, respectively. The related
tax benefit was $22, $4 and $35 in 1996, 1995 and 1994, respectively.
[Enlarge/Download Table]
Net realized investment losses for the respective years ended December 31 are
summarized as follows:
1996 1995 1994
--------------------------------------------------------------------------------------------------
Fixed maturities, at market $ (62) (13) (99)
Other 0 0 (14)
--------------------------------------------------------------------------------------------------
Net losses before taxes (62) (13) (113)
Tax benefit on net realized losses (22) (4) (38)
--------------------------------------------------------------------------------------------------
Net losses after tax benefit $ (40) (9) (75)
==================================================================================================
[Enlarge/Download Table]
Major categories of net investment income for the respective years ended
December 31 are:
1996 1995 1994
--------------------------------------------------------------------------------------------------------
Interest:
Fixed maturities, at market $ 1,132 410 309
Short-term investments 98 0 0
Other 1 201 69
--------------------------------------------------------------------------------------------------------
Total investment income 1,231 611 378
Investment expenses 11 6 7
--------------------------------------------------------------------------------------------------------
Net investment income $ 1,220 605 371
========================================================================================================
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(in thousands)
(3) SUMMARY TABLE OF FAIR VALUE DISCLOSURES
[Enlarge/Download Table]
1996 1995
----------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ------- ---------- -------
Financial assets
----------------
Fixed maturities, at market
U.S. Government $ 19,506 $ 19,506 $ 14,129 $ 14,129
Mortgage backed securities 906 906 999 999
Certificates of deposit
and other short term investments 2,389 2,389 800 800
Receivables 4,046 4,046 4,820 4,820
Separate account assets 769,981 769,981 690,262 690,262
Financial liabilities
---------------------
Separate account liabilities 769,981 756,349 690,262 672,655
----------------------------------------------------------------------------------------------------------
<FN>
See Note 1 "Summary of Significant Accounting Policies" for description of the
methods and significant assumptions used to estimate fair values.
</FN>
(4) RECEIVABLES
[Download Table]
Receivables at December 31 consist of the following:
1996 1995
---------------------------------------------------------------------------
Premiums due $ 3,318 3,468
Reinsurance commission receivable 450 371
Due from administrators 0 198
Other 278 783
---------------------------------------------------------------------------
Total receivables $ 4,046 4,820
===========================================================================
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(in thousands)
(5) ACCIDENT AND HEALTH CLAIMS RESERVES
Accident and health claims reserves are based on long-range projections subject
to uncertainty. Uncertainty regarding reserves of a given accident year is
gradually reduced as new information emerges each succeeding year, allowing more
reliable re-evaluations of such reserves. While management believes that
reserves as of December 31, 1996 are adequate, uncertainties in the reserving
process could cause such reserves to develop favorably or unfavorably in the
near term as new or additional information emerges. Any adjustments to reserves
are reflected in the operating results of the periods in which they are made.
Movements in reserves which are small relative to the amount of such reserves
could significantly impact future reported earnings of the Company.
[Enlarge/Download Table]
Activity in the accident and health claims reserves, exclusive of hospital
indemnity and AIDS reserves of $293, $287 and $205 in 1996, 1995 and 1994,
respectively, is summarized as follows:
1996 1995 1994
-------------------------------------------------------------------------------------------------
Balance at January 1, net of reinsurance
recoverables of $9,249, $10,049 and $8,117 $ 11,000 10,149 7,823
Incurred related to:
Current year 11,372 10,502 10,061
Prior years (3,079) (2,245) (2,839)
-------------------------------------------------------------------------------------------------
Total incurred 8,293 8,257 7,222
-------------------------------------------------------------------------------------------------
Paid related to:
Current year 1,458 1,097 1,073
Prior years 6,500 6,309 3,823
-------------------------------------------------------------------------------------------------
Total paid 7,958 7,406 4,896
-------------------------------------------------------------------------------------------------
Balance at December 31, net of reinsurance
recoverables of $7,476, $9,249 and $10,049 $ 11,335 11,000 10,149
=================================================================================================
Due to lower than anticipated losses related to prior years, the provision for
claims and claim adjustment expenses decreased.
(6) REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
risks under excess coverage and coinsurance contracts. The Company retains a
maximum of $50 coverage per individual life.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk to minimize its exposure
to significant losses from reinsurer insolvencies.
Included in reinsurance receivables at December 31, 1996 and 1995 are
recoverables on paid and unpaid claims from Allianz Life for $1,554 and $1,556,
respectively. A contingent liability exists to the extent that Allianz Life or
the Company's unaffiliated reinsurers are unable to meet their contractual
obligations under reinsurance contracts. Management is of the opinion that no
liability will accrue to the Company with respect to this contingency.
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(in thousands)
[Enlarge/Download Table]
Life insurance, annuities and accident and health business assumed from and
ceded to other companies is as follows:
Percentage
Assumed Ceded of amount
Gross from other to other Net assumed
Year ended amount companies companies amount to net
-----------------------------------------------------------------------------------------------------------------
December 31, 1996:
Life insurance In force $ 1,700,286 0 647,863 1,052,423 0.0%
-----------------------------------------------------------------------------------------------------------------
Premiums:
Life insurance 9,174 0 2,304 6,870 0.0%
Annuities 11,725 0 0 11,725 0.0%
Accident and health insurance 15,482 6,623 9,270 12,835 51.6%
-----------------------------------------------------------------------------------------------------------------
Total premiums 36,381 6,623 11,574 31,430 21.1%
=================================================================================================================
December 31, 1995:
Life insurance In force $ 1,826,979 0 715,945 1,111,034 0.0%
-----------------------------------------------------------------------------------------------------------------
Premiums:
Life insurance 10,291 0 2,642 7,649 0.0%
Annuities 10,679 0 0 10,679 0.0%
Accident and health insurance 15,717 6,689 10,820 11,586 57.7%
-----------------------------------------------------------------------------------------------------------------
Total premiums 36,687 6,689 13,462 29,914 22.4%
=================================================================================================================
December 31, 1994:
Life insurance In force $ 1,320,843 0 740,856 579,987 0.0%
-----------------------------------------------------------------------------------------------------------------
Premiums:
Life insurance 10,467 (2) 2,898 7,567 0.0%
Annuities 8,781 0 0 8,781 0.0%
Accident and health insurance 15,759 8,827 13,443 11,143 79.2%
-----------------------------------------------------------------------------------------------------------------
Total premiums 35,007 8,825 16,341 27,491 32.1%
=================================================================================================================
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(in thousands)
[Enlarge/Download Table]
Of the amounts assumed from and ceded to other companies, life and accident and
health insurance assumed from and ceded to Allianz Life is as follows:
Assumed Ceded
--------------------------------- ------------------------------
1996 1995 1994 1996 1995 1994
-------------------------------------------------------------------------------------------------------
Life insurance in force $ 0 0 0 2,432 2,930 2,745
-------------------------------------------------------------------------------------------------------
Premiums:
Life insurance $ 0 0 0 36 55 69
Accident and health insurance 2,547 2,959 2,600 766 921 784
-------------------------------------------------------------------------------------------------------
Total premiums $ 2,547 2,959 2,600 802 976 853
=======================================================================================================
(7) INCOME TAXES
INCOME TAX EXPENSE
[Enlarge/Download Table]
Total income tax expenses (benefits) for the years ended December 31 are as
follows:
1996 1995 1994
-------------------------------------------------------------------------------------------------------------
Income tax expense attributable to operations:
Current tax expense (benefit) $ 435 (109) 154
Deferred tax expense 2,396 1,612 1,099
-------------------------------------------------------------------------------------------------------------
Total income tax expense attributable to operations $ 2,831 1,503 1,253
Income tax effect on equity:
Income tax allocated to stockholder's equity,
Adoption of SFAS No. 115 0 0 44
Attributable to unrealized gains and losses
for the year (166) 292 (189)
-------------------------------------------------------------------------------------------------------------
Total income tax effect on equity $ 2,665 1,795 1,108
=============================================================================================================
COMPONENTS OF INCOME TAX EXPENSE
[Enlarge/Download Table]
Income tax expense computed at the statutory rate of 35% varies from tax expense
reported in the Statements of Income for the respective years ended December 31
as follows:
1996 1995 1994
-----------------------------------------------------------------------------------------
Income tax expense computed at the statutory rate $ 2,248 2,414 1,558
Other 583 (911) (305)
-----------------------------------------------------------------------------------------
Income tax expense as reported $ 2,831 1,503 1,253
=========================================================================================
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(in thousands)
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES ON THE BALANCE SHEET
[Download Table]
Tax effects of temporary differences giving rise to the significant components
of the net deferred tax liabilities at December 31, 1996 and 1995 are as
follows:
1996 1995
----------------------------------------------------------------
Deferred tax assets:
Future policy benefit reserves $ 3,427 4,808
Unrealized losses on investments 19 0
----------------------------------------------------------------
Total deferred tax assets 3,446 4,808
================================================================
Deferred tax liabilities:
Deferred acquisition costs 10,757 10,481
Unrealized gains on investments 0 147
Investments 1,429 690
----------------------------------------------------------------
Total deferred tax liabilities 12,186 11,318
================================================================
Net deferred tax liability $ 8,740 6,510
================================================================
Although realization is not assured, the Company believes it is not necessary to
establish a valuation allowance for the deferred tax asset as it is more likely
than not the deferred tax asset will be realized principally through future
reversals of existing taxable temporary differences and future taxable income.
The amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future reversals of existing taxable
temporary differences and future taxable income are reduced.
The Company files a consolidated federal income tax return with AZOA and all of
its wholly owned subsidiaries. The consolidated tax allocation agreement
stipulates that each company participating in the return will bear its share of
the tax liability pursuant to United States Treasury Department regulations. The
Company accrues income taxes payable to Allianz Life under AZOA intercompany tax
allocation agreements. The Company's liability for current taxes was $504 and
$142 as of December 31, 1996 and 1995, respectively, and is included in payable
to parent in the liablity section of the accompanying balance sheet.
(8) RELATED PARTY TRANSACTIONS
In 1994, Allianz Life contributed additional paid-in capital to the Company of
$6,500.
Allianz Life performs certain administrative services for the Company. The
Company reimbursed Allianz Life $1,246, $1,115 and $1,994 in 1996, 1995 and
1994, respectively, for related administrative expenses incurred. The Company's
liability to Allianz Life for incurred but unpaid service fees as of December
31, 1996 and 1995 was $598 and $521, respectively, and is included in payable to
parent in the liability section of the accompanying balance sheet.
AZOA's investment division manages the Company's investment portfolio. The
Company paid AZOA $11, $5 and $4 in 1996, 1995 and 1994, respectively, for
investment advisory fees. The Company had no incurred but unpaid fees to AZOA as
of December 31, 1996 and 1995.
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(in thousands)
(9) EMPLOYEE BENEFIT PLANS
The Company participates in the Allianz Primary Retirement Plan (Primary
Retirement Plan), a defined contribution plan. The Company makes contributions
to a money purchase pension plan on behalf of eligible participants. All
employees are eligible to participate in the Primary Retirement Plan after two
years of service. The contributions are based on a percentage of the
participant's salary with the participants being 100% vested upon eligibility.
It is the Company's policy to fund the plan costs as accrued. Total pension
contributions were $29, $16 and $18 in 1996, 1995 and 1994, respectively.
The Company participates in the Allianz Asset Accumulation Plan (Allianz Plan),
a defined contribution plan sponsored by AZOA. Under the Allianz Plan
provisions, the Company will match from 50% to 100% of eligible employees'
contributions up to a maximum of 6% of a participant's compensation. The total
Company match for 1996, 1995 and 1994 Plan participants was 100%. All employees
are eligible to participate after one year of service and are fully vested in
the Company's matching contribution after three years of service. The Allianz
Plan will accept participants' pretax or after-tax contributions up to 15% of
the participant's compensation. It is the Company's policy to fund the Allianz
Plan costs as accrued. The Company accrued $41, $5 and $35 in 1996, 1995 and
1994, respectively, toward planned contributions.
(10) STATUTORY FINANCIAL DATA AND DIVIDEND RESTRICTIONS
Statutory accounting is directed toward insurer solvency and protection of
policyholders. Accordingly, certain items recorded in financial statements
prepared under GAAP are excluded or vary in determining statutory policyholders'
surplus and gain from operations. These items include, among others, deferred
acquisition costs, furniture and fixtures, accident and health premiums
receivable which are more than 90 days past due, deferred taxes and undeclared
dividends to policyholders. Additionally, future life and annuity policy benefit
reserves calculated for statutory accounting do not include provisions for
withdrawals.
[Enlarge/Download Table]
The differences between stockholder's equity and net income reported in
accordance with statutory accounting practices and the accompanying financial
statements for the years ended December 31 are as follows:
Stockholder's equity Net Income
--------------------------- --------------------------------
1996 1995 1996 1995 1994
------------------------------------------------------------------------------------------------------
Statutory basis $ 21,886 18,359 2,358 2,821 (796)
Adjustments:
Change in reserve basis (13,696) (17,857) 4,070 3,281 (2,812)
Deferred acquisition costs 38,245 38,586 (341) 1,009 8,090
Deferred taxes (8,740) (6,510) (2,396) (1,612) (1,099)
Nonadmitted assets 154 119 0 0 0
Interest maintenance reserve (68) 31 (99) (105) (183)
Asset Valuation Reserve 7 2 0 0 0
Liability for unauthorized reinsurers 0 1,209 0 0 0
Unrealized losses on investments (53) 422 0 0 0
Other (91) 0 (1) 0 0
------------------------------------------------------------------------------------------------------
As reported in the
accompanying financial statements $ 37,644 34,361 3,591 5,394 3,200
======================================================================================================
The Company is required to meet minimum capital and surplus requirements. At
December 31, 1996 and 1995, the Company was in compliance with these
requirements. In accordance with New York Statutes, the Company may not pay a
stockholder dividend without prior approval by the Superintendent of Insurance.
The Company paid no dividends in 1996, 1995 and 1994.
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(in thousands)
REGULATORY RISK BASED CAPITAL
An insurance enterprise's state of domicile imposes minimum risk-based capital
requirements that were developed by the National Association of Insurance
Commissioners (NAIC). The formulas for determining the amount of risk-based
capital specify various weighting factors that are applied to financial balances
or various levels of activity based on the perceived degree of risk. Regulatory
compliance is determined by a ratio of an enterprise's regulatory total adjusted
capital to its authorized control level risk-based capital, as defined by the
NAIC. Enterprises below specific triggerpoints or ratios are classified within
certain levels, each of which requires specified corrective action. The levels
and ratios are as follows:
Ratio of total adjusted capital to
authorized control level risk-based
Regulatory Event Capital (less than or equal to)
------------------ -------------------------------------
Company action level 2 (or 2.5 with negative trends)
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
The Company met the minimum risk-based capital requirements as of December 31,
1996 and 1995.
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company is required to file annual statements with insurance regulatory
authorities which are prepared on an accounting basis prescribed or permitted by
such authorities. Currently prescribed statutory accounting practices include
state laws, regulations, and general administrative rules, as well as a variety
of publications of the NAIC. Permitted statutory accounting practices encompass
all accounting practices that are not prescribed; such practices differ from
state to state, may differ from company to company within a state, and may
change in the future. The NAIC currently has a project underway to codify
statutory accounting practices, the result of which is expected to constitute
the only source of "prescribed" statutory accounting practices. Accordingly,
that project will likely change the definition of what comprises prescribed
versus permitted statutory accounting practices, and may result in changes to
existing accounting policies that insurance enterprises use to prepare their
statutory financial statements. The Company does not currently use permitted
statutory accounting practices which have a significant impact on its statutory
financial statements.
STATE EXAMINATION
Preferred Life is currently under routine examination by the New York State
Department of Insurance. No matters of significance or adjustments to Preferred
Life's statutory financial statements have been brought to management's
attention as a result of this examination.
(11) COMMITMENTS AND CONTINGENCIES
The Company is subject to claims and lawsuits that arise in the ordinary course
of business. In the opinion of management, the ultimate resolution of such
litigation will not have a material adverse effect on the financial position of
the Company.
The Company is contingently liable for possible future assessments under
regulatory requirements pertaining to insolvencies and impairments of
unaffiliated insurance companies. Provision has been made for assessments
currently received and assessments anticipated for known insolvencies.
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PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(in thousands)
(12) SUPPLEMENTARY INSURANCE INFORMATION
[Enlarge/Download Table]
The following table summarizes certain financial information by line of business
for 1996, 1995 and 1994:
As of December 31 For the year ended December 31
--------------------------------------------- ----------------------------------------------------------------
Future Benefits, Net
policy Other Premium claims change
benefits, policy revenue losses, in
Deferred losses, claims and other Net and policy
policy claims and contract invest- settle- acquisi- Other Premiums
acquistion and loss Unearned benefits consider- ment ment tion operating written
costs expense premiums payable ations income expenses cost (a) expenses (b)
-----------------------------------------------------------------------------------------------------------------------------------
1996:
Life insurance $ 290 1,219 908 5,151 6,870 268 4,371 (27) 2,297
Annuities 37,855 325 0 864 11,725 0 202 265 7,069
Accident and
health insurance 100 0 979 19,104 12,835 952 8,392 103 3,494
-----------------------------------------------------------------------------------------------------------------------------------
$ 38,245 1,544 1,887 25,119 31,430 1,220 12,965 341 12,860
===================================================================================================================================
1995:
Life insurance $ 263 594 844 5,615 7,649 104 5,428 (6) 2,374
Annuities 38,120 6 0 16 10,679 0 (100) (1,008) 6,180
Accident and
health insurance 203 0 1,486 20,536 11,586 501 8,401 5 2,335
-----------------------------------------------------------------------------------------------------------------------------------
$ 38,586 600 2,330 26,167 29,914 605 13,729 (1,009) 10,889
===================================================================================================================================
1994:
Life insurance $ 257 511 834 6,909 7,567 80 6,702 (47) 2,275
Annuities 37,112 271 0 0 8,781 0 357 (8,121) 12,200
Accident and
health insurance 208 0 1,451 20,403 11,143 291 7,331 78 2,521
-----------------------------------------------------------------------------------------------------------------------------------
$ 37,577 782 2,285 27,312 27,491 371 14,390 (8,090) 16,996
===================================================================================================================================
<FN>
(a) See note 1 for aggregate gross amortization.
(b) Premiums written are not applicable for life insurance companies.
</FN>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements
The following financial statements of the Insurance Company are included
in Part B:
1. Independent Auditors' Report
2. Balance Sheets as of December 31, 1996 and 1995
3. Statements of Income for the years ended December 31, 1996, 1995
and 1994
4. Statements of Stockholder's Equity for the years ended December
31, 1996, 1995 and 1994
5. Statements of Cash Flow for the years ended December 31, 1996,
1995 and 1994
6. Notes to Financial Statements - December 31, 1996, 1995 and 1994
The following financial statements of the Separate Account are included
in Part B:
1. Independent Auditors' Report
2. Statements of Assets and Liabilities as of December 31, 1996
3. Statements of Operations for the year ended December 31, 1996
4. Statements of Changes in Net Assets for the years ended December
31, 1996 and 1995
5. Notes to Financial Statements - December 31, 1996
b. Exhibits
1. Resolution of Board of Directors of the Company authorizing the
establishment of the Variable Account*
2. Not Applicable
3. Principal Underwriter Agreement
4. Individual Variable Annuity Contract*
4a. Waiver of Contingent Deferred Sales Charge Endorsement*
4b. Enhanced Death Benefit Endorsement*
5. Application for Individual Variable Annuity Contract*
6.(i) Copy of Articles of Incorporation of the Company*
(ii) Copy of the Bylaws of the Company (to be filed by Amendment)
7. Not Applicable
8. Form of Fund Participation Agreement*
9. Opinion and Consent of Counsel
10. Independent Auditors' Consent
11. Not Applicable
12. Not Applicable
13. Calculation of Performance Information
14. Company Organizational Chart*
27. Not Applicable
* Incorporated by reference to Registrant's N-4 filing (File Nos.
333-19699 and 811-05716) as electronically filed on January 13, 1997.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The following are the Officers and Directors of the Company:
[Download Table]
Name and Principal Positions and Offices
Business Address with Depositor
------------------------------ ---------------------------------
Lowell C. Anderson Director
1750 Hennepin Avenue
Minneapolis, MN 55403
Ronald L. Wobbeking Chairman, Chief Executive Officer
1750 Hennepin Avenue and Director
Minneapolis, MN 55403
Thomas G. Brown Director
One Liberty Plaza,
45th Floor
New York, NY 10006
Edward J. Bonach Director
1750 Hennepin Avenue
Minneapolis, MN 55403
Alan A. Grove Secretary and Director
1750 Hennepin Avenue
Minneapolis, MN 55403
Shannon Hendricks Treasurer
1750 Hennepin Avenue
Minneapolis, MN 55403
Dennis Marion Director
500 Valley Road
Wayne, NJ 07470
Reinhard Obermueller Director
560 Lexington Avenue
New York, NY 10022
Robert S. James Director
1750 Hennepin Avenue
Minneapolis, MN 55403
Eugene T. Wilkinson Director
14 Commerce Drive
Cranford, NJ 07016
Eugene Long Vice President of Operations
152 W. 57th Street and Director
18th Floor
New York, NY 10019
Thomas J. Lynch President, Chief
1750 Hennepin Avenue Marketing Officer
Minneapolis, MN 55403 and Director
Carol B. Shaw Second Vice President
152 W. 57th Street, 18th Floor
New York, NY 10019
Timothy J. Tongson Appointed Actuary
1750 Hennepin Avenue
Minneapolis, MN 55403
W. Michael Carroll Director
48 Comell Road
P.O. Box 867
Latham, NY 12110
Stephen R. Herbert Director
900 Third Avenue
New York, NY 10022
Jack F. Rockett Director
140 E. 95th Street, Suite 6A
New York, NY 10129
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR
OR REGISTRANT
The Company organizational chart was filed as Exhibit 14 to Registrant's N-4
as filed on January 13, 1997 and is incorporated herein by reference.
ITEM 27. NUMBER OF CONTRACT OWNERS
Not Applicable.
ITEM 28. INDEMNIFICATION
The Bylaws of the Company provide that:
Each person (and the heirs, executors, and administrators of such person) made
or threatened to be made a party to any action, civil or criminal, by reason
of being or having been a Director, officer, or employee of the corporation
(or by reason of serving any other organization at the request of the
corporation) shall be indemnified to the extent permitted by the laws of the
State of New York, and in the manner prescribed therein.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted for directors and officers or controlling persons of the
Company pursuant to the foregoing, or otherwise, the Company 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,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
a. NALAC Financial Plans, LLC is the principal underwriter for the
Contracts. It also is the principal underwriter for:
Allianz Life Variable Account A
Allianz Life Variable Account B
b. The following are the officers and directors of NALAC Financial Plans
LLC:
[Download Table]
Name & Principal Positions and Offices
Business Address with Underwriter
---------------------- ----------------------
Alan A. Grove Director
1750 Hennepin Avenue
Minneapolis, MN 55403
James P. Kelso Director
1750 Hennepin Ave.
Minneapolis, MN 55403
Thomas B. Clifford President and Director
1750 Hennepin Avenue
Minneapolis, MN 55403
Michael T. Westermeyer Secretary and Director
1750 Hennepin Avenue
Minneapolis, MN 55403
Michael J. Yates Treasurer
1750 Hennepin Avenue
Minneapolis, MN 55403
Edward J. Bonach Director
1750 Hennepin Avenue
Minneapolis, MN 55403
Catherine L. Mielke Compliance Officer
1750 Hennepin Avenue
Minneapolis, MN 55403
c. Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Thomas Clifford, whose address is 1750 Hennepin Avenue, Minneapolis,
Minnesota, maintains physical possession of the accounts, books or documents
of the Variable Account required to be maintained by Section 31(a) of the
Investment Company Act of 1940, as amended, and the rules promulgated
thereunder.
ITEM 31. MANAGEMENT SERVICES
Not Applicable
ITEM 32. UNDERTAKINGS
a. Registrant hereby undertakes to file a post-effective amendment to
this registration statement as frequently as is necessary to ensure that the
audited financial statements in the registration statement are never more than
sixteen (16) months old for so long as payment under the variable annuity
contracts may be accepted.
b. Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information.
c. Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form promptly upon written or oral request.
d. Preferred Life Insurance Company of New York ("Company") hereby
represents that the fees and charges deducted under the Contract described in
the Prospectus, in the aggregate, are reasonable in relation to the services
rendered, the expenses to be incurred and the risks assumed by the Company.
REPRESENTATIONS
The Company hereby represents that it is relying upon a No-Action Letter
issued to the American Council of Life Insurance, dated November 28, 1988
(Commission ref. IP-6-88), and that the following provisions have been
complied with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each registration statement, including the
prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in connection with
the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase
the contract specifically to bring the redemption restrictions imposed by
Section 403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section 403(b)
annuity contract, prior to or at the time of such purchase, a signed statement
acknowledging the participant's understanding of (1) the restrictions on
redemption imposed by Section 403(b)(11), and (2) other investment
alternatives available under the employer's Section 403(b) arrangement to
which the participant may elect to transfer his contract value.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, as amended, the Registrant certifies that it has caused this
registration statement to be signed on its behalf in the City of Minneapolis
and State of Minnesota, on this 2nd day of May, 1997.
PREFERRED LIFE VARIABLE ACCOUNT C
(Registrant)
By: PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
(Depositor)
By: /S/ALAN A. GROVE
___________________________________________
Alan A. Grove
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
By: /S/ALAN A. GROVE
___________________________________________
Alan A. Grove
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on
the dates indicated.
Signature and Title
[Download Table]
Lowell C. Anderson* Director 5/2/97
------------------------ ------
Lowell C. Anderson
Ronald L. Wobbeking* Chairman, Chief Executive 5/2/97
------------------------ Officer and Director ------
Ronald L. Wobbeking
Shannon Hendricks* Treasurer 5/2/97
------------------------ -------
Shannon Hendricks
Alan A. Grove* Secretary and Director 5/2/97
------------------------ ------
Alan A. Grove
Thomas G. Brown* Director 5/2/97
------------------------ ------
Thomas G. Brown
Edward J. Bonach* Director 5/2/97
------------------------ -------
Edward J. Bonach
Robert S. James* Director 5/2/97
------------------------ ------
Robert S. James
Thomas J. Lynch* Director 5/2/97
------------------------ ------
Thomas J. Lynch
Dennis Marion* Director 5/2/97
------------------------ ------
Dennis Marion
Eugene T. Wilkinson* Director 5/2/97
------------------------ ------
Eugene T. Wilkinson
Eugene Long* Director 5/2/97
------------------------ ------
Eugene Long
Reinhard W. Obermueller* Director 5/2/97
------------------------ ------
Reinhard W. Obermueller
------------------------ Director ------
W. Michael Carroll
------------------------ Director ------
Stephen R. Herbert
------------------------ Director ------
Jack F. Rockett
* By /S/ALAN A. GROVE
____________________________________
Alan A. Grove, Attorney-in-Fact
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM N-4
(FILE NOS. 333-19699 AND 811-05716)
PREFERRED LIFE VARIABLE ACCOUNT C
PREFERRED LIFE INSURANCE COMPANY OF NEW YORK
INDEX TO EXHIBITS
EXHIBIT PAGE
EX-99.B3 Principal Underwriter's Agreement
EX-99.B9 Opinion and Consent of Counsel
EX-99.B10 Independent Auditors' Consent
EX-99.B13 Calculation of Performance Information
Dates Referenced Herein and Documents Incorporated by Reference
37 Subsequent Filings that Reference this Filing
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